Amsterdam/Rome — Developing countries as a group have been growing faster than developed countries for several decades. As a result the ratio between average incomes between the two sets of countries – albeit still very large – has been shrinking. This is good news. The other piece of good news is that over this period the number of people living in extreme poverty has also been dropping – from 1.9 billion in 1990 to about 650 million in recent years. China has recently declared an end to extreme poverty.
The bad news is that much of increased income and wealth in many developing countries has been concentrated at the top with relatively little going to the poor. This includes big, fast growing countries such as China and India.
As a result the bulk of the population in developing countries is living in a society where income inequality is increasing. This matters for two reasons:
Firstly, that the increase in average GDP in the developing countries is not translating as fast as it should into generalised well-being indictors such as such as higher education, real wages, average height and life expectancy. This is very disappointing.
Secondly, people are not as happy as they could be. After all happiness is impacted not just by how much they earn and consume, but also about their place in society and how they stand compared to others. The widening gap between the poor and the rich in many countries creates a sense of depravation and injustice. This makes them highly susceptible to political turbulence and instability, both of which have a high cost in terms of economic performance and wellbeing.
Is the increase in inequality an inevitable part of the development process, or at least of the early stages of growth? Is it true that one “cannot redistribute poverty”? Is it true that rich tend to save and invest more and therefore some concentration of income and wealth is necessary to generate higher growth? Is it true that only a rich and privileged business class has the confidence and appetite for risk and innovation that is a prerequisite for development? There is strong evidence that the answer to all the above questions is a “NO”. Growth and development can go hand in hand with reduced inequality and better living standards for the poor.
Developing countries are very much on their own in charting out a pathway out of the current situation of inequality and poverty. The developed countries that used to be on the forefront of well balanced growth have for some time abandoned this role
Historic evidence comes from Western Europe which during the early part of the last century, managed to increase wellbeing indicators in line with, or sometimes even faster, than GDP growth.
To some extent this was due to technical innovations such as those in preventive and curative medicines, but a lot had to do with improved social services in health and education, opening up to trade, social protection programmes, and increasing civil rights, particularly to minorities and vulnerable groups.
More recently, experience in several Latin America countries show how more democracy and strong social welfare programmes can reduce inequality and improve the lives of the poor.
The need to address inequality has been made more urgent by the COVID-19 pandemic. The past year has exacerbated inequality by increasing unemployment, cutting workers’ wages and hitting the poorest and most vulnerable communities.
Weak social safety nets and poor public health systems have left the poor in a dramatic situation. COVID-19 has particularly hit women who have reduced access to health services and jobs. There has been a sharp increase in domestic violence against women and girls.
Given this worsening situation, can anything be done to make growth more equitable? Most certainly – in fact there are several things that can be done and they fall into two broad categories – more “pro-poor” growth, and well-designed social welfare programmes.
One of the most important pro-poor policies relates to macro-economic stability. It is often not appreciated how vulnerable the poor are to inflation, recessions, overvalued exchange rates and high interest rates. Keeping these key macro-economic variables under control is imperative. It is not going to be easy as Governments battle the COVID crisis but has to be done.
The other major element of a pro-poor growth strategy is increasing access for the poor to the essential prerequisites for a productive life. These include improved infrastructure that meet the needs of the poor such as clean water and sanitation, as well as improved electricity and transport services.
Equally important are better access to health and education; and to physical and financial assets, in particular credit and land in both rural and urban areas. Of increasingly importance is access to digital services which are an essential prerequisite to accessing new technologies and productivity growth.
Finally, it is essential that developing countries work together to maintain an open trading system which allows them to produce in line with their endowments and skill levels.
Clearly not all the poor will be able to take advantage of the improved opportunities created by pro-poor growth. Factors that exclude them include geographical isolation, gender bias, disabilities, ethnicity or sometimes pure and simple bad luck where things “just don’t work out”.
Currently only a fraction of the population of developing countries has access to comprehensive social protections programmes and safety nets. This needs to increase dramatically – not as a form of charity but as a form of social responsibility.
Unfortunately developing countries are very much on their own in charting out a pathway out of the current situation of inequality and poverty. The developed countries that used to be on the forefront of well balanced growth have for some time abandoned this role.
Income inequality in the developed world also started increasing in the 1980s. This happened not only in highly market oriented economies such as the USA, but also in historically egalitarian countries such as Germany, Denmark and Sweden.
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And this is not just as a result of technical or market-driven changes that favour for example the “tech-giants”, but also reflects policy choices such as reduced taxes for the richest.
The tendency for Governments in developed countries to favour the rich was exacerbated during the 2008 financial crisis where vast amounts of public money were provided in the form of support to the financial institutions and large-scale industrial enterprises considered “too big to be allowed to fail”.
Early indications are that something similar may happen with the post-COVID recovery effort. Substantial amounts of public funds may end up going to large firms – rather than to the poor – which may exacerbate the trends towards rising inequality.
In the coming decades, the developing countries have a historical chance not only to closing the gap in terms of average incomes gap with developed countries, but also improving the quality of this growth.
Daud Khan works as consultant and advisor for various Governments and international agencies. He has degrees in Economics from the LSE and Oxford – where he was a Rhodes Scholar; and a degree in Environmental Management from the Imperial College of Science and Technology. He lives partly in Italy and partly in Pakistan
Leila Yasmine Khan is an independent writer and editor based in the Netherlands. She has Master’s degrees in Philosophy and one in Argumentation Theory and Rhetoric – both from the University of Amsterdam – as well as a Bachelor’s Degree in Philosophy from the University of Rome (Roma Tre). She provided research and editorial support.