not enough for us...

The theory was that as the rich got richer, we'd all benefit. But it hasn't worked.
Click to follow
The Independent Online
Yes, it certainly hurts. But no, it absolutely certainly does not work.

Apologies to Brian Mawhinney and his chums at Conservative Central Office, but their disastrous slogan - suitably adapted - summarises as well as anything the resounding international verdict delivered on Thatcherism last week.

Reports by three blue-chip international bodies - the World Bank, the Organisation for Economic Co-operation and Development (OECD) and the United Nations Development Programme (UNDP) - have all roundly condemned rising inequality in Britain, now revealed as the most unequal country in the Western world.

And they went on to explode the central rationale of policies pioneered here by Margaret Thatcher and exported, with the willing assistance of Ronald Reagan, to the rest of the world. They made it clear, from recorded observation around the world, that inequality - deliberately promoted by Thatcherism as an aid to economic growth - in fact hinders it.

Looking back, this may prove to have been a defining few days, the week in which the prevailing economic theory of the last two decades was finally exposed as a sham. And its nemesis has not come from its natural enemies: the OECD has long been a vocal supporter of Conservative economic policies, while the World Bank has spent much of the last 15 years imposing them on developing countries worldwide.

For 20 years economists have kowtowed to the idea that there was a necessary trade-off between equality and efficiency. You could have a fast-growing, efficient economy, they said, or a more equal society - but not both.

Thatcher and Reagan took this a stage further with their so-called "trickle- down theory", the enshrinement of the view that if the rich were encouraged to have plenty of cake, the poor would get to eat it. By this theory, the rich were performing a public service by getting richer still, because their prosperity would automatically "trickle down" to the poor.

Unsurprisingly, it became the height of fashion, at least among the well- off. At a moment of high enthusiasm, at the Royal Geographical Society's 1991 presidential dinner, Mrs Thatcher declared "our job is to glory in inequality". She and Reagan told their electorates, and everyone else within shouting distance, that tax cuts for the rich would be good for the economy, and ultimately for everyone else as well.

The rich would spend and invest and so create jobs for the poor. Wide wage differentials were justified on the grounds that they reflected market demand, and provided incentives to work harder. The result would be higher productivity and faster growth.

This economic alchemy sounded almost too good to be true. It was. The failure of the trickle-down theory is there for all to see in the arid landscapes of British - and world - poverty.

"Everyone in the nation has benefited from increased prosperity - everyone," exulted Mrs Thatcher in the House of Commons in May 1988, at the height of the property boom.

Not so. Statistics show that the poor's share of Britain's national income shrank in the 1980s, for the first time since the Second World War. Worse, their poverty deepened. The poorest tenth saw their real income plunge by almost 20 per cent between 1979 and 1993, while the richest tenth increased their takings by 61 per cent.

And there were many more of the poor, too. By the Government's own figures, the number of people living in poverty almost trebled over this period, from 5 million to 14 million, a quarter of the population. More than 4 million of the poor are children, again three times as many as when the Conservatives took office.

A 1991 survey showed that one in five parents and one in 10 children had gone without food in the previous month because they did not have money to buy it. Other studies showed widening differences in life expectancies, so that a baby born into Social Class I could expect to live seven years longer than one in Social Class V.

Last week, as we report on page one today, the UNDP's "Human Development Report" published statistics showing that Britain is now the most unequal country in the Western world, with the poorest two-fifths of its people sharing less of the national wealth than in any industrialised country apart from Russia. The gap between the richest and poorest fifths is exactly the same as in Nigeria and far worse than in such countries as Jamaica, Sri Lanka or Ethiopia.

The report shows that inequality has increased worldwide. Over the last 15 years 1.6 billion people (more than one in every four) have seen their incomes fall. Over the last 30 years the share of the world's wealth shared between the poorest fifth of its people has gone down from a meagre 2.3 per cent to a catastrophic 1.4 per cent, while the share enjoyed by the richest fifth has risen from 70 per cent to 85 per cent. In other words, the gap between rich and poor has more than doubled.

Another of last week's reports - this one from the rich countries' own club, the 27-nation OECD - explains some of the reasons why the trickle- down theory has failed so spectacularly. The report, the latest edition of its "Employment Outlook", is something of a recantation.

