Time for the ‘trickle-up’ approach?

Unless redistributive policies are put in place to level playing field, goal of prosperity for all will remain elusive

For decades those in positions of power, within rich and poor countries alike, have ascribed to reliance on those already well-off in the effort to create more wealth, in the belief that this wealth will eventually ‘trickle-down’ to benefit the rest of their populace.

Advocates of trickle-down economics have typically favoured cutting taxes on the rich, while slashing public spending on the poor, in the hope that the rising level of prosperity will benefit everyone. Use of this ‘trickle-down’ approach has persisted despite ample evidence of it causing increasing inequality between the rich and the poor.



Instead of trying to spread wealth more evenly within society, entities like the World Bank and the IMF have also long been funding efforts which incentivise the private sector, including big business, to help achieve growth. It is, however, interesting to see these major development stakeholders now beginning to take note of rising global inequalities, as well as acknowledging their associated detrimental economic and sociopolitical effects.

Recently released research by the IMF on Redistribution, inequality and growth has found little evidence of redistributive efforts having an adverse effect on growth. Analysis of historical data instead reveals more durable growth taking place after reduction in inequality. The IMF researchers have thus concluded that it would be a mistake to focus on economic growth alone, and let inequality take care of itself, because the resulting growth may not only exacerbate inequalities, but also be lacklustre and unsustainable in the longer term. Countries like Pakistan, which have experienced spurts of economic growth, without this growth resulting in improving the lives of ordinary citizens, provides a perfect illustration of this phenomenon.

Besides broader sociopolitical or ethical considerations, this new research demonstrates that redistributive efforts which aim to bring about more equality, in turn facilitate faster and more durable economic growth. Redistributive policies, such as taxing the rich and helping the poor, thus seems to be a sensible way to raise rather than lower the economy’s growth rate, as was previously suspected.

This new evidence undermines the justification of a widely held belief amongst economists that making the rich richer enriches the nation as a whole. Instead, there is now evidence based rationale available for making the poor less poor. The research does not imply that positive incentives are not needed to reward work and innovation. It does, however, demonstrate that excessive inequality is likely to undercut growth, by limiting access to health and education needed to increase productivity, by causing investment-reducing instability, as well as undermining the sociopolitical consensus required to adjust to global shocks.

Whether these new views of inequality change the economic debate within international development and finance agencies like the World Bank or the IMF, as well as amongst national policy-makers remains to be seen. However, this debate must go beyond reliance on market-based strategies only, which merely aim to co-opt the poor into capital markets, through the provision of micro-credit loans for instance, without altering the underlying structures which perpetuate inequalities. Encouraging the wealthy to create more wealth, while asking the poor to tighten their belts further, is not the answer to economic growth. Unless redistributive policies are put in place to level the playing field for the disenfranchised masses, the goal of prosperity for all will remain as elusive as ever.

Published in The Express Tribune, August 29^th, 2014.

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