Skip to content

Inequality

Whenever a politician is asked why economic growth is so important, the first response is always the same: we need it to solve poverty. Without growth, the poor will always be poor, and obviously that is unacceptable.

I agree that poverty must be ended, and some places definitely need to grow, both whole countries and underprivileged towns and neighbourhoods. However, once a fairly high standard of living has been achieved, further growth doesn’t reach those who need it most. In wealthy countries, growth does nothing for the poor, and there are two reasons for this. 1) Poverty is relative, and 2) growth is not evenly distributed.

This is easily proved. Here is Britain’s GDP since the 1960s:

As you can see, a constant rise, and that has ended absolute poverty. The number of people without a roof over their heads and food on the table is very small. But bear in mind that poverty is relative. If you earn £12,000 in a country where the average person earns £5,000 a year, you’re very wealthy. Earn that in modern Britain, and you’re officially on a low income. A low income is defined as 60% or less of the median income at the time. Here’s the percentage of people living in low income households in the UK over the last 30 years:

Despite the remarkable performance of our economy, there are actually more people on low incomes than there were before the boom years of the Thatcher government. (Note that this is a percentage, not a sum total, so it cannot be explained by a growing population.) One in five Britons lives in relative poverty, a higher proportion of low income households than almost every country in Europe.

The economy is five times larger than it was in 1980, but the number of people on low incomes has risen. This is very simple really – poverty is relative. If the income of the poorest doubles, and the income of the richest doubles at the same time, the poor are still poor despite their increase. Growing your way out of poverty is a mathematical impossibility. The problem is not the size of the economy, but how it is shared.

And that brings us to point number two.

Growth is not evenly distributed. The reason why growth fails to lift people out of poverty is quite simple: the benefits of growth don’t go to the people who need them most. The economy is structured in favour of those who are already wealthy. Through shares, property, pensions and savings and so on, interest accrues to those who have the most invested, and that’s the wealthy. Here is a graph from Wealth in Great Britain (pdf), a  December 2009 report from Office for National Statistics:

As the image shows, wealth is badly distributed. The least wealthy half of all households own just 9% of all the wealth between them. The top fifth own 62% of all the wealth.

What’s true in Britain is also true of the world, only even worse. The richest fifth of people own 85.2% of all the wealth, and the poorest own less than 1%. All the growth of the world’s economies has done little for those at the bottom of the rung. Because the poorest only receive a tiny sliver of any new growth, it would take an enormous amount of growth to  make even a small difference to their income. In the boom years of the 1990s, for every $100 dollars of growth, just 60 cents reached those living below the absolute poverty line. “For the poor to get slightly less poor,” writes Andrew Simms in the New Scientist, “the rich have to get very much richer. It would take around $166 worth of global growth to generate $1 extra for people living on below $1 a day.”

Consider the case of Egypt. Egypt has been considered a huge success story, with enviable growth rates of 7% in recent years. Despite this, the number of Egyptians living on less than $2 a day has increased from 20% to 44%. By the government’s own admission, 9 out of 10 Egyptian have gained nothing.

—–

In summary, poverty is relative, and growth is unevenly distributed. (There’s a simpler explanation of all this here). The myth of endlessly rising wealth for all falls between those two facts. The good news is that if growth is not lifting people out of poverty, we’re not stuck with it. We can move beyond growth without abandoning the poor.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s