Why inequality is worse than poverty for the economy

Focus on poverty has dominated discussions on development policy and practice and yet it is largely an intrinsic outcome of inequality as the underlying cause.

The lack of opportunities and the means to harness them may be rooted in the limitations of resources or poverty but is quite often a problem of how these resources are distributed among the competing entities.

Quite often a small group of individuals will set the priorities and processes of distributing resources and do so in a manner that grants themselves a lion’s share.

Unless the system managing national resources has strong governance structures that effectively guard against selfishness and greed, the outcome is likely to be an unequal distribution of resources (inequality) that is then perpetrated through generations.
Households that are deprived in this initial round are likely to remain disadvantaged until the governance structures change to address the original problem.

The trouble with inequality, which makes it worse than poverty, is it affects everybody including the rich.

By undermining the very bottom of the pyramid – the poor – the rich at the top, who depend on the poor masses for a market and production of basic inputs used by their businesses cannot succeed either.
Like lions, which do not eat grass and have to rely on existence of the ‘poor’ Gazelles at the lower end of the food chain, the rich need a vibrant domestic market to begin with. Otherwise, the rich will also cry, which is already happening in Uganda.

Inequality in resource endowments among the poor and non-poor but vulnerable is a root cause of limited domestic market, given the low income levels.

The limited demand makes a trader on William Street think the hawkers have taken the buyers while they too are going home with hardly any sales.

The cycle is eventually escalated to manufacturers who imagine Ugandans must be buying imported products prompting the likes of “Buy Uganda Build Uganda”.

There is no way the economic pyramid for Uganda can be built on the weak foundations of very poor people who are struggling to keep their heads above the waters.

With individual incomes of less than Shs1,000 per day, having divided a breadwinner’s Shs6,000 by the number of dependents, the economy cannot even sustain a company that makes match boxes. And the investors know it!!

More funding to education, health, agriculture etc. will not save the day in an environment of weak governance and outright corruption.
What used to be an “Economy Stupid” issue in the era of President Clinton has graduated into a “Political Stupid” matter.

The Presidential Orders in the US intended to preserve American markets and jobs for citizens, Brexit in the UK and ring-fencing of categories of procurement in Uganda will certainly not solve the underlying fundamental problem of inequality at the global and local levels.

The German approach of using the social market economy, which is geared towards inclusiveness, where feeble birds pick ticks off the Elephant’s trunk, should be considered.

Bankers must not play the role of predators but work closely with the borrowers for the success of the economy.

Foreclosures should not be the first line of consideration when giving loans but rather the cash flow and both parties must ensure the cash actually flows.

The government must resolve the market failures rather than use undeserved legislations. Mere politicking about the economy will result in the economy kicking the politics, which is already happening.

Dr. Fred K. Muhumuza, is a Development Policy Analyst committed to inclusive growth.

E-mail: [email protected]