How is it that poverty, common in emerging economies, has become an issue in some of the most developed countries in the world? Radio VR is exploring the issue with Moussa Haddad of Child Poverty Action Group and Dr. Richard Wellings, of the Institute of Economic Affairs, UK.
Poverty could leave the UK society "permanently divided". This is a conclusion of the State of the Nation report published on the 20 of October.
To quote the policy paper, “this is the last State of the Nation report prior to the 2015 UK General Election. As such it presents a verdict on the past and provides a window into the future. The central conclusion is that the next government will have to adopt radical new approaches if poverty is to be beaten, mobility improved and if Britain is to avoid becoming a permanently divided society. We define that as the 2020 challenge”.
Child poverty is among the most painful issues examined in the report. It says, as many as 1.4 million children are now in "relative poverty" due to the effects of rising rents and mortgage costs since 2010.
The report also states that the Government's target of reducing child poverty by half by 2020 would not be met. "Absolute child poverty increased by 300,000 between 2010-11 and 2012-13" and "independent experts expect child poverty to increase significantly over the next few years".
Says Moussa Haddad, Senior Policy and Research Officer at Child Poverty Action Group:
Child poverty, having reduced in the last decade, the progress on that reduction is stalled and we are about to see, according to independent projections, poverty heading upwards, when there currently is a 2020 target that all political parties have signed up to, to end the child poverty by 2020. Therefore, the report has acknowledged what’s been an unspoken truth, that we need some target to meet that and a commitment. And so, it suggests putting forward a roadmap with clear actions, clear policies to actually achieve an end to child poverty, but potentially reset the date, because the progress has been so slow on that.
When we are talking about child poverty, is the progress stalled only in this particular area or do we observe growing poverty in all age groups?
Moussa Haddad: In the UK, if you are looking at different age groups, children have the highest risk of poverty. Working age adults have a lower risk and pensioners have a lower risk still. But we wouldn’t want to put it into hierarchy of one’s poverty being more important than the other. But children are particularly susceptible to poverty, because at the same time as their parents have the additional costs that children impose, they also have reduced earnings because they need to stay at home and look after their children to some extent. So, their earning goes down and the cost to have children goes up. And that is the reason we need the social security system and other services that help to smooth incomes over the lifetime, so that parents are given some support to make sure that they have enough money to raise their children.
Do I get it right that the radical new approaches could imply the increase in state social spending?
Moussa Haddad: It is interesting to look back to the 2000s when the UK had unprecedented reduce in child poverty. The numbers in poverty went down by over a million children, which is the best performance anywhere in the OSCD. What they did during that time was a mix of steps. There was protected investment in children’s benefits. There was work to support through tax credits. Some were supported both with the cost of children and with the services needed to help them get into work. And So, what we are looking for is not…you could call them radical policies, but we are looking to actually repeat what we know has already worked, and social security investment and benefits for children need to be a part of that.
But doesn’t that actually imply a revision of the whole of the economic strategy, not only in the UK but in the rest of Europe?
Moussa Haddad: It requires re-privatization. So, for example, the current Government in the UK found somewhere around 15 billion pounds to raise the threshold, if that money was targeted more directly in terms of low income families, then it could have a massive effect on poverty. This is a question more about priorities than it is about economic fundamentals. But what we would call for, just as in family life children are prioritized, we think in the national life the same thing is to happen. It is a question of prioritization.
Do you think that the recommendations of this repot are going to be heard by the political elite?
Moussa Haddad: That’s a hard question. Of course, we hope it will be heard. We think what the report is calling for, is an honest discussion about priorities and about what needs to happen to end child poverty. So, we are very hopeful that the politicians, who in 2010 committed to the goal of eradicating child poverty, we would like to think that they would be committed to the means for achieving that as well.
Dr Richard Wellings, Deputy Editorial Director at the IEA — the UK-based Institute of Economic Affairs:
We have seen significant falls in real wages over the last few years. And that is partly related to slow rates of economic growth, which have obviously reflected the poor rates of productivity growth in the UK economy. So, there are major economic problems. Also, clearly, there is a big problem with the low-end as well, with the particularly poor economic performance in those categories.
