Growth is good for the poor

According to World Bank experts, an equation helps prove that when the rich get rich, the poor get rich. Oh, yeh? Richard Douthwaite argues that it is a myth and that the poor will never catch up

The protesters against the world trade talks in Seattle last December and against the World Bank and IMF in April succeeded in getting their main argument widely accepted: namely, that global free trade is widening the gap between rich and poor both within countries and between them.

There is overwhelming statistical evidence for this view. The United Nations Development Project has been saying it for several years. Its 1999 Human Development Report stated that the income gap between the fifth of the world's people living in the richest countries and the fifth in the poorest was 74 to 1 in 1997, up from 60 to 1 in 1990 and 30 to 1 in 1960.

Within countries, inequality had been rising since 1980 it said, citing China, the countries of eastern Europe and the CIS, and OECD countries, "especially Sweden, the United Kingdom and the United States" as examples.

But the free traders, led by the World Bank, are fighting back. Their new weapon, widely hailed in the financial press last week, is a long, detailed economic research paper full of equations and theory, called Growth is Good for the Poor, by David Dollar and Aart Kraay, of the World Bank's development research group.

The Financial Times said that the paper "provides what appears to be incontestable evidence" that sustained growth raises the real incomes of the poor and that growth is "helped along by just the policies many of the demonstrators oppose: by macro-economic stability and openness to trade".

Even the Guardian joined in. Mark Atkinson wrote on the economic pages that the report illustrated "the harm that would be inflicted on the poor if governments were to listen too hard to the protesters at Seattle and retreat from open markets".

It does no such thing. As Dollar and Kraay's purported conclusions seem set to become one of the myths of our time, to be used triumphantly whenever arguments about globalisation break out, it is worth looking at what their report actually says, and what its figures really show, rather than the spin which is being loaded on to them.

Labelled "preliminary and incomplete", their paper claims that 370 observations from 125 countries over four decades show 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 incomes of the poor do not drop by proportionately more than those of the better-off in economic crises. This applies to poor countries as well as richer ones.

• The relationship has not changed in recent years as countries have progressively opened themselves up to the free movement of goods, services and capital.

• Openness to international trade benefits the poor to the same extent as everyone else.

• Government spending on primary education and democratic institutions doesn't do anything to raise the share of national income going to the poor.

• Cutting government expenditure and curbing inflation raise the growth rate. They also seem to give the poor a larger share of the higher incomes that result.

• State social spending does not increase the growth rate. Nor does it increase the share of national income going to the poor.

The final three remarkable conclusions have been greeted with glee by economic fundamentalists and require an investigation by themselves. In the space available here, the best we can do is to look at the claim hard-wired to the paper's title, that growth is good for the poor because it raises their incomes by as much as those of everyone else.

Since the poorest fifth of the population in every country gets only a tiny fraction of total national income - in the US, for example, it gets 4.2% - one explanation for D&K's results could be that their data isn't accurate enough to pick up the real changes taking place. A 1% error, for example, could mean that the poor had lost a quarter of its income, without it showing in the figures.

"There's a lot of approximation," says Ray Thomas, who teaches statistics at the Open University. "Estimating the income of the bottom 20% [they way D&K have done] is defensible because of the lack of any alternative. But it is not really good enough when the aim of the exercise is to make generalisations about the average income level of the bottom 20%."

Especially, as Dollar and Kraay write, they know very little about what has happened to the distribution of income within the bottom 20%. Thomas thinks that as the bulk of the incomes received by the bottom 20% go to the richer members of it, their figures might well be missing what's happening to the poorest of the poor.

So the most likely explanation of the conflict between the UNDP statistics and Dollar and Kraay's is inadequate data. "For most countries, only one or a handful of observations are available," their paper admits.

Moreover, even if we accept the paper's finding that the incomes of the poor grew at the same rate as the rich in percentage terms, what this means in real life is that the absolute number of possessions the rich could afford was growing much faster than those of the poor. If the top 80% of the population had 96% of the income and the bottom 20% had 4% initially, 25% growth would have enabled the poor to acquire one more possession for every 20 acquired by the better off.

But this is playing the economists at their own game by measuring everything in money terms. This is a mistake because when economic growth takes place, almost everything in society and the economy changes, and even if incomes rise sharply it is impossible to say without a detailed social investigation whether the population of the country concerned becomes better off.

For example, because the growth statistics only measure the monetarised parts of the economy, they ignore those things that people do for themselves. Thus, if a child is cared for by its mother at home, that does not contribute to national income and hence growth. If it is placed with a childminder, it does. A meal in McDonald's adds more to gross national product than a meal cooked at home. Growth can therefore be generated by making people less self-reliant. Whether this indicates they are better off is another question.

Supposing, for example, that when a third world country opened up its economy to the world its agricultural workers were required to become more mechanised. If, as a result, fewer workers were needed in the countryside and they moved to city slums, growth could well be generated by such a change and the incomes of the people who moved could well be higher than they were in their villages.

However, as they would then have to buy all their food and fuel rather than producing it for themselves, and might have to pay rent and fares for the first time, they could easily be much worse off.

Dollar and Kraay's paper is not pure research. It is a political document written, as Dollar told me, because "we were afraid that the current debate on globalisation was losing sight of the basic fact that the status of the poor is linked to the overall health of the economy. If the economy is not growing, it is very unlikely that the poor are doing well."

That's true, but only because we have an economic system that, whatever damage it is doing to people's lives or to the environment, has to continue to expand if it is not to collapse, taking the poor, and the rest of us, with it.

Instead of acting as growth promoters, D&K would have been better employed investigating how the system has to be changed so that growth can be brought to a stop without costing millions of the poor what little income they have.

Indeed, if we turn its findings around, what their paper shows is that the impoverished are being used as the excuse for continuing with a growth process that is failing to make the poorest any better off in relative terms. After all, if the income of the poor rises only one-for-one with overall growth, they'll never, ever, catch up.

• Richard Douthwaite, a former Department of the Environment economist, is the author of The Growth Illusion: How Economic Growth Enriched the Few, Impoverished the Many and Endangered the Planet (Green Books, £12.95).

Dollar and Kraay's paper can be downloaded from the website

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