Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries
World War II devastated the economic infrastructures of Germany and Japan. It flattened their factories, reduced their rail yards to rubble, and eviscerated their harbors. But in the decades that followed, something puzzling happened: the economies of Germany and Japan grew faster than those of the United States, the United Kingdom, and France. Why did the vanquished outperform the victorious?
In his 1982 book, The Rise and Decline of Nations, the economist Mancur Olson answered that question by arguing that rather than handicapping the economies of the Axis powers, catastrophic defeat actually benefited them, by opening up space for competition and innovation. In both Germany and Japan, he observed, the war destroyed special-interest groups, including economic cartels, labor unions, and professional associations. Gone were Germany’s partisan unions and Japan’s family-controlled conglomerates; the U.S. Teamsters, the United Kingdom’s Society of Engineers, and France’s Federation of Building Industries all survived. A generation after the war, only a quarter of West Germany’s professional associations dated back to the prewar era, whereas a full half of the United Kingdom’s did. Olson’s findings had a disturbing implication: in politically stable countries, narrow coalitions of business lobbies hold back economic growth through self-serving policies, and only a major military defeat or a grisly revolution can overcome the resulting inefficiencies.
Back when Olson was writing, few economists cared about economic inequality in advanced countries; unemployment and sluggish investment were the problems of the day. To the extent that experts did focus on inequality within countries, they did so with respect to the late industrializers, where migration from poor villages to richer cities was accentuating income disparities. Even there, however, inequality was considered a temporary side effect of development; the economist Simon Kuznets argued that it dissipated with modernization.
Had Olson considered inequality, he might have noticed that World War II had two other curious economic consequences. First, the devastation reduced inequality—not just in the defeated countries but also in the victorious countries, and even in neutral ones. Second, these reductions proved temporary. Around the 1970s, developed economies started becoming less and less equal, defying Kuznets’ celebrated hypothesis.
Such puzzles lie at the heart of The Great Leveler, an impressive new book by the historian Walter Scheidel. Scheidel proposes that ever since foraging gave way to agriculture, high and rising inequality has been the norm in politically stable and economically functional countries. And the only thing that has reduced it, he argues, has been some sort of violent shock—a major conflict such as World War II or else a revolution, state collapse, or a pandemic. After each such shock, he writes, “the gap between the haves and the have-nots had shrunk, sometimes dramatically.” Alas, the effect was invariably short lived, and the restoration of stability initiated a new period of rising inequality.
Today, the risk of violent shocks has fallen considerably. Nuclear deterrence has made great-power war unthinkable, the decline of communism has rendered wealth-leveling revolutions unlikely, powerful government institutions have staved off the risk of state collapse in the developed world, and modern medicine has kept pandemics at bay. However welcome such changes may be, Scheidel says, they cast “serious doubt on the feasibility of future leveling.” Indeed, he expects economic inequality to keep rising for the foreseeable future.
The Great Leveler should set off loud alarm bells. Scheidel is right to call on the world’s elites to find ways to equalize opportunities, and to do so before driverless cars, automated stores, and other technological advances complicate the task. The bloody history he recounts suggests that reducing inequality will be difficult, even in the best of circumstances. But he also exaggerates his case; there are reasons to believe that societies can reform without an instigating catastrophe.
THE MARCH OF INEQUALITY
Jumping across civilizations and eras, The Great Leveler finds example after example of periods of rising inequality punctuated by cataclysmic events that suddenly flattened distributions of income and wealth. The range of evidence is breathtaking. Scheidel tracks the distribution of wealth between 6000 BC and 4000 BC through indications of physical well-being, such as skeletal height and the incidence of dental lesions; signs of conspicuous consumption, such as lavish burials; and evidence of entrenched hierarchies, such as temples. He estimates inequality in the Roman Empire by looking at the assets of top officials and influential families, as reported in censuses. He measures Ottoman inequality by turning to records of estate settlements and official expropriations. For premodern China, fluctuations over time in the number of tomb epitaphs, which only the rich could afford, serve as a proxy for the shifting concentration of wealth. Specialists in particular eras and regions will undoubtedly quibble with some of Scheidel’s assumptions, inferences, and computations. But no reasonable reader will fail to be convinced that inequality has waxed and waned across time and space.
