The Struggle Against World Poverty:
Why Inequality Matters
Description: The G-8 leaders completed their Canadian talkfest with much predictable mutual congratulation - especially about the new aid package for Africa. Critics were unimpressed, arguing that too little assistance was offered and that the promises made were
Date: 05 July 2002
Author: Andrew Mack, Director - Human Security Centre
Source: Canberra Time
The G-8 leaders completed their Canadian talkfest with much predictable mutual congratulation - especially about the new aid package for Africa. Critics were unimpressed, arguing that too little assistance was offered and that the promises made were beset with too many conditions. But no one disagreed about the need for action.
For years, Sub-Saharan Africa's population growth has exceeded its economic growth. One striking consequence has been that between 1987 and 1998 the number of Africans living in poverty increased by no less than 80 million. The World Bank expects another 116 million to be added to the ranks of the very poor in the next ten years. And poverty in Africa, as elsewhere, has a woman's face. 70% of the world's poor are female.
Lack of governmental capacity, massive debt, denial of access to rich country' markets, widespread corruption, capital flight, 'brain drain', AIDS and armed conflict continue to mire the continent in appalling poverty and prevent it from realising its potential.
The G-8 states have emphasised governance, health and education, peace and security, and economic growth as areas of primary concern. African leaders have stressed the need for the rich nations of the North to open their markets to African goods and the need for debt relief. Few would dispute the desirability these goals. But one critical issue has been ignored by both sides - the role that economic inequality plays in perpetuating poverty.
Mainstream development economists argue that the primary focus of development policy should be the elimination of poverty, not inequality, and that economic growth is the key to poverty reduction.
It is certainly true that reducing inequality, on its own, is no substitute for growth. Suppose a country has a high degree of income inequality and an average per capita income of $2 a day. Further suppose that it somehow eradicates all its income inequalities overnight. Per capita income will remain exactly the same miserable $2 a day. All that has happened is that the misery is now shared more equally.
But while growth is crucial it is not enough.
Development economists too often ignore the fact that gross inequalities of income make it more difficult to reduce the worst forms of poverty. The reasons are straightforward enough.
First, high levels of income inequality can slow national growth rates, largely because the productive potential of the poor is not realized. More equal societies generally grow faster, and their growth patterns are more stable. During the past 30 years the relatively egalitarian states of East Asia have grown three times faster than the highly unequal economies of Latin America. Differences in equality are not the whole explanation for the difference in growth rates, of course, but they are an important part of it.
Second, high inequality levels undermine the effectiveness of growth strategies in reducing poverty. This is true even when the incomes of the poor rise at the same rate as overall growth. In Brazil, for example, the poorest fifth of the population receives only 2.5 percent of national income; in Indonesia the figure is nearly 10 percent. If Indonesia and Brazil both grow at the same rate, the income of the poorest 20 percent of Indonesians will increase four times as much as that of the poorest 20 percent of Brazilians. Decreasing inequality makes economic growth work more effectively for the very poor.
Third, growing inequality in the developing world is associated with increased criminal violence and - where the inequality is between groups - with armed conflict as well. In Africa, the World Bank estimates that civil war causes a 2% loss of economic growth each year, not to mention tens of thousands of lives.
Fourth, high and increasing inequality and social exclusion increase the risks of a backlash against the very market reforms that represent the best long-term hope for escaping the scourge of poverty.
One reason that the issue of growing income inequality is accorded so little attention is that it is seen as an inevitable consequence of the immutable forces of globalisation. Some economists believe that widening income gaps are regrettable, others that they are a spur to competition and needed structural changes. Few believe that the process can be arrested.
But the recent history of the industrialized economies suggests that this is much too simplistic a view. While the forces of globalization may indeed tend to increase inequality, this tendency can be countered by government policy.
From 1977 to 1997, inequality increased dramatically in the United States, Britain and New Zealand, yet in Canada there was relatively little change, while in France inequality levels actually declined. All these OECD countries were exposed to much the same forces of globalization, yet the income distribution outcomes were very different. It was government policy that permitted inequality to rise in the US, Britain and New Zealand; and it was government policy that stopped Canada and France from going down the same inegalitarian path.
Domestic policy also makes a difference in the developing world. The striking differences in equality levels between East Asia and Latin America owe more to domestic policy than to global market forces.
The message is clear. Politics matter and growing income disparities are not an inevitable consequence of globalization. Reducing inequality increases the benefits of economic growth for the poorest of the poor.
*Formerly Professor of International Relations at the Australian National University, Andrew Mack was Director of Strategic Planning in the Executive Office of UN Secretary-General, Kofi Annan, until January last year. After a year at Harvard he joined the University of British Columbia in Vancouver, Canada where he directs the Human Security Centre.