The OECD has always been a great enthusiast for the "flexible labour market" - where the distribution of earnings is not constrained by union power or the establishment of a minimum wage - and its previous reports have applauded Britain for this. But suddenly it has changed its tune, admitting that British-style flexibility is not all it is cracked up to be.

Wage inequality in Britain, and in the similarly-minded US, has increased more than anywhere else over the last decade, it reports. And, it adds, rising inequality is becoming extremely worrying. For a start, greater inequality in many countries has not improved the lot of the poor at all. The trickle down just didn't happen. Real wages for the worst paid have fallen in Australia, New Zealand and the US, while the pay of the richest has gone up. Nor has increasing inequality been matched by a rise in social mobility: those flexible and widely disparate wages are not encouraging people to work harder and move faster up the incomes ladder after all. The same people are still stuck at the bottom, only now they are even further away from mainstream society.

Widespread wage inequality, it continues, is not even good at generating jobs. You would think - and ministers certainly do - that lots of low- waged jobs would be created in an unequal society and surely it is better to have the low-skilled in some sort of employment than stuck on the dole. But the OECD report demolishes this, too. It appears that there is no link between high inequality and low unemployment.

So, despite the comforting trickle-down theory, rising inequality has not done much to help the poor - quite the reverse. But this week's new evidence is an even more damning indictment. It suggests that too much inequality can even be bad for growth.

The OECD report concludes that growing inequality is far from conducive to growth. It admits: "The future prosperity of OECD countries depends on reducing social and economic exclusion in the forms of high unemployment, non-participation in the labour market ... and, in some instances, growing inequalities in earnings and incomes."

The equally orthodox World Bank is moving even further down the road to recantation. An unpublished paper co-authored by Michael Bruno, its chief economist , says bluntly: "Reducing inequality not only benefits the poor immediately but will benefit all through higher growth."

Records of the actual performance of both rich and poor countries painstakingly collected by the World Bank and the UNDP suggest that countries with small gaps between their rich and poor citizens have done better than those with big ones.

Both the UNDP and the World Bank contrast the performance of the Far East "tiger" economies such as South Korea and Taiwan with that of Latin American giants such as Brazil and Mexico. The Far Eastern countries enjoy far greater equality than the Latin American ones in both income and land ownership, and have grown very much faster. The "Human Development Report" shows that the Far Eastern tigers achieved staggering per capita growth of 7.6 per cent a year between 1960 and 1993 while maintaining, or improving, equality. It even calculates that if South Korea had been as unequal as Brazil back in 1960 its GDP 25 years later would have been 15 per cent lower than it actually was.

The UNDP also points to Japan and Sweden, which combine much the best long-term growth record of industrialised countries with great reductions in inequality. In Japan, for example, the proportion of the national income shared by the poorest fifth of its people doubled between 1960 and 1980 to 10 per cent, while the share of the wealthiest fifth fell from 50 per cent to 45 per cent.

Mr Bruno, who is also the World Bank's vice-president for development economics, hammers the point home in his paper, co-authored with two senior colleagues. They conclude that detailed analysis of nine OECD countries over more than 160 years shows that the higher the share of the national cake owned by the richest fifth of a country's population, the lower is its rate of growth. Studies in developing countries, they add, support this. There is, adds the UNDP, "a positive correlation between economic growth and income equality".

Over the last few years top Conservative politicians - including such former "wets" as Chris Patten and Michael Heseltine - have trekked eastwards in search of the elixir of growth. They have come back solemnly assuring us that the spectacular success of the "tigers" proves that Britain must be subjected to more of the same policies that have failed so comprehensively over the last 17 years, including less public spending and lower taxes.

The World Bank and the UNDP - both of which have been intimately concerned with the development of these economies over decades - draw a very different lesson, and so, it appears, do the countries themselves. Dr Richard Jolly, the co-ordinator and principal author of the "Human Development Report", said last week after launching it in East Asia that he found it was taken for granted there that greater equality promoted growth. "It is a very tough-minded attitude, not sentimental at all. They say: 'Of course equality works. You have to give people a stake in the country. That is what we have done.' "

People in socially cohesive societies work harder, one egalitarian argument goes. And money in the hands of the relatively poor works harder, too. The rich tend to spend extra money on imported luxuries - or salt it away in Swiss bank accounts. The poor tend to spend it on food or on simple goods, all labour-intensive products usually made locally by other poor people. These then use their extra income in the same way and so a virtuous spiral is set up, self-reliance is increased, and the economy is built.

