Capsized by the rising tide: Does growth lead to income inequality?
You’ve heard the old line about how a “rising tide lifts all boats?” In fact, the evidence shows that the “rising tide” of global economic growth is in fact lifting mostly yachts; meanwhile, a lot of people are getting dumped in the water.
Oxfam recently released new research that shows how people’s incomes are becoming more unequal in the world’s largest economies. Oxfam focused on the G20 countries because they are the self-appointed leaders of the global economy and, indeed, constitute more than 70 percent of the world’s GDP. A survey of the G20 countries shows that only four have made progress since 1990 in reducing inequality; 16 have seen the income gap grow, slowing or stopping progress to reduce poverty. Not only is economic growth in those countries failing to “trickle down” to ordinary people, but the G20 economies are rapidly exhausting the natural resources they need to support our health and prosperity. That ecological burden falls most on the poor, who by and large lack the resources to cope with the resulting environmental degradation, particularly from climate change.
In the past, this inequality and ecological plunder would be seen as part of the cost of supporting economic growth. Conventional wisdom used to be that growth brings inequality; a rising tide lifts all boats, but rich boats rise faster, and that’s the cost of doing business. But this conventional wisdom is being shown to be false in practice; in fact, some of the planet’s fastest-growing economies are growing while reducing inequality, and reducing their ecological impact.
Mexico is a key case in point. Mexico has a history of unequal income and wealth distribution, as well as resource-intensive development. But over the past decade, Mexico has decreased inequality significantly, while reducing its rate of carbon emissions relative to economic growth (though emissions are still growing in Mexico, they are slowing as growth accelerates).
Some other G20 countries (Brazil, Argentina, Korea) are also managing to make growth work to reduce inequality. And several (the U.K., France, Germany) are learning how to grow while using a shrinking share of natural resources in absolute terms. But no industrialized country has yet figured out how to support economic growth in a way that won’t exhaust the planet’s resources. Only two G20 countries (India and Indonesia) are using less than their share of natural resources; if their current growth trends continue, that won’t last long, as their consumption increases along with growth.
But the positive examples — like Mexico’s reduced inequality or Germany’s reduced carbon footprint — show us that inequality and environmental ruin are not inevitable outcomes of economic growth. The world doesn’t need to stop growing in order to avoid inequality and protect the planet. Rather, smart policy choices can mean that more people can reap the benefits of growth, and for the long run. Those policy choices include investment in public goods like health and education, income support programs, and progressive taxation to reduce inequality; and investment in green tech and making the costs of carbon use transparent to reduce dependence on finite natural resources. By implementing these policies, countries can help more people keep their boats upright even as they encourage the tide of growth to roll in.