Growth and Equality are Compatible

Profile: Jeffrey Sachs

By Ooi Kee Beng [Penang Monthly, Dec 2012]

Penang Institute held the fourth event in its “Penang in Asia” Lecture Series on 20^th October 2012. The honoured speaker was Professor Jeffrey D. Sachs. PM Editor Dr Ooi Kee Beng managed to squeeze a jet-lagging Prof Jeffrey Sachs for an interview while they were being ferried in a Penang state limousine from G Hotel to Traders Hotel, where Prof Sachs was to speak.

His lecture was on “The New Era of Sustainable Development”, a subject that he works on more effectively than most other economists in the world, alongside the theme of poverty.

Prof Sachs is a syndicated columnist for magazines that reach into more than 80 countries; and has twice been placed among Time Magazine’s 100 most influential world leaders. The Economist recently ranked him among the three most influential living economists of the 21^st century.

Aside from being the Director of The Earth Institute at Columbia University, Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management; he is Special Advisor to United Nations Secretary-General Ban Ki-moon on the Millennium Development Goals, a position he also held under former UN Secretary-General Kofi Annan.

Over the last seven years, he authored three inspiring New York Times bestsellers: The End of Poverty (2005), Common Wealth: Economics for a Crowded Planet (2008), and The Price of Civilization (2011).

[A comprehensive biodata on Prof Sachs can be found on the website of the Earth Institute at Columbia University at http://www.earth.columbia.edu/articles/view/1770%5D.

OOI KEE BENG:  Prof Sachs, thank you for agreeing to talk to me. Unfortunately, Penang traffic seems good today, so we will have little time before we arrive at the hotel. I shall therefore just put to you a couple of rather broad questions.

The income gap is something you have written a lot about. One of the big issues discussed in East Asia, and indeed throughout the world, is how economic growth relates to the widening of the income gap. To take the extreme case, in Maoist China between 1949 and 1978, the income gap was reduced to the minimum as a matter of policy. The result was economic, political and social chaos. Since then, the Dengist approach allowed for some to get rich first and for cats of any colour to catch mice, to paraphrase some of Deng Xiaoping’s famous and catchy quotes.

China’s income gap is now enormous, and that is coupled to other pressing problems such as corruption in high places. Some getting rich first does not seem to mean that others can soon catch up. The newly rich take too many of the mice, and some cats are left with hardly any mice at all.

Can you share your ideas with us about how developing countries can satisfy the need for fast growth with the need to be inclusive in economic development? Is the middle way in this context the social democratic solution, with high taxes, huge bureaucracy and comprehensive redistribution of wealth?

In this part of the world, there is of course apprehension that welfare systems may be economically counter-productive, and corruption may worsen when the State becomes the Great Arbitrator in wealth distribution.

JEFFREY D. SACHS: I think there are two or maybe three aspects about the issue of income inequality that are worth noting from the very beginning.

First, there is a long-standing theory that when an economy makes a transition from a traditional, rural and very underdeveloped status to a modern economy, it will go through a period when income inequality will rise and then later decline. And that was of course the hypothesis of Simon Kuznets [a Russian American economist (1901-1985) based at HarvardUniversity who won the 1971 Nobel Memorial Prize in Economic Sciences]. He said that in a traditional society, there was a lot of equality in income; and when it began developing, some would benefit from it and others would be left behind. Over time, however, more would benefit from the continued development in society, and income inequality would peak, after which it would start to decline.

That is one view, and it has been much debated. There may be a tendency in that direction but it is not an overwhelming fact.

The second dimension of income inequality is that changes in international trade and technology cause income distribution to change irrespective of growth in a particular country. For example, when China entered the global economy after 1978, all over the world, the wages of lower-skill workers tended to decline because they faced new competition from low-wage Chinese workers. That increase in inequality was not so much a function of dynamics within individual countries as it was a reflection of the change in the global economy because of China’s entry. Another example of that would be technological change like the computer and information revolution that is a world-wide phenomenon, and many economists hypothesise that that tends to favour those with high skills, or substitute or in fact cause a destruction of jobs for those with low skills because computers can replace repetitive kinds of activity and clerical operations, in the way that robotics can also replace workers on the assembly line.

So there is the idea that technological advances can change income distribution. Once again the assumption there is that people with higher skills tend to benefit compared to those with lower skills.

If we look at changes over the last 20 or 25 years around the world, there is a rather consistent widening of income between those with high educational attainments for example those with university degree, and those with little schooling. That may be a reflection not so much of dynamics within a given country as the joint outcome of globalisation and technological change.

