The right question to ask is not if inequality threatens democracy but which inequalities matter.
The storming of the Capitol in Washington in January has sparked a lively debate on the origins of discontent in American society. While for some observers the events that unfolded that day strikingly reveal the damage four years of Donald Trump in the White House have done to the longest-standing democracy in the world, for others they rather expose underlying fractures already uncovered by the global financial crisis but left to fester for a decade.
High and entrenched inequality, in particular, has been denounced as the main source of dissatisfaction undermining the stability of democratic institutions, not only in the United States but in most western democracies. All at a time when trust in these institutions is more needed than ever before, amid a pandemic which remains still largely unchecked.
In discussing the virtues and fragility of democratic institutions, almost two centuries ago Alexis de Tocqueville already warned about a possible ‘tyranny of the majority’. In unequal societies democracies may generate excessive redistributive pressure curtailing property rights and distorting the incentives for individual entrepreneurship—an argument also at the heart of modern endogenous fiscal-policy theory. Symmetrically, inequality can also favour capture of major parties on both sides of the political spectrum by part of the elites, generating in this case a ‘tyranny of the minority’, conceived by Thomas Piketty as multiple-elite party systems.
Conventional indicators of inequality are however generally not adequate to explaining growing dissatisfaction with democracy. In the United Kingdom, for example, headline inequality measures rose quite quickly under Margaret Thatcher but they have been relatively stable since. Still, the country turned its back on the European Union, and to the official position of the government, voting for Brexit. In France meanwhile, the Gini coefficient of inequality has been decreasing since the global financial crisis but this did not prevent the gilets jaunes social protest taking the stage in 2019. Even Sweden, one of the less unequal western democracies, has faced a right-wing populist insurgency, with the Sweden Democrats leaping in the space of just three elections from a 5.7 per cent share of the vote in 2010, when they first entered parliament, to 17.7 per cent in 2018.
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Dissatisfaction in these countries cannot be explained by looking simply at changes in standard inequality indicators. This does not mean that inequality does not matter. In fact, no single statistic can convey a full picture of inequality and examining only the Gini (or equivalent headline indicators) might not be enough to perceive distributional shifts.
To understand the growing discontent, we must consider indicators better suited to reflecting the changes that have taken place over recent decades. The functional distribution of income, reflected in the ratio of wages to profits, has significantly shifted to the advantage of capital since the turn of the millennium.
This is partly due to the stagnation of real wages but is mainly related to the disappearance of stable and well-paid jobs which has contributed to a disproportionate polarisation of labour markets. Technological changes have affected millions of workers employed in fabrication and assembly tasks whose skills have become unnecessary. The bulk of routine-production, administrative-support and clerical jobs have faded away, diverting workers without a college education into low-wage occupations. Policies to increase flexibility of labour markets and footloose capital penetration, in turn, have contributed to the secular fall in real, non-graduate wages.
Economic globalisation and growing competition from emerging economies have further accelerated deindustrialisation, laying waste to many manufacturing centres. It is no coincidence that several studies have linked political support for nativist or populist movements to economic shocks. In presidential elections between 2008 and 2016 in the US, counties with greater trade exposure were found to be more likely to shift toward the Republican candidate. In addition, districts with industries more vulnerable to Chinese imports tended to elect congressional representatives taking more polarised stances, both Republicans and Democrats. Similar results hold for Europe, where higher penetration of Chinese imports and increased labour-market insecurity have been found to be associated with the rise of far-right nationalist parties.
These shocks are certainly not the only explanation for the rise of authoritarian populism on both sides of the Atlantic. But they might have aggravated and exacerbated cultural divisions related to generational, spatial or social cleavages, giving to populist leaders the additional boost they needed.
These dynamics emerge clearly also by looking at indicators sensitive to the middle of the income distribution rather than to its extremes, such as the ratio between the tenth and the fifth decile. These reflect better than the Gini coefficient the declining living conditions of the middle class, the most affected by changes in the structure and geography of production on a global scale.
At the same time, different types of agglomeration economies have boosted localisation and spatial inequalities. This is reflected in spatial segmentation between prosperous, cosmopolitan urban centres and lagging rural communities, smaller towns and peripheral urban areas. In an increasingly specialised world, where access to technology and knowledge are factors of production of primary importance, being close to its frontier offers significant advantages. Those lucky enough to live in innovative urban centres have a much steeper age-earnings profile and face growth opportunities denied to citizens in peripheral areas.
Finally, it is important to highlight how economic and spatial inequalities often coincide and overlap with ethnic and cultural differences. In the US, for example, Afro-American households tend to live in peripheral areas and have a median income around 40 per cent lower than non-Hispanic white households. Analogously, in France, top-down decisions regarding the assignment of populations within housing projects eventually led to a concentration of populations increasingly homogenous in terms of ethnic identity, religion and socio-economic status. These so-called horizontal inequalities, or inequalities between culturally defined groups, can generate deep resentment and seriously undermine democratic coexistence.
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Identifying deep causes of discontent is an initial step to restoring faith in democracy, but policy should follow suit. Reducing the multiple inequalities which are poisoning democratic coexistence depends in large part on strengthening the capacity of democracies to generate good jobs. Active labour policies to counteract the effects of deindustrialisation are of paramount importance, along with measures aimed at marginalised groups to facilitate access to fairly retributed posts, with ‘place-based’ policies favouring local development in remote areas.
But we also urgently need new trade rules empowering states and labour vis-à-vis multinational corporations. The serious tensions hampering the workings of the international trading system and the stalemate in which the World Trade Organization is enveloped offer a unique opportunity to shape a new framework and broaden the space for labour and social policy.
Piergiuseppe Fortunato is an economist at the United Nations Conference on Trade and Development, where he leads projects on global value chains and economic integration, and an external professor of political economics at the Université de Neuchâtel.