When do you think it all started?
Dr Richard Wellings: This is partly due to long-term demographic trends. If we look back to late 1960’es and 1970’es, we saw a shift in the pattern of birth from the middle classes towards the people in lower socio-economic groups. And one explanation for that is that the welfare state, where people found it advantageous to have more children, because it gave them access to council housing and more welfare benefits, and so on. So, to some extent we are now reaping the consequences of that shift in demographics. And, of course, when you do have this long-term demographic shift, there isn’t really that much we can do about it, because to some extent it is baked in the cake and it takes many decades to change those kinds of big changes in the society.
So, do I get it right that, if we talk in general terms, it is the liberal policies which might be, at least indirectly, the cause of what we are having now?
Dr Richard Wellings: That partly is the rise in the welfare state. Obviously, immigration has also been a factor, in the sense that the groups coming into the UK have been highly polarized. We've seen lots of immigrants at the top end with high kills, but also we have some other groups, like the Somalis, who came here through the asylum system, who have got very big economic problems.
Around 80% of working age Somalis are thought to be unemployed. And I think around 98% are in subsidized housing. So, some of these groups have got big economic problems. And that in itself is going to increase social divisions. I mean, that’s not comment whether it was right to allow them to settle, because clearly they did have enormous human right issues in their own country. But nonetheless, all these trends are a factor here.
But also, it is just a problem of a heavy Government regulation, high taxation. And that will tend to lower the growth rate of the UK economy and will tend to increase absolute poverty, compared with an alternative way of how to higher growth.
Does the picture in the UK reflect the situation in most economically developed countries?
Dr Richard Wellings: Yes, I mean, I think most developed countries are experiencing similar trends. It is partly because they’ve implemented similar policies and they’ve had the welfare states for decades now. They’ve also moved towards high regulation, high taxation economies that are sclerotic in terms of economic growth. And they’ve also got similar long-term demographic trends. It is obviously, connected to some of the big global shifts as well. So, if you’ve got a welfare state that effectively pushes up costs in the West, then it is more difficult for the people with low skills to compete with the countries like China, where the human capital is pretty high but the wages are still pretty low. So, obviously, this global issue is also important.
But China is also experiencing a high rate of social division within the society. What could be the cause of the social division?
Dr Richard Wellings: Well, you’ve got to remember that China had a very low starting point. So, it only really started growing rapidly since 1979 and a premarket reform of Deng Xiaoping. And in the rapidly developing countries, clearly, growth is highly regional. So, it tends to be in the east of the country and in the big cities, whereas the rural areas are still a long way behind, they still got a long way to go in terms of economic development. So, when you’ve got growth inevitably very patchy in its initial stages, that does create social divisions in places like China.
But what could be done in the countries with developed economies? Social divisions are a nasty problem and it can create all kinds of social tensions, it could end in a social explosion. Is there anything we could do about it?
Dr Richard Wellings: One way is to tackle the high cost of living, so that the people at the poor end can and enjoy decent quality housing, low cost energy and so on, just to make their life a lot easier. And the key to that is the regulation. So, for example, in the UK removing some of the planning controls that make housing so expensive in the southeast of England, or removing some of these environmental regulations that push up the price of energy, that all helps to improve the lives of people at the low end.
But then, again, on a more pessimistic note, there is not really that much that can be done about these long-term demographic trends. And also, I think it is a mistake to see the solution in terms of more state intervention. So, early years education, pushing more poor people into universities and so on. Because all this intervention just costs the taxpayers more money and in a lot of way it just exacerbates the problem you have of a high tax\low growth economy. And as we've seen in the past as well, it tends to be ineffective. So, if the UK state school system is pushing out around 20% of school leavers, who are, unfortunately, innumerate and illiterate, it just shows how ineffective that kind of solution can be.
But then, what could be implied by ‘radically new approaches’ which are mentioned in this report? What could the new Government do about it?
