The Hindu Business Line : Do the rich locomote the global economy?

It is their free-spending ways, conspicuous consumption and leisure spending which have kept the global economy on a roll despite various trials and tribulations, contends Ms Ajay Kapur.

It is a sort of a conundrum. Not the yield curve one (made famous by Alan Greenspan, the former Chairman of the US Federal Reserve in which long-term interest rates fell even as short rates were raised sharply), but the apparent indifference of the global economy to hardening rates, soaring oil and commodity prices and geopolitical uncertainties. And stock markets have followed. The Dow looks like going to 12,000 and the Nikkei has been the best — performing G-7 market in the last year. The FTSE too is well past 6,000. As far as emerging markets are concerned, returns have been phenomenal, the outstanding example being India.

Will the party last, is the oft-asked question. Most interesting, but that is not the theme of this column. Instead, try to look at the theory and logic-defying growth characterising the world. (Even the eternally pessimistic Mr Stephen Roach, Chief Economist of Morgan Stanley, now thinks the US' imbalances will be resolved with a soft landing, because central banks are `normalising' monetary policy and interest rates — he still doesn't buy the global growth story, though).

When conventional wisdom and explanations break down, it is time to think differently. Among the theories now doing the rounds is one which attributes the continuing momentum in the world economy to the increasing inequality of incomes.

It is known that those with special knowledge and skills earn disproportionately more than others not so well endowed. This is so especially in current times. Apart from significant income differentials, the wealthy have seen the values of their assets — property, stocks, commodities, etc — touch stratospheric heights. Rising wealth inequality has compounded worsening income inequality.

It has been all to the good, is the contention of Mr Ajay Kapur, a global investment strategist with Citibank. Confident of the future, the super-rich have loosened their purse strings. It is their free-spending ways, conspicuous consumption and leisure spending which have kept the global economy on a roll despite various trials and tribulations.

It is, of course, Thorsten Veblen's `The Theory of the Leisure Class' all over again. The wasteful habits of the rich are really not wasteful because they are the livelihood of the less fortunate. What would they do otherwise?

Concentration of income and wealth has undoubtedly increased the world over. But this does not mean the poor are worse off than they were before — only that the distance between them and the rich has increased.

The message (presumably)? Anti-rich policies are a hindrance to growth maximisation. Better for governments to focus on needed infrastructure, education, healthcare, etc. to improve the human development indices and growth will take care of itself.

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