Markets, Inequality & Poverty

Leonard Chiti, SJ

Abstract

Can free markets contribute to eliminating inequalities and eradicating poverty? Proponents
of free market economics claim that markets allowed to operate freely can lead towards the
promotion of equity while opponents believe that markets on their own cannot bring about a
just and equitable society.
The demise of the communist system in the late 80s led to the fall of planned economies and
ascendancy of market economies. It marked the apparent triumph of capitalism. Capitalism as
an ideology and market based economic policies emerged as the dominant orthodoxy in
development.

Resume

The basic thesis of neoliberal economic policies is that the state is an inefficient and
ineffective allocator of scarce resources. The market is seen as a better allocator.
These policies are predicated on the existence of free and perfect markets. Markets allow free
entry and exit of economic actors. This facilitates market forces of supply and demand to
determine prices. Economic actors respond to prices by exchanging goods and services
leading to optimal efficiency. At this stage, resources are redistributed in society by an
‘invisible hand’ to meet the needs of the population.
The logic of markets is that economic actors are motivated solely by maximising utility.

Neoliberal economic policies derived from neoclassical economic theory state that

growth in Gross Domestic Product (GDP) translates into poverty reduction. This growth is

associated with rising productivity, new jobs and higher incomes. The new wealth created

thus somehow ‘trickles down’ to the poorest members of society thereby improving their

quality of life.

Zambia recorded positive growth rates in the 1990s following the introduction of

neoliberal economic policies. However, poverty levels remain high and inequalities persist.

1
 Introduction

The fall of the Berlin wall in 1989 marked a significant watershed in the theoretical

debates between pro-market advocates and their detractors. The wall which physically

separated East from West Germany marked the beginning of the end of communism. The

downfall of communism in Eastern Europe marked the apparent triumph of capitalism. It led

to the fall of planned economies and the dominance of market economies. Capitalism as an

ideology and market based economic policies emerged as the dominant approach to

development. This approach stressed the goal of economic activity as maximising utility on

an individual level and profit on a corporate level. The ascendancy of market systems

flourished during the reign of right wing political forces led by Ronald Reagan in the United

States of America and Margaret Thatcher in the UK in the 1980s. The World Bank and the

US Treasury at the time were avid promoters of market reforms. These forces espoused an

ethic that placed a high premium on methodological individualism.

Theory and Practice

Proponents of the self-regulating market systems argue that when rational human

beings act out self interests and seek to maximise profits without restraint society benefits

from their endeavours.1 They augment their arguments by referring to the failed economic

theories, policies and practices of the now defunct Soviet system.2

However, the capitalist system itself has experienced some challenges, notably the

East Asia crisis in the late 1990s and more recently the Global Economic Crisis of 2008. Both

events have raised questions about the efficacy of markets to deliver on development. The

supremacy of the market as a mechanism to enhance wealth, reduce poverty, eliminate

inequalities and promote development is now in doubt. This has brought to the fore the

debate between the supporters of the market who regard the market as the best tool to allocate

2
scarce resources and those who oppose them. In recent times it is a debate that has pitted the

so-called ‘finance’ advocates and the civil society advocates.3

This paper argues that markets are necessary to promote growth but not sufficient to

eliminate inequalities and eradicate poverty. It begins by defining the terms used in the paper.

It will then relate to the recent history of Zambia as a case study that demonstrates that the

neoliberal economic paradigm has failed to reduce neither poverty nor narrowed inequalities.

Finally, it will state that an anthropology based on the Catholic Social Teaching (CST) is

helpful in restoring the right order of human relations within a market paradigm.

Markets, poverty and inequality

Markets

In this paper markets are defined as spaces, physical or otherwise that facilitate

interaction of agents who are willing and able to exchange goods and services. They are

institutions that bring about a redistribution of goods and services in an economy.4

The logic of the market is that wealth can be allocated efficiently by impersonal

market forces to members of any given community. Liberal economists assume that when the

market is left to itself then its inherent self-direction will govern its operations efficiently and

produce efficient outcomes.5 This implies that when self-interested individuals enter the

market and pursue their own goals of maximising utility, then somehow an ‘invisible hand’

will ensure that their combined efforts work to the general benefit of everyone.6

Inequality

Inequality in this paper is understood as the differences that exist in society in terms

of income and consumption. Inequalities then refer to the disparities that exist in society in

terms of income and the distribution of wealth.7

3
 Poverty

Four approaches to the definition and measurement of poverty have been developed.

