Wednesday, September 28, 2016
Photo of Zia Qureshi

There is a better way, one that is less controversial and politically more amenable to action: putting in place reforms that promote strong, inclusive growth that by its nature reduces inequality.

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Growing Out of Inequality

WASHINGTON, DC – Income inequality has been increasing in most major economies – and in many of them, it has been increasing significantly. This is a cause for growing concern, and rightly so: inequality not only can undermine an economy’s long-term growth prospects; it can restrain growth in the short term by depressing aggregate demand.

The typical approach to tackling inequality – redistributive tax-and-transfer fiscal policies – can be controversial and divisive, owing to perceived tradeoffs between economic growth and greater equality. The result is usually heated debate and passionate rhetoric, but little concrete action. Politicians are especially prone to this dynamic – as evidenced by much of the conversation about inequality in the ongoing presidential election campaign in the United States.

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There is a better way, one that is less controversial and politically more amenable to action: putting in place reforms that promote strong, inclusive growth that by its nature reduces inequality. This approach focuses on reducing inequalities of opportunity and broadening the base of participants in the growth process, thereby ensuring that more people benefit from it. Politicians who champion this approach may find it easier to build winning coalitions to enact it.

The range of policies that can stimulate inclusive growth is broad. It includes improving access to markets, leveling the playing field for large and small firms, investing in human capital, and promoting job creation. Regulatory and institutional reforms that strengthen the rule of law and promote open, competitive, and fair business environments are one example. This agenda also features the development of infrastructure that expands economic opportunities and policies that make it easier to access finance.

Education is a key area to consider when promoting inclusive growth. Improving the availability and quality of education expands the talent pool in the labor force and upgrades and broadens its skills base. Early childhood development programs, for example, have been demonstrated to provide lifelong educational benefits and the foundation for success in the workplace.

Moreover, it is important to remove barriers in the labor market. Greater flexibility is crucial to providing opportunities for an educated workforce to find well-paying jobs – especially when efforts to do so are complemented by macroeconomic policies that boost demand for labor. The removal of barriers to women’s participation in economic activity is another important lever for sparking inclusive growth.

The effectiveness and appropriateness of reforms that promote inclusive growth will differ from place to place. But few countries lack significant opportunities to strengthen several policies in this area.

To be sure, redistributive fiscal policies often will remain necessary. But it is important that they be designed in a way that causes as little economic harm as possible. Well-designed tax-and-transfer policies may not be inimical to growth – or at least can minimize the efficiency cost of redistribution. On the tax side, examples include expanding the base of the personal income tax, ensuring that the rate structure is progressive, removing excessive and regressive exemptions, and improving property taxation. On the transfer side, they include retooling social safety nets to encourage acquisition of new skills and capabilities (conditional cash transfers are one possibility) and retooling social-insurance programs to eliminate adverse incentives and bolster their breadth and sustainability.

This agenda is all the more important because rising inequality can produce a backlash against globalization and technological change, both of which are major drivers of economic growth. Rather than attempting to restrain them, policies must address their more disruptive effects in a careful and imaginative way, through education and retraining programs, more flexible labor markets that allow workers to adjust to changes in the economic environment, and well-designed safety nets to support them through the process. International cooperation will be key to managing some aspects of globalization, especially regarding taxes on mobile capital.

At a time when the world is concerned with both slowing economic growth and rising inequality, policies that can be simultaneously pro-growth and pro-equality merit close consideration. It is time to stop trying to re-slice the pie and start ensuring that it gets bigger in a more inclusive way, so that there is more to go around and more people get a slice.

 

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Photo of Steven J. Klees

Relying on market fundamentalism has continued to marginalize three billion people, seriously damaged the environment, and widened the economic divisions in even the richest of countries.

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Pro-Growth is Not Pro-Poor

COLLEGE PARK, MARYLAND – Zia Qureshi recently argued that economic growth is the way out of inequality – and, by extension, poverty. In Qureshi’s view, more direct redistributive policies are too “controversial and divisive.” In fact, there is ample reason to believe that the world will never grow its way out of inequality and poverty, and that redistribution is our only hope for greater social justice.

