By Gonzalo Vina
1,182 words
21 August 2002 10:25
Dow Jones International News
English
(Copyright © 2002, Dow Jones & Company, Inc.)
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Sometimes, the simplest truths are the ones everyone ignores.
Danny Quah, a leading academic economist in Britain best known for his work in areas such as the weightless economy, feels that one such truth has been ignored for a long time: that the best way to raise living standards is for economies to grow.
The point may seem basic, but for several decades now, many of the efforts aimed at alleviating poverty around the world have focused on distributing wealth rather than creating it.
That, says Quah, is the wrong way round. Focus on growth, not on tackling inequality, if you really want to help the poor.
"In China, when Deng Xiaoping liberalized markets following 1979, everyone remarked on how the move in China from a socialist state to a more capitalist, open market would see inequality increase," says Quah, who teaches at the London School of Economics.
"And yes, inequality has increased in China, but the increase relative to the huge boost to overall economic performance from market liberalization is totally insignificant. Hundreds of millions of people have been brought out of a state of abject poverty...My hunch is that that country is representative of what can happen everywhere else."
Quah fleshed out his ideas in a recent lecture at the Bank of England, in which he provided the numbers to back up his views based on an empirical study on economic growth and inequality of income rates in India and China, home to a third of the world's population.
In China, per capita annual income grew 3.58% between 1980 and 1992 and inequality - measured with what experts call a Gini coefficient - rose to 0.38 from 0.32, while in India, incomes grew by 3.12% during the period and the inequality measure was unchanged at 0.32.
A Gini coefficient of zero indicates a perfectly equal distribution of income, while a coefficient of 1 is the highest level of inequality, where only one person has any income at all. In a real economy, inequality lies between zero and 1.
To put the Chinese and Indian figures in a first world context, the U.S. saw incomes rise 1.33% in the same period, and inequality there rose to 0.38 from 0.35 - in line with China.
"In the space of the last ten years, they (China and India) have lifted half a billion people out of poverty. Half a billion people is like 10% of the world. That's a huge impact on humanity," Quah notes.
Quah doesn't have a list of specific recommendations for maximizing economic growth in any one country. There is nothing prescriptive about his study other than that growth should be the most important goal for any government.
He doesn't advocate privatization or liberalization, doesn't oppose capital controls or temporary protective trade measures. He is no free-market fundamentalist of the sort criticized by Joseph Stiglitz, the Nobel prize-winning former chief economist of the World Bank.
And Quah seems unconcerned where his findings may fall in the political spectrum, shrugging off accusations that he is just another advocate of the free-market, free-trade Washington Consensus.
"My emphasis shares with the (Washington Consensus) view a focus that goes away from distributional concerns. To that extent, people can lump me in with them as well," he says.
"But focusing on those specifics would miss the bigger picture. To the extent that aggregate growth in India and China and elsewhere to varying degrees - Singapore and Malaysia, to name just two - occurs, with or without Washington Consensus conventions, that's just as good too. Mine is a much simpler and therefore more general theme."
Nor is he an advocate of trickle-down economics: "Trickle-down economics says, let's take care of the rich first and foremost, then their overwhelming generosity - or the workings of markets - will eventually drip some of the wealth down to the poor too."
"The distribution issue - should we target the rich, poor, or middle class - don't even go there. That question is totally secondary, despite what the rhetoric we've seen elsewhere might assert. Instead, what's of first order importance is, if we get economic growth on track, it benefits everyone."
Opponents of globalization and on the left of politics will beg to differ, as will some in Quah's own profession, including followers of Amartya Sen, the Nobel laureate who has most famously written about inequality in the developing world.
Quah says his work is "diametrically opposed" to Sen's, who, he says, "sometimes veers remarkably close to saying distribution is all."
And he points out that by devoting so much time to making society a fairer place, the authorities are hampering economic growth, which in turn ends up hurting the poor as much as, if not more than, the rich.
Yet for all of Quah's good intentions, one can't help feel that they are easy to hold from the comfort and relative prosperity of living in London. Would workers in a sweatshop in South East Asia support him?
"I'd like to hear the voices of the people who are working in these so-called sweat shops in the Far East. I grew up in Penang and I remember stories about the semiconductor companies coming, and some would say they were exploiting the people there. Actually, the way that sector in the Malaysian economy is performing now, when the industry is doing well, those people do well, when it doesn't do well those people aren't doing well."
Quah hopes his latest work will lay out the basics and allow others to build from there. Raising living standards is the best path for social harmony, and if the world is to make any inroads on poverty, the nature of the debate has to change.
"Many policymakers, many informed observers perceive a tension between growth and inequality. That you can have economies grow, that you can have globalization, that you can have good rates of technological advances and have economies grow overall, but that this comes at a terrible cost of allowing inequality to increase," Quah says.
He wants the debate to center around rethinking the amount of resources devoted to social programs and policies that incentivize growth.
"I don't think we should go for draconian Far-East Asian models of social protection. But if we are concerned about providing resources to protect the very poor, well let's recognize also that going for growth also improves the situation of the very poor."
"We should rethink the boundaries and recognize that a lot of the things we do that cultivate market incentives, get markets to work and get economies to perform well are things that help the poor in very measurable and visible ways," he says.
-By Gonzalo Vina, Dow Jones Newswires; 44 20 7842 9497; gonzalo.vina@dowjones.com
Reproduced with permission
Copyright © 2002 Dow Jones & Company, Inc.
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