Poverty is defined in terms of the income, capability, social exclusion and participatory

approaches.8

A common method of defining poverty is the income method. It uses a given

threshold in terms of US dollars that is required for a decent standard of living.9 It defines

poverty in terms of a shortfall in consumption.10

The capability approach pioneered by Amartya Sen suggests that poverty is ‘…the

deprivation of basic capabilities rather than the merely lowness of incomes … ‘ Sen suggests

that the expansion of human capabilities should be employed to determine human well-

being.11

The social exclusion concept refers to a process through which people are excluded

from full participation in the society to which they belong. The final approach developed by

Robert Chambers gained widespread use in the poverty debates within the World Bank.12

The World Bank characterizes this way of understanding poverty as ‘voicelessness and

powerlessness.13 This refers to the inability of people to influence processes and development

programmes to impact positively on their actual life situation.

Markets are promoted as the best instrument in allocating resources efficiently and

effectively.14 This follows Adam Smith comment that the ‘hidden hand’ of the market

converts individual interests into the wealth of the nations’15 It is frequently stated that

getting ‘prices right’ is the pathway to growth and prosperity.16 Actors in the market

respond to prices in the market.17 The ascendancy of liberalization following the collapse of

planned economies has given rise to the neoliberal orthodoxy that posits markets as the best

mechanism for achieving growth and reducing poverty. The free operation of the market will

spur on entrepreneurs and private investors to enter the market, promote competition,

4
improve efficiency and thereby raise incomes. Inequalities will disappear and poverty

eradicated. For such a process to succeed requires little government intervention and neutral

incentives to motivate individuals to interact freely in the market place.18

Neoliberal economic policies derived from neoclassical economic theory hypothesise

that establishing markets and providing a laissez faire environment leads to increased

productivity. This increase will yield increased incomes and raise the standard of living for

all concerned. This implies that the solution to high levels of poverty and wide inequalities

lies in increased economic growth. In the initial stages such growth may not be sufficient to

wipe out inequalities pace but eventually with long term sustained growth such inequalities

will disappear and poverty levels will fall.19

Application to Zambia

Since 1991, Zambia has been implementing neoliberal economic policies following

the election of right wing leaning government. The introduction of market reforms followed

an economic crisis in the 1980s, growing out of an inefficient economic system, decline in

copper prices and a protracted drought.20 The Zambian government instituted market

oriented reforms that entailed reducing subsidies, privatizing government owned firms and

liberalizing the trading environment. These reforms formed part of the so-called ‘Washington

Consensus’ a raft of economic reforms sponsored by the World Bank, the IMF and the US

Treasury. The goal was to replace State intervention in the economy and allow markets

through the private sector to drive the economy.

Zambia is one of the poorest countries in the world. 64% of its population lives below

the poverty threshold while 51% live in extreme poverty.21 It is ranked 164 out of 182

countries on the Human Development Index.22 It is also considered to have high inequalities

amongst its population23 Statistics show that Zambia has one the highest Gini coefficients in

the world, with the latest figure standing at 50.824. The latest government review on the

5
performance of the Fifth National Development Plan indicates that in 2006 the Gini

coefficient representing income distribution was as high as 60.25

The transition to a market oriented economy took the form of structural adjustment

programes (SAPs) in 1991. SAPs were intended to arrest a declining economy that had been

in free fall since the mid 1970s. Market reforms will restore efficiency, stimulate growth and

ultimately improve the quality of life of the Zambians. The introduction of market reforms

was expected to lead to greater equity.26 At the time up to 71% of the population was

classified as poor.27

In terms of poverty levels, a reduction from 71% to 64% was achieved between 1991

and 2009. However, in terms of inequality, Zambia remains a very unequal society. The 2006

Living Conditions Monitoring Survey shows that 50% of the population earns 15% of total

national income while 10% of the population earns 48%.28

The implementation of neoliberal economic policies through SAPs did not

immediately yield the kind of economic growth that would reduce poverty levels

significantly. Even though Zambia achieved some stability following the introduction of a

market economy and scored growth rates of around 5% over several years, nonetheless

inequalities remain high as indicated by the Gini coefficient. The notion that growth will lead

to poverty reduction and equity has not matched the neoclassical economy theory in the case

of Zambia. The so called ‘trickle down’ effect has hardly touched the majority of Zambians.

