Trickle down

An economic theory propounded by W.W.Rostow. It is that economic development of a modern type in a poor country benefits first the rich and later the poor by an automatic process. If it worked it would be because the expanding modern economy required more workers who would gain by belonging to the monetary economy.

The theory is attractive to those who believe governors don't need to take decisions because "the system" will take them. (The cynic wonders if not very intelligent politicians like the idea that they don't need to think.)

In practice it doesn't seem to be true. Brazil is the classic example of a country where both rich and poor co-exist without the poor's condition improving, perhaps because the rich refuse to pay taxes or resist the setting of taxes which would provide social services for the poor - that is, lack the solidarity of feeling they belong in the same community. But the poor of the United States and other "developed" countries may show the same failure of trickle down economics.

That is, it appears to be possible to maintain a modern economy and a traditional economy in the same country while remaining in more or less separate compartments. The Soviet Union might be another example. In South Africa the two were separated by law. In most former colonial countries there are small groups of people living at a similar level to the richer persons in the west; and a mass of people living on a very small cash income. Study of micro-economic conditions would probably show why trickle down fails to occur. One reason may simply be that modern technological economies employ few unskilled workers.

Another is that poor countries fail to bargain a good price for their assets. In Sierra Leone foreign companies have negotiated contracts which allow them to export raw materials while paying little to the government. The terms of world debts also prevent trickle down as in reality the poorer countries are paying in interest payments more than they receive in aid. Is the idea of Trickle Down anything other than an excuse for the rich to do nothing?

In world terms wealth does not equalize from the developed to undeveloped, presumably because of the tariffs and other trade restrictions which prevent the developing countries from exporting manufactures to the developed areas. Would a genuinely free market achieve this? It might, but we shall probably never find out as voters in the richer countries press for tariff barriers to be maintained against the low wage economies (notwithstanding the WTO agreement which may benefit multinational companies based in the richer countries).

This is related to the problem of Economic Imbalance.

Last revised 18/09/09


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