The eco­nomics of in­clu­sion

Financial Mirror (Cyprus) - - FRONT PAGE -

Many peo­ple find eco­nomic growth to be a morally am­bigu­ous goal – palat­able, they would ar­gue, only if it is broadly shared and en­vi­ron­men­tally sus­tain­able. But, as my fa­ther likes to say, “Why make some­thing dif­fi­cult if you can make it im­pos­si­ble?” If we do not know how to make economies grow, it fol­lows that we do not know how to make them grow in an in­clu­sive and sus­tain­able way.

Econ­o­mists have strug­gled with the trade­off be­tween growth and eq­uity for cen­turies. What is the na­ture of the trade­off? How can it be min­imised? Can growth be sus­tained if it leads to greater in­equal­ity? Does re­dis­tri­bu­tion ham­per growth?

I be­lieve that both in­equal­ity and slow growth of­ten re­sult from a par­tic­u­lar form of ex­clu­sion. Adam Smith fa­mously ar­gued that, “It is not from the benev­o­lence of the butcher, the brewer, or the baker that we ex­pect our din­ner, but from their re­gard to their own in­ter­est.” So why would growth not in­clude peo­ple out of self-in­ter­est, rather than re­quir­ing de­lib­er­ate col­lec­tive ac­tion?

It is well known that lev­els of in­come are dra­mat­i­cally dif­fer­ent around the world. Thanks to more than two cen­turies of sus­tained growth, av­er­age per capita in­come in the OECD coun­tries is just un­der $40,000 – 3.3, 11.3, and 17.7 times more than in Latin Amer­ica, South Asia, and Sub-Sa­ha­ran Africa, re­spec­tively. Sus­tained growth has ob­vi­ously not in­cluded the majority of hu­man­ity.

What is less well known is that huge gaps ex­ist within coun­tries. For ex­am­ple, GDP per worker in the State of Nuevo León in Mex­ico is eight times that of Guer­rero, while out­put per worker in the Depart­ment of Chocó in Colom­bia is less than one-fifth that of Bo­gotá. Why would cap­i­tal­ists ex­tract so lit­tle value from work­ers if they could get so much more out of them? The an­swer is sur­pris­ingly sim­ple: fixed costs. Mod­ern pro­duc­tion is based on net­works of net­works. A mod­ern firm is a net­work of peo­ple with dif­fer­ent ex­per­tise: pro­duc­tion, lo­gis­tics, mar­ket­ing, sales, ac­count­ing, hu­man-re­source man­age­ment, and so on. But the firm it­self must be con­nected to a web of other firms – its sup­pli­ers and cus­tomers – through multi-modal trans­porta­tion and telecom­mu­ni­ca­tion net­works.

To form part of the mod­ern econ­omy, firms and house­holds need ac­cess to net­works that de­liver wa­ter and dis­pose of sewage and solid waste. They need ac­cess to the grids that dis­trib­ute elec­tric­ity, ur­ban trans­porta­tion, goods, ed­u­ca­tion, health care, se­cu­rity, and fi­nance. Lack of ac­cess to any of th­ese net­works causes enor­mous de­clines in pro­duc­tiv­ity. Just think of how your life would change if you had to walk two hours each day to ob­tain drink­ing wa­ter or wood for fuel.

But con­nect­ing to th­ese net­works in­volves fixed costs. Be­fore any­one can con­sume a kilo­watt-hour, a liter of wa­ter, or a bus ride, somebody has to get a cop­per wire, a pipe, and a road to their house. Th­ese fixed costs need to be re­couped through long pe­ri­ods of use.

If in­come is ex­pected to be low (per­haps be­cause of other miss­ing net­works), it does not pay to con­nect a firm or a house­hold to the net­work, be­cause the fixed costs will not be re­couped. Growth is not in­clu­sive be­cause fixed costs de­ter mar­kets from ex­tend­ing the net­works that un­der­pin it.

Changes in th­ese fixed costs have out­size ef­fects on who is in­cluded. For ex­am­ple, the first tele­phone company started op­er­a­tions in 1878, while mo­bile phones are barely 25 years old. One might ex­pect that the for­mer would have dif­fused more than the lat­ter, just be­cause of the time ad­van­tage. Yet, in Afghanistan, there are 1,300 mo­bile phones for ev­ery land­line. In In­dia, there are 72 cell­phone lines per 100 per­sons, but only 2.6 land­lines.

In fact, many In­di­ans with mo­bile phones must defe­cate in the open be­cause the me­dian In­dian does not have piped wa­ter in his house. In Kenya, where there are 50 mo­bile phones per 100 peo­ple, only 16% of the pop­u­la­tion has ac­cess to elec­tric­ity. This re­flects the fact that cell­phone tow­ers and hand­sets are much cheaper than pipes and cop­per wires, mak­ing it pos­si­ble for the poor to pay the fixed costs.

It is the fixed costs that limit the dif­fu­sion of the net­works. So, a strat­egy for in­clu­sive growth has to fo­cus on ways of ei­ther low­er­ing or pay­ing for the fixed costs that con­nect peo­ple to net­works. Tech­nol­ogy can help. Clearly, cell­phones have done won­ders. Cheaper pho­to­voltaic cells may en­able re­mote vil­lages to get elec­tric­ity with­out the fixed costs of long trans­mis­sion lines. Mo­bile bank­ing may lower the fixed costs faced by tra­di­tional banks.

But in other ar­eas, the is­sue in­volves pub­lic pol­icy. From its be­gin­ning in 1775, the US Postal Ser­vice was based on the prin­ci­ple “that ev­ery per­son in the United States – no mat­ter who, no mat­ter where – has the right to equal ac­cess to se­cure, ef­fi­cient, and af­ford­able mail ser­vice.” A sim­i­lar logic led to the ex­pan­sion of the in­ter­state high­way sys­tem.

Ob­vi­ously, all of this costs money, and it is here that pri­or­i­ties mat­ter. Poor coun­tries lack the money to con­nect ev­ery per­son to ev­ery net­work at once, which ex­plains the huge re­gional dif­fer­ences in in­come. But too many re­sources are of­ten al­lo­cated to pal­lia­tive re­dis­tribu­tive mea­sures that ad­dress the con­se­quences of ex­clu­sion rather than its causes. Coun­tries such as Brazil, South Africa, Peru, Uganda, Gu­atemala, Pak­istan, and Venezuela spend sub­stan­tially more money on sub­si­dies and trans­fers than on pub­lic in­vest­ment to ex­pand in­fra­struc­ture net­works, ed­u­ca­tion, and health care.

A strat­egy for in­clu­sive growth must em­power peo­ple by in­clud­ing them in the net­works that make them pro­duc­tive. In­clu­sive­ness should not be seen as a re­stric­tion on growth to make it morally palat­able. Viewed prop­erly, in­clu­sive­ness is ac­tu­ally a strat­egy that en­hances growth.

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