GDP increase vs reducing inequality

I have some readers who ask me why I write about income inequality so often. First of all, I don’t think I write about such a critical topic often enough. Secondly, I am also frustrated that in our economy, Gross Domestic Product (GDP) growth rate still takes precedence over the reduction of income inequality.

There is now a current debate on the need to increase the minimum wage. The living wage is the minimum wage needed to satisfy the basic needs of a family of four or five persons. 

In the Philippines, this living wage is estimated at P1,200/day. The proposed minimum wage increase is from P610/day to P645/day. I recently wrote a column which I titled “Try living at P645/day.” Of course, I received several reactions that predicted that the increase of such a minimal and meager minimum wage would be bad for the country.

The National Economic and Development Authority (NEDA) also released a report that it would cause the loss of several thousand jobs. However, a closer reading of the NEDA report showed that there would be loss of jobs in some sectors, but an increase of jobs in other sectors.

Economies that depend on low wages as competitive advantage will remain dependent on a cheap labor force. This type of economy will never progress to a high-income country.

The business sector that depends on low wages to survive will never have the motivation to find ways to increase productivity. Another feature of a low-wage economy is that its most skilled people will seek higher compensation by going overseas to work.

This is true not just in our time but also in history. The best example is the history of the United States in the early 19th century. The southern United States depended on slave labor because it was the cheapest labor available. The northern United States, however, abolished slavery or never had slavery from its inception. The northern United States became industrialized and its agricultural sector became mechanized and less dependent on manual labor.

When the American Civil War was waged from 1861 to 1865, the industrialized and modernized northern United States defeated the non-industrialized southern United States, which was so dependent on slave labor.

Even in Southeast Asia and East Asia today, it is the economies which pay higher wages that are more progressive than the Philippines. These countries are Singapore, Malaysia, Thailand, Japan, Taiwan and South Korea. All these countries pay higher wages to their workers than the Philippines. And yet, there was a time when the Philippines was a richer country than all of them, except for Japan and Singapore. 

I think that those who oppose higher wages should study the economic history of Southeast and East Asia. 

Increasing wages is not just a humanitarian act but a common sense economic move that will actually lead to greater prosperity. As has been proven in some other countries, the higher wages will mean higher purchasing power by the ordinary citizens. This will translate to a higher consumption of goods and services, which will result in a higher gross domestic product for the country.

Of course, there will be some companies who will be forced to close due to higher wages. These are the companies who will refuse to seek ways of increasing their productivity.

This is the same case with land reform. Among certain business and landlord sectors, there is a campaign to spread the thesis that farming can only be profitable if the size of the farms is substantial. The assumption is that profitability and productivity depend on the farm size. However, in Japan, South Korea and Taiwan, the size of the farms is only a few hectares but the farms are very productive. This is the result of the widespread use of modern agricultural methods propagated by the government.

I remember attending a forum on agriculture many years ago and the representatives from South Korea and Japan told me that their economic progress only started when they launched their very successful land reform program. And yet in the Philippines, we continue to hear that the land reform program which resulted in relatively smaller farms is the reason that our agricultural sector has led to the lack of rice and other commodities. Perhaps, we should study how and why the land reform program was successful in Japan, South Korea and Taiwan.

Income inequality has also been the cause of violence in the form of revolutions in the history of the world. According to the book “The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century” by Walter Scheidel, over thousands of years, only violent events have significantly lessened inequality. Before, major causes of leveling have been mass warfare, revolutions, state collapse and catastrophic plagues. These are the main reasons for the destruction of the fortunes of the rich.

Today, the struggle against income inequality happens in both rich and poor countries. The victims of income inequality have turned to populists like Trump in the United States, Le Pen in France and Duterte in the Philippines, who appear as champions of income inequality against the wealthy elite.

This is the reason why I continue to write that reducing income inequality is more critical than increasing GDP.