The prediction of neoclassical economic theory that the action of self-interested

individuals pursuing maximum utility in a market system would lead to the improvement of

the general welfare of a population29 has yet to produce improvements in the quality of life of

Zambians. The expectation that high and sustainable growth will automatically translate into

poverty reduction.30 has not occurred 20 years after neoliberal economic policies were

introduced in Zambia.

6
 This link between poverty reduction and increased productivity is the preferred

approach of the neoclassical economists.31 Poverty can be eliminated if market forces are

unleashed to do what they do best, induce growth and the growth will culminate in more

incomes for everyone concerned. This will translate into a more equitable society with ease

access of the citizens of the country to the basic needs essential for survival. However the

evidence in Zambia does not fit the theory.

Surveys conducted by the Jesuit Centre for Theological Reflection (JCTR) since 1996

show that the cost of living for the majority of Zambians has been on a steady rise while the

corresponding income levels have not risen to match the cost of living.32 The evidence

adduced above supports the theory that neoclassical economic theory and its attendant

neoliberal economic policies do not in all cases lead to sustainable development. Sustainable

development in this sense is seen as enabling many more citizens of a country to enjoy a high

quality of life. Neoliberal economic policies which further the free actions of market forces to

spur on development have yet to show convincing evidence that the growth leads to equity.

Neoclassical Economic Theory and Poverty Reduction

Neoclassical economic theory assumes that a given rate of growth of GDP translates

into poverty reduction. Increases in GDP in any given country represent the best route

towards lifting people out of poverty. Such growth maybe accompanied by rapid rates of

industrialization giving rise to new jobs, increasing incomes and improving the living

standards of the poor.33 According to this line of thinking growth occurs when market forces

are allowed to determine the prices of different products on the market to stimulate

productivity and innovation. Consequently, a self-regulating market economy responding to

price signals is able to stimulate economic activities driven by supply and demand forces to

ensure that economic actors pursue self interests that culminate in economic growth. Narrow

7
economic interests are primary and no other considerations are allowed to play a part in

economic endeavours.

Neoliberal economic policies believe that the State is an inefficient and ineffective

actor in allocating scarce resources. The assumption is that the market is a better instrument

at allocating resources.34 Neoliberal economic models are predicated on the existence of free

and perfect markets. These markets allow free entry and exit of economic actors into the

market. This facilitates market forces to play the role of determining prices and consequently

allocating resources according to the dictates of supply and demand.35

The logic of markets embedded in neoclassical economics is predicated on the

assumption that economic actors are motivated and solely preoccupied with maximizing

utility. Consequently an economy can only reach optimal efficiency when there is no attempt

to regulate self-interested economic actors. This kind of economics would go so far as to

posit that those who are poor and unemployed have failed to take advantage of market

opportunities to earn a livelihood.

In its purist form classical and neoclassical economic theory does not have a place for

poverty alleviation programes particularly the type that are undertaken by the State.

Neoclassical economists see poverty reduction efforts as slowing down growth.36 This in

some ways explains the neoclassical economists’ antipathy towards the State’s intervention in

the economy. For neoclassical economists the market is superior to the State in resource

allocation and therefore the latter should be limited in its interventions in the economy.

Market fundamentalists are obsessed with growth. Growth comes from the

entrepreneurial activity of a rational economic actor operating in an enabling environment.

There is no questioning that growth is necessary for development and that markets can play

an important role in facilitating this growth. However, growth for its own sake is not a

sufficient condition for development and poverty reduction. What is crucial is to recognize

8
the limitations of both the State and markets in development activities.37 The State, however,

can play a meaning role in limiting or even compensating for market failures. Perhaps the

basic question that can be asked is ‘What can government do best?.38

Neoclassical economic theory fails to take into account the fact that markets can

experience failures. For markets to work efficiently several conditions need to occur such as

perfect information, unhindered entry and exit into the market, perfect competition just to

mention a few. Seldom are many of these conditions met. Consequently, market failures are

common particularly in Low Development Countries.39

It has been frequently stated that the market is a good servant but a bad master.40 Left

to itself it cannot guarantee the integral development of every human being. What is required

is to harness the good side of the market, as represented its ability to generate wealth, and

reject its bad side which is seen mostly in its unintended effects such as increase in

inequalities. Neoclassic economic theory with its attendant methodological individualism

places a heavy premium on a rational actor pursuing self-interest in a bid to maximise

material well-being. This displays a reductionist world view where everything is reduced to

economic interests. This effectively rules any other way of conceiving human well being.

