Dispelling the myth that a rising tide lifts all boats

A rising tide lifts all boats implies that when those at the top become wealthier, this eventually trickles down to everyone and makes society as a whole better off. Do we therefore need inequality in order to release people from poverty?

A new report, ‘Inequality and Growth’, released yesterday from the OECD indicates that the opposite is true, stating that: ‘when income inequality rises, economic growth falls’. The report estimates that rising inequality has knocked up to 10 percentage points off growth in New Zealand Mexico, the US and the UK. Furthermore, the growth which is happening is not inclusive and is only benefitting those at the top. For example between 2009-2011, the incomes of the richest 1 percent of the USA population grew by 11.2% while the bottom 99% of incomes fell.

A UNDP study from 2013 shows that it is possible to increase national income whilst decreasing income inequality, further dispelling the myth that policy makers must choose between inequality and growth. Countries that have moved from lower middle-income status to upper middle-income status, at the same time as reducing inequality during the last 20 years, include Malaysia, Botswana and Mauritius. Although there is still much progress to be made in these countries to continue to reduce poverty and inequality, they are on the right track for more inclusive growth.

According to Forbes, 67 people own the same amount of wealth as the poorest half of the world’s population. As an international development agency, why should we be concerned about the mega rich? Some might say we should only focus on very poor people in poor countries. Being wealthy isn’t wrong itself but the potential of the wealthiest to over consume their fair share and the pressure this creates for others to follow suit  is a threat to humanity’s future as our planet’s resources continue to be further stretched beyond their limits. Furthermore, yesterday’s OECD report states that ‘inequality significantly shapes the opportunities of education and upward mobility of disadvantaged individuals.’ Left unchecked, the gap can continue to widen between the rich and the poor as income inequality creates unfair opportunities between children creating vicious cycles of widening inequality.

Countries like Malaysia, Botswana and Mauritius show us that we don’t need high inequality in order to achieve economic growth. And the countries with the lowest levels of inequality in the world, including Norway and Denmark, are some of the richest in the world. They also score 1st and 4th place in the Legatum Prosperity Index which defines prosperity as more than just GDP including dimensions such as governance and health, however does not include the countries environmental impact.

The OECD’s report concludes that ‘policies that help to limit or reverse inequality may not only make societies less unfair, but also wealthier.’ Therefore, reducing inequalities enables holistic growth where everyone has the opportunity to flourish.