When income inequality hurts economic growth
BAD news for the advocates of spasmodic growth, an economy doesn't work like an inflated balloon. Pumping air stretches the balloon uniformly, but that's not exactly how prosperity gets distributed across the population in a country. This is the finding of Paris-based Organization of Economic Cooperation and Development. Its new study reveals that income inequality hurts economic growth.
That's why making many people rich doesn't diminish poverty. Instead it promotes polarisation and concentration of wealth. Big businesses are built, luxuries abound and decadence stalks a society. The poor gets upgraded as poverty moves from the belly to the brain. The howl of deprivation gets shifted from mouths to souls.
The OECD concludes that the single biggest impact on growth is the widening gap between the lower middle class and poor households. The rising income has to chase growing needs as luxuries continue to transform into necessities. Absolute poverty soon cedes place to relative poverty. Better fed, clad and housed, the poor still fail to afford an investment in education. They lag behind like their ancestors, and inequality persistently resists growth.
How exactly does it happen? When the children from poor families don't have access to education opportunities, it holds back their chance of social mobility and limits their scope of skills development. The vicious circle sets in for those whose parents have low levels of education, because their educational outcomes deteriorate as income inequality rises.
So, the OECD experts argue that the anti-poverty programmes cannot do enough unless cash transfers and increasing access to public services, such as high-quality education, training and healthcare are also fostered as essential pillars of social investment. In other words, poverty alleviation is bound to remain an elusive goal if a country does not engender greater equality of opportunities for its citizens.
There are numbers to prove the point. The OECD study estimated that Mexico and New Zealand lost more than 10 percentage points off growth due to growing inequality. The cumulative growth rate in Italy, the United Kingdom and the United States could have been 6 to 9 percentage points higher had income disparities not widened. Sweden, Finland and Norway have been similarly impacted. The exceptions are Spain, France and Ireland where greater equality helped increase per capita GDP.
An African proverb says that if you want to go faster go alone, but if you want to go far go together. The rich cannot expect to enjoy bounteous growth, expecting trickle down to pull up the poor. They cannot keep their governments, banks and regulators in their pockets and then expect the economy to have healthy rounds of growth. Accumulation of wealth can be a lonely pursuit like the struggle to overcome insolvency.
Investment and employment generation are necessary conditions, but their benefits aren't fully harnessed unless income distribution is a managed goal. If GDP grows, that growth must spread out amongst all citizens failing which wealth accumulates in a few hands like fat around the waist. This fat increases the risk of diabetes, heart disease, stroke, high blood pressure and certain cancers in a nation's body.
It throws cold water on the proponents of economic liberalism, the ideological belief in organising the economy on individualist lines, meaning that the greatest possible number of economic decisions is made by individuals and not by collective institutions or organisations. Many a knight have emerged in Bangladesh, who are riding the hobbyhorse of free market economy and jousting their entrepreneurial lances to justify profit-mongering as economic crusade. They tend to signify all their mischiefs and manipulations with the homilies of foreign exchange earnings and employment generation.
This is not to undermine the achievements of our business community but to underscore the fallacy of our policymakers regarding national prosperity. It's true the venture capitalists amongst us have turned around the economy, their hard work and acumen lifting a traditional economy out of misery. In fact, it's they who have built the momentum that has given this economy its buoyancy.
But our policymakers have been blindsided by this buoyancy, mistakenly convinced that what's good for the business is also good for the economy. They are evermore disillusioned between business as a means of nation building and nation as a means of business building. Starting from the national parliament to stock market to export processing zones, this country has been reduced into a life support system for the lust for business.
Last week a business magnate said on television that it was pettiness of the state to worry so much about who was moving how much money out of the country and buying second homes abroad. His words reeked of the same selfishness that characterised the plunder of this country by colonial hands, which didn't see anything wrong if the wealth of this nation ended up in Rawalpindi or London.
The writer is Editor, First News and an opinion writer for The Daily Star.
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