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Higher GDP is not always in favour of the poor

Oct 15,2019 - Last updated at Oct 15,2019

Non-economists always mix variables, as they do not pay attention to details because they depend solely on end results. One of these relationships is the general belief that poverty decline will be a natural outcome of economic growth, but in reality, this is not true, especially in developing nations. Growth can sometimes increase the number of the poor. The question is how?

The reason of such misperception between the manifestation of economic growth and the pervasiveness of poverty is due to lack of a clear definition of both economic growth and poverty. The GDP, which is rising and causing economic growth, is the net output of the economy's production components, labour, capital and natural resources. Economic growth simply means that the GDP will rise yearly.

From the definition of economic growth, it can be said that the share of each of the three previous elements of production can determine the relative share of the returns of this growth. For example, if the participation of workers in economic growth increases, the effects of this will be seen directly in the growth of their annual wages. If the share of capital grows, this will be revealed in more profits to shareholders and owners and so forth. 

If we look at the definition of poverty, it manifests people who have little income and who cannot meet their basic demands and needs of food, clothing and housing. Thus, when we compare the definition of economic growth to the definition of poverty, we can answer a question that is very pressing, which is:  How would economic growth yield to a rise in poverty at the same time? This happens when the share of workers in this growth is less than the share of natural resources and capital, the other elements of economy’s production.

But will economic growth cause poverty? If growth benefits the owners of natural resources and capital, leading to mutilation of the economic structure in terms of savings and investments, by then such returns go to low-value-added sectors, and future clusters of growth will be unhelpful for workers and any drives to reduce poverty levels will go with the wind.  The potential for economic growth would be detrimental to the poor in an indirect manner.

It can also be argued that economic growth could increase poverty if it increases capitalists’ ability to avoid paying taxes due or to delay paying them. This would weaken future government social security activities. In most countries, especially developing nations, theoretical notions are often not implemented, but plans to accelerate economic growth have become a primary goal for governments because higher economic growth is believed to lead to higher living standards. Though this should lead to better livelihood, this is not the case because the fruits of growth are not distributed equitably, and few people often account for most of the benefits of growth, or such growth can be false and unreal.

But how do we know that the rate of economic growth is false or unreal? In order to make this clear, we must first know how growth is calculated. It depends on examining the changes in the value of GDP over the years. The rate of economic growth is the difference between the new GDP and the old GDP, divided by the old GDP. This is the most popular method used in most countries in the world today, but this measure may not be accurate enough. Some economists revealed many constraints and problems in calculating the GDP.

About five decades ago, Robert F. Kennedy said: “It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. Yet, it does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.”

Whether we agree or disagree with Kennedy, the reality is that official statistics and data do not always reflect the experiences and well-being of citizens. In the end, the GDP takes averages and the total amounts, without digging deep into nuances and inequalities of citizens.

Some economists do believe there may be growth driven by sectors that do not benefit the poor in proportion to growth rates, and with the inflation that accompanies growth. By then, the poor find themselves getting poorer. Therefore, it is not important to see an increase in the income of the poor classes resulting from business expansion and growth because with every economic growth, there is a higher level of inflation that exceeds business expansion due to labour-intensive businesses.

To sum up, the difference between the growth rates and the rise of income of the poor goes to the rich in the form of return on investment. This is called misallocation of wealth along with issues of corruption, which prevent the poor from accessing the benefits of economic growth. The most important economic expansion rate is the one that focuses on quality of growth. There is poor growth, when poverty rates hike and economic growth results with no job opportunities, that is, real unemployment.

 

The writer is a consultant, senior political and media adviser and the executive director of Geostrategic Media Centre-USA. He contributed this article to The Jordan Times

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