Scheidel also seeks to explain what causes inequality. Thomas Piketty, in his best-selling Capital in the Twenty-first Century, answered the question by arguing that the rate of return on investment generally exceeds the rate of economic growth, causing people with capital to get even wealthier than everyone else. Scheidel accepts this mechanism but adds others. The most basic one involves predation. Until recently, the only way to become fabulously rich was to prey on the fruits of others’ labor. Cunning people grabbed power and then accumulated wealth through taxation, expropriation, enslavement, and conquest. They also monopolized lucrative economic sectors, largely for the benefit of themselves and their relatives and cronies. Exercising all this power—and holding on to it—required maintaining a military capable of overpowering challengers, which itself served as an instrument of further predation. In ancient Rome, Scheidel writes, “commanders enjoyed complete authority over war booty and decided how to divide it among their soldiers, their officers and aides who had been drawn from the elite class, the state treasury, and themselves.”
In the modern world, too, authoritarian states with ruling cliques preserve political power and acquire immense wealth through violence; consider China, Egypt, Russia, and Saudi Arabia. Where these differ from premodern states is that they share power with giant private companies. Premodern China had no equivalent of the e-commerce company Alibaba, nor did premodern Egypt have anything like the Bank of Alexandria, one of the country’s largest financial institutions. The owners of such companies include billionaires who have become wealthy without relying on violence (or at least without relying on violence directly, since they may support it indirectly by paying taxes to repressive states). But Scheidel downplays the role that private companies play in creating and perpetuating inequality in modern autocracies, an error that leads him to make unduly pessimistic forecasts about the future.
Some countries have found ways to reduce inequality without a catastrophe.
Giant corporations also play massive roles in advanced democracies. In these countries, the military and the police are constrained by various institutions, and politicians must maintain popular support to stay in power. But it is one thing for citizens to have the right to boot out a corrupt administration and quite another for them to exercise that right. The U.S. tax system has plenty of loopholes that benefit the wealthiest 0.1 percent of Americans, but the other 99.9 percent, through their choices at the ballot box, have effectively allowed those privileges to persist. Recognizing this oddity, Scheidel suggests that voters act against their own interests because of the power of elites. And so inequality keeps rising—until, that is, a shock sends it back down.
World War II reduced inequality mainly by obliterating assets that belonged disproportionately to the rich, such as factories and offices. As Scheidel notes, a quarter of Japan’s physical capital was wiped out during the war, including four-fifths of all its merchant ships and up to one-half of its chemical plants. Even though France was on the winning side, two-thirds of its capital stock evaporated. The war also depressed financial assets such as stocks and bonds, and it devalued surviving rental properties almost everywhere. In victorious and defeated countries alike, the rich lost a greater share of their wealth than did the rest of the population.
But it wasn’t just destruction that lowered inequality; progressive taxes, which governments levied to fund the war effort, also helped. In the United States, for example, the top income tax rate reached 94 percent during the war, and the top estate tax rate climbed to 77 percent. As a result, the net income of the top one percent of earners fell by one-quarter, even as low-end wages rose.
The mass societal mobilizations that the war required also played a critical role. Nearly one-quarter of Japan’s male population served in the military during the conflict, and although the share was lower in most other countries, nowhere was the number of enlisted men small by historical standards. During and after the war, veterans and their families formed preorganized constituencies that felt entitled to share in the wealth created through reconstruction. In the United States, the Supreme Court put an end to whites-only party primaries in 1944, no doubt partly because public opinion had turned against excluding African Americans who had shared in the wartime sacrifices. France, Italy, and Japan all adopted universal suffrage between 1944 and 1946. The war effort also stimulated the formation of unions, which kept rising inequality at bay by giving workers collective-bargaining power and by pressuring governments to adopt pro-labor policies. Mass mobilization for the purpose of mass violence thus contributed to mass economic leveling.
