Closing the Gap between Developed and Developing Countries: Two Steps
Forward, One Step Back
By Daud Khan and Leila Yasmine
KhanReprint | | Print | Send by email
Women ragpickers in Delhi scavenging through a pile of refuse for
recyclable material. Credit: Dharmendra Yadav/IPS
AMSTERDAM/ROME,
Jan 25 2021 (IPS) - Developing
countries as a group have been growing faster than developed countries for
several decades. As a result the ratio between average incomes between the two
sets of countries – albeit still very large – has been shrinking. This is
good news. The other piece of good news is that over this period the number of
people living in extreme poverty has also been dropping – from 1.9 billion in
1990 to about 650 million in recent years. China has recently declared an
end to extreme poverty.
The bad
news is that much of increased income and wealth in many developing countries
has been concentrated at the top with relatively little going to the
poor. This includes big, fast growing countries such as China and
India.
As a
result the bulk of the population in developing countries is living in a society where
income inequality is increasing. This matters for two
reasons:
·
Firstly, that the increase in average GDP
in the developing countries is not translating as fast as it should into
generalised well-being indictors such as such as higher education, real wages,
average height and life expectancy. This is very disappointing.
·
Secondly, people are not as happy as they
could be. After all happiness is impacted not just by how much they earn
and consume, but also about their place in society and how they stand compared
to others. The widening gap between the poor and the rich in many countries
creates a sense of depravation and injustice. This makes them highly
susceptible to political turbulence and instability, both of which have a high
cost in terms of economic performance and wellbeing.
Is the
increase in inequality an inevitable part of the development process, or at
least of the early stages of growth? Is it true that one “cannot
redistribute poverty”? Is it true that rich tend to save and invest more and
therefore some concentration of income and wealth is necessary to generate
higher growth? Is it true that only a rich and privileged business class has
the confidence and appetite for risk and innovation that is a prerequisite for
development? There is strong evidence that the answer to all the above
questions is a “NO”. Growth and development can go hand in hand with reduced
inequality and better living standards for the poor.
Developing
countries are very much on their own in charting out a pathway out of the
current situation of inequality and poverty. The developed countries that used
to be on the forefront of well balanced growth have for some time abandoned
this role
Historic evidence comes from Western Europe which
during the early part of the last century, managed to increase wellbeing
indicators in line with, or sometimes even faster, than GDP growth.
To some
extent this was due to technical innovations such as those in preventive and
curative medicines, but a lot had to do with improved social services in health
and education, opening up to trade, social protection programmes, and
increasing civil rights, particularly to minorities and vulnerable groups.
More
recently, experience in several Latin America countries show how more democracy
and strong social welfare programmes can reduce inequality and improve the
lives of the poor.
The
need to address inequality has been made more urgent by the COVID-19
pandemic. The past year has exacerbated inequality by increasing
unemployment, cutting workers’ wages and hitting the poorest and most
vulnerable communities.
Weak
social safety nets and poor public health systems have left the poor in a
dramatic situation. COVID-19 has particularly hit women who have reduced access
to health services and jobs. There has been a sharp increase in domestic
violence against women and girls.
Given
this worsening situation, can anything be done to make growth more
equitable? Most certainly – in fact there are several things that can be
done and they fall into two broad categories – more “pro-poor” growth, and
well-designed social welfare programmes.
One of
the most important pro-poor policies relates to macro-economic stability. It is
often not appreciated how vulnerable the poor are to inflation, recessions,
overvalued exchange rates and high interest rates. Keeping these key
macro–economic variables under control is imperative. It is not going to be
easy as Governments battle the COVID crisis but has to be done.
The
other major element of a pro-poor growth strategy is increasing access for the
poor to the essential prerequisites for a productive life. These include
improved infrastructure that meet the needs of the poor such as clean water and
sanitation, as well as improved electricity and transport services.
Equally
important are better access to health and education; and to physical and
financial assets, in particular credit and land in both rural and urban
areas. Of increasingly importance is access to digital services which are
an essential prerequisite to accessing new technologies and productivity
growth.
Finally,
it is essential that developing countries work together to maintain an open
trading system which allows them to produce in line with their endowments and
skill levels.
Clearly
not all the poor will be able to take advantage of the improved opportunities
created by pro-poor growth. Factors that exclude them include
geographical isolation, gender bias, disabilities, ethnicity or sometimes pure
and simple bad luck where things “just don’t work out”.
Currently
only a fraction of the population of developing countries has access to
comprehensive social protections programmes and safety nets. This needs
to increase dramatically – not as a form of charity but as a form of social
responsibility.
Unfortunately
developing countries are very much on their own in charting out a pathway out
of the current situation of inequality and poverty. The developed countries
that used to be on the forefront of well balanced growth have for some time
abandoned this role.
Income
inequality in the developed world also started increasing in the 1980s. This
happened not only in highly market oriented economies such as the USA, but also
in historically egalitarian countries such as Germany, Denmark and Sweden.
And
this is not just as a result of technical or market-driven changes that favour
for example the “tech-giants”, but also reflects policy choices such as reduced
taxes for the richest.
The
tendency for Governments in developed countries to favour the rich was
exacerbated during the 2008 financial crisis where vast amounts of public money
were provided in the form of support to the financial institutions and
large-scale industrial enterprises considered “too big to be allowed to
fail”.
Early
indications are that something similar may happen with the post-COVID recovery
effort. Substantial amounts of public funds may end up going to large firms –
rather than to the poor – which may exacerbate the trends towards rising
inequality.
In the
coming decades, the developing countries have a historical chance not only to
closing the gap in terms of average incomes gap with developed countries, but
also improving the quality of this growth.
Daud Khan works
as consultant and advisor for various Governments and international agencies.
He has degrees in Economics from the LSE and Oxford – where he was a Rhodes
Scholar; and a degree in Environmental Management from the Imperial College of
Science and Technology. He
lives partly in Italy and partly in Pakistan
Leila Yasmine Khan is
an independent writer and editor based in the Netherlands. She has Master’s
degrees in Philosophy and one in Argumentation Theory and Rhetoric – both from
the University of Amsterdam – as well as a Bachelor’s Degree in Philosophy from
the University of Rome (Roma Tre). She provided research and editorial
support.
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