Invest your wealth or each person for himself? Growth and tackling inequality are the key
Does a government that attempts to redistribute the wealth in search of greater equality among its citizens sacrifice economic growth?
Benjamin Franklin, one of the US’ founding fathers, said: “I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”
Such an affirmation remains controversial.
For example, 200 years later, US President Barack Obama, when arguing for raising taxes on the rich in 2008, said: “When you spread the wealth around, it’s good for everybody.”
Do people become lazier and more dependent upon the state, instead of relying upon their own grit and talent, as Franklin argued?
Generally, economists agree with Arthur Okun who argued, 40 years ago, that some inequality is needed to propel growth, that people respond to proper reward systems.
Without significant financial rewards, entrepreneurship and innovation, the underpinnings of a productive economy, would not flourish.
For example, one reason that people in Jordan shun entrepreneurship in favour of employment in large institutions, such as the government, is the perceived high risk-low return formula.
Therefore, in order to encourage entrepreneurship, institutions should come up with risk-mitigating measures or enable greater returns, or both.
Nobel laureate economist Simon Kuznet argued that when the economy is at an early stage of development, inequality is increasing as wealthy people appear and hire the resources cheaply since the demand is low.
However, after a certain stage, inequality should fall in order for the economy to continue to grow and develop.
Research from the IMF argues, correctly I believe, that jump-starting growth in an economy is easier than maintaining the growth trend.
Jordan, for example, can be easily made to grow fast and has had several episodes of fast and sudden growth from state of absolute economic stupor if not recessions; yet, maintaining the growth rates of 2004-2008 was a challenge.
In this milieu of varying views and little commonalities, a theme is emerging: that “sensible” policies aimed at achieving “sensible” levels of inequality would not derail or weaken growth and may even spur it.
And this brings me back to His Majesty King Abdullah’s request, in his letter to the Cabinet two weeks ago, to address rising inequality while the government also speeds economic recovery and growth.
The two are not mutually exclusive.
In order not to derail the desired growth momentum while mitigating inequality, certain policies can come into play.
These include an increased and focused redistribution through the social safety net, a directive that was underscored in the King’s letter.
Furthermore, policies aimed at discouraging idleness and enhancing strengths and capabilities to enable better participation in the economy will become an absolute necessity to maintain such a growth-equality drive.
By Yusuf Mansur