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Right now, growth is what matters

  • Published at 09:31 pm December 23rd, 2017
  • Last updated at 10:19 pm December 23rd, 2017
Right now, growth is what matters
The Finance Minister AMA Muhith has just told us something hugely important about Bangladeshi economic policy. It’s also the right thing to be doing to my mind – you are free to disagree with my, and his, opinion, of course. It’s also something not entirely obvious from what he says, that this is an important statement of underlying strategy. What Muhith has said is that Bangladesh has managed to reduce the number of people in poverty in recent decades. That’s simply an obvious truth. But what he’s gone on to say is that poverty reduction, not poverty alleviation, is going to continue to be the underlying feature of government plans. To understand this we need to realise that the word “poverty” now has two entirely different meanings. One is actual, real and absolute poverty. Having near nothing, living on perhaps Tk20 a day (without adjusting for local prices that is, so $1.90 in the official parlance). This is the sort of poverty that Bangladesh has so successfully reduced in recent decades. It’s the sort of poverty that doesn’t exist at all in the richer nations – there is no one in Europe or North America (or Japan etc) living on this sort of sum. The other sort is better known as relative poverty, or inequality. This is living on less than 60% of median household income. This is perhaps Tk15,000 in Bangladesh at the moment for a household, so “poverty” is below 10,000 a month for a family.
Worrying about inequality is something that only a rich country can afford to do
It’s a very different number from that absolute poverty, and much more so in the richer countries. This is how we get a report that 20% of Hong Kong is living in poverty but also that poverty there is $400 a month for an individual. Further, we’ve also got two different ways of reducing poverty. One is to work hard at expanding the economy so that all become richer. That relative poverty, the inequality, often increases when we do this. But the absolute poverty fades away entirely, as it has one in all of the rich countries. Economic growth doesn’t solve relative poverty, but it does absolute. Our other poverty alleviation method is to take some money off the richer people and give it to the poorer people. Obviously, we do this a little bit under any system at all of modern government. The rich do pay more tax to maintain the government than the poor do. And there’s always some amount of aid (however little or badly distributed) to the truly poorest, paid for from those taxes of the richer. We can most certainly reduce inequality in this manner and most countries do. We can and thus do reduce relative poverty in the manner as well. All of which is excellent. However, the problem with taxing people is that it slows economic growth. Yes, all taxes lower economic growth. It might well be true that what we then spend the money on raises it again, perhaps by more, but the tax itself does reduce growth. So, we’d like to tax as little as we can while still doing the things we must do through government – that definition of “must do through government” being a great source of arguments. All of which gives us a bit of a problem. Economic growth alone might increase relative poverty while reducing absolute. Redistribution will reduce relative poverty but might perpetuate absolute poverty, for the slower economic growth is the more those with less in our society will still be absolutely poor. If Bangladesh had seen no economic growth but more redistribution for the past 30 years, then many of the people would still be in that absolute poverty even if the country would be more equal. We’ve thus got to make a decision. Do we wish to have less absolute poverty or would we like a more equal country? The rich nations have, today, made the decision that more equality is more important. Europe quite happily taxes the rich a lot, knowing that this reduces economic growth, in order to redistribute to the poorer. But do note that Europe has none of that $1.90 a day absolute poverty, it has passed through that stage. Even in the absence of redistribution, it still wouldn’t exist. Bangladesh isn’t in that position. Even with more redistribution, there would still be that poverty -- a more equal Bangladesh would still have it. But we might still say that greater equality is more important than poverty abolition. Which is what AMA Muhith is telling us here. That the strategy is to work for that economic growth, not for the redistribution. Specifically, poverty removal is the policy, not poverty alleviation. Let’s have enough economic growth that there just isn’t any more poverty at all. After that we can, if we want to, work on the equality part, on the redistribution and relative poverty. Which is the thing that I agree with. There are varied problems and evils in this world but when I list them, the idea that some have more than others comes very much further down my list than the problem of some having near nothing. Thus, to me, the solution is to gain that economic growth, as fast as we can, so that all have something before we worry about how much. That is, for a poor country, growth is the imperative. Or, as I sometimes put it, worrying about inequality is something that only a rich country can afford to do.   Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.