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Growth, Inequality and trickle-down July 31, 2007

Posted by Sharath Rao in America, economics, statistics.

Almost every revolutionary technology that came in took some time to break the threshold of unaffordability. In fact much of it was so expensive that even the middle-class could not afford it to start with – long distance air travel, cell phone, automobiles, home computers etc. Over time however, as we all see, benefits – direct and indirect – are more widespread and to invent a word, ‘deepspread’ i.e. available to even poorer sections of the population. Then does trickle-down economics not work ? Perhaps not as much and as fast as we would like it to. But more than the virulent critics of GDP growth rate would suggest.

I am now treading into perilous waters – I don’t think its anyone’s argument that mere GDP growth rate is sufficient or that the growth rate is uniform across all economic classes. But I don’t know of poor countries that have reached high standards of living with low and uniform growth rates – say, to grow at 7% while maintaining a gini coefficient of say 0.3.

From this (very interesting) graph, advanced countries (France, Germany etc. ) have grown without exploding economic inequality. India going from 1950 to 1990 became more ‘equal’ ( arguably at the cost of GDP per capita growth ) and since 1990 has become more unequal as liberalization made available opportunities that a sizable section of the population (20% ??) could benefit from. Communist Poland was poor and ‘equal’ in 1990 and post-communism, it is rich with increasing, though not (yet) threatening, inequality.

It would be great (though highly unlikely) to have similar data for Western Europe and Japan of the 19th century. Even if one argues that the then prevalent order ( spoils from colonialism ) distorted the picture among other things by increasing growth rates,  inequality would only have increased during that period. In fact, the source of growth is irrelevant for higher level picture, its the relationship between growth and inequality that we are interested in. And it often helps to remember that most of history, most of the world has been in abject poverty.

I am not economist and as such not competent enough to study data and discern the related nuances and second-order effects. Would be great to hear comments or have useful sources.

( Just found this graph for the USA : War and depression years sort of distort the picture )

Warning : Inequality is a hotly debated issue. Read more here and here.



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