“Pro-growth is pro-poor” has been the informal slogan of the World Bank and the International Monetary Fund for decades, resulting in 35 years of neoliberal economic policies known as the “Washington Consensus.” These policies comprised the structural adjustment programs (SAPs) of the 1980s and 1990s, when developing countries were forced to cut social programs, privatize public services, deregulate industries, eliminate trade protection, and make their labor markets more “flexible” (a euphemism for making it easier to fire workers). These programs yielded modest growth at best; what they did succeed in boosting was poverty, inequality, and social protest.

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Dissatisfaction with the Washington Consensus came to a head during the economic crisis in Southeast Asia in the late 1990s, leading to a search for alternatives. Since 2000, the Bank and the IMF have been forced to work with a new template, Poverty Reduction Strategy Processes (PRSPs), which supposedly differ from the SAPs in two ways; they put more importance on social safety nets, and they encourage extensive participation of civil society in decision-making.

Unfortunately, the PRSPs have failed to deliver. Their safety nets are full of holes, and, too often, civil society is barely consulted. Indeed, the 1,200-page technical manual that must be followed to produce a plan belies the fundamental idea that these programs are owned and governed by those who adopt them. In the end, PRSPs look a lot like SAPs.

Prior to the neoliberal Reagan-Thatcher “revolution” of the 1980s, the economic consensus was that inequality and poverty were inherent to capitalism, and that a strong, well-financed government was needed to balance a market economy’s inevitable adverse effects on the distribution of income and wealth. Most economists promoted government provision of public goods; some even championed “equity before growth” strategies, which maintained that redistribution could lay the groundwork for growth that benefited the poor.

To be sure, even then, some conservative economists argued that growing economies could produce inequality for a time, but eventually greater equality would prevail. But this do-nothing philosophy was a minority view.

Starting in the 1980s, however, neoliberal economists began to dominate the discussion. They could not avoid talking about poverty, but inequality became an almost forbidden topic. The Nobel laureate economist Robert Lucas spoke for many when he dismissed the importance of inequality: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of [income] distribution.”

Fortunately, the pendulum has started to swing back. It is becoming increasing clear that the result of 35 years of pro-growth policies has been an almost unprecedented rise in income and wealth inequality. Even the most favorable analyses of the effect of neoliberal policies on poverty rely on an outdated definition of poverty: income of less than $1.25 per day.

A new focus on inequality – most notably by Thomas Piketty – has helped stimulate a resurgence of economic thinking like that advocated by Joseph Stiglitz, Anthony Atkinson, Paul Krugman, and Robert Solow. Many are now arguing not only that economic growth does not in itself reduce poverty and inequality, but also that pro-equity policies and conditions lead to faster and better economic growth.

Indeed, some economists now argue for a two-pronged attack on inequality: redistributive measures alongside market interventions to bolster wages and employment. Among the recommended policies are progressive income taxes, increases in capital gains taxes, higher estate taxes, and global mechanisms to tax income, wealth, and financial transactions. Governments could also facilitate unionization to give workers more bargaining power, substantially raise minimum wages, and create employment, for example, through government jobs programs, as the United States did during the 1930s.

While Qureshi calls for economic growth to be “inclusive,” most of the policies he recommends fit more with the failed Washington Consensus than with the new directions proposed by resurgent progressive economists. Relying on market fundamentalism has continued to marginalize three billion people, seriously damaged the environment, and widened the economic divisions in even the richest of countries.

Pulling out of this tailspin will not be easy. It will require strong national and international governance. But, to borrow Thatcher’s old slogan, if we are serious about reducing poverty and inequality, “There is no alternative.”

 

Can Economic Growth Alone Reduce Inequality?

Read Comments (15)
  1. Comment Commented

    To Mr. Mukherjee:
    Rawls presentation of "distributive justice" has been answered by Nozick, among others.

    Perhaps you will consider that the term intends "justice in distribution?" If so that leaves justice to be examined and you might want to consider that justice is the performance of obligations.

