Distributing Growth for the Benefit of All

By Johannes Berchtold

Governments repeatedly get trapped in arguments over wealth distribution. When growth points upwards, discussions over who gets what share die down. But as soon as growth shows signs of slowing down, the dogfight over the scraps starts. When growth is stagnant, wealth is a zero-sum game: Whoever wants a bigger slice of the cake has to take it away from someone else. This isn't the case in growing economies. As much as they may differ, from debt-ridden South European countries to heavily subsidized economies in South-East Asia, from saturated societies in Northern Europe to protectionist economies in Latin America, when economic fortunes fade, people suffer. They suffer most where political decision making is entrusted to a small elite, where economic institutions serve only the few and where people have been denied progress and prosperity. Where this happens, wealth distribution has been built on the wrong foundation in the first place.

Each society has to strike a balance between making growth benefit all without robbing people of their individual rewards. Generally speaking, societies that strike this balance well are more stable and enjoy more freedom, as current developments show. One instrument to accomplish this is transfer payments, as the modern welfare state demonstrates (sometimes to excess). But this model increasingly shows signs of stress, as the many it serves cannot agree on how to harmonise it with the requirements of the digital age, where new working and living patterns prevail. The core principles of the modern welfare state still dates back to the Industrial Age and may have become less just and less effective over time than many believe. Already, a middle-income family in any given developed economy struggles to keep up with the rising costs of living, let alone save for retirement.

If you need proof of how the modern welfare state can miss the mark, just look at the rising level of social inequality in much of the developed world. The IMF has linked the Gini coefficient to growth rates and found out that the more unevenly income is distributed in a society, the more future growth will be negatively affected. This may seem alarming, but it is important to draw the right conclusions: The answer cannot be even more redistribution of income and wealth. Instead, we have to find ways to make innovations in fields like health care systematically available to people, how to stop the hollowing out of the middle class and how to educate people to give them the means and tools to face the brave new world.

This article refers to «Growth - the good, the bad, and the ugly» debated at the 46th St. Gallen Symposium (11-13 May 2016, Switzerland).