Source: Al-Hayat

Social Peace Requires Both Economic Growth and EquEconomists often measure a country's general welfare exclusively in terms of per capita income. As this income increases, they argue, so too does a person’s ability to afford more commodities and services, and thus to achieve a higher standard of living. Other important factors, however, shape people’s welfare, such as access to free education, public health care, and other basic social services. Perhaps this is why, two decades ago, the United Nations Development Program (UNDP) included education and health care, in addition to per capita income, in its measurement of human development. The UNDP measure offers a more accurate picture of human welfare. It has its own flaws, however. The foremost is that it ignores the degree of inequality among people within the same country. Yet, increasingly economists have come to realize that equity matters and that welfare is influenced by how rich or poor a person is compared to the rest of the neighborhood.

In its latest annual report, the UNDP refined its approach to human welfare by suggesting an index adjusted for inequality. Because of their uneven income distribution compared to the world average, Arab countries were downgraded by 27 percent on the human development ladder.

Most economists have long thought that the widening gap between the rich and the poor was vital for economic growth, and thus any active search for ways to redistribute income would be ineffective and counterproductive. Three arguments were usually offered to justify this claim. First, the wealthy tend to save a larger portion of their income compared to poorer groups. Those savings finance productive investments, which boost economic growth and benefit the whole society. Second, the focus on redistribution by excessively taxing income and wealth could distort incentives and discourage production and investment, which might end up hurting the poor. Third, the cost required to implement and manage redistributive schemes can be high, which ultimately would limit their effectiveness.

However, recent studies, such as the IMF’s Andrew Berg and Jonathan Ostry’s September 2011 offering in Finance and Development, reveal that there is no inconsistency between economic growth and equity. In fact, a fair income distribution is vital to promoting and sustaining economic growth. Emerging countries that achieve rapid economic growth over years or decades tend to have less income inequality compared to those that fail to grow.

The rich in many developing countries, including the Arab states, tend to overspend on luxury goods and services that are often imported. National savings, thus, travel overseas instead of boosting domestic investments that create jobs and improve overall well-being. Conversely, middle and poor social classes usually buy local goods and services, thus contributing to domestic economic growth.

Large imbalances in income distribution also typically lead to social unrest and instability, which adversely affects investment and economic growth. There is no doubt that excessive income inequality in the Arab world has played a major role in spreading instability, raising public outrage, and igniting the Arab revolutions. Berg and Ostry found that improving the distribution of income by just 10 percent prolongs the period of stable growth by 50 percent. In fact, equitable distribution of income is much more important to sustainable economic growth than foreign investment and trade openness, which are usually the focus of Arab countries’ economic policies.

The choice of effective redistribution policies can be tricky. Some can result in distorted incentives and hurt economic growth. International experience over the past two decades reveals that policies that ensure equal-opportunity access to education and targeted social spending for disadvantaged groups are the most effective. Not surprisingly, policymakers in Latin American countries, known for their wide income inequality, have focused on these policies.

Arab states can benefit from the experiences of growing and stable emerging countries. One of key lessons they offer is that there is no inconsistency between economic growth and social equity. Policies that provide social protection and ensure access to education and health care for disadvantaged groups, beyond their ethical and human value, contribute directly to economic growth, political stability, and security.