PDF Summary:The Master Guides: The Global Wealth Gap, by Shortform

Why are some nations poor while others are rich? Is it the result of factors and circumstances determined long ago, or of contemporary political and economic decisions? Most importantly, is the global wealth gap inevitable, or is it possible that we can minimize—or even close—it?

In our master guide to the global wealth gap, we’ll examine answers to these questions from scholars, economists, and political theorists like Jared Diamond (Guns, Germs, and Steel) and Max Weber (The Protestant Ethic and the Spirit of Capitalism). We’ll cover different perspectives and theories on what the main cause of the wealth gap is, including geographical differences, cultural differences, and exploitation. In addition, we’ll go over theories of how we can (or can’t) solve it.

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For example, plantation owners in the antebellum South resisted industrialization, fearing the new technologies would unseat their place in the social and economic order. This meant the South had far less developed infrastructure than the North for many years, and lagged economically because of it.

3) Public Trust

Economist William Easterly’s The White Man’s Burden argues that in a capitalist global economy like the one we have today, public trust is a cultural value crucial for success. Easterly argues that without public trust, people won’t enter into economic exchanges because they’ll fear getting ripped off or cheated. Without these economic exchanges, an economy will stagnate.

Easterly uses the fall of the Soviet Union as an example of why public trust is so important. During this period, free market capitalism was suddenly imposed on the new Russian state with little time for them to adjust. Because there was no opportunity for Russia to develop public trust, politicians and business leaders instead turned to corrupt backroom dealings and allowed the economy as a whole to suffer for their own personal benefit.

Cause #3: Political Differences

Some authors argue that political decisions are a more direct cause of the global wealth gap than geography or culture. They suggest certain types of governments, laws, and political norms are conducive to success while others lead to poverty. In particular, they focus on three main elements of government:

1) Market Regulation

Some authors argue that the use or misuse of market regulations—the way a government manages and controls its economy—can lead a nation to success or poverty. In Why Nations Fail, economist Daron Acemoglu and political scientist James A. Robinson argue government regulation of the economy is crucial for success. Specifically, they say regulations must create an economic environment that is fair, competitive, and easy to enter into. Under these circumstances, people are able to put their ideas on the market and the best ideas will be able to succeed. This economy of good ideas encourages technological development, which increases efficiency to create more wealth.

Acemoglu and Robinson explain that to create this economic environment, the government must enforce property rights and contracts, split up monopolies, and provide high-quality public services like schools and roads. This evens the economic playing field enough that anyone with a good idea can succeed.

2) Corruption

Some experts also note that varying levels of government corruption—politicians using their positions for their personal economic gain—also contribute to international inequality. Collier (The Bottom Billion) argues that corrupt governments tend to impoverish their nations by prioritizing loyalty over competence and personal gain over broad economic success. For example, say a nation needs a new train station to transport goods and people more efficiently. Corrupt government officials hire their own political allies to build the station and overpay them to ensure their loyalty, or award building contracts to whoever pays the biggest bribe regardless of their qualifications. This makes the train station simultaneously worse and more expensive.

Acemoglu and Robinson (Why Nations Fail) note that corruption often discourages development, preventing economic growth. Corrupt governments often intentionally discourage development because large changes in the economy—shifting away from natural resources, for example—might threaten to shift economic and political power away from them.

3) Internal Stability

Finally, several authors argue that the global wealth gap also results from some nations being embroiled in conflict, whether they are under attack, engaged in a civil war, or otherwise unable to maintain a functional government. Acemoglu and Robinson (Why Nations Fail) explain that in an unstable country, people have no incentive to generate wealth since no government can guarantee they’ll keep what they make. Collier (The Bottom Billion) makes a similar argument, pointing out that instability causes people, investors, and their money to leave a nation altogether.

Cause #4: Exploitation

Instead of studying the differences between nations, some authors focus on how nations interact to explain the global wealth gap. Specifically, they view exploitation—nations taking advantage of others for their own benefit—as the main cause of international inequality. Put simply, they argue that rich nations often become rich by taking wealth away from poorer nations.

They focus on two main methods of exploitation:

1) War and Colonialism

Acemoglu and Robinson (Why Nations Fail) explain that the most direct way nations exploit one another is through violent force. This can be as simple as one nation declaring war on another to try and secure economic benefits, or as complex as one nation establishing a network of colonies across the globe to extract wealth from elsewhere. Either way, one nation uses violence to benefit at the expense of another, creating or widening inequality.

