Trickle Down Economics Doesn’t Work in Africa Either

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trickle-down

Bill Gates recently published the fifth of his Foundation’s annual letters. To be honest, I was never aware of the previous four, but the latest edition has been doing the Facebook rounds and caught my attention. I have a soft spot Bill Gates. The bugs in his software drive me crazy, but there’s something likeable about his boyish geeky mannerisms and regardless of the evil capitalist ways he made his fortune, it’s hard not to admire someone who gives away such a spectacular amount of money to humanitarian causes.

But, his 2014 letter is an irritant. It seeks to explode several popular myths surrounding the effectiveness of aid, but in doing so perpetuates one of the most ubiquitous falsehoods on poverty; the lie that because a country becomes richer, so do its poorest citizens.

Bill Gates is not, of course, the originator of this idea. He and his Foundation are, in my opinion, a mighty force for good in the battle against global poverty; not only because of its immense wealth, but because of its ability to think outside the square when looking for solution to poverty. In so many ways, Bill Gates seems to know better than others on the subject of poverty. He should know better on this point too.

Most Daily Blog readers are probably savvy enough to realise that GDP growth is a fairly blunt measure of a nation’s improving wealth, much less the wealth of the average citizen. Gates, though, uses an even more ridiculous measure; comparing the present-day infrastructure of selected developing world cities with the situation 20 years ago. He’s right, of course; economic growth throughout the developing world has fuelled a rapid modernisation of urban infrastructure and introduced a vast range of Western-style urban luxuries to previously shabby cities. As it happens, I am currently residing in Nairobi, one of Gates’ examples and am about to use a smart-phone app to get a pizza delivered to my third-floor apartment. For people in my income bracket, life in Kenya’s capital has improved a lot and, without a doubt, this has been stoked by the growth in the number of people in my income bracket. But, you don’t need to go far to see that this is hardly an accurate representation. I’m staying about 2km from Kibera, a residential area widely regarded as Africa’s largest slum. It’s a curious fact that while Kenyan GDP has grown by a healthy 4-5% per year over the past decade, Nairobi’s slum populations have increased by about the same margin.

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Kenya’s GDP growth rate is fairly modest by African standards. For those African countries “blessed” with valuable underground resources, the growth rates have often been spectacular. In such cases, though, the comparison between growth in nation’s wealth and a reduction of the number of people in poverty tends to be even weaker. This is because mineral resources may generate vast foreign currency incomes but actually employ very few people. Even in the mining sector, which generates comparatively higher employment than oil, low wages minimise the potential distribution of the underground riches. Those that do benefit tend to benefit a lot, whilst the majority do not benefit at all. This is not to say that mineral resource wealth flows entirely into private hands or to rich-world exploiters. The vast majority of natural resource income flows to national governments. Sadly, though, a variety of factors – including corruption, misplaced government priorities and the genuine challenge of accessing the poor – mean that government wealth frequently does not reach those who need it most. Thus, regardless of whether you’re talking about income growth in the private or public sector, that income tends to “trickle down” far enough to dramatically transform cityscapes, but nowhere near enough to benefit those who need it most.

But, hang on a minute, don’t the statistics tell us that the number of poor people in the world is falling? Yes, in global terms, the number of people living in extreme poverty has fallen dramatically over the past 20 years. Specifically, the number of people living below the global extreme poverty line has fallen from around 1.9 billion people in 1990 to around 1.2 billion people in 2010. Wow, that’s 700 million fewer brought out of poverty in 20 years! This is cause for celebration, but probably only if you live in China, because that’s where 680 of those 700 million not-poor-anymore people live.

In China, spectacular GDP growth and reduction in poverty are clearly linked. The rapid expansion of China’s manufacturing sector since the early 1980s has brought regular income to tens of millions of rural poor. This global statistics exaggerate the China-effect somewhat, because the global population (especially in the most poor countries) has risen considerably in that same period, so even if the number of poor people remained static in that period, that would be a reduction percentage-wise. But, nonetheless, China – together with several other Asian countries – dominate the figures meaning that the link between national income growth and poverty reduction is anything but uniform.

