Without economic growth, you can’t end poverty

22 December 2016
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The world is full of clichés. One to question proclaims that “economic growth is only good if it benefits everyone.” Really?

Sarah lives out in the middle of nowhere. She grows vegetables and raises livestock to survive. This year, her cow produced a calf—in terms of Sarah’s economics that’s growth. In addition, Sarah managed to double her vegetable crop. She is now better fed than ever before and happy. But, that growth benefitted only her, no one else. If economic growth “is ONLY GOOD if it benefits everyone”, does that mean the growth Sarah saw is bad? Of course not.

Economic growth, itself, is good. Without it, you can’t end poverty.

Of course, most people aren’t like Sarah. They live in a hive of co-operation where they are constantly trading with each other.

So, precisely, how would economic growth here not benefit everyone?

Let’s call the rich ‘Rockefellers’ and the poor ‘Smiths’. If the Rockefellers double their income, what do they do with all the money?  Some decide to build larger houses, gilded mansions perhaps. Now, will it be the Rockefellers who pour the concrete, paint the walls and do the landscaping? Definitely not. Even just the building of a house benefits the Smiths. Mrs. Rockefeller, also, is well off. She’s not going to get down on her knees to scrub the floor. She’ll hire a Smith to do that.  Every Rockefeller transaction, no matter how much they may try to keep all the money to themselves, will benefit a Smith.

It would be extremely difficult to intentionally design an economy where economic growth isn’t inclusive. Attempts to exclude some people, hard as the apartheid regime tried, they failed. When economic growth occurs it spread benefits to Smiths as well as to the Rockefellers.

Another cliché frequently used is that “Economic growth has furthered inequality and the rich get richer and the poor stay poor.” A cliché widely believed even though the evidence does not substantiate it. Consider a claim made by Prof Sheldon Danziger in the New York Times: “For the last 40 years we have experienced a ‘gilded age of inequality’. The rich have gotten fabulously richer, while the middle class has struggled and more workers have fallen into poverty.” The good professor offers no evidence for that, especially for the United States, which is what he was writing about.

US Census data contradicts the Professor. In terms of 2014 dollars, in 1967, only 8.1% of Americans earned more than $100,000 annually. By 2014, the percentage was 24.7%. The number of people in the middle-income and lower-income groups shrunk while those in the upper-income group increased. Maybe the “rich got richer”, but then, so did everyone else. In 1967, the majority of Americans, 58.2%, earned less than $50,000 per year. After adjusting for inflation, by 2014, that number had declined to 46.8%.

This didn’t stop some people from lamenting “the middle-class is shrinking.” It did shrink, not because middle-income people fell into the lower-income category, but because the number of upper-income people tripled in size.

While the rates are different, the pattern is similar around the world. The reality is the number of poor is decreasing. Last year the World Bank said: “Global poverty is estimated to have declined in 2012 to 902 million people, or 12.8 percent of global population, according to the most recent data. Poverty is forecast to fall in 2015 to 702.1 million, a poverty rate of 9.6 percent, the first time the share [of] people living in extreme poverty would be in the single digits.”

An under-appreciated aspect of economic growth is it’s very difficult for an economy to grow when that growth is to be showered on only a select few. Perhaps under the Soviets the elite were the only ones not standing in queues hoping to be able to buy something, but socialist economies had trouble growing. In growing economies, the wealth tends to spread, whether it’s anyone’s intention or not.

A study by the World Bank found increases in wealth-production lift people out of poverty even if the distribution of wealth doesn’t become more equal. Under the worst scenario, increased wealth benefits the poor even if they don’t become relatively more equal to the wealthy. Wealth increases benefit everyone. The additional wealth the rich receive, however, has only a marginal impact on their standard of living, while the additional wealth to the poor is significantly important. Even without wealth becoming more equal, increases disproportionally benefit those who are poorest, relative to those who are wealthiest.

This doesn’t mean we can’t support policies that will impact wealth distribution but we have to careful. The typical regulation, or state intervention, benefits the wealthy, not the poor. Regulations increase the cost of doing business, something which benefits the economic “big boys” who can afford compliance, to the disadvantage of the poor. Ending state involvement in crony capitalist measures and regulations can increase both the total income of the poor, as well as the distribution of wealth, benefitting the poorest segments of society more than the wealthiest.

James Peron is the president of the Moorfield Storey Institute, an independent think tank dedicated to equality of rights before the law, social tolerance and civil liberties. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.


 


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