Trickle Down Approach to Poverty

Back to Basics: The Theory

It is often said that a rising tide lifts all boats. Experience tells us that the same is not necessarily true of a growing economy. In both developed and developing economies, the benefits of growth are seldom evenly distributed.

The proponents of trickle-down economics, argues that rising incomes at the top end of the spectrum would lead to more jobs, more output, more income and less poverty as the growth and higher incomes at the top end will move at the lower end and to the poor. According to this thesis, as long as an economy is growing, the benefits will eventually reach the poor and make their way through the system that will make everyone better off.

The theory of Trickle Down represents an unhealthy obsession with GDP and Growth as the most reliable measure of economic success. The theory believes in the saying ‘One size fits all’. The theory argues that to eradicate poverty, the only thing that matters is growth. A growing economy will take care of everything. As growth happens, the fruits of growth will eventually flow to the poorest and the lower section of the society and ultimately lifting them up.

The Critique of Trickle Down Economics

• The IMF and the World Bank in their various reports debunked the idea of trickle-down economics. They found out that the benefits of growth within an economy are rarely spread evenly, but also that an unequal rise in incomes can actually slow the rate of economic growth altogether.
• According to the report, a 1% rise in income for the wealthiest 20% of a society alone is likely to shrink annual growth by 0.1% within five years. By contrast, raising the income of the poorest 20% by a single percentage point increases annual growth by 0.4% over the same time frame.
• When it comes to eliminating poverty, the degree to which the benefits of growth are shared can have a significant impact on outcomes.
• According to Martin Ravallion, the former head of research at the World Bank, as cited in The Economist, a 1% increase in incomes in the most unequal countries produces a mere 0.6% reduction in poverty; however, in the most equal countries, it yields a 4.3% cut. In other words, societies can get much more ‘bang from a boom’ if they ensure benefits are more widely shared.
• This brings us to the point at which trickle-down theory ends and inclusive growth begins.

According to the Organisation for Economic Cooperation and Development (OECD), Inclusive growth is “a new approach to economic growth that aims to improve living standards and share the benefits of increased prosperity more evenly across social groups”.

Inclusive Growth in India

Note for Students: Inclusive growth refers to both the pace and pattern of growth, which are considered interlinked and therefore need to be addressed together. Inclusiveness represents equality of opportunity in terms of access to markets, resources and an unbiased regulatory environment for businesses and individuals. In a nutshell, it is not just about the quantity of growth within our economies and societies, but also about its quality.

Inclusive Growth matters because widening inequality have been shown to lead to a range of social and economic challenges for societies over time. These include both social and political instability, not to mention the sheer waste of potential that occurs when large swathes of populations do not have the opportunity to improve their situation.

Features of Inclusive Growth

The Multi-Dimensional Poverty Index

• The Multidimensional Poverty Index (MPI), published for the first time in the 2010 Report, complements monetary measures of poverty by considering overlapping deprivations suffered by individuals at the same time.
• The index identifies deprivations across the same three dimensions as the HDI and shows the number of people who are multidimensionally poor (suffering deprivations in 33% or more of the weighted indicators) and the number of weighted deprivations with which poor households typically contend with.
• It can be deconstructed by region, ethnicity and other groupings as well as by dimension and indicator, making it a useful tool for policymakers.
• The MPI can help the effective allocation of resources by making possible the targeting of those with the greatest intensity of poverty; it can help address some SDGs strategically and monitor impacts of policy intervention.
• The MPI can be adapted to the national level using indicators and weights that make sense for the region or the country, it can also be adopted for national poverty eradication programs, and it can be used to study changes over time.
• About 1.5 billion people in the 102 developing countries currently covered by the MPI—about 29 percent of their population — live in multidimensional poverty — that is, with at least 33 percent of the indicators reflecting acute deprivation in health, education and standard of living. And close to 900 million people are at risk (vulnerable) to fall into poverty if setbacks occur – financial, natural or otherwise.