But more equality alone does not necessarily promote economic growth - after all the Soviet economies had plenty of equality and their economies ran into the sand. It is the nature of the equality that makes the difference.

The World Bank paper suggests that relative equality in incomes is "not a robust determinant of future growth". What does count, both it and the "Human Development Report" agree, is relative equality in the ownership of assets, such as land.

"The key to East Asia's success," says the "Human Development Report", "was a relatively equal distribution of private and public assets - countries there concentrated on redistributing not income, but wealth. What generates income is productive wealth. A progressive redistribution of assets tends to boost growth because it has a broad, positive effect on people's incentives."

The World Bank, in another unpublished paper, says that a more equal distribution of land in developing countries enables more people to get credit and invest, and thus to build the economy - thus simultaneously reducing poverty and increasing growth. Conversely, says Mr Bruno, data from scores of countries shows that unequal land ownership restricts credit and hinders growth.

Both the World Bank and UNDP say that some Far Eastern countries, notably S. Korea, Taiwan and Japan, achieved initial lift-off through large-scale land reform which swept away highly unequal patterns of ownership. But politically this is hard to achieve; in each of these cases it was imposed from outside in the aftermath of war.

Fortunately, there is an even more important asset, much more accessible and common to all the success stories - education. Back in 1960 both Pakistan and S. Korea had similar incomes, but only 30 per cent of all Pakistani children went to school compared to 94 per cent in S. Korea. This, says the UNDP, is one reason why S. Korea's GDP grew to three times the size of Pakistan's over the next 25 years. Similarly Botswana and Kenya also had much the same GDP in 1960: Botswana spent five times as much per head on health and education, and is now more than three times wealthier.

Research suggests that a country increases its GDP by 9 per cent for every extra year of primary education it gives its people. It also reduces inequality: the World Bank says that just a 1 per cent rise in the proportion of the labour force which receives secondary education increases the share of income received by the poorest half of the population by between 6 and 15 per cent. It adds: "Countries which give priority to basic human capabilities in schooling, health and nutrition not only directly enhance well-being, but are also more likely to see improving income distributions and higher average incomes over the long term."

The same holds true for industrialised countries, says the OECD report, in what looks very like an endorsement for new Labour's emphasis on training and education. If countries do not have enough educated workers, skills shortages and inflationary bottlenecks build up: people with good qualifications are in high demand, and their wages go up - but the rest are left behind.

"Investment in further education and training is very unevenly distributed across the workforce in most countries, to the detriment of those with fewer skills," it says. "A more equitable distribution of training could, therefore, enhance future productivity, thereby leading to future growth and employment." So better education is good for equality and good for growth.

Again, country comparisons underline the point. The UNDP ascribes the remarkable long-term growth records of Japan and Sweden, to heavy investments in education as long ago as the end of the last century. Britain, it adds, still spends much less of its national wealth on education than most industrialised countries: it is even beaten by the United States.

So, at last, it's official. Even the most hard-headed economists agree that widening inequality not only hurts the poor but is bad for growth. It has taken a long time for the big institutions to change their minds. Persistent long-term unemployment, marginalisation and social disintegration have finally made an impact.

And yet, the evidence suggests, if governments were to take the full lessons on board and to start promoting greater economic fairness in the right way, particularly by investing in education, they might achieve the growth that has long eluded them. This works - and it doesn't hurt. Now there is a slogan that might just catch on.

Additional reporting by Milly Jenkins.

Leading article, page 20

It's our job to glory in inequality, and see that talents and abilities are given vent and expression for the benefit of us all

Margaret Thatcher, 1991

Reducing inequality not only benefits the poor immediately but will benefit all through higher growth

Michael Bruno, chief economist, World Bank, 1996

An equitable distribution of public and private resources can enhance the prospects for future growth

UN Development Programme, 1996

Future prosperity depends on reducing ... high unemployment ... and, in some instances, inequalities in earnings and incomes

OECD, 1996