The Difference Between Inequality and Poverty
The problem of inequality has often been considered to be one of the biggest social problems of our generation.
Widespread concern about the great disparities of income and wealth have fueled anti-globalisation sentiments all around the world, and threaten to undermine the advances in trade, investment, and immigration we have seen.
One key problem is that contemporary discussions of inequality have often conflated it with poverty. Not only are inequality and poverty conceptually distinct, a failure to distinguish between them can lead to problematic policy conclusions. Additionally, when market advocates criticise redistributive policies and government welfare programs, they are seen as anti-poor. Thus, separating these two concepts can help market advocates regain the moral high ground in this debate.
Conflating inequality and poverty
It is generally assumed that inequality implies poverty i.e., the rich people are prospering, so poor people must be suffering. This conflation is very subtle and is best seen through the presentation of inequality in the widely-used high school economics textbook Economics (7th ed) by John Sloman. According to Sloman:
Inequality is one of the most contentious issues in the world of economics and politics. Some people have incomes far in excess of what they need to enjoy a luxurious lifestyle, while others struggle to purchase even the basic necessities. The need for redistribution from rich to poor is broadly accepted across the political spectrum. Thus the government taxes the rich more than the poor and then transfers some of the proceeds to the poor, either as cash benefits or in kind.
The chapter seeks to explain the phenomenon of inequality but, almost imperceptibly within this opening paragraph, implicitly suggests that under such unequal situations, there are poor people who ‘struggle to purchase even the basic necessities’. In fact, this is not necessarily the case.
Inequality in relation to income simply means the existence of a gap between those who earn the most and those who earn the least. The mere existence of an income gap, even if it’s widening, says nothing about the actual income levels of those who do earn the least.
In other words, an income gap does not necessarily mean that those at the lowest income brackets are poor. Just because Bill Gates is loaded with greenbacks and is many times richer than I am does not, by itself, suggest that I am ‘poor’ in an absolute sense.
It is clear that a society with a very uneven distribution of income can still be one with high levels of absolute prosperity, in such a way that even those who earn the least (relatively) have enough to survive – comfortably.
Implications of the conflation
Not only is it possible that the least well-off in unequal societies have enough to survive, it is actually likely for them to be much better off in unequal societies than in more equal ones.
Assuming the absence of crony capitalism, income inequality is a corollary of a free, dynamic, and growing economy that increases prosperity for all.
Attempts to close inequality through standard welfare-state policies such as redistributive taxes, subsidies, minimum wage laws, price controls, and the public provision of ‘free social goods’ like health care can, and often have, slowed down economic growth. Thus impacting the generation of wealth that the least-well-off depend on.
Put another way, policy attempts to fight inequality retard economic growth, slow down poverty reduction at best, and exacerbate poverty at worst.
Aside from the economic costs of state-centric welfare programs, there are less quantifiable human costs as well. Generous welfare programs often trap individuals in a state of dependency on the government, which not only disincentivises them from working but robs them of the dignity and sense of achievement that comes from earning their own income and being independent and self-sufficient.
Consequently, if poor people were truly at the centre of our attention, we should endorse inequality, or at least the market system it is based on. When people are left free to trade, invest and innovate in the market, inequality is inevitable simply because people are different and some may be more adept at spotting profit opportunities. Yet, if this system is left largely unhampered, it generates vast amounts of wealth that benefits everyone, including the least well off.
The above does not mean that there is no role for government in social policymaking. Yet there is a need to ensure that implemented policies facilitate wealth-creation for all rather than redraw the relative shares of the economic pie. The social policies implemented in the country of Singapore provide useful lessons on how best to help the least well off in any society.
Social policies that reward working
Singapore’s social-welfare system is based on the fundamental principle of meritocracy, considered a cardinal principle in the Singaporean psyche. It has been said that one of the shared values in Singapore is ‘work for reward, reward for work.’ Even where government assistance is provided to the least-well-off, such schemes are carefully designed to promote and encourage work and thus to promote self-reliance. The belief is that Singaporeans should work and take care of themselves, rather than solely depend on the government.
These principles are reflected in several key initiatives. A testament to its pro-work orientation, Singapore’s main ‘welfare’ scheme is titled ‘Workfare’. One of its components is the Workfare Income Supplement, which provides a cash payment to low-income individuals who are working. It is not a ‘free handout’ but essentially an incentive to encourage work.
A further illustration of Singapore’s pro-work orientation is the other component of this policy: a training support scheme, which incentivizes workers to upgrade their skills in order to increase their productivity and thus their earning potential.
Singapore has also deliberately rejected a national minimum wage law. In its place, it has instead introduced a targeted ‘Progressive Wage Model’ in several low-wage sectors such as cleaning, security, and landscaping. Employers in these sectors are expected to pay their workers a minimum but are also incentivised to send them for retraining in order to increase their productivity. Where typical minimum wage legislation simply expects employers to pay the mandated wage, Singapore’s take on it goes further in its encouragement of productivity improvements.
Subsidies are also provided but only in a limited and targeted fashion. In the healthcare sector, for example, individuals are expected to make co-payments for their medical expenses and cannot rely on government subsidies to simply cover 100% of their bill. More aid is in fact given to the neediest individuals who cannot afford even basic essentials, but the principle of self-responsibility looms heavy in the Singapore system. Not surprisingly, health outcomes in Singapore far exceed those of the United States, even though it spends only a fraction of its GDP on health care in comparison to the USA.
Singaporean social policies might remain anathema to purist libertarians who prefer to eliminate all social assistance entirely. But if we must have social welfare policies in the world of here and now, there is a lot to admire in this system – particularly its targeted, limited nature and its pro-work, pro-responsibility orientation.
Singapore’s leaders have managed to identify the difference between inequality and poverty, and have opted to pursue growth-oriented policies, sometimes even at the expense of the income gap. The Prime Minister Lee Hsien Loong said in 2013:
If I can get another ten billionaires to move to Singapore, my Gini coefficient will get worse, but I think Singaporeans will be better off because they will bring in business, bring in opportunities, open new doors, and create new jobs.
In conclusion, there is cause for concern about most societies’ obsessive focus on inequality at the expense of the very poor. Conflating inequality and poverty can ironically lead to misguided policies that ultimately hurt the poor.
The next time you’re asked about whether you care about the ‘problem of inequality’, respond in the negative and that you care too much for poor people instead. Market advocates should always frame markets as a powerful, poverty-killing device, and regain the moral high ground in this most essential debate.