Our 99 percent

The top 1% in Macedonia receive 12 percent of the total national income. That’s the third highest share in Europe, after UK and Germany. The real income of these 1% increased nearly threefold between 2005 and 2010, while the income of the other 99% increased only by 11 percent. One half of the growth in income between 2005 and 2010 went to the top 1%.

I’m sure you know that we are leaders in the region, if not in whole Europe, in terms of economic growth and reforms. But, did you know that we are also leaders in income inequality? Did you know that the top 1% income earners in Macedonia take approximately 12 percent of the total income in the country, which is by far the highest in the region? For comparison, in Serbia, Croatia and Slovenia the top 1% get only 6 percent of the total income. Only UK and Germany have higher share of the top 1% income, of around 13 percent of the total income. US, which has exceptionally high income inequality, has a top 1% share of approximately 17 percent.

It’s even more interesting to note how the income of the top 1% in Macedonia evolved over time. It was rather stable between 1990 and 2005, fluctuating around 5 percent. Then, in 2006, it started rising, and reached 12 percent in 2010. Expressed in real cash terms (i.e. in 2011 international dollars), the top 1% income fluctuated around 1 billion dollars until 2005. Then it began to rise and reached 2.9 billion dollars in 2010. So, the real income of the top 1% in Macedonia increased nearly threefold between 2005 and 2010. At the same time, the real income of the remaining 99% of the population increased by only 11 percent (see the figure below).

fig1

If the real growth in total income during this period, of approximately 20 percent,  is decomposed to income going to the top 1% and income going to the remaining 99%, it can be seen that one half of the total income growth ended up in the hands of the richest 1%. In actual US dollars, the richest 17,000 people in Macedonia (1% of the total workforce of 1,700,000) made around 1.1 billion USD in 2010 (Macedonian Gross National Income in 2010 was 9.2. billion USD). Or, approximately 66,000 USD per capita per annum. Or, around 5,500 USD per capita per month. Meanwhile, the remaining 99% made something like 400 USD per month, on average.

You may ask – what’s wrong with this? What’s wrong with income inequality? Leaving aside the philosophical and the ethical considerations, here are some specific arguments against income inequality.

Number one, income inequality has adverse effects on economic growth. Growth is longer and more sustainable if it is more inclusive. Number two, inequality in income leads to inequality in opportunity. Today, when you need money for virtually everything, including some basic needs, such as schooling and good healthcare, inequality in income means that some people have bigger opportunities than other. I’m sure you’ve heard about the “Great Gatsby curve”, which suggests that chances for the poor to become rich are smaller when inequality is higher. Similarly, it is well documented that income inequality is associated with poorer health and social welfare. Number three, inequality can have adverse effects on health per se, not only because of poorer chances for treatment. Some studies forcefully document that inequality creates stress, due to the feeling of inferiority, which than creates other health problems, mostly heart diseases. Number four, income inequality usually leads to inequality in political power. Richer people can influence politicians more than poorer people, which inhibits democracy and leads to plutocracy, a system governed by a small group of rich people, who take decisions that serve their own interests, not the interests of the majority.

Number five, inequality can lead to higher crime rates and social unrest – the poor may feel that the rich have something unjustly, and may, hence, take the law into their own hands. Number six, there are arguments that it’s harder to fight poverty when inequality is high. Number seven, income inequality often leads to economic crises. Lower income earners try to ”keep up with the Joneses”, but, since they don’t have money, need to borrow for this. If inequality is very high, the debt can become too high and may lead to a financial crisis.

What are the driving forces behind the rapid increase in inequality in Macedonia? Answering this question requires a research on its own, but let me posit several hypotheses. The first possible explanation is the stock exchange. Macedonian stock exchange went through a boom in 2006 and 2007, exactly the period when the rise in inequality started. The MBI-10 index was around 2,300 at the beginning of 2006. Until September 2007, it reached 10,000. Since it is the rich who invest in stocks, the stock exchange boom is likely to have lead to an increase in their income. But, since the stock exchange started falling after 2007, reaching 2,500 by end of 2010, it’s not so likely that the overall increase in inequality in 2010 is because of the stock exchange.

The second possible explanation is the tax system. With the introduction of the “flat” income tax in 2007, the tax rates on income above 360,000 and 720,000 denars were cut to 12 percent, from 15 and 24 percent (in 2008 the rate was additionally reduced to 10 percent). That means that people making 66,000 USD per year before tax, were left with 7,500 USD more after tax with the reduced rates.

The third potential explanation is in the increase in the public procurement. Public procurement money are often siphoned off by a handful of well connected higher income individuals. According to the Public procurement bureau, 150 million euros were spent on public procurement in Macedonia in 2006 (the first available data). By 2010, this money increased to 740 million euros. If inefficiency in public procurement remained stable during these years, this means that waste in public procurement has increased substantially between 2010 and 2006.

Things won’t change by themselves. As Thomas Piketty forcefully argues in his recent bestseller, the inherent laws of capitalism lead only to concentration of wealth and income, i.e. to an increase in inequality, not to a decrease. The Kuznets curve, which predicts that economic development inevitably leads to a decline in inequality, is regarded only as a fairy tale today. Branko Milanovic argued long time ago that inequality does not decline due to economic factors, but because societies decide to reduce inequality, by adopting redistributive institutions (i.e. higher and progressive taxes and higher and better-targeted social transfers). Daron Acemoglu and James Robinson claimed that these institutions get created as a result of political instability, which arises from inequality and forces elites to democratize, i.e. to establish redistributive systems. But, Acemoglu and Robinson also claimed that if the degree of mobilization in the society is low, the outcome is often “autocratic disaster”, i.e. a society with high inequality and low growth. That’s why it is vital for our 99% to mobilize.

And now we arrive at the main question – why our 99% stay silent? Why we don’t see any reaction? I’m sure you remember the “Occupy…” movement. Why we don’t see something like that in Macedonia, when economic inequality is one of the highest in the world? I can offer two explanations. The first one is that our 99% are not aware of the inequality. When you constantly hear on TV that your country is a leader in Europe in terms of reforms and economic growth, that foreign companies come to the country every day etc., you start to see life through rose-colored glasses. Poverty and inequality seem to be forbidden topics. Nobody talks about them. If this is the explanation, I hope that I will help improve the situation with this column. I hope that people will become aware that the growth that we saw in recent years in Macedonia, no matter how fantastic it is, is benefitting mainly the rich. It will take much more than just one column to achieve this, but at least we know the path.

I am more concerned by the second explanation, which seems more probable to me, which is that our 99% are inherently such that they don’t want to react. They are afraid that things may get worse if they raise their voice. That they may be labeled as rebels. That they may lose their job. So, they keep calm, following the traditional Macedonian saying –  “all things come to he who waits”. No, dear friends, nothing will come to you if you wait. Waiting will only make things worse. But if you don’t get this, there’s nothing else I can say.

(Views expressed herein are those of the author and do not have to represent the views of the institutions that he represents. The data on inequality used here are from the Standardized World income Inequality Database, version 4, of Frederick Solt. The figures that are cited refer to 2010, the last available data for Macedonia.)