Are low interest rates and globalisation driving the widening wealth gap?
In short: While globalisation was intended to enrich nations, it has created a heavy wedge between capital and labour. Combined with falling real interest rates that inflate asset prices, these forces may be accelerating income inequality, leaving many behind despite the abundance of human capital skills in advanced economies.
The economic landscape of advanced nations has been shaped by two powerful, converging forces. First, rapid growth in emerging worlds has exerted downward pressure on manufacturing wages in developed economies. Second, a shift in loanable funds—driven by a savings glut in emerging markets—has lowered real interest rates. This shift has promoted an escalation in asset prices and increased debt levels through highly leveraged financial institutions. This phenomenon is exacerbated by the fact that globalisation places a high premium on human capital skills. While these skills are abundant in the UK, they are not ubiquitous across the population.
According to former NIESR Director Professor Jagjit Chadha, such dual pressures tend to worsen wealth disparity. This is compounded by a historical tendency to underprice risk. An 'unholy mix' of monetary policy and financial engineering once promised to eliminate the boom and bust cycle, but instead created a fragile period of global growth that impacted future economic prospects. This fragility was further intensified by the fact that risk was systematically underpriced during this period. Consequently, the sustained global growth proved to be remarkably unstable.
The debate often centers on the distinction between equality of opportunity and equality of outcome. While equality of opportunity focuses on an equal starting point (ex ante), inequality of outcome concerns the actual results (ex post). Even for those who champion a 'level playing field,' the outcomes remain significant. In the UK, the transition from 1990s confidence to current stagnation and crisis has been marked by policy blunders, a lack of long-term strategic thinking, and the unplanned exit from the EU, which stalled recovery from the financial crisis. Furthermore, the UK's recent economic trajectory has been marred by short-term political priorities. The unplanned departure from the EU has also contributed to years of economic uncertainty.
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Sources
- Summary by Intellect · source: Macroeconomics, Capitalism and Inequality - Professor Jagjit Chadha
- Also: Speaker spotlight: Professor Jagjit S. Chadha | University of Cambridge
- Also: niesr.ac.uk — Jagjit S Chadha - NIESR
- Also: Trends in Inequality
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