Why income inequality is bad for growth

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Give credit to the Organisation for Economic Cooperation and Development, or OECD—an organization that has so often either mirrored or defined (depending on your point of view) the consensus on economic policy issues—for so thoroughly embracing the idea that high and growing income inequality may well be bad for growth. The Paris-based organization of leading developed and developing economies late last month issued its latest finding in its report “In It Together: Why Less Inequality Benefits Us All, which finds that “econometric analysis suggests that income inequality has a sizeable and statistically significant negative impact on growth.” (Emphasis in the original.)

The new report finds that between 1990 and 2010 gross domestic product per person in 19 core OECD countries grew by a total of 28 percent, but would have grown by 33 percent over the same period if inequality had not increased after 1985. This estimate is based on an econometric analysis of 31 high- and middle-income OECD countries, which concluded that lowering inequality by just one “Gini-point” (a standard measure of inequality used by economists) would raise the annual growth rate of GDP by 0.15 percentage points.

More here

Source: agenda.weforum.org

Visa facilitation as a means to support tourism growth, socio-economic development and job creation

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Yesterday an update appeared on the Malawian president’s Facebook page, in which she informed her social media followers that she had participated in a ‘.. Ministerial Roundtable of the United Nations World Tourism Organisation at Victoria Falls’. The topic for discussion at the forum was ‘visa facilitation as a means to support tourism growth, socio-economic development and job creation’.

Considering that the themes of infrastructure, airports and increased cross-national trade within Africa have popped up several times in discussions and articles on this website (for example here, here and here), I think her angle on the issue is commendable, and deserves a mention.

Recently, the Sudanese Billionaire, Mo Ibrahim expressed his displeasure during his address at the 11th Nelson Mandela lecture, with the visa regimes in Africa, saying:

“..The second issue is African economic integration. Only 11% of our trade is amongst the Africans. We refuse to let our people travel from one country to another. We always need a visa. And l also say, sadly, although being Sudanese, whenever l travel in Africa l always carry a British passport, because l am welcome.

My colleague here, a Member of our Board, had huge trouble in getting a visa to be able to join me here. He was a Secretary General of the United Nations, a board member, just to get a visa here is a major trouble. But with my British passport l am welcome here through your immigration lines. Is that acceptable?..”

One can only hope that these kinds of initiatives — which clearly will have a tangible economic benefit to Africa – do eventually get implemented by the countries concerned, and do not end up onto the large pile of broken promises by political leaders past and present.

The full update on the Facebook page is as follows:

Good evening my friends

Today I attended a Ministerial Roundtable of the United Nations World Tourism Organisation at Victoria Falls, on the border of Zimbabwe and Zambia where I addressed participants on the topic: ‘visa facilitation as a means to support tourism growth, socio-economic development and job creation’.

I addressed participants that our continent possesses many places of great beauty and I went on to talk about our beautiful country, Malawi, which happens to be one of the most beautiful countries for tourists attraction as we are blessed with a large freshwater lake, surrounded by white sands and full of a diversity of fish species and country boasts of wide open skies, beautiful rolling hills and mountains that offer rare experiences to climbers, bird watchers and adventure enthusiasts.

I made it clear that Malawi’s description as the ‘warm heart of Africa’ does not just refer to our inviting climate or the deep red of our sunset. It aptly describes the welcome you will receive from all Malawians as we are indeed very friendly and “warm hearted people of Africa”!

While talking about tourism I addressed participants that , tourism promises immense opportunities for growth of our economies and job creation; however millions of people continue to face unnecessary barriers to travel. These barriers include complicated and expensive visa processes; difficult and therefore expensive transport connections, lack of integrated border management systems and security threats.

For example, according to research by the United Nations WorldTourism Organisation; and World Travel and Tourism Council, facilitating visas among the G20 countries alone would create an additional five million jobs by 2015. This is a clear indication of the impact simplified and user friendly visa system can have on our economies.

It is my view that Visa Facilitation has the potential to enhance regional integration, intra-regional trade and easy movement of capital and people between countries and regions.Therefore, visa policies and procedures are among some of the most important instruments influencing tourism and investment. The development of policies and procedures for visas as well as other travel documents is closely linked to the development of tourism. Furthermore, the quality, reliability and functionality of visas have a direct correlation to number of arrivals at a destination.