    Thus, what are the obligations for distribution among members of a social order? How are they to be performed? Are they commutative; or some so, some not? What gives rise to or creates the obligations?

    Are we all equally obligated to one another? That would be hard to sustain. Are some more, or differently, obligated than others? When those adjustments are made, how would the results differ from those of interactions amongst free people in open societies? Read more

      Comment Commented

      Like most radical libertarians, Nozick was unable to distinguish between shared labor done in the spirit of community, and slave labor done under force of coercion. But despite that shortcoming (as I see it), I would encourage an examination of the links between growth and inequality in a hypothetical society that has adopted Nozick's approach to distributive justice in full.

      Otherwise, the notion "that justice is the performance of obligations" is far too limited and contractual to my view, and leaves open the rather crucial question of how those obligations come to be established in the first place.
      Read more

  2. Comment Commented

    I would argue that growth is neutral with respect to inequality, and note that Mr. Qureshi says as much in his final paragraph where he writes that "policies that _can_ be simultaneously pro-growth and pro-equality merit close consideration." It is policy harnessed with growth that allows it to impact inequality -- for better or for worse.

    We can certainly identify policies that have linked economic growth to extremes of INequality -- plantation slavery in the cotton South being the example that springs to mind.

    In any event, I believe the problem of inequality is a problem of _justice_, not economics as such, and I would recommend both of the authors here to see how they would fit "economic growth" into a framework of distributive justice like that presented by John Rawls.

    In the long run, it appears increasingly likely that Economic Man's addiction to economic growth will indeed make us all equal -- as our planet's resources are exhausted, its temperatures rise to Venus-like levels, and our species covers it like the mold on an orange. Read more

  3. Comment Commented

    The remiss of our times is that growth that creates Incentives that are truly economic multipliers are more hammered down by those who would have otherwise gained from them; marginal farmers toiling on unproductive land could have done better to work in industrial outfits that create avenues out of the land to diversify incomes. But would a single political party bringing such a simple solution up for debate in an election ever gain the popular mandate? Perhaps not. The solution would lie in the entire polity to rise to the occasion, which seems rather odd in most places in this world, barring the supremely developed economies, the Nordic states or Switzerland. The irony is not entrenched in the politics of development but in the development of politics in areas of depravity. Read more

  4. Comment Commented

    These discussions seem to turn on *distributions*; of incomes, accumulated assets (productive or for deferred consumption) and of access to relationships that provide economic and social benefits (or ameliorate relative burdens & responsibilities).

    That may be part of the cause of so much emphasis on redistribution - considered as a form OF distribution to replace or displace the effects of what may be the factors for the current resulting conditions of distribution.

    That brings us to consider "inequalities" as resulting conditions of the factors FOR the present systems of distribution; including those factors which were not present in periods of lesser inequalities, or not of the same effect in those periods.

    What had been the previous system(s) of distribution of good and services (public and private) in those prior more "optimum" period; and what had been the "balance between public and private goods and the determinations of their distribution? What were the relevant factors?
    Have other factors been added, including creating "new" mechanisms for distributions of those two kinds?

    Is it not possible that factors and methods have been introduced into the previous distribution systems which have disrupted what may have been the previous "equalizing" effects of the earlier methods and factors?

    Is it not likely that we have fouled up the distribution system by inserting additional factors and methods (such as "social programs') in search of other objectives, which has led to the resultant conditions of "inequalities" from those insertions.

