Does economic growth benefit the poor?
When discussing social issues with friends and family, it’s not uncommon for someone to say that economic growth only benefits a small, privileged elite, while the poorest remain prisoners of their economic circumstances. But this perspective, fuelled among other things by Oxfam’s annual report on inequality, could not be further from the truth, especially in the Canadian context.
Time and again, economic research has debunked this popular belief. The only question that remains is how much the poor benefit from growth. One study, looking at 58 countries, found that 10% annual GDP growth is associated with a 10% increase in the incomes of the less fortunate. In other words, when the economic pie grows, everyone gets a bigger piece.
As a result, economic growth provides opportunities that allow for social mobility and ultimately lead to a reduction in poverty. It is therefore not a coincidence that the substantial growth Canada has experienced in recent decades has been accompanied by an impressive reduction in poverty. The portion of the population in a low-income situation went from 13% in 1985 to a little over 9% in 2015, a drop of nearly a third in just 30 years.
The biggest reduction was experienced by women, especially those aged 65 and over, with a 74% decrease. As a result of such reductions, the historical gap between men and women has almost entirely disappeared.
There are substantial differences between the provinces, however. The case of Newfoundland and Labrador, which saw its low-income rate fall by nearly two-thirds, is particularly striking. In the space of 30 years, it went from the cellar to second place among the provinces. Saskatchewan and Alberta, which saw their low-income rates cut in half, went from the middle of the pack to first and third place, respectively.
Alongside these reductions, we also observe that fewer and fewer Canadians find themselves in low-income circumstances for a long period of time. Newfoundland and Labrador, Saskatchewan, and Alberta stand out once again with very clear improvements, while Quebec is in the middle of the pack when it comes to the persistence of low-income.
More Prosperity, Less Poverty
These gaps in poverty reduction are explained primarily by differences in the rates of economic growth experienced by the different provinces. For example, Newfoundland and Labrador is both the province where per capita GDP has grown the most (61%) and where the persistence of low-income has fallen the most (‑66%). Conversely, it is Ontario that has experienced the least growth (22%) and by far the smallest decrease in long-term poverty (-14%).
Overall, the experience of the Canadian provinces in recent decades shows that on average, a $10,000 increase in per capita GDP entails a 1.7-percentage-point decrease in the persistence of low-income. To get a sense of this effect, Alberta had a per capita GDP of $72,200 and a persistence of poverty rate of 3.3% in 2015, versus 41,000 and 6.2% for Quebec. In other words, the richer the province is, the shorter the time that people remain in poverty.
If the goal is to reduce poverty, we should focus our attention not on income inequality at a specific point in time, but rather on wealth-creating public policies like reducing the tax burden, liberalizing the labour market, fighting corruption, and the free movement of goods and services. Any policy that goes against these broad positions generates adverse effects by too often allowing small groups to enrich themselves at the expense of the large majority of consumers and taxpayers. It is these kinds of inequalities that should be the priority for groups seeking a more equitable distribution of wealth.
Alexandre Moreau et Kevin Brookes sont analystes en politiques publiques à l’Institut économique de Montréal. Ils sont les auteurs de « La croissance économique profite-t-elle aux pauvres ? » et signent ce texte à titre personnel.