In lieu of the above reasons I am calling for regional interconnectivity amongst our nations which may entail improving the current state of transport and telecommunications infrastructure and facilitating institutional improvements to optimise the efficiency and capacity of road, rail, water and air transport and the social sectors in education and health.

I believe that this in turn has high potential on enhancing economic growth; thus contributing to overall objective of poverty reduction. The link between tourism and poverty reduction is well known as one of the fundamental contributions is job creation which is part of our government’s economic recovery plan that my government is pursuing.

Thank you all for your support and prayers

May God bless you!

Good night!

Dr Joyce Banda
President
Republic of Malawi “

Infrastructure

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While you’ll find several references to Infrastructure on this site, I think this time around I’ll leave it to the experts to do the convincing. Paja akulu anati mutu umodzi siwusenza denga

And if one takes time to browse through the cited references below (some of which are straight off page 1 + 2 of Google), it’s hard to argue against the fact that Infrastructure is one of the essential drivers of economic development. In this sense, and for the avoidance of doubt,  infrastructure is not limited to roads, railways, airports and buildings (for hotels, schools, Universities, hospitals, business centres, research facilities, etc), but also includes for example a good telecommunication network (internet, voice, data and the like) and power supply.

Infrastructure for sustainable development – European Commission

Intro reads: ” Good quality infrastructure is a key ingredient for sustainable development. All countries need efficient transport, sanitation, energy and communications systems if they are to prosper and provide a decent standard of living for their populations. Unfortunately, many developing countries possess poor infrastructure, which hampers their growth and ability to trade in the global economy. “

Infrastructure’s value to economic growth – Richard Lee, Partner, KPMG (via BBC)

which includes the statement : “…In fact, a recent KPMG International survey found that an overwhelming majority – 90% – of business executives said that the availability and quality of infrastructure affects where they locate their business operations…”

Needs For and Benefits of Infrastructure Connectivity – Asian Development Bank Institute
which includes the statement: “… The rapid economic and population growth of Asian economies in recent years has put huge pressure on its existing infrastructure, particularly in transport and energy, but also in communications. Asia’s infrastructure is world-class in parts, but is generally below the global average. This is a bottleneck to future growth, a threat to competitiveness, and an obstacle to poverty reduction.”
which includes the following statement: – “…An adequate infrastructure is a prerequisite to economic development. Transportation and communications are important in developing and strengthening social, political, and commercial ties. These ties must be developed before trade can be handled on a regular basis.”
Why Is Infrastructure Important – David Alan Aschauer, formerly Senior Economist, Federal Reserve Bank of Chicago, and now (at the date of writing/publication) Elmer W.Campbell Professor of Economics, Bates College
Infrastructure and Poverty – The Global Poverty Project
the Intro reads: “Infrastructure – physical resources like roads, telecommunication networks, schools and drains – is necessary for a society to function: people can’t access healthcare if there are no hospitals; trade can’t take place if there are no roads on which to transport goods to markets. Infrastructure facilitates the basic functions of a society that are necessary to transport resources and people, produce and trade goods, provide essential services and ultimately reduce poverty.”
it follows with ” Lack of infrastructure also leads to lack of employment by acting as a disincentive to investment. Companies who struggle to produce and sell goods in an area with inadequate roads, electricity or water supply do not want to set up the factories or businesses that could potentially generate employment, improve living standards and reduce poverty. “
and “Lack of infrastructure can also lead to poor health and high mortality. Where there are no clinics or hospitals available, or where lack of roads or bridges makes them inaccessible, people cannot access the medical services that they require to be healthy and productive. A villager in Mozambique explains “The most dangerous thing is that [cholera] has always appeared during the rainy season, and it is then that the river is in spate and boats cannot cross.”
The Broader Benefits of Transportation Infrastructure – Ian Sue Wing, William P. Anderson and T.R. Lakshmanan, Center for Transportation Studies and Dept. of Geography & Environment, Boston University [similar article here]
uses the term Meso-scale to describe their approach. A slide from their presentation is quite appropriate in summarising some of the developmental + ‘equilibrium’ impacts, and worth replication:-
infra-messo
Finance and Infrastructure: The Economic Benefits of Infrastructure Projects Procured with Private Finance –  Andrew W Morley, International Congress Washington, D.C. USA, April 19-26 2002.
Infrastructure – Engineers Against Poverty
Intro reads as follows: “Without significant progress in the provision of infrastructure services it will be impossible for many countries to significantly achieve the Millennium Development Goals (MDGs). Globally, more than 1 billion people have no access to roads, 900 million do not have safe drinking water, 2.3 billion lack reliable sources of energy, 2.5 billion have no sanitation  facilities and 4 billion are without modern communication services.”
which contains the paragraph “When it comes to infrastructure development, Thailand has done very well compared with some other Southeast Asian neighbors. In fact, appropriate infrastructure, including access to power and water, has helped Thailand fuel rapid economic growth during the past three decades. Good infrastructure has made Thailand attractive to foreign investment, helped facilitate international trade, and improved the efficiency of everyday business activities. All of these led to more jobs, and more jobs led to more income for the poor. For some not-so-poor people, good infrastructure also helps them improve productivity or fulfill their lifestyles.”
RURAL INFRASTRUCTURE AND ECONOMIC DEVELOPMENT –  Dr. Mohammad Tarique, Lecturer, University Dept. of Economics, B.R.Ambedkar Bihar University, Muzaffarpur.
Abstract reads: “Infrastructure development has a key role to play in both economic growth and poverty reduction. Failure to accelerate investments in rural infrastructure will make a mockery of efforts to achieve the Millennium Development Goals in poor developing countries while at the same time severely limit opportunities for these countries to benefit from trade liberalisation, international capital markets and other potential benefits offered by globalisation”
Private Sector Participation in Infrastructure:the case of Thailand – Deunden Nikomborirak – Asian Development Bank Institute Discussion Paper No. 19
Road Funding: Time for a Change :- Economic Growth Benefits of Transportation Infrastructure Investment – Dr. John C. Taylor,  Associate professor of marketing and logistics at Grand Valley State University and a senior policy analyst with the Mackinac Center for Public Policy in Midland, Michigan.
which contains the statement “…No, the key benefit and reason for transportation investment is from helping to make businesses and individuals more productive, across the geographic landscape. We rely on our transportation investments to increase the economy’s overall productivity – both in terms of making individual travel (business and personal) faster and more reliable, and in terms of the productivity benefits of making freight flows faster and more reliable…”
World Bank — Malawi’s infrastructure: A continental perspective: Vivien Foster; Maria Shkaratan, ISSN: 1813-9450.

