The Rising Tide: Is growth really good for the poor?

By Centre for Poverty Analysis (CEPA)

On 03 November 2015

Fifteen years ago, two World Bankers produced an influential paper titled “Growth is good for the poor”. Using empirical evidence drawn from 92 countries over four decades, it showed that when a country grows economically, the incomes of the poor – the bottom 20% of the population on the income scale – tend to rise at the same percentage rate as those of everyone else. The paper appeared to corroborate the Washington Consensus that growth does indeed trickle down to the poor.  Further, the authors used the same methodology to show that government spending on primary education and democratic institutions does not contribute to raising the share of national income going to the poor. And since cutting government expenditure and curbing inflation raises the growth rate, they argue that cutting state social spending will in fact benefit the poor.

These are sweeping conclusions drawn from very little reliable data and the paper was subsequently severely criticised on account of its methodology and even challenged by other studies which empirically showed that often, growth is NOT good for the poor.  In addition to showing that empirical data can be manipulated to show whatever we want to, these critiques gave rise to a new movement which argued that it is not any growth but a particular type of growth that is beneficial to the poor. The ‘inclusive growth discourse’ retains the primacy of economic growth but sanitises the idea by qualifying that the rate and pattern of growth is important. As the World Bank states on its Inclusive Growth Website, “rapid pace of growth is unquestionably necessary for substantial poverty reduction, but for this growth to be sustainable in the long run, it should be broad-based across sectors, and inclusive of the large part of a country’s labor force.” (emphasis added)

It is this unquestioning acceptance of the need for rapid economic growth that Debra Efroymson, in her new book Beyond Apologies: Defining and Achieving an Economics of Wellbeing, challenges. Referring to an ‘Economic Growth Myth’, she notes that debates about development are based on the implicit need for economic growth and “the main question is how to achieve it. Which economic model will work better at achieving growth? How can we sustain growth? Why are some countries growing while others remain stagnant or decline?” In other words, since the rising tide will raise all boats, the focus is on getting the highest, quickest, best possible tide. In her book, she makes a compelling argument that economic growth is only a means to an end, and if the process of growth compromises those valued ends, then it is time to rethink not only the process of growth but also whether growth is really the way to reach our valued ends.

Efroymson’s message is that we need to take one step back – and critically examine this idea of economic growth, without letting the mathematical formulae and economic jargon get in the way of common sense and our lived experience. For example, proponents of economic growth led development assume that more production automatically benefits the poor, but is this really the case? Many corporations make no secret of their desire to locate their factories in countries where wages are low. For example, according to the ILO, Sri Lanka has one of the lowest minimum wages in the clothing, textile and footwear industry. We strive to maintain this ‘competitive edge’, and wage rises are strenuously resisted for fear that factories will relocate to another, poorer country. Yet what use is this thriving industry when our workers are paid low wages to make money for corporate executives and shareholders elsewhere? Of what value is mere production when it doesn’t translate as decent work and decent wages for the citizens of the country?

In most countries, the poor tend to be located in rural areas, engaged mostly in agriculture and related activities. Agricultural reform is one of pillars of economic growth with the need to increase agricultural production and reduce food prices drives much of policy formulation in this sector. Many economists, including here in Sri Lanka, promote commercialization and switching agricultural production away from small farmers towards large corporations that raise animals and vegetables on large farms and producing processed foods. As Efroymson notes, in the USA where this shift was successfully achieved, the result is cheaper food, but also more nutrition related disease, more environmental degradation and corporate control of virtually the entire food supply chain. This is almost the inevitable outcome when we think of agriculture as an economic sector, to be improved and made efficient, rather than in terms of the wellbeing of those who engage in it.

Finally, as Efroymson notes “economic growth tracks growth in GDP, not the growth in jobs, or the growth in services provided to the poor, or the growth in the number of low-income people who are able to buy or otherwise access what they need to survive.” GDP is a very poor measure of the wealth of a nation, let alone of its people’s wellbeing. Consider the case of a tree, which is not reflected in GDP data while it is growing, but enters the GDP figures when someone is paid to cut it down and transport it away. Thus we have the strangely perverse situation where cutting down a huge swathe of virgin rainforest can show up as an increase in the country’s GDP! As the experience of many countries has shown, very high rates of GDP growth can exist side by side with high inequality where the benefits of growth do not in any way reach the poorer segments of the population.

Looking at countries such as the USA, which have focused on achieving high rates of economic growth while cutting social spending on such necessities as health and education is a cautionary tale on what not to do, if we are genuinely committed to a world free of poverty. Many studies have shown that the poor are not just poor in terms of income, but also lack access to quality education, health care, housing and transport options to name a few, which further limits their ability to engage in economic activities that have high returns. Poor households tend to be trapped in a vicious cycle which is difficult to break out of. Promoting rapid economic growth for its own sake, with neither a proper understanding of what constraints are faced by poor households nor social policies to address these constraints, is most likely to exacerbate existing inequalities in society with only marginal gains in wellbeing.

Independent research and the evidence of our lived experience suggests that the rising tide doesn’t raise all boats. In fact, some boats just sink and are submerged when the tide rises. If we are serious about eradicating extreme poverty we need to be more critical of economic dogmas and more proactive, to understand the nature of their poverty as well as to address their specific constraints.  It is the responsibility of policy makers to help those who cannot help themselves, and it cannot be shirked by waiting for a tide that may sink, rather than raise, all but a few boats.

Beyond Apologies: Defining and Achieving an Economics of Wellbeing by Debra Efroymson is available for free download from The Institute of Wellbeing website.