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From trickle-down to bubble-up

David Woodward | 23 May 2013

Economic policy should focus on poverty reduction rather than on growth and should start in rural areas. First of two blog posts by David Woodward.

As noted in one of my blogs in The Broker’s inequality debate, the idea of ’trickle-down’ – that the poor can be made less poor if the rich become richer, as this will increase demand for goods produced by the poor – has failed at the global level, just as it failed at the country level. The current model of globalization is creating a global economy which systematically excludes most of the global poor.

If we are to accelerate our progress in reducing poverty after 2015 – and especially if we are to have some hope of eradicating poverty in a meaningful sense in a period of decades rather than centuries – this needs to change. We need to shift from a model premised on the unrealistic assumption that the economic benefits of growth will automatically trickle down to the poor to one where the considerable economic benefits of poverty reduction and eradication will bubble up to the rest of the economy. This means focusing economic policy on poverty reduction, not growth, particularly in rural areas, where poverty is greatest.

As poor households’ incomes increase, they buy more. While published empirical evidence is surprisingly limited, they will typically spend much of their additional income on things which are (or could be) purchased locally, and largely from other low-income suppliers – higher-value food to improve and diversify their diets, basic household goods, housing repairs and improvements, transport services, basic agricultural equipment, clothes, school fees, health services, etc. Raising poor people’s incomes will therefore increase the incomes of their wider communities, promoting further poverty reduction through a multiplier effect – but this depends on the capacity of poor producers to satisfy the increased demand.

This suggests the potential for a virtuous circle of poverty reduction: a stimulus to the incomes of the poor, for example through labour-intensive public works or cash transfers, could have a significant impact on poverty. However, this effect could be greatly increased if it were accompanied by supply-side measures directed towards poor households – income-generation schemes, micro-grants (rather than micro-credits) and agricultural extension and support – specifically oriented towards increasing the production of those goods whose demand will be increased. (This could readily be estimated from household expenditure survey data.) It might be possible to strengthen this effect to some degree through import restriction or other mechanisms to ensure preference for local purchasing, e.g. a local currency.

A further boost to rural economies could come from substantial investment in household and community-level micro-renewable energy technologies, to overcome the ‘electricity divide’ (UNCTAD 2006). Lack of access to energy is a critical constraint on development in many poor rural communities. Public resources and purchasing power are limited, and this is compounded by the considerable capital costs of transmission systems, especially in remote and sparsely populated areas. This makes traditional centralized energy systems unviable; but potential for renewable energy is often considerable, and much more conducive to smaller-scale local generation. Increased (and more reliable) access to energy could greatly increase the productive capacity of rural areas, fuelling both growth and diversification, as well as improving living conditions.

Of course, poverty is not only about income. Increased access to health services and education, in particular, is also critical; and it is increasingly recognized that user charges for health services and school fees (particularly for basic education) represent an important barrier to access, and impose substantial costs on poor households (Yates 2009, World Bank 2009). Increasing the public provision of essential health services and basic education, free at the point of delivery, is thus a central component of any inclusive development strategy.

Clearly, the financial costs of the type of development outlined above would be substantial – for public works, cash transfers, income generation, rural electrification and public health and educational services. In most countries, this would require substantial improvements in tax systems, and an increase in tax collection capacity, which would itself be costly.

However, the potential for public revenue-raising is seriously constrained by a number of features of the global economy. This represents an important constraint on any country seeking to pursue a development strategy of this nature in the globalized economy as it currently operates. To be fully effective, this model would therefore need to be supported by changes in the global system. These changes will be the subject of my second blog in this series.

References

UNCTAD (2006), Least Developed Countries Report, 2006: Developing Productive Capacities. Geneva: UNCTAD.

World Bank (2009), Abolishing School Fees in Africa : Lessons from Ethiopia, Ghana, Kenya, Malawi, and Mozambique. Washington D.C.: World Bank.

Yates, R. (2009), Universal Health Care and the Removal of User Fees. The Lancet 373:2078-81.

This blog is based on two unpublished papers: “More with Less: Towards a New Economics Paradigm for Poverty Eradication in a Carbon-Constrained World”, written for nef (the new economics foundation) in 2008; and “‘Always with Us’? How we could Eradicate Poverty (if we really wanted to….)”, written for Christian Aid in 2009. These are available on request by e-mailing the author at woodwarddavid@hotmail.com.

Photo credit main picture: Solar Electric Light Fund (SELF)

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David Woodward

David Woodward is an independent consultant on development issues, author of Debt, Adjustment and...

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