- 13 Jul 2003 23:05
#18014
A cure worse than the disease
http://www.guardian.co.uk/business/stor ... 04,00.html
Everybody knows that the world isn't fair. Inequality is part of the human condition. Always has been, always will be. What has never really been clear is just how unequal life is. Now, thanks to an economist at the World Bank, it is clear. The richest 50m people, huddled in Europe and North America, have the same income as 2.7bn poor people. The slice of the cake taken by 1% is the same size as that handed to the poorest 57%.
These are mind boggling numbers. Well might Branko Milanovic, the economist responsible for the study in the January 2002 Economic Journal wonder whether this state of affairs is sustainable. It's a rhetorical question, of course. For a while, the rich may retreat into their fortresses but in the end an army stuck in a fortress is weak not strong, vulnerable rather than safe.
There is scant comfort to be drawn from the fact that the rich are becoming spectacularly richer rather than the poor becoming poorer in absolute terms, although this is true for a sizeable minority, especially in sub-Saharan Africa. In a world that has shrunk as a result of technology and the spread of the mass media, it is relative poverty that is the danger. As Mr Milanovic puts it, there must be serious doubt about how long such huge inequalities can last when the poor can see the rich flaunting their lifestyles on TV and in the movies.
The danger is that we assume that inequality on this scale is a natural phenomenon, rather like a monsoon or a blizzard, and that there is therefore nothing that we can or should do about it. Policy choices have been made to organise the world in the way that it is because that is deemed the way to maximise utility. The intellectual basis (such as it is) for trickle-down economics is that you might need to make societies more unequal (but only in the short term, you understand) in order to foster the dynamism and flexibility that will eventually enrich us all.
Germany's problem, according to this view, is that it has tried to be too equal, which is why a truckload of trickle-down advice is heading its way right now.
Extreme caution is needed here. Shock treatment didn't work in Russia; it shortened male life expectancy by six years within a decade. Shock treatment didn't work in Argentina; the country is effectively bankrupt. Shock treatment works well in the theoretical models of free-market ideologues but nowhere else.
You don't believe me? In that case, let's look at a real life example. For our case study we need to head off to the Pacific and go back in time to 1984. New Zealand was the perfect field trial for extreme structural reform. It was small and geographically separate, it has a single-house parliament dominated by the executive and it was dosed up to the eyeballs with all the toxins that the reformers said were poisoning capitalism. Import controls, capital controls, strong trade unions, a redistributive welfare state, a large state sector; New Zealand was hooked on all the bad drugs.
Starting in 1984, the country's Labour government said that this all had to change. It started by deregulating interest rates, removing international capital restrictions, floating the currency and removing agricultural subsidies.
Having got the taste for change, it then scrapped regulations on business, abolished import quotas, enshrined price stability in law as the sole object of monetary policy, forced workers into individual contracts, announced that budget deficits would eventually be banned, cut income taxes and slashed welfare benefits. This was not a detox regime: it was cold turkey.
As a consequence of these reforms, inequality in New Zealand grew more rapidly than in any other country. The government created an underclass where none had existed before. But purged of its addiction, it was hailed as the country that the rest of the west should emulate, the role model that had dared to do what even Mrs Thatcher would not, and was all the better for it.
There was only one problem with this argument. It was called Australia. Although Australia is not quite as close to New Zealand as the rest of the world thinks, it is relatively close and has strong cultural and economic similarities. Australia has by no means turned its back on economic reform in the past two decades, but it has been more selective and a lot more gradualist in its approach.
Looking back.
The latest edition of Political Economy (Volume 14 number 1) contains a fascinating comparison of the track records of the two Australasian nations by Paul Dalziel, a New Zealand academic. His first conclusion is that New Zealand's living standards have suffered badly when compared to those in Australia.
Up until 1987, the two countries had a broadly similar growth pattern, but the upshot of New Zealand's spell as an economics laboratory mouse is that it has expanded much more slowly than its neighbour, with significant effects on personal incomes. Dalziel says that had output in New Zealand matched that in Australia, per capita incomes in New Zealand would have been almost NZ$5,000 (£1,473) higher by 1998 than they actually were. The cumulative loss to each individual was NZ$30,000 and the cost to the country was a chunky NZ$114bn.