Then there is a third dimension of course which is that national policies may either widen or reduce income inequality. In most high-income countries, the government’s tax-and-transfer system has a tendency to narrow income inequalities because taxes are at least mildly progressive, i.e. paid by higher incomes, and transfers are mildly progressive, i.e. received by predominantly lower- and middle-class households rather than by upper-class households.

And so, another determinant of income inequality is therefore government policy; how redistributive it is, and also what the spending aims towards achieving. Spending on education tends to be equalising if education services reach most of the country’s population. So, the government can lower income inequality by investments that are widespread and that benefit minority groups, and are open to lower-income households in health and education services.

So when we observe changes in income inequality, there are many dimensions that have to be taken into account—the country’s own dynamics, the relationship to globalisation, the relationship to technological change, and the nature of the government’s own policies in terms of its social spending and tax policies.

The fact of the matter is, there have been considerable differences in the extent of income inequality over the last 20 years. I think it is true to say that in most countries, inequalities have tended to increase though there are some countries, such as Brazil for example, where the income distribution has become more equal, not less equal.

Among those countries where there has been an increase in inequality, it surely is the case that all these different factors are at play. There is no simple explanation for any country’s phenomenon. It’s a joint result of its trade relations, its technological change, and its government’s policies.

The countries that I tend to point to as role models—those of northern Europe—are countries that experienced a widening of income inequality through forces of globalisation and returns to skills, but they counteracted those tendencies, at least in part, through redistributive policies especially through social democratic measures that guaranteed access to high-quality health care and education for all young people in the society. And as a result of that, the countries of northern Europe have the lowest extent of income inequality in the world.

I think the measure of the Gini Coefficient there is somewhere between 0.25 and 0.3.

In the United States, there has been relatively little redistributive offset, and in fact sometimes government policy had actively promoted the benefits of the rich. The Gini Coefficient there is higher, somewhere between 0.4 and 0.45, which is among the highest in the high-income world.

Among developing countries, there are cases of countries especially in Latin America and Africa where the income inequality is even larger. That typically reflects an unequal access to public services, and an unequal system of education. And also, those countries have typically a long history of unequal access to land ownership and other kinds of assets. That reflects the long history of racial differences and colonial rule in those countries.

In many Latin American countries, the Gini Coefficient is as high as 0.5. That’s also the case in some African countries. So this remains a complex phenomenon that does not have a single simple explanation for income inequality or change over time.

When you come to ask about the effects of this income inequality on society, I think there are two main points to emphasise.

One is that in highly unequal countries, poor people often lack access to human capital investment. They are too poor to be able to afford quality education, to be able to send their children to university. Maybe they live in poor neighbourhoods that have very low quality education, and they end up spending just a short period of time in school, and with very poor results.

This means that society loses a lot of its highest returns, because the best returns for society by far are in investments in one’s own children. If you fail to make those investments, and a significant portion of young people in the country don’t get proper education, don’t get proper nutrition and health care, then the loss for society is extremely large.

The other point is that societies with high-income inequality are highly unstable, obviously. There is a much greater battle there between the haves and the have-nots. The alternation of power can be quite destabilising in terms of public policies. And so countries that veer towards very high levels of income inequality end up losing social solidarity and political stability.

This can of course have very serious long-term consequences.

OKB: The income gap is a big problem in Asia as well. China of course is a case in point. Malaysia and Singapore, among Southeast Asian countries, have the strongest economies and it is they who also have the highest income equality in the region. Considered regionally, the problem gets even more serious. Some would argue in alarmed voices that political stability is under threat in this part of the world as well, and some way of economic thinking that can lead to profound changes is needed if things are not to come to a head.

What advice would you have for governments in the region?

JF: Well, I think one thing is quite obvious. This is that for a place like Malaysia, which is a middle-income economy striving to become a high-income country, the quality of education and the ability to innovate through a strong local cadre of engineers and scientists, is very important.

And at least the evidence is that the quality of the education received in Malaysia is not high enough yet for that high-income aspiration [to be realistic]. Some recent international comparisons on Science, Maths and Reading saw Malaysia scoring relatively low compared to high-income countries.

And so, even aside from the inequality issue, this is a more fundamental issue from the point of view of economic development. But I would say also that where inequalities are concerned, ensuring quality education that reaches all parts of society including children in poor households, is absolutely key. This is the great strength of the social democratic idea, and it is a reality in countries like Denmark or Norway or Sweden where there is pre-school available for all children, and a great deal of socialisation which means that children from all income classes enjoy the benefits of quality day-care, quality pre-school and then quality public education.

And so, those investments in my view not only give high-quality returns from the point of view of economic development but also high-quality returns in terms of social inclusion.

This is a case where growth and equality go together. They don’t contradict each other.