POVERTY IN DEVELOPED COUNTRIES IS COMPLICATED
Would you be surprised if you found out that the US and Japan, the two countries which have long been regarded as big economies, are actually “poor economies”? Before going into the details, we need to define what poverty is first.
There are two types of poverty: “absolute poverty” and “relative poverty.” In the past, absolute poverty used to refer to those who are unable to secure the minimum amount of calories and nutrients required to sustain a healthy human body, or more simply, those who cannot eat properly every day. More recently, however, it refers to those who do not have enough money “to buy food.” This means that those who are self-sufficient are not considered to be participating in economic activities.
According to a report jointly published by the United Nations and the World Bank in 2015, the poverty line is defined as $1.25 or less per person per day, or an annual income of (approximately) $450. Of the world’s total population of 7.2 billion people, it is estimated that 1.4 billion people, or one out of five, are living below the poverty line.
Relative poverty, on the other hand, refers to those who earn less than 50% of the median income of a country (median is the midpoint value of a frequency distribution, meaning the most frequently observed income value; this is different from the average). As mentioned in the beginning, the US and Japan, which were once considered as the “rich countries,” are now the top two among the G7 (the seven largest economies in the world) in terms of the proportion of people in the country who fall into the category of relative poverty. The US is just over 17%, and Japan is slightly less than 16%. Among the 36 OECD (Organisation for Economic Co-operation and Development) countries, the US ranks second (Israel ranks No.1) and Japan ranks 7th (2017 data).
However, it should be noted that both countries have a large GDP and high median annual income. In the case of Japan, even if one had an annual income of about $25,000 (more than 2.5 million yen), he may still be defined as relatively poor. Compare this with the absolute poverty line of $450 per year. Why are they so different?
Since the 1980s, many national governments set neoliberalism as their economic policy: the Reagan administration in the US, the Thatcher administration in the UK, and the Nakasone administration in Japan. Under this policy, highly public projects such as railways were privatized one after another; at the same time, the term economic globalization started to emerge. It became normal for people (workers), goods, funds, and information to cross borders. As a result, some people became billionaires through global businesses such as the IT industry, while many regular workers were competing with foreign workers who work at much lower wages. This has resulted in a decrease in real wages.
As mentioned above, relative poverty is calculated from the national median income, but the same method is applied to calculate the wealthy population. For example, in the US, the assets owned by the top 1% in the 1980s were about 128 times the median value, although they have grown to 288 times the median value in 2010. In other words, the assets held by the top 1% account for 33.8% of the nation's total assets, while the bottom 50% holds only 2.5%. If we look at the top 10%, they account for 50% of the total income and 70% of the total assets of the country.
Consequently, the middle class in the US, the population of which was once considered to be larger than that of Japan, has collapsed as many have fallen into the relatively poor class, and spurred a resentment toward globalism. This was one of the driving forces behind Trump's election in 2016. However, if we look at what the Trump administration has been doing, it is to renege on environmental agreements such as the Paris treaty in the name of protecting the domestic energy industry, enter into a “trade war” with China, pledge construction of a wall on the US-Mexico border, and dispute with Congress about these decisions. At any rate, the country which has long been recognized as the “land of freedom and opportunity” now suffers from significant inequality and increasing poverty, and the confrontation is growing between those who have and those who do not.
Since the end of the World War II, it has been the case that any social phenomena observed in the US will resurface in Japan with about ten years delay. Then with another 15 to 20 years, they would further spread to South Korea and other Asian countries. The greatest concern about the issue of relative poverty, not only in Japan but in any developed country in general, is that children who are born and raised in financially challenged households are often deprived of a chance to receive higher education; without advanced education, they are less likely to get a stable job. As such, poverty will be passed on from generation to generation.
In order to change this situation, as a first step, it would be necessary for people in the middle class with relatively stable wealth to change the mindset that being low-income implies a lack of effort. In addition, we must work together to change the social system that makes people think it is not rewarding to work hard, but this will require a drastic revision of the current tax system. Imposing tax on financial assets is an option, but, as noted by a French economist Thomas Piketty, there is a risk to introducing such a policy, because wealthy people would simply transfer their assets to so-called tax haven countries.
An increased taxation on inherited properties and passive income is a readily feasible option, and socially justifiable as well. For Japan, a good strategy would be to reduce financial burdens related to education and medicine by exclusively utilizing consumption tax for welfare-related purposes.
There are two aspects of the tax system: government revenues and the redistribution of wealth. Importantly, the latter has functioned as an automatic stabilizer to control inequality, and therefore, social disorder arising from it. However, neo-liberal economics presented a theory that “redistribution can make rich poorer but not poor richer,” and therefore underpinned a policy that is gentle to the wealthy population and/or large corporations who made money through international businesses. This is one of the major reasons why relative poverty keeps growing in developed countries (though it is not the only cause). If so, we should be able to identify actionable measures that are relatively easy, such as the reintroduction of a more progressive tax system.