Increasing inequality is a political economic issue affecting countries across the world. Inequality has been a pervasive feature of modern society. Inequality can be broadly categorized into income and wealth inequality. This class/income divide fuels poverty and marginalization and creates a divide in access to opportunity. Often, lower-income communities lack the structural privileges to climb the income ladder and further social mobility. Inequality is a highly complex issue and intersects with wealth, capital, and power. The way in which inequality impacts Sri Lanka’s socio-political and economic outlook is discussed in this editorial.
The Rate of Return on Capital (R ) exceeding the Rate of Return on growth (G): The implications of R>G in Sri Lanka
The French economist Thomas Piketty has argued in his book Capital in the 21st Century that when the rate of return on capital (R) is greater than the rate of economic growth (G), over the long-term, the result is a concentration of wealth, It is this unequal distribution of wealth which creates social and economic instability. Piketty proposes a global system of wealth tax, including progressive taxation of high income earners, to address inequality and avoid the vast majority of wealth being concentrated within a tiny minority. Let us attempt to fit in Piketty’s arguments with inequality in Sri Lanka.
The figures below indicate a clear trend, where the percentage of households with an income less than Rs. 36,000 is rising steadily. They also indicate the share of household income and percentages of households falling into the richest 20% or 40%. On one end of the spectrum, there is an affluent minority in Sri Lanka who possess inherited wealth and other forms of capital in the forms of rent, dividends, profits, and shares. This wealth continues to multiply. Thus, in some ways, Sri Lanka’s situation fits in squarely with Piketty’s thesis. Piketty argues that when the rate of growth is low, as it has been in Sri Lanka over the last three decades, wealth tends to accumulate more quickly and within the top 10% or top 1%, thereby increasing inequality.
Source: “A balancing act: Can Sri Lanka overcome regional income inequalities?” 28 December 2018, https://www.ft.lk/Opinion-and-Issues/A-balancing-act-Can-Sri-Lanka-overcome-regional-income-inequalities/14-669644.
The fundamental force driving this dynamic can be summed up in R > G. This extreme concentration of wealth in the hands of a small minority is seen in the context of people’s protests to fuel anger and frustration amongst the public. This can be connected, at least in part, to the economic and political crises Sri Lanka faces today. It is a crisis of inequality. More particularly, it is a crisis of wealth and income inequality.
How can Piketty’s proposals to address inequality be applied to Sri Lanka? For instance, a wealth tax is not an easy feat, due to the political influence of the business elite. Also, a rigorous documentation of the tax base and clarity on asset ownership is seriously needed in Sri Lanka. There are no silver bullets in tackling inequality in Sri Lanka but rigorous economic analysis and targeted tax regimes are at least a starting point.
Power, wealth concentration, and inequality in Sri Lanka: The relationship among these three forces
Why do extreme inequality and wealth concentration matter? Because of power: political power and private power. The net concentration of wealth in the hands of a small group of elite means that power is concentrated and the economically-weaker majority group has little or no political decision-making power. The richest Sri Lankans who own and control the country's largest companies influence the stock market in a significant manner, and exert enormous personal and political power. They fund political candidates, parties, and political campaigns and influence and shape Sri Lanka’s democracy. Is it appropriate that a small share of unelected wealthy groups and/or individuals wield so much power in Sri Lanka?
In conclusion, inequality in Sri Lanka is a very important and concerning issue. It impacts the economic, political, and social realms. There needs to be a broad-spectrum dialogue on a long-term strategy to address inequality in Sri Lanka
06 June 2022
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