The correlation between economic growth and inequality is not as strong as many would like to believe. Combating inequality can, in fact, lift the poor out of extreme poverty, but this can happen in countries with only modest growth.
There is no doubt that the Occupy Movement has had a significant role in bringing inequality into mainstream political debates. At the same time, a concern over the financial crisis has encouraged chief economists to describe “stark social inequalities” as “the greatest threat to economic growth.” These words were not uttered on the fringes of Zuccotti Park; they were made at the launch of the Global Risks 2012 Report a week ahead of the annual World Economic Forum meeting. Even pre-eminent global institutions, such as the G20, have promoted inclusive growth to tackle inequality; yet by any account the political response necessary to take action has been poor. In OECD countries today, the average income of the richest 10% of the population is about nine times that of the poorest 10% – a ratio of 9 to 1.
Oxfam’s new report Left behind by the G20 sheds light on how the G20 itself is falling behind on inequality. Even in championing itself as the stronghold of global economic leadership, 14 out of 18 G20 countries have seen inequality increase since 1990 as economic growth failed the poor. In fact, only Brazil, Argentina, Mexico and Korea managed to reduce inequality in the last two decades, which means that inequality rose in all high-income countries of the G20 with the exception of Korea. It seems clear that something isn’t right, and that the poor always get left behind.
In 2009 the World Bank’s chief economist, Justin Lin, said that, “The global crisis is an opportunity not only to identify new areas of research on how to help the developed and developing countries cope with the challenges of the crisis and prevent similar crises in the future, but also on how to achieve sustainable, inclusive growth across all countries.” The suggestion, therefore, is that a focus on growth alone is not enough. The G20 has thrown its political weight behind committing to shared growth and narrowing the development gap, and yet lifting people out of poverty in their own economies is failing to work.
So why does this happen? The first step is to understand why ignoring inequality is a barrier to growth itself. Extensive proposals for reducing inequality are argued in The Spirit Level, an intriguing treatise on the subject. Inequality – of many different kinds, not simply income inequality – is linked to weaker and less accountable public institutions, social unrest, crime, and lower levels of health and well-being. The ongoing Occupy protests are a good illustration of popular discontent with growing inequality, and particularly with the way that inequalities of wealth and power reinforce each other: it seems that people are no longer willing to accept inequality as a given. Crucially, Oxfam’s report finds evidence that there is no link between particular stages of development and changes to levels of inequality, thus casting doubt on the argument that inequality is an inevitable stage along the way to development.
The report digs further into the link between poverty reduction, inequality and growth by taking models from the World Bank and the UN to examine the potential impact of inequality on poverty in three G20 countries: Brazil, Mexico and South Africa. The results are startling: in Brazil, with only modest growth, income inequality fell significantly and nearly 12 million people have escaped absolute poverty. Continuing progress against inequality in Brazil would lift five million more people out of dollar-a-day poverty by 2020 than if inequality remains stagnant. Accelerating the fall in inequality in Mexico could reduce the number of people in absolute poverty by more than three quarters. Most worryingly, allowing inequality in South Africa to grow at the recently observed rate could push well over a million extra people into extreme poverty, even whilst the economy grows. This raises serious questions about the desire of world leaders to promote austerity followed by growth as the answer to our global economic woes.
There is a clear and powerful rebuttal to the popular assumption that the rising tide will lift all boats. The evidence in this report shows that even with robust growth, it is possible for a country’s populations to remain sunk in poverty unless governments invest in policies that promote the reduction of inequality – like free essential public services such as health and education, and progressive taxation to rebalance some of the disparity in incomes and help increase government accountability to citizens. What is clear is that if the G20 is to live up to its commitments on shared and sustainable growth, it must now practice what it preaches and tackle these linked, but distinct, challenges of equality and sustainability.