There are a few Egyptian economists who do believe that the effects of economic growth must, sooner or later, benefit all Egyptians. These are the people who congratulate the government on the recent rise in the growth rate, which has reached 7 percent after two decades of growing at about half this rate. However, these economists are either members of the government they are congratulating or are on good terms with the World Bank and the International Monetary Fund, which incessantly advocate the same philosophy: Even if growth benefits only the rich at first, these benefits will eventually trickle down to the poor.
The trickle-down theory was presented by British classical economists two centuries ago. It was supported by the experiences of Britain and the rest of Western Europe as well as the United States towards the end of the 19th and early 20th centuries. Income did trickle down there, from the rich to the poor, after decades of rapid growth. The working classes who suffered during the early decades of the industrial revolution started to taste the fruits of rapid growth. Eventually, they became the middle class, and the growth of the middle classes in these booming economies was proof of the validity of the trickle-down theory.
Unfortunately, what happened once may not happen again. Even if it does happen again, the process of trickling down may be too slow and too slight to be noticed at all. The circumstances in so-called developing countries are so different from those that prevailed during the 19th and early 20th centuries – whatever trickles down today may be very little.
Income is supposed to trickle down because as investment increases, the demand for labor rises, labor becomes scarce and wages increase. But what if the population grows faster than the demand for labor so that wages never rise? Labor does not become scarce and trade unions continue to weaken, unable to persuade employers to pay higher wages. Moreover, since technology is less labor-intensive today than it used to be, the demand for labor does not increase as much with the growth of investments.
In the earlier experiences of development, investors relied mainly on their own countries’ markets to sell new goods, hence, trickling down was a condition for rapid growth. To raise the standard of the working classes was a necessity for the successful marketing of output. In today’s globalized world, employers are not as dependant on local consumers or local labor. They can produce anywhere and sell anywhere, so why worry about the standard of living of the poor?
Even in the affluent societies of the West, the trickle-down theory has been performing badly over the last 30 years, with income distribution becoming increasingly unequal. If this is happening in rich countries, why should we expect things to be better in Egypt where the population is increasing much faster, where labor is becoming less rather than scarce, where trade unions are weaker than ever?
The middle class in Egypt – if it is growing at all – is absorbing a tiny percentage of the rapidly growing number of the poor. To talk as if things are trickling down like they used to in the 1950s and 60s, when strong redistribution measures were taken, or in the 1970s, where migration to the Gulf benefited the poor more than the rich, is to ignore the realities of the new world. Those who continue to preach the trickle-down theory are likely to be the ones who do not really care whether anything trickles down at all.
Dr Galal Aminis Professor of Economics at the American University in Cairo. He is the author of the acclaimed “Whatever Happened to the Egyptians? .
