Money managers say inequality risks social contract

LONDON Tue Dec 6, 2011 1:39pm EST

Deutsche Bank Global Head of Discretionary Portfolio Management & Strategy Arnaud de Servigny speaks during the Reuters Investment Outlook Summit in London December 5, 2011. REUTERS/Benjamin Beavan

Deutsche Bank Global Head of Discretionary Portfolio Management & Strategy Arnaud de Servigny speaks during the Reuters Investment Outlook Summit in London December 5, 2011.

Credit: Reuters/Benjamin Beavan

LONDON (Reuters) - Rising inequality both within countries and between nations have reached critical levels that need to be addressed to avoid trade, tax and regulatory backlashes that could strangle an already wounded world economy, European money managers say.

Speaking at Reuters 2012 Investment Outlook Summit, taking place in New York, London and Hong Kong this week, the investors said four years of financial crises, austerity and rising unemployment in the West had exposed rising income and wealth gaps that damaged the sense of fairness required to bind societies.

The potential instability from damaging the broader social contract ultimately threatened those at the top of the pile as well as the aggrieved majorities.

"What people are starting to realize is if you're wealthy, preserving wealth in a society that is unstable is not easy," said Arnaud de Servigny, global head of discretionary portfolio management and strategy at Deutsche Private Wealth Management.

De Servigny said that to the extent the 2011 crisis is about sovereign debt, it is "a crisis of solidarity systems." As with previous periods of capitalism where intense bursts of activity led to big wealth gaps, he said it could take a long time to turn around.

Alan Brown, Chief Investment Officer at UK asset manager Schroders (SDR.L), said public anger at social injustice had to be taken seriously and, if not, there was a real risk of protectionism along with swinging wealth tax increases.

"In times of austerity, everybody believing there is fairness is important. There has to be a perception of fairness."

Brown said the world was currently characterized by free movement of trade, technology and money but restricted movement of labor. As a result, those in the developed world needed to acquire ever-more skills to even participate in economic growth.

"Real wages in middle America haven't now increased for 25 years. So when you see these 'Occupy Wall Street'-type protests, or the riots here in the UK, I think one would be very unwise to treat those as just being small things that will just go away."

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Graphics on income inequality in U.S. and around world: r.reuters.com/cec45s

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As the credit crunch of 2007 and 2008 morphed from taxpayer bailouts of failed banks into a sovereign debt crisis, government austerity and rising jobless, popular anger has grown about the malfunctioning of capitalism and the rising levels of inequality bequeathed by years of financial excess in the West.

The anger has spilled onto streets, from the "Occupy Wall Street" protests in the United States, anti-austerity riots in Athens or public sector union strikes in Britain. Liberal economists, such as Nobel laureate Joeseph Stiglitz, have questioned U.S. capitalism that allows a super rich 1 percent of the population to grab the lion's share of national wealth.

On Monday, the Organisation for Economic Cooperation Development said the earnings gap between the rich and poor had reached its highest level in 30 years and countries should consider raising taxes on the rich to reduce the growing inequality between the haves and have-nots.

"Without a comprehensive strategy for inclusive growth, inequality will likely continue to rise," OECD Secretary General Angel Gurria said in a statement. "There is nothing inevitable about high and growing inequalities."

CHINA AND EMERGING MARKETS

Hedge fund partner Stephen Jen told the Reuters Investment Summit on Tuesday that the problem in the West was exacerbated by China's integration into the world economy 10 years ago. "The return on capital and labor was fundamentally altered," he said.

But he said constantly trying to protect Western industries, banks and workers from rising competition from the developing world was a huge mistake.

"The constant bailout, using our money, our children's wealth, has to stop. A forced transfer of wealth from taxpayers to the bankers? I don't think it's fair. We all need to recognize that we need to shape up to face up to emerging markets' competition."

Jim O'Neill, Chairman of Goldman Sachs Asset Management, said rising unemployment was at the root of the tension and concerns would shift again once jobless rates started to fall. But he said inequality concerns within Western countries often ignored what had happened worldwide.

"It's completely under-appreciated that we are living through globalization and an era of great narrowing in income differentials. Globalization is taking hundreds of millions of people out of poverty, even if one of the outcomes seems to have been rising income differentials in developed countries."

(Additional reporting by Sujata Rao, Natsuko Waki, Carolyn Cohn; graphics by Van Tsui, Stephen Culp and Scott Barber)

(Editing by Susan Fenton)

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