Making Developing World Inequality Matter Again

Recently, I spent two weeks in Cape Town for the World Cup. None of the pre-tournament fears I had heard were realized, at least not for me: it was safe, well-organised, beautiful and there was enough accommodation and transport to keep people happy. The odd robbery on the pitch was as bad as it got.

But Cape Town, as incredibly beautiful and exciting a place as it is, still leaves one lasting negative impression: the extent of inequality there is enormous. It's not like the inequality one encounters in, say Malawi, where the center of Lilongwe is moderately built up, and there are extremely rich individuals, though much of the population lives in poverty. Rather, Cape Town itself feels like a very prosperous, beautiful European city, with a couple of enclaves of poverty parked outside of it.

The center of town is decorated by beautiful apartments with views of Table Mountain, and as one drives out towards Cape Point, one sees some astounding houses with sea views and infinity pools. But outside of town, there are extensive townships, where the physical conditions of life aren’t even in the same planet as Sea Point. Some houses are made of a mish-mash of found materials, ingeniously held together and placed so closely beside each other as to form a labyrinth. The contrast could barely be starker.

This isn’t news to anyone who knows South Africa, and it’s clear that there is a great deal of work going on to address such an imbalance there. I’m not trying to make a point about how South Africa still needs to address issues of poverty: such a fact is well-known at home and abroad, and progress is being made. But it did make me start thinking about how in most of the developing world, this question of inequality has been muted in the last 10 to 20 years.

Back in the 1970s and 1980s, inequality was to be addressed through redistribution and high state spending. These approaches went out the window when the World Bank and IMF rolled through the developing world, with a new set of policies called structural adjustment — which emphasized fiscal tightening and a reining-in of state expenditure. Structural adjustment created both many benefits and many catastrophes — but one clear outcome it also fueled was a decline in attention paid to inequality issues.

However, a new approach soon emerged: ‘pro-poor’ spending. Pro-poor expenditures are basically those which aim directly at the poorest groups, and are encouraged by almost all development partners. They’ve now become a standard part of any development worker’s vocabulary, with most aid agencies advocating for (or tying aid to) a certain proportion of pro-poor expenditures in each developing country budget. Such a move seeks to address inequality not through redistribution — but by ensuring that aid focuses on the poorest. Accordingly, under such a scenario, domestic tax money isn't used to redistribute — which makes businesses and elites happy. Instead, foreign assistance is used to ensure that rather than supporting whole economies, funds are aimed more directly at the poor.

But does this approach actually result in the best results for the poor? An emphasis on pro-poor expenditures leads to a proliferation of support programs that might assist the poor, but they don't address an economy's systemic failures. For example, almost every intervention in the private sector or credit market is aimed at small and medium-sized enterprises. These efforts have an immediate appeal, but they may actually be simply throwing good money after bad. After all, if a basic business environment is flawed, though supporting small entrepreneurs may give them a temporary boost, such help won't solve the root causes holding them back.

What’s more, it’s not clear that this small-support model has ever actually worked. Almost all currently developed countries got where they did by supporting large conglomerations, big industry and large-scale, commercial farming. If these are the roots of long-term economic success, the best strategy to support the poor may actually be to ensure that the large industries and farms produce enough good jobs, and that workers’ rights are protected through good legislations and responsible unionism. Then, through a system of fair corporate and income taxation, a mild form of redistribution can begin — without generating backlash from the private sector that top-rate taxation and public ownership often inspires. Managed well, this system would also maintain fiscal standards demanded by the World Bank and IMF.

Inequality on its own may not be a hot issue anymore. But the softly-softly approach we're currently taking on the issue through pro-poor expenditure don't seem particularly effective or sustainable to me. Instead, we should focus on ways to create prosperous economies that support social justice and the poor. Right now, I'm afraid all we're doing is taking the path of least resistance.

Photo Credit: thomas_sly