Why inequality hampers economic growth

The social aspect of economics has always attracted decision makers and economists due to the importance of social advancement, progress and inclusion in tightening gaps among social classes and promoting an inclusive economic growth where diverse social classes and sectors have a fair contribution to the local economy.

The turmoil in the region enforces inevitable geopolitical and socio-economic circumstances in Jordan, where the demographic situation and social classification become more complex.

Socio-economic inclusiveness through institutionalisation and a decentralised decision-making process is a top priority.

Most governorates’ social demographics were impacted by both internal and external factors, including the influx of refugees.

Social demographics and resilience are under pressure, and a wider range of lower-middle- and middle-class citizens is exposed to an inverse social mobility, forced to move to lower social classes and enjoying less economic adaptive capability, unable to cope with increasing living expenses.

Inequality is not engendered only by the dramatic population growth, but also by the low minimum wages and fewer job options.

The increasing gap among social classes and wages reflects negatively on the production and business environment.

A rigid economic contribution that overlooks the needs of local development can adversely drive economic activity and negatively affect socio-economic resilience.

The unequal contribution to the national GDP will not appear in the explicit economic and GDP growth figures. The implicit shortfall is due to an inhomogeneous economic activity, low levels of social capital and insufficient labour productivity.

The economy grew 2.5 per cent, but in rigid terms, as it does not precisely measure the contribution of local development efforts or decentralised governmental approaches to lessening the gap and creating a more coherent and inclusive economic growth.

An inclusive growth has to take into consideration regional circumstances, and work towards a diversified and decentralised contribution to economic growth. 

Concerning labour productivity, the misallocation of human resources forces the economy to grow through non-productive factors. Increased income inequality prevents skill development among poorer classes and, as a consequence, an inclusive economic growth.

Inequality hampers production factors and has a negative impact on GDP. 

As the GDP equation includes all efforts needed for production, including public and private sectors, and labour productivity, it is imperative to incentivise individuals’ efforts to contribute to the local economic growth through reducing social inequality.

Also, inequality weakens the social capital, which is how people interact collaboratively to share knowledge and positive social conduct, and lay the foundation for social trust.

When social trust is affected, it adversely affects the doing-business environment, which limits the opportunities of small and medium enterprises to outstand, adversely impacting productivity rates.

Income inequality can affect the level of community engagement, thus, weakening economic activity.

Economic participation can be enhanced through linking social classes and sectors with least economic contribution to proper levels of economic activity.

Inclusive growth will trigger the factors and means of production, and promote an effective social capital, leading to a more balanced distribution of development gains.

Access to higher education, innovation and entrepreneurship will develop a fair production paradigm among different social classes.

Boosting local development and social advancement gains obtained through regional and international efforts (including the 2025 vision presented at the WEF) will inevitably create a more coherent economic growth, especially if accessibility to a wider range of public services, including education and health services, major socio-economic resilience pillars, is ensured.

By promoting equality and inclusion through social and economic systems, and a more vibrant socio-economic activity, one can ensure the growth of the GDP.

Recent rankings and studies in countries such as Norway, Ireland, the Netherlands, Canada and Switzerland showed and emphasised, the correlation between social advancement and inclusion, and GDP growth.

The writer is an economist and public policy consultant, expert in socio-economic programmes and projects at UN agencies and international organisations. He contributed this article to The Jordan Times.