Douwe Osinga's Blog: Communism might have been right after all

Saturday, April 9, 2005

Last week I wrote about income distribution. Poorer people in richer countries might be worse of if they were poor in a poorer country. Most economist nowadays think that having a very even income distribution kills some of the incentives for entrepreneurs to do their thing and thus hurts economic growth. Absolute equality for all means poverty for all. A good reason to reject socialism? May be not.

A more equal income distribution makes all poorer maybe, but it doesn't hurt the long term economic growth potential. Country A with an unequal distribution might just always be 1.5 as rich as B where things are more equal, while both growing at the same economic growth rate. Of course if you towards a more unequal distribution, this would temporarily boost the economic growth, i.e. if A would become like B in a period 20 years, it could catch up and therefore have 2.5% more economic growth in that period.

The interesting thing of course is that increasing the average income while making the distribution more unequal means that you predominately make the rich richer, while keeping the poor, poorer or slightly richer. The real question is, whose income should economic policy optimize? People tend to answer directly or indirectly with 'me'. Quite some people I know wouldn't mind raising the taxes for the higher incomes to do well. Invariably they think that the higher incomes start at around 40% more than what they make.

To answer this question, John Rawls came up with the Veil of Ignorance or the Original Position in his 'A Theory of Justice'. Underlying all societies is a social contract. This contract should be in a way that we'd all agree to it if we didn't know where we'd end up in society. Rawls concludes from this that this conctract should be in such a way that the poorest do relatively well, i.e. you can increase the income of the rich and make society more uneven, but only if this makes the poorer less poor.

An unresolved issue here remains what the poorest are. The absolute poorest guy in whole of the country? Or the poorest 50% of a country? Economists keep statistics about which percentage of the total income in a country is earned by the poorest 10%, so this seems to be as good a number as any. Plus it is not unreasonable..

Say I give you a coin. You throw it. If it is heads, your income will be halved for the rest of your life. How much should your income rise to make you take the bet? For most people, the answer is, a lot. Having less money just sucks a lot more than it is nice to have more money. So if you didn't know where in society you'd end up, you'd have a great incentive to make live easier for the poor, as an insurance against the maybe not very likely outcome that you'll be in the group of the poorest 10%.



GDP per head

low 10

high 10

Sierra Leone




















Central African Republic




































Czech Republic
























United Kingdom
































United States




In the table above I show the average income in a group of countries and the income of the poorest 10% in those countries. For good measure, I've added too how the richest are doing. Obviously, the average, the poor and the rich are doing quite well in Norway, no surprise there. However, if you look at the scores of the poor in the US, you see that they are actually doing less well than if they would have been poor in countries like Slovenia or the Czech republic. (And yes, being poor in Sierra Leone is really bad).

These countries are therefore actually doing a better job in taking care of their citizens, poorer though they might be. If you look at the more detailed list, you see that former communist countries are doing better in general, that countries in South-East Asia aren't so bad either and that most countries in the Americas (with the exception of Canada) don't take care much of their poor. The 500 bucks a poor Brazilian makes a year is pretty extreme.

In most ex-communist countries the gap between rich and poor has grown and often the average income has only recently caught up with the figure under communism, while the rich countries have just kept growing. In other words, back in the communist days, it was really true that the poor were better off there than they were in the West. If you take Rawls theory serious, this suggest that on some measure their societies were more just.