Capital markets and investments
- Why is the gap in inequality increasing in cities?
- What perpetuates wealth accumulation, and can better policy and regulatory framework affect this for long term equity?
This is what our cities increasingly look like in many parts of the world. The disparity between the urban rich and the poor is large and growing. How can we envision and bring into being a more equal world? Today we will explore how wealth is created in cities, the roots of inequality and examples of how we can reach out to a more equal and just future.
Cities are epicentres of production, employment and economic opportunity. Savings and value addition from the economic activities as diverse as agriculture and mining, fishing and forestry flow too, and are reinvested in cities. Largely urban based activities like manufacturing, higher education and services like real estate, finance and IT further concentrate savings and wealth creation in urban areas.
This often leads to a virtuous cycle of increased urban output and savings leading to a further concentration of prosperity, income and savings in urban areas and the further growth of urban wealth. Cities reflect in na exaggerated manner, global wealth and income disparities.
As an example, India is a low middle income country with the largest population of poor people in the world over 200 million but in 2015, it’s 48 billionaires collectively had a Net worth of 11% of its 2 trillion dollar GDP. Over half these billionaires live in Mumbai. In 2015 the 421 billionaires in the United States which had a population of over 320 million had a Net worth of 10% of the 18 trillion US economy. New York is home to close to 20% of these billionaires. Other cities that hosted billionaires in 2015 include Moscow – 68, Hong Kong – 64, San Francisco – 26 and Sao Paulo – 25. So we see the cities are the first choice of residence for the very wealthy, but they are not the only inhabitants of cities, even the most prosperous ones.
Many urban residents are poor and vulnerable. Both rich and poor people are necessary for cities to function and to be productive. The poor are drawn to cities as sites of social and livelihood opportunity. For as long as we can look back, urban poverty has tended to cluster along with prosperity, wealth and often opulence in cities. The urban poor face various forms of social exclusion that often reduces the access to the very resources that they need to improve their living conditions: work, education, affordable healthcare, safe housing and basic services, in short, the universal entitlements promised by the SDGs. This is why the commitment to a universal goal of Reducing inequality ‘Goal 10’ and enabling Gender equality ‘Goal 5’ and ensuring that no person is left behind has so much transformatory potential.
Many contemporary cities tend to concentrate wealth and poverty in particular areas through spatial segregation, exclusive planning and limiting access to public goods and services. Across many low and middle-income countries, cities are home to large and expanding informal settlements, shrinking public and green spaces, expanding footprints of gated communities and exclusionary comercial spaces. An extreme case of this was the Apartheid state of South Africa which before 1994 excluded the majority of its population from employment, residence, education and dignity by segregating neighbourhoods, facilities and cities. But similar processes are at work in the everyday-life of cities across the world.
Further, land allocation and ownership in cities tends to discriminate against the poor leading to the creation of informal settlements which are then exposed to forced evictions and displacements. Such processes destroy the limited assets that poor and vulnerable people have put together with great difficulty over the years and worsen urban inequality.
In South Africa’s most important economic province Gauteng, for example, nearly two decades after the end of apartheid, spatial inequality and multi-dimensional poverty have not declined much, with the peripheral townships still continuing to be marginal.
Research on Bangalore in India shows similar trends of the concentration of poverty and inequality.
This is in spite of an IT-led economic boom that almost doubled the city’s population in less than a generation. This can be seen in this 2015 map of Bangalore that shows both informal settlements in the heart of the city and poor peripheral areas that do not have access to the infrastructure and connectivity of richer neighbourhoods.
Conventional economic theory encourage such trends, many of which are now shown to be incorrect and inappropriate in a world committed to the SDGs. The economist Simon Kuznets, hypothesised in the 1950s based on the rapid growth of the US economy and the investor behaviour of the wealthy that as a country’s per capita income rises, inequality would first rise and then decline. This led to the common development policy prescription of encouraging rapid economic growth in spite of increasing inequality and the consequent destabilisation that it brings using the analogy that a rising tide would eventually lift all boats.
