“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.” — Plutarch.
A society that allocates more resources to the upper echelons at the expense of a middle class perpetuates a centuries-old problem that only leads to a reduction in the demand for goods and services, resulting in a crippled economy.
Puerto Rico is already showing signs of social imbalance and low social mobility and is becoming a society of limited opportunities where the circumstances surrounding a person’s birth determine the possibilities of progress and wellbeing, said Miguel Soto-Class, president of the Center for the New Economy during the think tank’s recent annual economic conference.
“Inequality is currently being discussed in the International Monetary Fund, Davos, and other prominent forums, since it is a factor that hinders economic growth: it causes a reduction in aggregate demand for goods and services, which in turn impacts large companies and producers,” he said.
Social inequality refers to a situation in which individual groups in a society do not have equal status, with the disparities reflecting in areas such as access to education, health care, quality housing, transportation, and other social goods and services.
‘Good’ and ‘bad’ inequality
While inequality poses a challenge to economic growth and Puerto Rico is “sowing the seeds for a dark and dystopian future,” Sergio Marxuach, public policy director for the CNE, also said current perspectives on the issue also denote the need for “good” and “bad” inequality.
“We have to think about this as we do about cholesterol, ‘good’ inequality is necessary to create incentives for people to study, work and take risks. But after a certain level, which is hard to define empirically, ‘bad’ inequality helps preserve the status quo, limits political change as well as access to education and social mobility,” Marxuach said during his presentation.
“Inequality in Puerto Rico has reached levels that adversely affect economic growth and jeopardize social stability,” he said.
Perhaps one of the areas where social inequality is most evident in Puerto Rico is in wealth. The average income reported in the top 5 percent of local households is 33 times greater than households in the lowest tier, Marxuach said. In the U.S., the top income earning group is 15 times higher than the lowest strata.
“In countries with high inequality, low income people do not have the opportunity to develop their talents fully, or access social networks to help them navigate the job market,” Marxuach said. “This reduces investment in human capital, hence economic growth.”
Absence of ‘social trust’
Economic and social inequality adversely affect the levels of reliability and legitimacy of social institutions or what is commonly referred to as “social trust.”
“There is ample evidence pointing to inequality as a factor associated with differences between countries in the proportion of people in a society who say they trust each other,” said Harold Toro, the CNE’s research director. “The greater economic inequality, the lower that ratio. In turn, low confidence levels directly affect economic growth.”
Meanwhile, Richard M. Locke, Professor of Political Science and Business Administration from the Massachusetts Institute of Technology, noted that studies in Italy and Brazil have shown that credibility and trust can lead to cooperation between private firms, even in places that seem to lack the institutional requirements or cultural resources necessary to sustain them.
“Trust, social capital and cooperation are important but scarce in many developing economies,” he said.