Easterly (The White Man’s Burden) discusses how colonial governments established by European nations in Asia, Africa, and South America created political and economic problems that still exist long after decolonization. Europeans imposed arbitrary borders that ignored the ethnic, linguistic, and religious makeup of a given area and purposefully heightened ethnic tensions to divide and conquer colonial populations. Many of these divisions remain today and are responsible for ongoing conflicts and civil strife that impact those nations’ economies. In addition, colonies had political and economic institutions designed around slavery and harsh working conditions—institutions whose economic consequences are still felt today.

2) Political Pressure

Nations can also use subtler forms of political and economic pressure to exploit one another. For example, author and activist Naomi Klein’s The Shock Doctrine explores “economic shock therapy,” where the United States used political and economic influence to force other nations into mass privatization—selling public services and industries to private owners at very low prices. The main benefactors of economic shock therapy were foreign corporations who were able to buy formerly public services for little money or speculate on vast market shifts. Meanwhile, nations that underwent shock therapy often became more impoverished as social safety nets and jobs were cut to minimize public spending and maximize corporate profits.

For example, when Indonesia’s economy was on the verge of collapse in the 1990s, the International Monetary Fund would only offer to loan the nation money if they adopted a number of free-market reforms, causing unemployment to skyrocket and massively increasing inequality within the country. Then, multinational corporations bought up large amounts of stock in Indonesian companies to profit off of the nation’s economic troubles—causing so much social unrest that the people eventually rose up and deposed their government.

Solutions to the Global Wealth Gap

Now that we’ve gone over the common theories on why international inequality exists, we’ll explore some of the potential solutions to it—how nations and peoples can work to close the wealth gap. Some of these solutions apply only to specific causes of international inequality and have been noted as such, while others can be applied more broadly. In particular, we’ll look at the following proposed solutions:

1. Do nothing: International inequality isn’t a problem and therefore doesn’t need to be solved.
2. Encourage development: Rich nations can solve inequality by using foreign policy to encourage economic development in poor nations.
3. Mass redistribution of wealth: Nations and peoples around the world can solve inequality by redistributing wealth from the rich to the poor.

Solution #1: Do Nothing

Some argue international inequality is inevitable and acceptable. Sowell (Basic Economics) argues that because cultural, geographical, and political differences all contribute to international inequality, it’s too complex an issue to solve. He proposes nations focus on internal economic improvements rather than on addressing wealth disparities between each other.

Solution #2: Encourage Development

Richer nations can work to solve international inequality not necessarily by redistributing wealth directly, but by helping poorer nations help themselves—in other words, by encouraging economic development through foreign policy.

They suggest doing this in a few different ways:

Encourage Development Through Trade

Collier (The Bottom Billion) proposes richer nations eliminate protectionist and “fair trade” policies. When rich nations adopt protectionist policies to favor their own industries, they take business away from poorer countries. When richer nations adopt fair trade laws—laws that set artificially high prices on specific commodities from poor nations—they can make poorer countries dependent on those specific industries and prevent them from developing or diversifying their economies.

Encourage Development Through Foreign Aid

In addition, some authors propose that rich nations strategically use foreign aid to encourage development in poor nations. They suggest doing this in two main ways:

1) Improving access to services: Esther Duflo and Abhijit Banerjee’s Poor Economics suggests international financial institutions and charitable organizations can aid the poor by improving their access to information and essential services. Specifically, they argue that access to financial services—nonpredatory banking, lines of credit, and so on—can help people make better economic choices to escape poverty.

2) Targeting aid specifically: Easterly (The White Man’s Burden) argues for a “bottom-up” model of foreign aid in which richer nations directly fund development projects designed by local community leaders of poor nations. This method avoids imposing unwanted or impractical projects onto poorer nations and is designed to bypass corrupt governments that might misuse foreign aid. For example, a richer nation might allow individual community leaders from a poor nation to plan and propose their own projects, which the rich nation would then fund directly.

Solution #3: Mass Redistribution of Wealth

Some authors argue that distributing wealth more equally along class lines will solve inequality both within and between nations.

Global Wealth Tax

Thomas Piketty’s Capital in the 21st Century argues wealth must be redistributed through a global progressive tax—in other words, a tax that’s higher the more wealth someone has. Money raised through this tax would then be redistributed to the poor. Piketty believes this tax must be global because if it only applies to certain nations, the rich will relocate their assets somewhere else to avoid it.

Revolution

Famously, philosopher and economist Karl Marx’s The Communist Manifesto supports using revolution to seize the wealth of the rich and abolish private property in favor of communal ownership. In such an instance, wealth would be shared collectively among everyone regardless of their nationality, erasing the global wealth gap.