Revolutions equalize access to resources only insofar as they involve violence.
By this logic, modern wars fought by professional soldiers are unlikely to have a similar effect. Consider the wars in Afghanistan and Iraq: although some U.S. veterans of these conflicts have returned embittered, they constitute too small a constituency to command sustained attention, and few Americans feel compelled to support substantial transfers of wealth to citizens who enlisted voluntarily.
Revolutions, The Great Leveler explains, act a lot like wars when it comes to redistribution: they equalize access to resources only insofar as they involve violence. The communist revolutions that rocked Russia in 1917 and China beginning in 1945 were extremely bloody events. In just a few years, the revolutionaries eliminated private ownership of land, nationalized nearly all businesses, and destroyed the elite through mass deportations, imprisonment, and executions. All of this substantially leveled wealth. The same cannot be said for relatively bloodless revolutions, which had much smaller economic effects. For example, although the Mexican Revolution, which began in 1910, did lead to the reallocation of some land, the process was spread across six decades, and the parcels handed out were generally poor in quality. The revolutionaries were too nonviolent to destroy the elite, who regrouped quickly and managed to water down the ensuing reforms. In the absence of mass violence concentrated in a short period of time, Scheidel infers, it is impossible to meaningfully redistribute wealth or substantially equalize economic opportunity.
Indeed, Scheidel doubts whether gradual, consensual, and peaceful paths to greater equality exist. One might imagine that education lowers inequality by giving the poor a chance to rise above their parents’ station. But Scheidel points out that in postindustrial economies, elite schools disproportionately serve the children of privileged parents, and assortative mating—the tendency of people to marry their socioeconomic peers—magnifies the resulting inequalities. Likewise, one might expect financial crises to act as another brake on wealth concentration, since they usually hit the superrich the hardest. But such crises tend to have only a temporary effect on elite wealth. The 1929 stock market crash, which permanently destroyed countless huge fortunes, was the exception to the rule. The crisis of 2008—which most wealthy investors recovered from in just a few years—was much more typical.
Scheidel argues that the democratic process cannot be counted on to reduce inequality, either. Even in countries with free and fair elections, the formation of bottom-up coalitions that support redistribution is rare. Indeed, the poor generally fail to coalesce around leaders who pursue egalitarian policies. Scheidel doesn’t go into much detail about why, but the problem is largely one of coordination. According to the theory of collective action (popularized by Olson, as it happens), the larger a coalition, the harder it is to organize. This means that because of numbers alone, the bottom 50 percent will always have a harder time mobilizing around a common goal than will the top 0.1 percent. It’s not just that the incentives to free-ride are larger in big groups; in addition, priorities within them can be more diverse. Most Americans agree on the need for education reform, but that majority disagrees hopelessly on the details.
Yet another obstacle to reform lies in efforts to discourage the bottom 50 percent from mobilizing. Across the world, elites have promoted ideologies that focus the poor’s attention on noneconomic flash points, such as culture, ethnicity, and religion. They also spread conspiracy theories that attribute chronic inequalities to evildoers, real or imagined. Today’s populist politicians—both the right-wing and the left-wing varieties—demonize particular groups, thereby deflecting attention from genuine sources of economic inequality. For U.S. President Donald Trump and France’s Marine Le Pen, it is immigrants; for U.S. Senator Bernie Sanders and France’s Jean-Luc Mélenchon, it is corporations. Even elites who disavow populism deflect attention from the real problems. Many American academics, for example, champion affirmative action, which tends to favor the wealthiest minorities and makes no real dent in inequality. Given all these barriers to reform, Scheidel’s pessimism can seem well founded.
EQUALITY IN PEACE?
