Economic Progress and Poverty

By Anil Gujadhur

History shows that governments have restored economies to sustained growth by redistributing the fruits of growth more fairly rather than relying on what a market system acting on its own can deliver

The present generation of Mauritians may not have experienced it. Poverty was so deeply rooted in the country barely one generation behind, that it was the exception rather than the rule to live outside of poverty. This factor cut across all social groups other than the small group of owners of the means of production. Families distinguished among themselves from the numerous others which barely had the wherewithal to survive.

Just as an example, immigrants to Mauritius had no more than two sets of rudimentary clothes to put on. They would wear each one in turn, waiting for the other washed-up set to dry out in the sun for next use. Continuous manual work required frequent washing of the body as well as that of their meagre supply of clothes.

There was barely any sanitation worth the name. Healthcare was out of reach. Shelter consisted of thatched houses mounted on raw wooden poles obtained from the woods or, in the best of cases, stone-walled houses having iron-sheeted roofs. Education was out of limits. This was the life. That is why politics was so deeply centred on the need for government to help out the poor.

Now that this state of affairs is more or less behind and the whole world has changed, people have faint memories of the dire level of poverty their predecessors have gone through. It is perhaps best to do so. The past is the past but not quite. One cannot simply dismiss it without drawing the lessons.

Recently, the Chairman of the National Empowerment Foundation was stating that there has taken place a reduction in the number of families distraught by dire poverty from 7000 lately to 6000 at present. The lot of the one thousand families taken out of deprivation has improved no doubt. We do not know whether the remaining have the bare necessities to face up to the general environment in which they are living.

For, poverty can be absolute but also relative. In the case of absolute poverty, living conditions are precarious. The victims can’t even afford to have the bare necessities of life. Even if they can cope in this regard today, they can’t look with the same amount of reassurance to tomorrow. Sadly enough after so many years of welfare state, we still have cases of absolute poverty among those who, for some reason or other, failed to be taken into the mainstream when the fruits of growth were being shared out. It should be clear that those families which are stuck in absolute poverty have difficulty even to contemplate how to get out of it (e.g. through education).

In the case of relative poverty, people consider themselves as poor in relation to those they think are better off. For them, most of the better off people are those in their immediate surroundings. They have their basic needs supplied but they believe that they could fall behind into poverty if something went amiss in their main lifeline, such as one member of the family being laid off. Such people make constant efforts to get away from the danger zone by engaging in as many lines of economic activity as possible. It is this constant effort to get out of the clutches of perceived riskiness that has yielded a rich crop of achievers from among immigrant families which made desperate efforts to improve their lot.

It is not unusual for those who are left behind in this process to look enviously upon others who snatch themselves out of the jaws of utter economic deprivation. In some cases, they even try to pull the latter down, if possible, to their own level. Those who manage to rise above the lot, on the other hand, retain the DNA of the days of utter poverty of their ancestors and keep struggling not only to put themselves out of risk but to even extend the safety net to their coming generations. For them, the struggle becomes Olympian until their very end.

There are also among the latter those who will not be happy until they have reached the level of riches which measures up to that of the erstwhile quasi feudal economic elite which held sway over them. They will at all cost not want to be counted ever again in the fold of the poor of their previous generations. This past carries a stigma for them, which they would want to rub off on all counts by striving to be in “higher” company.

Redeemer of poverty

Leaving aside the sociology of this steep social climb out of poverty, the economic factor catches up sooner rather than later. China and India recorded sustained high annual growth rates in the decade up to 2009, around 9-10% per annum. Hundreds of millions of poor people living in these countries were suddenly lifted out of their wretched state when this economic spurt took place. Incomes generated by the new economic boom travelled out to families that had remained more or less on the fringes of survival, having long been deprived of basic food, clothing and shelter. Many of those who had been out of employment or were under-employed heretofore were taken in by the system.

This situation gave rise to capitalism being vindicated by some as a redeemer of poverty. The high growth rates recorded by the so-called ‘emerging markets’ were attributed to the working of free markets and free trade. No doubt, they were. In fact, liberal free market policies the world over had hugely increased the size of global markets. The global economic turnaround was achieved by a wide endorsement of free trade, unfettered capital flows and reinforcement of global supply chains. In the light of this turn of events, it started even being claimed that for economies to keep growing, the state (i.e., taxation, government spending and regulation) should shrink and let the markets do the work instead.