Dr Richard Wellings: I think the report is really on the wrong track. It sees the solution in terms of more state intervention, more spending on education, regulations to try and artificially push up wages. But these policies will turn to be counterproductive. So, trying to artificially raise wages will just tend to increase unemployment, particularly for the young people where it is already a big problem. And increasing spending on education is unlikely to be successful, and it will also increase the tax bill as well and lower the economic growth.
So, I think they really need to withdraw the state. And although not that much can be done about these long-term demographic trends and also these global shift, a lot can be done in terms of reducing the living cost, at least meaning that people on low incomes can have a good lifestyle, because they can then afford housing, they can afford energy, they can afford their travel costs and so on. At the moment things are going in the opposite direction. There is more and more government regulation. A lot of it is coming from the EU. It is just pushing up the living costs and making life very difficult for those in the poorest sections of the society.
But if the state increases social spending on education, on public health, wouldn’t it help to reduce social tensions?
Dr Richard Wellings: The problem here is that there really aren’t enough resources to expand the state any further. So, you see that the Western countries already have very high debt levels; they are borrowing huge amounts of money. And if you increase taxations to pay for all these social programs, then, unfortunately, that is going to decrease the economic growth and in the long run actually increase absolute poverty. So, there is a real dilemma here. You can try and make short term fixes, to try and improve the lives of people on low incomes. But, at the same time, if you do that, you risk low economic growth and having less tax revenue in the longer run, which means that it is completely counterproductive.
And the problem is that we are looking at the consequences of some very long-term demographic trends and global shifts, with the West declining relative to the Far East and so on. And there isn’t really that much that the government can do about that, particularly in the case of the demographic problem, because they can’t suddenly change the dictions that were made 20 or 30 years ago by parents.
Looking back into history, we sometimes see that in a desperate situation like that some radical politicians tend to seek radical solutions, like going to war, for instance. Could that be a case here? I'm talking about Europe at large, not necessarily the UK.
Dr Richard Wellings: Yes, there is a danger that when you do have a long period of economic crisis and falling living standards for a large parts of the population, it does create political instability. And I think that is probably a particular risk in the parts of southern and eastern Europe that don’t have a long tradition of participatory democracy, and also they don’t have the same strong institutions that tend to diffuse these matters. And their political culture is also very different. So, when you think about southern Europe, a lot of those countries were fascist dictatorships just 40 years ago. And they also have a huge communist tradition, as well.
So, the potential for instability in some of these countries is enormous. And clearly, that means that political leaders need to tread very carefully. And really, there needs to be an action from bodies like the European Commission, who really needs to get their acts together in terms of reducing costs for businesses and creating an environment that is favorable for growth. But at the moment it is a horrendous economic depression in southern Europe. They’ve actually been increasing all the regulation on businesses and causing more and more problems for them, which is exactly the wrong policy.
Is there anyone in the European Commission who could actually get things back on the right track?
Dr Richard Wellings: I think there are some people who realize the problem. But obviously, when you have this huge degree of centralization in Brussels, it is very difficult to push a change through it. It’s got an enormous amount of institutional inertia. And then, you also have the political culture there, that for decades now has been in favor of more centralization and more regulation, more control by politicians over the economy. And it is going to be very difficult to change that political culture. And I can’t see it happening within the next few years. It is going to be a very long drawn out process. And in the meantime, there is a huge risk that one of those southern European countries will go completely off the rails. And that is some pretty nasty situation.
Isn’t it ironic that these are the same people who used to criticize the late Soviet Union for centralized economic policies?
Dr Richard Wellings: Exactly! I mean, there are obviously parallels with the former Soviet Union the way that the EU is actually organized, with a massive democratic deficit, with highly centralized and detached elite which has very different world views from the European population, which is dangerous in itself. And clearly, this kind of centralization is just hugely inefficient in terms of allocating the resources as well.
So, we now see a lot of European countries where government spending is over half of the economy, which isn’t too far removed from some of the more liberal communist countries like Yugoslavia or Hungary, which is extremely worrying. And obviously, that is going to mean that growth is going to be low and there is probably no prospect of a strong recovery. We could be in this kind of situation that has afflicted Japan, where there’s basically been very little growth for the last 20 years.