But Scheidel’s own narrative also offers cause for hope: as The Great Leveler acknowledges, some countries have found ways to reduce inequality without a catastrophe. In the 1950s, Scheidel reports, South Korea undertook land redistribution in order to mollify its peasants and discourage them from allying with communist North Korea. During the same period, Taiwan, fearing an invasion from mainland China, ushered in similar reforms to consolidate domestic support. Both places thus managed to promote equality peacefully, in order to prevent violence that would have proved far costlier for elites. Scheidel explains away these cases by noting that World War II and the Korean War empowered the masses and softened the elites. Yet he also notes that Mesopotamian rulers from 2400 BC to 1600 BC repeatedly provided debt relief to counter potential instability. Although these resets did nothing to right the structural sources of inequality, they managed to keep economic disparities within bounds.
Until recently, the only way to become fabulously rich was to prey on the fruits of others’ labor.
Scheidel could also have mentioned an instructive case from the Ottoman Empire. From the fourteenth century onward, Ottoman sultans regularly expropriated their subjects, including merchants, soldiers, and state officials. In the empire’s heyday, the sixteenth century, abrogating that privilege would have been unthinkable. But beginning in the late eighteenth century, the economic, technological, and military rise of Europe caused the sultanate to worry that keeping that privilege in place would hold back economic growth, encourage secessions, and set the stage for foreign occupation. And so in 1839, Sultan Abdulmecid I peacefully gave up this privilege, along with several others that Ottoman elites had enjoyed for centuries. A few years later, he reformed the judicial system, setting up secular courts available to people of all faiths as an alternative to Islamic courts, which, by discriminating against commoners and non-Muslims, had long contributed to inequality.
In all these cases, the beneficiaries of entrenched privileges, recognizing a looming existential threat, chose to undertake reforms. Today’s populist surge does not yet pose a serious threat to the fortunes of the very rich. But if Scheidel’s forecast of ever-worsening inequality materializes, that might change. The trigger could come from, say, a takeover in some G-7 country by radical redistributionists. At that point, elites might form political coalitions to pursue top-down reforms now considered hopelessly unrealistic. In times of peace and stability, as Olson recognized in The Rise and Decline of Nations, elites form self-serving coalitions to increase their wealth. Faced with the possibility of losing all, they might do the same to stave off a more drastic redistribution.
As with any collective action, free-riding could get in the way. Certain superrich individuals might choose to let other elites bear the burdens involved in lessening inequality, such as funding a new bipartisan coalition, and if there were enough free riders, the overall effort would fail. Yet the very nature of rising inequality would lessen the disincentives to cooperate: the more wealth gets concentrated at the top, the smaller the number of people who must get organized to form a movement committed to slashing inequality. In the United States today, there are just over 100 decabillionaires—people with 11-digit net worths; if only half of them formed a political bloc aimed at raising estate taxes to equalize educational opportunities, the effort would likely gain traction.
There is another reason to scale down the pessimism, and it has to do with the relative salience of various types of inequality. The Great Leveler focuses on inequality within nations, paying little attention to inequality among nations. But the latter is becoming increasingly relevant to human happiness. Just as mass transportation made national disparities matter to people whose frame of reference had previously been limited to their own local communities, so the Internet is heightening the relevance of international disparities. It means more to today’s Chinese, Egyptians, and Mexicans than it did to their grandparents that they are generally poorer than Americans. Technologies that give people in the developing world greater contact with people in the developed world—from video chat to online universities—promise to make such global differences matter even more, thus reducing the significance of the national inequality on which Scheidel focuses.
The good news is that global inequality has lessened dramatically since World War II, even as income and wealth have become more concentrated within individual countries. With economically underdeveloped countries growing more rapidly than developed countries—in large part thanks to falling trade barriers in the developed world—the gaps between people in different countries has narrowed. As late as 1975, half of the planet’s population lived below today’s poverty line of $1.90 a day, which the World Bank considers extreme poverty. That proportion has now fallen to ten percent. Countries that entered the early stages of industrialization just a few decades ago, from India and Malaysia to Chile and Mexico, now export high-tech goods. For anyone who finishes reading The Great Leveler in a state of despair, these massive and rapid transformations, achieved in a remarkably peaceful era, offer grounds for hope.