As economies integrated more closely with each other, especially since the 1980s, the global market economy embraced newer upcoming countries in its fold. The enormous gap between the incomes and wealth of a handful of rich countries, on the one hand, and those numerous ‘developing’ countries, on the other, appeared to be closing. It is estimated that as many as 1.5 billion ‘emerging market’ workers were absorbed in the process by the global wave of growth and were thus lifted out of the stagnation of a life of poverty during this relatively short period of economic turnaround in ‘emerging markets’.

Now, those fantastic sustained high growth rates of key ‘emerging economies’ over a decade or so have come down. Both India and China have slowed down. It is estimated that some 100 million Chinese and 200 million Indians still remain in dire poverty over and above all those who had been lifted out of it in the preceding years of high and sustained growth. Capitalism therefore appears to have reached its own limits in terms of tackling the problem of poverty. Not that it does not hold the potential to grapple with the problem once high growth resumes.

But the question arises as to what could have arrested the machinery of growth which held out a promise to grapple with the problem of poverty that had remained stubbornly defiant over so long in so many less developed economies. It is seen that one of the factors currently stalling economic growth in both rich and less rich countries of the world relates to the unequal distribution of incomes and wealth that the new prosperity of the past few decades brought about. In both rich and less rich countries, this period of rapid economic growth saw an accentuation of income disparities. Some became immeasurably richer while others are being evicted from their homes as they have become incapable of honouring debts. The spread of outrageous inequality has acted as one of the factors which have arrested the pace of growth.

Re-balancing of outcomes

The Economist (13^th October) cites a recent report by the Asian Development Bank, which states that “if emerging Asia’s income distribution had not worsened over the past 20 years, the region’s rapid growth would have lifted an extra 240 million people out of extreme poverty”. What does this mean? That government have failed totally to do their role of redistribution in the name of economic liberalism. Freed of the restraining influence of governments, the law of the jungle played out on markets. Bankers’ bonuses were but one of the hallmarks of this free-for-all grabbing by the already rich and powerful. Rich people kept accumulating as if tomorrow were Doomsday. Growing inequality and deprivation at the individual level proceeded step-in-step to reach breaking point. What does this indicate? While institutions like our local National Empowerment Foundation can do what they can with the resources at their command, the real solution lay elsewhere in the management of the broader economy. In simple terms, it requires governments to play their role more actively. They and they alone can bring about the required re-balancing of outcomes to avoid economies hitting this kind of roadblock.

The state could step back into its legitimate role to redistribute income by means of its tax and spending policies. It should ensure that taxes are fairly administered. The bulk of collections need not be raised by non-discriminating indirect taxes falling on all alike such as VAT. Everyone should pay tax according to his ability to pay rather all being lumped together into a single direct tax bracket for the sake of “simplicity”. The actual “tax effort” made by individuals should be fair. The State should not be intimidated for having adopted proactive welfare policies acting to mitigate sharp income disparities across the board.

The basic duty of governments is to regulate. Regulations relate to things like busting oppressive monopolies and concentrations of abusive power. Regulating also involves governments into concluding binding national pay agreements to protect workers rather than making workers powerless, especially if employers threaten to leave the negotiating table at the crucial time (as the MSPA was attempting to do when unions were asking for bonus payments to be agreed in favour of workers). In terms of ensuring a less lopsided income distribution, governments may even have to curtail excessive “capture” of incomes by certain dominant financial intermediaries (banks and non-banks) which use their market power to unilaterally increase charges on customers and, by the same token, transfer even more revenue to the richer shareholders, thereby accentuating income disparities in the economy.

More egalitarian outcomes conducive to economic uptake require governments to assert themselves explicitly by effecting larger directed government transfers, providing income support schemes where necessary and pursuing the objective of keeping in place sustainable welfare states.

History shows that governments have restored economies to sustained growth by redistributing the fruits of growth more fairly rather than relying on what a market system acting on its own can deliver. Governments have kept misallocation by markets under hard scrutiny and dealt with them decisively without hurting the mainsprings of economic growth. They should quickly get rid of the guilt complex that appears to seize them whenever they are not making offerings at the altar of inefficient private enterprises. Their concerns should embrace a wider public interest to seek explicitly more balanced outcomes for all and get the economy going again on a more even keel.

* Published in print edition on 23 November 2012