Income inequality and growth: A chicken and egg situation?

A recent blog by a World Bank economist has an interesting take on “inequality” and tackles the emerging question of whether growth can bridge inequality or whether it is growth that causes inequality in the first place. He raises the question, “what if it is not inequality that is damaging to economic growth but the lack of economic growth that is damaging to equality?”

This debate isn’t new, but when the industrialized world begins talking about this nexus, you know that there’s an interesting dynamic playing out. “Inequality” is now no longer a policy preoccupation of those in developing countries alone. Given the global economic crisis and the debilitating effect it had on prosperity in the developed/industrialized world, it’s not unusual nowadays to hear Western world leaders talking about it in key policy speeches. President Obama, for instance, chose to focus heavily on inequality of income and opportunity in his 2014 State of the Union address.

In his piece, ‘Is Inequality the Convenient Villain or a Misguided Obsession?’, economist Jean-Pierre Chauffour reiterates what many other economists widely believe – that at the heart of tackling inequality is economic growth. In other words, countries must grow in order to reduce inequality.

Sri Lankan researchers had identified this nexus early on, but stressed on the importance of growth being inclusive in order for it to help tackle inequality. For example in the IPS State of the Economy 2011, which had ‘inclusive growth’ at the heart of its theme that year, the report argued that,

Inclusive development, however, is not only about sharing growth. It is also about empowering people to participate meaningfully in creating growth.

[…]

Apart from the desirability of inclusive growth from a purely ethical standpoint, inclusiveness is needed for sustaining economic growth, as exclusion leads to underemployment of productive resources that could restrict growth.

Meanwhile, in a curious turning of tables, the IMF seems to believe that if there is better redistribution of income – an inherently non-liberal economic view – there would be less inequality. A recent staff paper, titled ‘Redistribution, Inequality and Growth’, provided some revealing insights into the Fund’s thinking on this – that ‘redistribution is overall pro-growth’. (I’m still recovering from seeing the IMF, of all people, talking about redistribution!)

Meanwhile, a report by global NGO Oxfam also aims to tackle the inequality question, but specifically homing in ‘extreme inequality’, ‘wealth concentration’ and ‘political capture’.

yacht-landscape-billion-oxfam

An image used by Oxfam in its global advocacy campaign following the release of its report ‘Working for the Few’ that highlights income inequality.

 

This debate is good. Developing countries aren’t alone when it comes to researching and tackling the drivers of, and solutions to, inequality. Of course the policies that are used to tackle inequality in the industrialized world won’t necessarily help in the developing world. Yet, there is certainly a common understanding emerging – that inequality is morally undesirable, is a drag on prosperity, but it can be tackled and that tackling it is intrinsically linked to the concept of inclusive economic growth. But in a time of slow growth and increasing pressure on public finances to cut welfare and social services, this becomes an even trickier challenge.

In the closing section of Chauffour’s article, he rightly argues,

Digging into the various manifestations of economic inequality—inequality of opportunities vs inequality of outcomes, in-country inequality vs global inequality, “good” inequality vs “bad” inequality—opens a wide research agenda. While the academic conversation continues, the forces that have been able to reduce extreme poverty in the world by more than half since the early 1980s—namely, sustainable accelerated economic growth—should not be derailed.

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