November 28, 2000
Why We Don't Have to Choose between Social Justice and Economic Growth: The myth of the equity/efficiency trade-off
by Andrew Jackson
Director of Research
Canadian Council on Social Development
Mainstream economic theory holds that there is a fundamental trade-off between equity - a reasonably equal distribution of income and wealth - and efficiency - or economic growth. The basic idea is that societies that care too much about promoting equality will pay a price in terms of slower growth. Today, this theory is combined with the common argument that any advanced industrialized country that hopes to copy the recent economic success of the United States must buy into the high inequality U.S. social model.
The purpose of this paper is to critique this basic argument on both empirical and theoretical grounds, and to show that there are positive linkages between relative equality and good economic performance.
The economic and social performance of seven countries which are broadly representative of three different socio-economic models - "liberal," "social market" and "social-democratic" - are compared. The central conclusion is that, in the 1990s, there was no clear association between inequality and economic growth, and that two low-inequality countries - the Netherlands and Denmark - did very well in both economic and social terms. At a minimum, this indicates that it is possible to achieve high growth and low unemployment without sacrificing the goal of social equity. Moreover, the paper shows that growing differences in income distribution among these seven countries are primarily caused by a shift to greater inequality in the so-called "liberal" countries; there has been no universal trend towards greater inequality.
The paper surveys recent studies which show that equality producing institutions and policies do not necessarily carry a significant price in terms of poorer economic performance. Specifically, it points out that widespread collective bargaining and labour market regulation can maintain low levels of earnings inequality without blocking job growth or needed business investment, and that the relatively high taxes needed to finance "generous" redistributive transfers and accessible public services do not necessarily have negative impacts on growth. Going one step further, the experience of some countries suggests that reform and renewal of these institutions and policies -rather than their erosion - can have positive impacts on economic performance.
A final section of the paper critiques the general argument that "globalization" forces modern societies to abandon the goal of equality if they are to effectively compete in the international market. The paper points out that while changes to social and economic policies intended to promote equity may well be necessary, and while it is not easy to balance the goals of equity and efficiency, it is still possible for modern societies to "grow together" rather than "grow apart." This general conclusion is highly relevant to the debates currently underway about the degree to which Canada must become more like the U.S. in social terms, if we are to match their success in economic terms.
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