Higher unemployment has always seen by the free-market fundamentalists as a price worth paying for necessary structural reforms, so Dalziel's second conclusion - that New Zealand's record on joblessness has worsened relative to Australia - is hardly a surprise. At the end of the 1970s, New Zealand had an unemployment rate of 1.5%, only a quarter of that in Australia. The gap closed by the end of the 1980s, and although the jobless rate in New Zealand was lower than in Australia for much of the 1990s, by 1998 both countries had similar levels of unemployment - 8%.
More surprising, perhaps, is that New Zealand's record on labour productivity has been so rotten, despite the shake-out in the labour market and the attack on trade unions. The notion that slash and burn tactics allow managers to "clear out the dead wood" and force through changes to improve efficiency is hard to substantiate in the light of the fact that in the 1990s - after the deregulation of the labour market - New Zealand's productivity increased by 5.2% while Australia's rose by 21.9%.
In terms of inequality, New Zealand was in a class of its own. As was true across the west, the rich were the real beneficiaries of structural reform, with the top 10% of the income distribution enjoying a 26.5% increase in real incomes between 1983-84 and 1995-96. What was different about New Zealand was that the poorest half of the population had less real purchasing power at the end of this period, and the poorest groups suffered the most.
This was not what the reformers in New Zealand had expected or desired. The aim, set out in 1984, had been to tackle "an unacceptable level of poverty". Dalziel concludes that the shock treatment of the 1980s and 1990s did not achieve that core objective, a view that is shared by New Zealand's current prime minister, Helen Clark, who has raised the top rate of income tax, increased pensions, reregulated the labour market and cut student fees.
In a brutal sense, the New Zealand experiment was worthwhile. It highlighted the ineffectiveness and risks of policies that deliberately foster inequality. New Zealand has shown the world how not to do it.
http://www.guardian.co.uk/business/stor ... 04,00.html
Everybody knows that the world isn't fair. Inequality is part of the human condition. Always has been, always will be. What has never really been clear is just how unequal life is. Now, thanks to an economist at the World Bank, it is clear. The richest 50m people, huddled in Europe and North America, have the same income as 2.7bn poor people. The slice of the cake taken by 1% is the same size as that handed to the poorest 57%.
These are mind boggling numbers. Well might Branko Milanovic, the economist responsible for the study in the January 2002 Economic Journal wonder whether this state of affairs is sustainable. It's a rhetorical question, of course. For a while, the rich may retreat into their fortresses but in the end an army stuck in a fortress is weak not strong, vulnerable rather than safe.
There is scant comfort to be drawn from the fact that the rich are becoming spectacularly richer rather than the poor becoming poorer in absolute terms, although this is true for a sizeable minority, especially in sub-Saharan Africa. In a world that has shrunk as a result of technology and the spread of the mass media, it is relative poverty that is the danger. As Mr Milanovic puts it, there must be serious doubt about how long such huge inequalities can last when the poor can see the rich flaunting their lifestyles on TV and in the movies.
The danger is that we assume that inequality on this scale is a natural phenomenon, rather like a monsoon or a blizzard, and that there is therefore nothing that we can or should do about it. Policy choices have been made to organise the world in the way that it is because that is deemed the way to maximise utility. The intellectual basis (such as it is) for trickle-down economics is that you might need to make societies more unequal (but only in the short term, you understand) in order to foster the dynamism and flexibility that will eventually enrich us all.
Germany's problem, according to this view, is that it has tried to be too equal, which is why a truckload of trickle-down advice is heading its way right now.
Extreme caution is needed here. Shock treatment didn't work in Russia; it shortened male life expectancy by six years within a decade. Shock treatment didn't work in Argentina; the country is effectively bankrupt. Shock treatment works well in the theoretical models of free-market ideologues but nowhere else.
