Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: Broad-based Growth Can Counter Inequality, Instability—Stiglitz
October 11, 2011
- Gross domestic product fails to reflect overall well-being
- Growth with inequality can lead to political instability
- Advanced economies should help low-income countries pursue growth
Countries should strive to achieve high, broad-based growth in order to avoid potential political instability triggered by increasing levels of inequality, economist Joseph Stiglitz told a Washington conference.
Stiglitz: ‘There are many dimensions to success, and GDP does not measure most of the relevant dimensions. It measures one dimension, but only one’ (IMF photo)
INCLUSIVE ECONOMIC GROWTH
The conference, held on the sidelines of the 2011 IMF-World Bank Annual Meetings, discussed the consequences of commodity price volatility on low-income countries. The topic of inclusive growth as a policy to tackle the increasing levels of inequality was also debated at length.
In an interview with IMF Survey online, Nobel laureate Stiglitz explained that while a country’s GDP might be increasing, it does not necessarily mean that life is getting better for all its citizens.
IMF Survey online: What does the gross domestic product measure?
Stiglitz: GDP is a measure of the level of economic activity, the market activity in particular. It is the subtotal of all the things that people buy and sell, including services and goods. It was a measure that was developed after the Great Depression when people wanted to get a thermometer of what was happening in the economy. Unfortunately, in the period since it was first developed 67 years ago, it has come to be used as a measure of well-being.
There are many dimensions to success, and GDP does not measure most of the relevant dimensions. It measures one dimension, but only one. So, for instance, you want to know about sustainability. Can growth continue? Is a country selling its natural resources, stripping its trees, and not reinvesting? What you want is a measure of sustainability.
You want to know a measure of inequality. All the wealth, all the income of a country could go to a few, and that would mean a country could have a high GDP, high GDP growth, but most citizens would actually be getting worse off. What you want to know is a measure of inequality.
IMF Survey online: So why does inequality matter in an economic sense?
Stiglitz: Inequality in itself may give rise to instability. And the links between inequality and growth are debated and complex, but let me give you a couple examples.
What happened in the United States before the crisis? The middle class was not doing very well. Because they were not doing very well, consumption—demand for goods—was limited. The central bank worried that because of the limited consumption the economy would be weak, lowered interest rates, and threw out regulations. The economy had a bubble. Housing prices soared. But as housing prices soared, the banks could lend them money to consume, so people were spending beyond their income. It was clearly not sustainable.
A basic lesson of economics is that something that is not going to be sustainable is not going to be sustained. The bubble broke and now we are dealing with the aftermath and the whole world suffered. So that is a clear connection between inequality and the current problems.
Other examples, of course, can be found in countries where they allow inequality to grow too much or they allow unemployment to grow too high. This also increases the risk of political instability.
IMF Survey online: What about low-income countries? What can they do to promote inclusive growth?
Stiglitz: One of the things is to make sure you have an inclusive financial system—a financial system that not only links to big businesses, but also to small and medium-sized enterprises; a microcredit system; and an inclusive financial system. If you are going to have growth that is widely shared, you also have to have an educational system that is inclusive, which means reaches both girls and boys; making sure that all the citizens, no matter what the income of the parents, are able to live up to their potential.
IMF Survey online: These days, what do you feel is the role of advanced economies and larger institutions in promoting inclusive growth?
Stiglitz: There are at least three things they can do. The most obvious is to give assistance to help countries pursue growth policies. Many of the poor countries, low-income countries, do not have the resources.
The second thing is that they have to open up their markets. Not only will we send a handout, but a hand up.
Finally, we have now realized that many of the policy stances that were pushed by international organizations in the past were counterproductive. Deregulation, liberalization done in the wrong way, can lead to not only more instability, but also growth that is not pro poor: less inclusive growth.
I think those three things would make a very big difference.
IMF Survey online: Do you feel that globalization has changed over the last 10 years?
Stiglitz: Globalization has changed and our understanding of globalization has changed. I think the crisis of 2008 taught many people many lessons. For instance, the IMF recently has been talking much more about inequality. When I was at the World Bank a decade ago you almost never heard any discussion from senior people about inequality. Now I think it is being taken much more seriously. The movement from the G-7, G-8, to the G-20, was emblematic. It was recognition that if we are going to solve global problems we have to bring in emerging markets.
But I still worry that the concerns of the poorest countries in the world are given short shrift. The focus is battles among the developed countries, what Europe and the United States can do to prevent a crisis. They have really turned inward. In a sense, as a result of turning inward, they have not given the focus that they should be giving to how we can make our global system work better. We live in a globalized world and unless we work harder to make our whole global system better, it will not work.