28 April 2015

Empowering women in poor countries is the solution to Western economic woes


Just as we should be revelling in economic recovery, and some seven long and lean years on from the financial crisis, a gloom has descended across the economics profession. That gloom comes from the threat of “secular stagnation”.

The spectre appears worrying on two counts. The first concerns a slowdown in Western economies’ growth potential. According to Robert Gordon, even if technological progress continues at past levels, four “headwinds” will combine to knock up to 1.2% off our growth rate: unfavourable demographics, a limit to the further expansion of (higher) education, rising inequality and high levels of public debt. In addition, others argue that we are also suffering from demand deficiency – from interest rates being unable to reach low enough levels to ensure that what potential does exist is actually achieved. The “solution” involves encouraging higher levels of spending – including, as Larry Summers has suggested, greater use of fiscal policy. However, the obvious risk is that this serves to reignite old problems: consumer booms, property booms and government spending sprees. To Summers, financial instability and demand deficiency are linked.

Our economy is taking a knock from both the demand and the supply side. The future looks bleak – unless, that is, we can find the right solutions. In what follows, I propose a new solution – one that can tackle both secular stagnation and inequality. It is a solution that is based on a new way of looking at the problems we face: that is, that the global economy is suffering from a serious sex problem. As we will see, history suggests a clear solution: empowering women across the globe.

Mention sex, and any good economists should instantly think of Malthus. As a bunch, economists have historically been famous for their “dismal science”, and Malthus was one of the original doomsters. He was an eternal pessimist. Despite being a religious man, he thought that helping the poor (such as through redistribution) would be futile. His reasoning was that the “passion between the sexes” meant that population would overpower resources in the economy, keeping the standard of living trapped at a low level. So, looking back to Malthus, sex and stagnation are natural bedfellows.

Whilst Malthus’s thinking has been largely discredited for the modern age, his emphasis on population is more relevant today than we might at first think. As the financier Toby Nangle has recently argued, one of the key developments in the last 35 years has been a major expansion in effective labour supply driven by the greater integration of the world economy. Through immigration and offshoring, businesses in the West have had access to a greater workforce than ever before. The result has been decreased bargaining power for workers in the West, contributing to rising inequality, and businesses shifting away from using capital and towards labour, resulting in lower investment rates, a consequential fall in interest rates and slower productivity growth.

When seen in these terms, history shows just how bad things can become. Throughout the sixteenth, seventeenth and eighteenth centuries, and as the economic historian Bob Allen has shown, wages were on a persistent downward trend in much of Europe – in response to rising population. At the same time, economies were stagnating. However, as Allen also shows, there was an exception: north-western Europe. In Britain and the Netherlands, wages resisted the downward trend and economic expansion took hold. The empowerment of women was central to this “bucking” of the trend.

From early on, north-western women began to gain economic independence; they went out to work and delayed marriage – and so reproductive activity – until they were in their mid-20s. This helped to keep families small and wages high, preventing the standard of living from collapsing as it did elsewhere. According to Allen, these high wages provided firms with an incentive to mechanise, increasing investment and the pace of technological change. The Industrial Revolution followed and for two centuries the West entered a virtuous circle in which high wages and growth positively fed back on each other.

In more recent times however, the expansion in labour supply from the global economy has undermined this virtuous circle by placing downward pressure on wages in the West. The obvious “solution” would be to resist globalisation: to put up barriers and to limit immigration, as is becoming popular in some political circles. However, if we wish to maintain the benefits of global integration, history suggests another solution, one that can tackle both secular stagnation and inequality: empower women in poorer countries.

If women have “agency” – if they have control over their bodies – they will make fertility choices that help to keep poverty at bay at the individual level, which, in turn, prevents population growth from undermining wages throughout the wider economy. For a woman to have control over her body, economic empowerment is vital. Rather than being a powerless pawn, to be “married off” at a young age, destined to produce child after child, women who have an ability to support themselves financially are able to take control of their lives. They have the financial freedom that allows them to stand up to early marriage, and can go out into the world and build an independent life, determining for themselves whether, who and when to marry. Women’s wombs become their own.

If we can empower women, we can harness the invisible hand: by acting in their own self-interest, women will be able to aid the wider (global) economy – just as they helped north-western Europe centuries ago. The room for improvement is significant. According to UNICEF, in countries including Bangladesh, Niger, Mali, Chad and Central African Republic, at least six out of ten women aged 20-49 were child brides. In India, the median age of marriage for women aged 25-49 is 17.4 years (and closer to 15 years for the poorest groups).

An important exception – and one that perhaps helps to prove the point – is China. Back in 1980, China was home to more poor people than anywhere else in the world. However, since 1981, 680 million people have been lifted out of poverty, and the proportion of those living in poverty has fallen from 84% to 10%. This has been the single most important development in lowering global poverty and global income inequality over this period. According to Arthur Brooks, globalisation and market liberalisation are responsible. However, I would suggest another equally as important part of the story: the “One Child Policy”. With this policy, the Chinese state has managed to overcome a population problem that has blighted the standard of living of the poor throughout history. Along the way, it has freed women to work outside of the home, providing them with a degree of economic independence and helping to challenge traditional gender roles, something that will serve the nation well into the future.

Whilst such a policy might have helped to lift wages above subsistence levels in China, significantly reducing poverty and increasing the incentive to invest, it has, of course, come at a price. By reducing the ability of couples to determine the size of their own family, it has cost liberty and freedom – along with creating the significant problem of “missing women”. You could also say that the policy has been over-zealous – that China now faces a problem of too few (young) people rather than too many. Other economies, including that other big population centre, India, may therefore wish to consider an alternative: female empowerment.

If we can improve the position of women and girls in poorer countries, many of the problems we face here in the richer economies will naturally resolve themselves. Global population growth will slow, improving the bargaining power of workers across the globe and so helping to lower inequality in the West. At the same time, these more expensive workers will encourage businesses to invest in capital, with which interest rates will return to previous levels, demand-deficiency will be avoided and economic growth potential will rise.

Women are the missing element in almost all of the current macroeconomic discussions – something that may reflect the lack of women in the economics discipline itself. It is time for a sexual revolution in both the economics profession and in the global economy. That is why I am both a feminist and an economist.

Dr Victoria Bateman is an Economic Historian and Fellow in Economics, Gonville & Caius College, Cambridge, and Fellow of the Legatum Institute, London.