As you can see, the above papers + articles present a credible argument that a good and functional infrastructure is essential for economic development.
But that’s not to say that there are no credible counter arguments against infrastructure. That’s not what I’m saying. I’m sure one can cite the prevention of deforestation or preservation of natural habitats as factors against excessive infrastructure. Also, there is the issue of encouraging tourism which could probably mean encouraging greater biodiversity, creating / preserving forests  and wildlife reserves (but even in such circumstances, you still need a world-class airport for a good first impression (the kind of impression you get when you first land at Hong Kong International); functional roads (at least 3 lanes on each side between major cities) that minimises journey times; and world-class hotels and resorts. Why should you give tourists (who in large numbers can be the source of much-needed forex revenue) less than what they are accustomed to, and expect that they will return to your country, or recommend a visit to their friends?). Never mind recommendation, how can you compete on the global stage, when your facilities are substandard? Further, why shouldn’t it be possible to build modern factories with reduced carbon footprint (see Marks & Spencer’s ‘eco-factories’ initiative here) side by side with wildlife/forest reserves?
So, considering all this, I find it hard to imagine a credible setting in which arguments against infrastructure may find pre-eminence, over arguments for infrastructure; especially for a poor country whose majority infrastructure was built  50-year ago; whose roads are littered with pot-holes, with virtually no world-class business centres; that has old airports – with poor facilities including smelly badly looked after toilets; a country that experiences intermittent blackouts almost every week; that is struggling to attract significant investment from abroad; a country where 74% of the population live below the poverty line; which is heavily reliant on agriculture and dwindling tobacco exports + has negligible industrial output; has few natural resources; has a large relatively unskilled young population and suffers widespread corruption and cronyism, even in the upper echelons of its government.

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My question to you then is: why are the leaders of such countries not investing heavily (sooner than later) into major infrastructure projects, when it is in fact a determinant factor in economic development and a serious game changer? Is it because they are in fact not cut out for the job and would be better followers instead of leaders?