June 2005
While the notion of liberty is widely praised today, its counterparts of equality and fraternity are no longer en vogue. The welfare state that protects its population from the risks of sickness, age and poverty is considered a European aberration that developing societies should not follow. This point of view sees redistribution not as an effective weapon in the war against poverty, but almost as a mechanism to perpetuate misery.
This perspective is based on three arguments that appear plausible only at first glance. The first argument is that redistribution reduces the rate of investment in an economy as every dollar that the wealthy would otherwise invest productively is consumed by the poor. Secondly, much of the money is said to end up in the pockets of someone other than the poor, financing the necessary bureaucracy as well as additional corruption expenses. And thirdly, as for instance the World Bank argues, redistribution is viewed as endangering political stability and leading to violent conflicts, because the ‘elites’ are not prepared to be fleeced without resistance.
These arguments are theoretically weak, empirically unfounded and, for all practical purposes, cynical. If the poorest of the poor actually have to spend all assistance on food and clothing –is that a valid excuse for denying them help? The World Bank may be realistic in assuming that the dissatisfaction of tax-paying elites has a greater destabilising impact on governments in developing countries than widespread poverty. But is it right for the Bank to condone such attitudes?
Critics of redistribution assume that, from an economic perspective, the present distribution of wealth is optimal. This is a daring statement in view of rampant rent-seeking and capital flight which are experienced by most developing countries. Redistribution does always take place, just not from the rich to the poor.
If, for example, minimum standards for buildings are set unrealistically high, then public spending on housing can only benefit the middle classes. Similarly, subsidies for health care and retirement provisions tend to only serve those who are in regular employment. In many countries, however, the poor contribute to funding such handouts by paying consumption taxes.
In any event, only ill-informed persons can claim that the poor do not invest. Small businesses account for a major proportion of employment and income all over the world. Hardly any major city could cope with its housing problems were it not for self-help settlements called ‘slums’. Official statistics usually fail to acknowledge the enormous contribution of the informal sector to the economy and to public welfare. At the same time, the poor are at the mercy of corrupt officials and brutal demolition squads.
Not even a die-hard optimist would suggest that the Millennium Development Goals can be met through economic growth alone. ‘Support for self-help’ is considered the ideal aid approach. If at all, material transfers are only deemed acceptable in the form of safety nets and, of course, in the case of catastrophes.
Many development agencies try to support informal businesses through supposedly non-distributive means such as micro credit, training and infrastructure development. Nonetheless, the poorest remain excluded due to the doctrines of cost recovery and (misunderstood) sustainability. This applies particularly to credit programmes even though their operators loudly profess the opposite.
In order to compete with private suppliers (‘loan sharks’), micro credit is usually heavily subsidised –in most cases, administrative costs are simply neglected. For good reasons, however, the participating groups only accept people who can be expected to make regular repayments. All too often, the result is neither effective poverty reduction nor worthwhile business promotion. Programmes also tend to collapse as soon as donors withdraw.
For successful development, poor people’s investment in their ‘human capital’, in particular the health and education of their children, is probably even more important than productive investments. Extreme need, however, forces children to leave school prematurely in order to contribute to their family’s income. Frequently, they work in very exploitative and, in health terms, hazardous conditions.
The poor are trapped in a vicious cycle. The desperate search of children, young mothers, elderly and sick persons for any kind of income leads to an oversupply of unskilled labour and simple services. Consequently, ‘normal’ incomes also sink to a level insufficient to maintain health and productivity. Poverty therefore deepens and becomes chronic over several generations. This holds true not only for individual families but also for villages, urban districts, regions and even entire countries.
Economic growth in itself (whether pro-poor or not) is not enough to effectively help the chronically poverty-stricken. They suffer from a syndrome that combines poor health, inadequate education and social discrimination. Michael Lipton, an eminent scholar on poverty, argues that extreme inequality is a major obstacle to growth. His research shows that mass poverty is not just a result of economic stagnation, but can also become a substantial cause of it.
The logic of survival is different from that of entrepreneurship. Only people whose very existence is not threatened by any failure are in a position to take risks. The poor, on the other hand, do not start businesses because they have a specific talent or new ideas. They do so because they cannot find wage employment. They do not specialise but rather attempt to diversify their income sources, so as to provide a better cushion against unavoidable crises.
Moreover, asset accumulation is restricted by the prevailing obligation to share with relatives or neighbours who are currently in greater need. This practice is crucial to the survival of all poor communities that must cope with extremely volatile incomes. In such a setting, however, the common instruments of small business promotion fail to make a sustainable difference.
Michael Lipton and Robert Eastwood therefore call for intelligent ‘pro-growth poverty reduction’ strategies. In this perspective, public spending on poor people’s education and health is by no means lost money but rather an investment that enhances labour productivity. Such payments should actually be made cornerstones of economic policy. Evidence from success stories like Brazil, Vietnam and other emerging markets supports Lipton’s argument.
Howard White has provided ample empirical proof for (moderate) redistribution adding considerably to the positive effects of economic growth on poverty at the macro-level. It is telling that even though he did his research on behalf of the World Bank, his findings have neither been acknowledged in the Bank’s latest report on poverty nor on its web site.
One of the fundamental functions of the modern state is still to guarantee the fulfilment of basic human needs (of course according to local standards) for all citizens. Redistribution of wealth is necessary for this purpose. For ethical reasons alone, states must not neglect this task. Doing so, moreover, would mean giving up on social integration and stability, and thus on general security and prosperity. This is particularly true for the poorest countries where poverty is an immediate matter of life and death.
That certain powerful groups –middlemen, slumlords and mafia syndicates– have a vested interest in poverty should not be overlooked. These people do not want markets to function more efficiently, allowing all people to make their own decisions and choices, and society as a whole to enjoy higher standards of living. Rather, they are the ones who benefit from dependency and thus have the most to gain from the flimsy rhetoric on poverty reduction without redistribution.
It is clear that without international aid, poor countries will hardly be able to fulfil this fundamental responsibility for the welfare of their people. It is, however, legitimate and even advisable to force governments to meet their obligations by making aid conditional in this sense.
Whether the Poverty Reduction Strategy Papers are a step in the right direction remains to be seen. It seems more likely that the present pussyfooting around the issue of redistribution will result in another wasted opportunity after the disaster of structural adjustment. – Third World Network Features
About the writer: Dr Erhard Berner is a sociologist who specialises in urban development and poverty in South and South-East Asia. He works as an Associate Professor at the Institute of Social Studies in The Hague. (berner@iss.nl)
The above article first appeared in D+C (Development and Cooperation) (Volume 32, No. 6, June 2005).
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