    Are we looking for causes to find curs or merely for treatments? Read more

  5. Comment Commented

    Set the global development bank, with mixed capital, public-private, to promote projects of small and medium enterprises, globally, that generate real growth of national economies, in order to increase quality employment. Read more

  6. Comment Commented

    For the past 30 years, income from investments, capital gains and alike, all at reduced tax rates, have contributed significantly to inequality. Globalization has enabled multinational businesses to shift profits to tax-free jurisdictions and to use pre-tax income for international acquistions, and as a consequence, grow even faster without paying its fair share in the countries where the customers are and the highly profitable prices for goods and services can be realized. The challenge is to find a better and fairer balance. Read more

  7. Comment Commented

    Mr. Qureshi has no deeply analyzed statistically valid evidence that promoting "strong, inclusive growth ... by its nature reduces inequality." Instead, he is stuck in the past. He needs to read Capital in the 21st Century (Piketty). To Mr. Klees's list of redistributive measures, I suggest adding a well-crafted carbon tax--the best approach to pricing carbon while revenue-neutral and redistributive.
    Read more

  8. Comment Commented

    Pro-Growth is definitively NOT Pro-Poor, as Picketty has clearly demonstrated; the ridiculous barrier for escaping poverty voiced in Lima during the World Bank-IMF show last week, of USD 4 per person per day, illustrates that magic thinking at these institutions prevails. Better to think out-of-the-box, as suggested in my two below comments. But first, consider this:

    https://www.academia.edu/13062623/Informal_Proof_of_Thomas_Pikettys_Thesis-2014060802 Read more

  9. Comment Commented

    There is no single solution to the plight of the poor anywhere; rather, Development with a capital "D" is called for: Comprehensive Environmentally-Friendly Inclusive Socioeconomic Development, based on the multiple insights and tools that can be brought to bear on the problem of extreme poverty, and backwardness, through an articulation in a For-Profit Partnership of all entities, private and public, that impact economic activities at a hemispherical level. For instance, in the American Hemisphere. The U.S. is not an island. Read more

  10. Comment Commented

    There is no single solution to the plight of the poor anywhere; rather, Development with a capital "D" is called for: Comprehensive Environmentally-Friendly Inclusive Socioeconomic Development, based on the multiple insights and tools that can be brought to bear on the problem of extreme poverty, and backwardness, through an articulation in a For-Profit Partnership of all entities, private and public, that impact economic activities at a hemispherical level. For instance, in the American Hemisphere:

    A.https://www.academia.edu/13062837/La_Reforma_Tributaria_del_Siglo_XXI_The_XXI_Century_Tax_Reform_-_2011100411

    B.http://www.academia.edu/12823884/Some_attempts_at_promoting_A_Partnership_for_Development_with_the_United_States_of_America_-_1997031002

    C.https://www.academia.edu/12823841/Mathematical_Model_and_Simulation_for_A_Partnership_for_Development_with_the_United_States_of_America_-_December_1999
    Read more

  11. Comment Commented

    Simply use what has been advised to China for Basic Industrial Ecosystems in 1983 and spread the advice for the world. Get it done instead of debating it and writing books. Read more

  12. Comment Commented

    Important as it is, a high economic growth doesn't always lead to the elimination of poverty. However, I believe that economic growth is the most effective and efficient method of lessening poverty. That's because high economic growth cannot occur without business investments. And, business investments are what creates lots of needed jobs. Also, lots of high and low-paying jobs require skilled and non-skilled labor force. And, the labor force in turn needs an educated and trained workers. So, at every turn of economic growth, there are investments that need to be made so that an economy can realize high growth: Investments in training and educating people; investments in machines and equipment; and investments in funding and financing.

    Having said that, let us now examine the factors that lead to high economic growth. In the United States, growth has been anemic, averaging 2.5% for the last three decades. Actually, many policy makers have now come to accept that the economy can grow no further. However, the reality is that with some adjustments in the taxation code, high economic growth of 5% can be realized with a general lowering of income taxes and, the re-introduction of a new tax rate for high income earners. For this reason, I propose a revamped tax code with the following rates: Zero (for married couples filing jointly, $65,000); 15% (for married couples filing jointly, more than $65,000.01); 28% (for married couples filing jointly, more than $350,000.01); and 39% (for married couples filing jointly, more than $600,000.01). Also, I propose that capital gains be taxed at a rate of 22% for all income earners, including those who don't pay income tax. Growth does not always lead to a reduction in the poverty levels but, it is the most effective and effective way of lessening poverty. Can this be done? Definitely, yes. I expect one political party to control the presidency and both houses of congress in next year's elections. Read more