Why economic growth is not sufficient to tackle inequality

In the quarter-century since the publication in 1990 of the first Human Development Report, the world has made astounding strides in reducing poverty and improving the health, education, and living conditions of hundreds of millions of people. And yet, as impressive as these gains may be, they have not been distributed equally. Both between countries and within them, deep disparities in human development remain.

Consider infant mortality. In Iceland, for every 1,000 live births, two children die before their first birthday. In Mozambique, the figure is 120 infant deaths for every 1,000 live births. Similarly, in Bolivia, babies born to women with no education are twice as likely to die within a year than babies born to mothers with at least a secondary education. And these disparities continue throughout a person’s life. A five-year-old child born in a low-income household in Central America is, on average, six centimeters shorter than a child born in a high-income household.

Such differences have taken root for a variety of reasons. These include “vertical inequalities,” like skewed income distribution, as well as “horizontal inequalities,” such as those that exist within groups because of factors like race, gender, and ethnicity, and those that form between communities, owing to residential segregation.

Many people face different, simultaneous forms of discrimination, and the degree of exclusion they suffer is a result of the interaction among them. A combination of vertical and horizontal inequalities can generate extreme exclusion and marginalization, which in turn perpetuates intergenerational poverty and inequality.

Fortunately, the world has become increasingly aware of inequality’s pernicious effects on democracy, economic growth, peace, justice, and human development. It has also become clear that inequality erodes social cohesion, and increases the risk of violence and instability.

Ultimately, economic and social policies are two sides of the same coin.

Besides the moral argument for reducing inequality, there is also an economic argument. If inequality continues to rise, higher growth will be needed to eradicate extreme poverty than if the economic gains were more evenly distributed.

High levels of inequality are also correlated with the possibility of political capture by elites who defend their interests by blocking egalitarian reforms. The problem with inequality is not only that it obstructs the pursuit of collective goals and the common good; it also erects structural barriers to development, for example, through meager or regressive taxation and underinvestment in education, health, or infrastructure.

Growth alone cannot guarantee equal access to public goods and high-quality services; deliberate policies are required. Recent history in Latin America, the most unequal region in the world, provides a good example of what is possible when such policies are put in place. The region made significant gains in social inclusion during the first decade of this century, through a combination of economic dynamism and sustained political commitment to fighting poverty and inequality as interdependent problems.

Thanks to these efforts, Latin America is the only region in the world that managed to reduce poverty and inequality, while continuing to grow economically. More than 80 million people have joined the middle class, which for the first time has surpassed the poor as the largest segment of the region’s population.

To be sure, some have argued that this was made possible by favorable external conditions, including high commodity prices, which supported economic expansion. However, evidence from the World Bank’s LAC Equity Lab confirms that growth explains only part of Latin America’s social gains; the rest was due to redistribution through social spending.

Indeed, progressive policies were at the heart of the economic expansion itself: a new generation of better-educated workers entered the labor force, earning higher salaries and reaping the dividends of social spending. The largest wage increases occurred in the lowest income brackets.

Now that Latin America has entered a period of slower economic growth, these achievements are being put to the test. Governments have less fiscal space, and the private sector is less able to create jobs. Efforts to reduce poverty and inequality are at risk of stalling – or even of losing hard-won gains. The region’s policymakers will have to work hard to maintain progress on long-term human development.

The importance of tackling inequality is enshrined in the ideals of the French Revolution, the words of the United States Declaration of Independence, and in the targets established by the United Nations Sustainable Development Goals. The effort is at the root of shaping a world that is not only fair, but also peaceful, prosperous, and sustainable. If, as the Universal Declaration of Human Rights puts it, “all human beings are born free and equal in dignity and rights,” should we not all be able to continue to live that way?