Friday, 28 February 2020

Trickle Down Theory

Updated: September 15, 2015 2:51 pm

Trickling down of economic growth to the people at the bottom of the pyramid has been one of the central themes for discussion in the domain of politics and economics. There are proponents and opponents of it. It is assumed that policies which allow top income earners better generation of wealth, growth and development would eventually help the whole society and go down the ladder to the last person. Such an assumption has been challenged on the ground that it would result in skewed development and breed inequality of income and opportunity.

It is well known that Reaganomics or the supply side economics, the defining feature of which is trickling down of economic growth, became a model for economic planning across the world in the 1990s. However, it is noteworthy that top leadership in many western countries critically looked at the trickle down theory. Joseph Stiglitz in his book Making Globalisation Work, published in 2006, wrote, “Trickle-down economics, which holds that so long as the economy as a whole grows every one benefits, has been repeatedly shown to be wrong.” Even earlier in nineteenth century i.e. in 1896 in the USA the Democratic Presidential candidate William Jennings Bryan advocated for a development model which was exactly opposite of the trickle down theory. He said: “There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.”

In our country President Mr Pranab Mukherjee in his assumption speech delivered on July 25, 2012, said “Trickle-down theories do not address the legitimate aspirations of the poor. We must lift those at the bottom so that poverty is erased from the dictionary of modern India.” It was widely referred to by media and some of our top leaders and intellectuals heartily welcomed such pronouncements coming from the newly sworn in the Head of our Republic. The former Chief Minister of West Bengal Buddhadeb Bhattachajee stated on August 6, 2012: “Even President has admitted trickle-down theory does not work.”

It is not so well known that it was the late President of India Mr KR Narayanan, who, while accepting a book Poverty of Nations authored by Dr AM Khusro in Rashtrapati Bhavan on October 4, 1999, critically referred to the widespread belief that development that took place in the world would somehow trickle down to the average man and categorically stated that the trickling down process was rather slow and unsuccessful. He then quoted famous economist Dr John Kenneth Galbraith who called the trickle down theory horse and sparrow theory and explained that if horses were fed well with oats, birds could get something of it on the roadside next day. President Narayanan summed by saying: “In India …the filtering down process is even more impractical than in other societies because our society happens to be fragmented and walled in so tightly that infiltration is very difficult to take place from one layer to the other.”

The book Making Globalisation Work authored by Joseph Stiglitz has been quoted earlier. It deserves to be mentioned again. Out of ten chapters in the book there is one on “The Promise of Development” and the other on Democratising Globalisation. In the first one Mr Stiglitz discussed the strategies adopted by Washington Consensus forged by the World Bank, International Monetary Fund and the US Treasury Department and wrote that those strategies required, among others, minimum role of the government, accelerating privatisation of government enterprises, liberalisation of trade and capital market and unchaining the business sector from all restrictions for its growth and development. Such an approach according to him shifted attention from employment generation to price stability. He further added that Washington Consensus prescribed a catalogue of dos and don’ts which included privatisation of factories and social security, strengthening of property rights, prevention of corruption, low taxation and maintaining the balance of budget. Then Stiglitz wrote a revealing paragraph which contained reference to trickle down theory. He observed, “In practice, the Washington Consensus put little emphasis on equity. Some of its advocates believed in trickle down economics, that somehow all would benefit—though there was little evidence to support such a conclusion. Others believed that equity was the province of politics, not economics: economists should focus on efficiency, and the Washington Consensus policies, they believed, would deliver on that”.

In the second on “Democratizing Globalisation” Stiglitz described trickle down theory as a discredited theory and stated that those who adhered to such a theory accepted growing inequality and had a firm faith on the robustness of market economy in dealing with challenges of globalization. The articulations of such celebrated economists like Joseph Stiglitz bring out the futility of trickle down theory which unfortunately became the central aspect of policies followed in the 1990s. It is therefore necessary to follow a people-centered approach to development.

Mahatma Gandhi powerfully advocated such an idea when he stressed production by masses as opposed to mass production. As early as 1908 he wrote in his book Hind Swaraj: “Growth will not be a pyramid with the apex sustained by the bottom, but it will be an oceanic circle whose centre will be the individual.” In the 1930s, he wrote about non-violent mass action for transforming society. Clarifying one aspect of such action he said that it meant lifting the social and economic standards of our people living in villages of our country. Economic equality got a prominent place in his famous Constructive Programme. He described it as the master key to non-violent Independence. He wrote that it meant “the abolition of the eternal conflict between capital and labour ….and the leveling up of the semi-starved naked millions…”.

With his sharp understanding of Indian society and economy he had prophesied that a bloody and violent revolution would be a certainty if power and riches are not voluntarily shared by rich and powerful with people. That is why talked of trusteeship and wanted mobilisation of public opinion in its favour and even enactment of legislation to implement and enforce it. When our Prime Minister Dr Manmohan Singh while addressing the Annual General Meeting of the Confederation of Indian Industry on May 24, 2007, invoked the idea of trusteeship of Gandhiji, he was roundly criticised by some of the business leaders of our country. The then Deputy Foreign Minister of Norway Mr Bohr during his visit to India in 2001 had said that the challenges of globalization could be addressed by following Mahatma Gandhi’s pro-poor approach. And he also said that in his country there was so much income equality because of consensus that rich would pay more taxes than other sections of society. This means there must be a willing acceptance of a culture of sharing which is necessary to save our democracy and avoid a bloody and violent revolution arising out of trickle down theory.

By Satya Narayana Sahu

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