You don't believe me? In that case, let's look at a real life example. For our case study we need to head off to the Pacific and go back in time to 1984. New Zealand was the perfect field trial for extreme structural reform. It was small and geographically separate, it has a single-house parliament dominated by the executive and it was dosed up to the eyeballs with all the toxins that the reformers said were poisoning capitalism. Import controls, capital controls, strong trade unions, a redistributive welfare state, a large state sector; New Zealand was hooked on all the bad drugs.
Starting in 1984, the country's Labour government said that this all had to change. It started by deregulating interest rates, removing international capital restrictions, floating the currency and removing agricultural subsidies.
Having got the taste for change, it then scrapped regulations on business, abolished import quotas, enshrined price stability in law as the sole object of monetary policy, forced workers into individual contracts, announced that budget deficits would eventually be banned, cut income taxes and slashed welfare benefits. This was not a detox regime: it was cold turkey.
As a consequence of these reforms, inequality in New Zealand grew more rapidly than in any other country. The government created an underclass where none had existed before. But purged of its addiction, it was hailed as the country that the rest of the west should emulate, the role model that had dared to do what even Mrs Thatcher would not, and was all the better for it.
There was only one problem with this argument. It was called Australia. Although Australia is not quite as close to New Zealand as the rest of the world thinks, it is relatively close and has strong cultural and economic similarities. Australia has by no means turned its back on economic reform in the past two decades, but it has been more selective and a lot more gradualist in its approach.
Looking back.
The latest edition of Political Economy (Volume 14 number 1) contains a fascinating comparison of the track records of the two Australasian nations by Paul Dalziel, a New Zealand academic. His first conclusion is that New Zealand's living standards have suffered badly when compared to those in Australia.
Up until 1987, the two countries had a broadly similar growth pattern, but the upshot of New Zealand's spell as an economics laboratory mouse is that it has expanded much more slowly than its neighbour, with significant effects on personal incomes. Dalziel says that had output in New Zealand matched that in Australia, per capita incomes in New Zealand would have been almost NZ$5,000 (£1,473) higher by 1998 than they actually were. The cumulative loss to each individual was NZ$30,000 and the cost to the country was a chunky NZ$114bn.
Higher unemployment has always seen by the free-market fundamentalists as a price worth paying for necessary structural reforms, so Dalziel's second conclusion - that New Zealand's record on joblessness has worsened relative to Australia - is hardly a surprise. At the end of the 1970s, New Zealand had an unemployment rate of 1.5%, only a quarter of that in Australia. The gap closed by the end of the 1980s, and although the jobless rate in New Zealand was lower than in Australia for much of the 1990s, by 1998 both countries had similar levels of unemployment - 8%.
More surprising, perhaps, is that New Zealand's record on labour productivity has been so rotten, despite the shake-out in the labour market and the attack on trade unions. The notion that slash and burn tactics allow managers to "clear out the dead wood" and force through changes to improve efficiency is hard to substantiate in the light of the fact that in the 1990s - after the deregulation of the labour market - New Zealand's productivity increased by 5.2% while Australia's rose by 21.9%.
In terms of inequality, New Zealand was in a class of its own. As was true across the west, the rich were the real beneficiaries of structural reform, with the top 10% of the income distribution enjoying a 26.5% increase in real incomes between 1983-84 and 1995-96. What was different about New Zealand was that the poorest half of the population had less real purchasing power at the end of this period, and the poorest groups suffered the most.
This was not what the reformers in New Zealand had expected or desired. The aim, set out in 1984, had been to tackle "an unacceptable level of poverty". Dalziel concludes that the shock treatment of the 1980s and 1990s did not achieve that core objective, a view that is shared by New Zealand's current prime minister, Helen Clark, who has raised the top rate of income tax, increased pensions, reregulated the labour market and cut student fees.
In a brutal sense, the New Zealand experiment was worthwhile. It highlighted the ineffectiveness and risks of policies that deliberately foster inequality. New Zealand has shown the world how not to do it.
- By litwin
- By Pants-of-dog