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Addressing Rising Inequality via Tax Reform, Infrastructure Investment and Civil Society

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published
19 August 2016

Zambia can sound like a success. One of sub-Saharan Africa’s fastest-growing economies – with an average annual expansion of 3% between 2004 and 2013 – it was classed by the World Bank as a lower-middle-income country in 2011.

Yet, Oxfam draws the attention to the fact that during that time poverty in the country grew. In 2003, 65% of the population were living below the poverty line of $1.25 a day, but by 2010 this had risen to 74%. Poverty is particularly acute in rural areas, where inhabitants suffer from a lack of jobs, health facilities, schools and roads.

Economic growth has also been accompanied in the same period by greater inequality at the global level. According to Oxfam, “the richest 1% now have more wealth than the rest of the world combined”. Looking closer at this figure shows that in 2015, “just 62 individuals had the same wealth as 3.6 billion people – the bottom half of humanity.” In 2010 the figure was 388.

This concentration of wealth, says Oxfam, has a direct effect on the poor: If inequality within countries had not increased between 1990 and 2010, an extra 200 million people would have escaped poverty. That could have risen to 700 million had poor people benefited more than the rich from growth.

“Relying on economic growth alone to trickle down to the poorest is a mistake,” said Winnie Byanyima, Executive Director of Oxfam International, at the European Development Days 2016. "Extreme inequality captures the benefits of growth, puts a brake on the fight against poverty and sparks social unrest.”

 

 

The causes behind the rising inequality crisis were the subject of a session at the 2016 European Development Days, ‘An economy for the 1%’, where Byanyima spoke. Reasons range from poor infrastructure to discrimination against women, but among the biggest is tax avoidance; the use of tax havens and loopholes to reduce tax bills without actually breaking the law. Currently, $7.6 trillion of individual wealth – more than the combined gross domestic product (GDP) of the UK and Germany – is held offshore, according to Oxfam's recent estimate.

Tax Avoidance

“Tax avoidance and the rules that allow for companies and individuals not to pay the right taxes in the places they are operating are huge mechanisms of the super-concentration of wealth,” said Jaime Atienza Azcona, Campaigns and Policy Director, Oxfam Intermón (Spain). 

It’s not just multinationals that are taking advantage of tax havens. Almost a third of rich Africans’ wealth is held offshore, costing an estimated $14 billion in lost tax revenues every year. This is enough to pay for healthcare that would save 4 million children’s lives and employ enough teachers to get every African child into school, according to Oxfam. Instead, African governments resort to indirect taxes – such as sales taxes – which generate 70% of African tax revenue and place the burden on poor consumers, said Byanyima.

The solution sounds obvious: Close down the loopholes. However, according to Oxfam, wealthy elites concentrate not only economic wealth but also political power. “It is very clear that whether it is in America or here in Europe, that the extremely rich have a bigger say in decision making and policymaking than poor people,” said Byanyima.

Within the EU, the European Commission is working on addressing these problems. An Anti-Tax Avoidance Package presented in January 2016 aims to get companies to pay taxes where they make their profits; ensure enhanced tax transparency, to give Member States the information needed to ensure fair taxation; and at the same time make sure that companies that pay their fair share are not penalised through “double taxation”.

The public is increasingly aware of tax avoidance and becoming more vocal. “Multinationals increasingly recognise that they have to do things differently than in the past,” said Bert Zuijdendorp, Head of the Company Taxation Initiatives unit at the European Commission. “Even in situations where they are within the limits of the law, they still may want to consider the effect on society of the actions that they take.”

The Commission hopes that this could spur better tax systems and enhanced tax compliance worldwide. “We want to put our own house in order, but we also want to help others around the world to apply good tax governance standards,” said Zuijdendorp. Assistance could aim to improve tax administration – the capacity to levy and collect taxes – as well as to promote sustainable spending. “Our strategy is: Collect more; spend better.”

Other factors

Aside from tax avoidance, there are other factors influencing inequality and its consequences, particularly for  certain segments of the population. Only three of the 30 richest people in the world are women, but women make up the bulk of the low-paid workers in industries such as garments.

In Jordan, employers are reluctant to hire women in case they get pregnant and need to take maternity leave. Though women technically have the right to do this, the rules are not implemented, said Ruba Ahmad, Human Rights Based Approach Trainer at Action Aid Global Platform, Jordan. “Women are so marginalised in society,” she said. “There’s this untapped potential – this human resource – that doesn’t contribute to development.”

People living away from economic centres suffer from poor infrastructure. Ahmad recently met some young, unemployed university graduates in northern Jordan. “The reason is that they live two hours outside the capital, Amman, which is where everything is centralised,” she said. “Even if they are willing to travel four hours a day for a job – which most of them aren’t – employers are not willing to employ them because they know that they’ll face a lot of challenges with coming to work.”

 

 Panos/GMB AKASH
Credit: Panos/GMB AKASH

 

Remedies for some of these problems include projects that help disadvantaged groups get to school and work. In Papua New Guinea, the European Investment Bank (EIB), Europe’s long-term lending institution owned directly by the 28 EU Member States, is helping to repair 27 insecure bridges used by 400,000 people living in remote areas of the country. The EIB, the world’s largest lender for renewable energy investment, is also backing solar power, hydropower and large scale wind farms across Africa. These are already supplying electricity to areas where many people don’t have access to it.

“The development of regions beyond our borders is very important for the European Union,” said Maria Shaw-Barragan, the EIB’s Deputy Director of Operations in Africa, Caribbean, Pacific, Asia and Latin America. “We are bringing the values of the European Union in terms of democracy, human rights and fighting poverty, as well as financial and technical expertise for first-time projects.”

There are signs of hope for global change from examples of successful rebalancing. Against the worldwide trend, wages and workers’ rights have improved in countries such as Vietnam in Asia, Bolivia and Ecuador in South America, and Ghana and Tanzania in Africa. In each case, said Atienza of Oxfam, the government raised more tax revenue from the better-off in society and used this to fund health and education and to improve the rights of the poor.

“We have seen these good examples, so it is now up to us actors in civil society to push forward with our proposals,” he said. “It really is possible. It just takes political energy and the willingness to make the world a fairer place.”
 

This collaborative piece was drafted by Sebastian Moffett with input from Alessandro Batazzi from DEVCO. 

DISCLAIMER: This information is provided in the interests of knowledge sharing and capacity development and should not be interpreted as the official view of the European Commission, or any other organisation.

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