Thomas Piketty, recently showed in his much cited book ‘Capital’ that Kuznets misread the facts and by extension, that the implicit public policy of letting inequality rise to be addressed by economic growth was a misplaced policy position. Piketty’s analysis is based on a long reading of economic history that shows that the rate of return on capital is higher than the rate of return on economic growth.
This implies that people who hold wealth typically financial and physical assets will tend to get more wealthy overtime than those who derive the income from employment, education or natural resources. The exception in current high income countries was the period between 1930 and 1975, due to the Great Depression and a World War that destroyed much of the wealth of the elites. Unequal wealth distribution and urban poverty causes social and economic and hence, political instability.
This is especially observed in highly unequal urban areas like Hong Kong which has seen a decline in its quality of life and an increase in inequality over the 2000s alongwith a massive increase in the wealth of the super-rich. One of the provocations behind Hong Kong’s 2014 Umbrella movement was popular concern about income disparity and high housing prices.
Similarly, parts of the 2011 Occupy Wall Street movement was led by students calling for the reform of the economic system and reducing inequality in cities following the 2008 financial crisis. cause for urban concern. Social exclusion and discrimination based on race, on gender, ethnicity and caste are common in many parts of the world and are inter-twined with questions of class and economic inequality. The ‘Black Lives Matter’ movement for racial justice in the workplace and everyday life spread rapidly across cities in the United States in response to racial profiling and brutality which are closely related to access to livelihoods and economic opportunity in inner-city and black neighbourhoods.
How does one address the challenge of rising inequality and cities, and its consequent impact on all the other SDGs?
First, we need to recognise that urban inequality defines our cities, especially in low and middle income countries where cities are magnets for growth and jobs, but also reflect disparities in economic and living conditions of their residence.
Second, we need to raise the floor for the most poor and vulnerable in the city, to meet the universal goals of the SDGs. Especially access to employment, safe housing and basic services, sustainable and affordable transportation. Participation in the city economy on more equal terms with access to services, credit and information on pricing and markets, will help the poor earn more and potentially decrease income and wealth gaps.
Third, we need a universal social security system or safety net that really leaves no one behind. Children, women, the elderly, the differently-abled and excluded social groups. A range of methods can be used to do this. Brazil’s Bolsa Familia program is reported to have helped over 1.7 million households, move out of poverty and reduce Brazil’s high GINI coefficients.
This was done via direct income transfers to poor households, if their children went to school and participated in public health initiatives. Unemployment benefits, subsidised housing, public health and education programs are other ways of ensuring that the minimum needs of the urban poor are met.
Fourth, we need to enable markets and tenure systems to work for poor people and not exclude or displace them. Here again, multiple Latin-american initiatives, including Brazil’s Statute of the Cities, help provide the space for the regulation of real estate markets, enabling greater access and social control.
Fifth, we need to address taxation and intergovernmental fiscal arrangements, to strengthen local governments that are more responsive to local needs. Progressive taxation systems are needed – that enable the wealthier sections of the population to fund a larger share of public expenditure and investment.
Sixth, we need affirmative action to break the nexus between social exclusion and economic stratification on gender, race, ethnicity, religion, caste and ability grounds. To enable access to entitlements like education and healthcare and access to public services and finally, to enable employment and equal compensation.
In summary, what have we learned?
One – Cities concentrate economic and social opportunity. This often leads to a virtuous cycle of increased output and savings, leading to a concentration of prosperity and savings, and further growth of urban wealth.
Two – Cities, individuals and enterprises that control this economic activity through ownership and knowledge, tend to accumulate more and more of this wealth.
Three – the world is highly unequal in terms of both wealth and income and this trend is unfortunately growing. The largest inequalities are often seen within cities which concentrate wealth and poverty through spatial segregation, limiting access to public goods and services, or through lack or denial of entitlements, or poorly regulated markets.
Four – ownership of financial and physical assets by elites enable a steady accumulation of wealth and consequente exclusion of others, sometimes leading to social, economic and political instability.
Fifth – inequality can and has been successfully addressed in some parts of the world, for a time. But one has to first acknowledge its existence as a challenge, and then addresses it through safety nets, public services, urban planning and regulation and progressive taxation.
More equitable and inclusive cities are possible, and are in fact essential, if we are to achieve the SDGs