To be more specific, we don't need just economic growth. We need better
redistribution.
As countries move along the path of development to better resources and higher standards of living, what does it mean for redistribution? The question takes us down an economic debate as old as time- if economic growth goes hand-in-hand with a reduction in economic inequality. This could take us on a tangent as we decide on the definition of economic growth and try to make it more inclusive, but for the sake of simplicity, we shall assume that economic growth means a rise in the productive capacity of the economy. Trends indicate the answer isn’t linear. The Palmo ratio captures the income share received by the richest 10% divided by the income share received by the poorest 40% and is a measure of economic inequality. As given by Our World in Data, 2022, the USA had a Palma ratio of 8.3, whereas India’s ratio was 6.5. This is in stark contrast to traditional economic theory, which states that the distribution of economic resources becomes more even as the level of economic growth rises. USA, a more productive economy by industrial standards should by logic have a higher level of income, which divided by a lower population should give a higher per capita GDP distribution, or in simpler terms- a higher distribution of economic gains. The Palma ratio shows this is not the case. Why does this happen? One possible answer is through the Kuznets Curve.
In 1955, Simon Kuznets gave the concept of the inverted U-shaped curve linking economic growth and economic distribution, depicted by the Gini coefficient (a measure of inequality; the higher it is, the worse is inequality). The upward-sloping portion of the curve indicates that as nations start to industrialise and the rate of economic growth accelerates, this growth is restricted to industrially superior regions within the nations and economic inequality rises. But as the gains from economic growth spread, this benefit spreads to the rest of the population and the gini coefficient falls throughout the downward-sloping part of the curve. This could explain why high-productivity economies like the USA might suffer from higher accounts of economic inequality. However many theories oppose this growth-distribution trend.
Economists state that as economies mature through the process of growth and development, they undergo significant structural changes. If government policy develops to concentrate development in certain pockets across countries, it can hamper this trickle-down way of thinking about the distribution of economic gains. Moreover, as the structural nature of globalisation unfolds, it is clear that it contributes significantly to tipping the economic scales further in the favour of a few. The reason for this lies within the very nature of globalisation. As nations liberalise and enter international markets, they often specialise in certain commodities or industries to develop a comparative advantage in production. This inevitably benefits some industries and some regions more than others. Thus, the increased productive capacity of nations lending to globalisation might actually increase economic inequality, as opposed to reducing it. Here the relationship defined by the Kuznets curve breaks down.
Other factors also affect the relationship between growth and inequality. Financial markets, in their nascent stages, are mostly restricted to people who have the necessary financial resources to avail of their services. People who reside in low-access, low-income areas are generally unable to access the services of financial markets. This can exacerbate inequality initially, and then eventually lead to a more even distribution of resources in the future as financial markets encourage nationwide investment.
In addition to the factors mentioned above, there are deep historical and contextual factors that affect inequality in countries. Studies show that countries that initially had higher poverty rates and low levels of development indicators, often face higher inequality after liberalisation. The income skew in the population worsens as privileged sections of the population garner the majority of the economic benefits from opening up the economy.
In conclusion, the relationship between growth and inequality is not linear. It is affected by financial, international and indeed chronological factors. The challenge for Economics is to contextualise and understand these variables to bridge the inequality-growth gap.
Opmerkingen