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Economic Growth: Will a Rising Tide Lift All Boats?

economic growth
Developing countries around the world face the tremendous challenge of promoting sustainable growth while also reducing poverty and increasing the living standards of their populations.

Around the world, conventional wisdom holds that by focusing development policy on economic growth, inequality will be reduced and incomes of every segment of society will increase–a rising tide lifts all boats.

While poverty has been reduced dramatically all around the world (700 million fewer people live in conditions of extreme poverty in 2010 than in 1990), big challenges still exist to further reducing this number. One of these challenges is rising inequality within and between nations.

Listed below are three reasons why income inequality must be addressed in both the developed and developing world in order to ensure long-term economic growth benefits for everyone and not just a select few.

1. Economic growth is not always equal

China, one of the countries where poverty reduction has been dramatic, is astoundingly tolerant of large gaps in inequality in exchange for growth. Deng Xiaoping, a top Communist Party leader from 1978 to 1992 who initiated economic reforms, is thought to have acknowledged, “It is good for some people to get rich first.”

While this may be true in some cases or at the beginning of market reforms, recent studies undertaken in Indonesia, South Africa, India and China reveal an increase in the gap between the rich and poor. This gap in income inequality can not only prevent further reduction in poverty, but it also has long term implications in the ability of large parts of the population of each country to be able to contribute to the country’s economy and growth.

2. Education, health, and job creation policies must be pursued simultaneously with growth policies

In order for a country’s population to contribute to and participate in the country’s economy, individuals must have the skills. Pursuing policies only focused on increasing GDP may improve growth outlook in the short run. However, in the long run, without education initiatives to match, a large segment of the population will remain poor.

In the 1990s, Brazil pursued a pro-equity growth policy in which it provided grants to help boost education. Average years of school for the poor shot up and when growth hit; they too were able to take advantage of the better jobs.

Just as an overall boost in education and health is important, so is robust job creation. People must have the opportunity to input the skills they have learned back into the economy.

For this reason, inequality cannot be solved without government involvement. The market left as is does not ensure that growth is shared equally. A combination of strong government programs and a strong private sector ensures better opportunities for more people.

3. Positive GDP growth can hide underlying inequality

The main measure of inequality within a given country is through the gini coefficient. The gini coefficient is a variable that measures how equal a country’s income is with zero representing an instance where everyone’s income is exactly equal, and one representing an instance in which one person has all of the income and the rest have none.

In South Africa, while the government is vocally committed to fighting poverty and inequality, between 2003 and 2008 overall income inequality increased. During this period, South Africa’s gini coefficient rose from an already high .66 to .70 – one of the highest in the world. So despite an average GDP growth rate of 3.2 percent (1994-2012), steps still need to be taken to ensure that the bottom segment of society is able to contribute and benefit from that growth.

Today, nearly 80 percent of humanity lives on less than $10 per day and over 3 billion live on less than $2.50. High levels of inequality exacerbate problems of poverty and reduce opportunities for the poor to move beyond their circumstances. Fewer opportunities for children to rise up economically means that inequality becomes more exaggerated over time and can affect the social structure of a country – leading to unrest, crime and violence.

Developed and developing countries alike all face the challenge of reducing their gini coefficient while also promoting growth. While each country faces unique challenges, this is one problem that can benefit from collaboration at the international level. From the information above, it becomes clear that poverty cannot be fully eliminated without measures in place that simultaneously address income inequality.

Andrea Blinkhorn

Sources: Science Mag, Global Issues, Global Issues 2, Politics of Poverty, United Nations, South Africa, Hvistendahl, M. (2014). While emerging economies boom, equality goes bust. Science,344(6186), 832-835.
Photo: PBS