But, hang on another minute, haven’t lots of countries made huge strides towards the Millenium Development Goals? Yes, many countries have made significant gains, particularly in important areas such as child mortality and access to drinking water. (And as Gates rightly points out in his letter, these gains are evidence of the effectiveness of aid.) But, whilst the MDGs are, to some extent, useful indicators of poverty, they cannot be directly equated with the extreme poverty classification. Someone born in, say, Ethiopia today might have a greater chance of living beyond her 5th birthday than she would have 10 years ago and that is a fantastic achievement. But, it does not necessarily mean that she does not live in extreme poverty. Moreover, the MDGs gains that have been achieved – as impressive as they are in many countries – have been achieved amongst the population groups where they are easiest to achieve, which invariably does not mean the extreme poor. I’m not trying to criticise the MDGs in this regard. It is natural to start with the low-hanging fruit and the death of a child is a tragedy that should be eliminated whether you are extreme poor, averagely poor, middle-class or mega-rich. Moreover, the MDGs are to be applauded as being far more important than gains in national income! But, the fact remains that the MDG achievements have not – at least not yet – always benefitted the extremely poor.

Many New Zealanders will be familiar with what I’m talking about. We have neither the extremes of poverty nor the huge gains in economic growth that much of Africa has experienced. But, we have been preached the importance of economic growth for decades only to see that growth result in measurable increase in poverty and a significant reduction in income equality. Individuals may be better off, but the majority of the population is not. When it comes to viewing Africa, therefore, we should know better than to make Bill Gates’ assumption that by growing a nation’s wealth, that wealth will trickle down to the people who need it the most.

9 COMMENTS

  1. Tanzania used to follow the sort of leftist policies that people like you propose as alternatives. They even had a name for African Socialism – Ujamaa, Like all socialist systems it failed miserably and made most people poorer than they were when it started. That is the history of post independence Africa. Failed leftist policies making people poorer.

    • ” Failed leftist policies making people poorer.”

      And what do failed rightist policies do for the poor – other than making them comparatively (i.e. relatively) even poorer of course?

      • That is generally not been the experience around the world.

        You just need to look at the comparative economic performance of Chile versus Argentina to see that in action

        http://www.project-syndicate.org/commentary/michael-boskin-compares-economic-policy-in-chile-and-argentina-to-explain-similar-systems–very-different-economic-outcomes

        Within Africa the recent growth is as a result of having far more sensible (i.e. business friendly) policies

        http://www.mckinsey.com/insights/economic_studies/whats_driving_africas_growth

        • “That is generally not been the experience around the world. ”

          For who, precisely, Gosman?!

          The top 10% or 1% may be doing well – but the rest are lagging behind.

          Have you not been paying attention?

        • Please define which businesses are benefiting from these ‘friendly’ policies?

          Does it include the traders in the market places and the small farmers (many of whom are women)?

          Or the arms dealers and oil companies persistently wrecking ecosystems, communities, and local businesses?

          Or the people who change countries, lured by the ‘friendly policies’ to put time, money, toil into restarting a severely curtailed sector (e.g. producing crops for export) only to find that their hard work, and that of their employees, is literally stolen to benefit those wonderful people who brought you ‘business-friendly policies? (Zimbabwe, for example.)

          Please also factor in those arch-lefties China (not), who are playing an increasing role in providing skills, expertise, development and management to various industries across Africa. Are the policies that support them different from, or similar to those offered to other northern players?

          As far as I can tell – Africa is not one nation. There are many countries and many agendas. Plus lots of well-educated people indigenous to those countries who just might be thinking differently from the people who provided part of that education. It seems prudent to remember that.

          Please also reflect upon the thought that tyrants look very similar, regardless of the ideology they claim to express. Neither Chile nor North Korea could claim to be a ‘workers’ paradise’, now could they?

          • I’m not sure why you bring Zimbabwe up as is an example of left wing policies impoverishing the people. Weirdly for an ultra-nationalist old time socialist party Zanu-PF oversaw the introduction of the US dollar to replace the old Zimbabwe dollar as their policies had completely destroyed the currency and it was the only way to stabilise the economy.

  2. “only to see that growth result in measurable increase in poverty and a significant reduction in income inequality.” ???
    ummm, should that not be -a significant reduction in income equality. ?

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