A flawed vision of the world

Neoliberalism’s worldview revolves around material concerns. The basic quest for

rational beings is to achieve as much material success as possible. When human beings are

given the freedom to pursue their private interests aided by the price mechanism society

benefits from increased growth of the economy41 Their anthropology is founded on the

notion that human beings are solely preoccupied with the pursuit of economic self-interest.

This vision of the world is flawed. It is purely a mechanistic worldview that gives too much

responsibility to the market to address the society’s challenges.

9
 Much of the conflict between the proponents and opponents of the market stems from

differing ideological positions. The former have received backing from conservative political

forces believe that society’s challenges can be resolved by strengthening the rights of

individuals to pursue individual interests. Conservatives who espouse capitalist approach to

economic activity believe that negative freedoms such as the right to non-interference to

economic actors to participate in economic affairs should be strengthened in order to enable

the fruits of such endeavours to ‘trickle down’ to the rest of society. On the other hand, civil

society perspectives that the rights of individuals should be matched with their corresponding

duties to aid the collective should be retained and promoted. The market cannot assure these

rights only the State can guarantee them.

The goal of development from a neoliberal point of view is to increase the nations’

GDP. The higher the GDP the more prosperous the country is reckoned.42 However, GDP

misses many aspects of our existence. Besides, much of the progress in important areas of life

is invisible to most people.43 The neoliberal paradigm simply promotes the materialistic

motivations of individuals.44

Ethical Concerns

The main normative aspect of neoliberalism is the promotion of individual

achievement and protection of negative rights45 Right wing political forces in the 1980s and

early 1990s at the time of the hegemony market economy economic theories supported such

approaches. However, as Allen and Thomas point out that social forces such as solidarity and

other non-market forces play crucial roles in improving the living standards of the people.46

This would be in sharp contrast to the moral voice of the Church which encourages the

promotion of social values.

Commenting on the crisis that beset the capitalist world in 2008, Frank Turner

wonders whether part of the problem of the Global Economic Crisis could not be ascribed to

10
the absence of ‘a moral or systemic crisis’.47 It surely can be argued that the absence of

ethical and moral consideration did play a part in the Financial crisis that engulfed much of

the Western World in 2008. The greed and irresponsibility exhibited by some economic

actors in these financial markets played a critical role in its unravelling. Neoclassical

economic theory would consider this normal as part of the motivating factor of ‘rational self-

interested’ economic actors.

Ethical and moral concerns are important in the Christian approach to interactions in

the market place. The Church Social Teaching is clear on the need to promote ethical values

such as solidarity, the common good and a special concern for the poor48 The economy and

by extension the market should serve the interest of those who are weak and unable to

actively take advantage of the market to advance their economic and material interests. The

market cannot guarantee this facilitate. And free markets cannot work in a moral vacuum.49

The State who primary responsibility is to promote the common good is expected to

supplement the actions of the market. Such goods as shelter, health care, education, transport

and welfare cannot be left to the market50

Civil society groups who oppose the self-regulating market in development activities

point to similar concerns. As a practical example, the JCTR, a faith based organisation that

engages in research, advocacy and education has always advocated for a value based

approached to development endeavours. It employs the CST to call for the respect of human

dignity and the promotion of human rights as a holistic approach to development. Such an

approach recognises that the market on its own cannot deliver on development. The market is

amoral and needs moral input to ensure that the ‘trickled down effect’ reaches all corners of

society. Free markets need appropriate political direction to ensure that the goods of the earth

are enjoyed by all its inhabitants.

11
 Conclusion

The preceding sought to suggest that the theoretical assumptions underpinning the

neoclassical economic theories are flawed. Neoliberal models of development advocated by

pro-market fundamentalists in the 1980s and 1990s failed to lift the vast majority of people

out of poverty. Such policies promoted by International Financial Institutions (IFIs) such as

the World Bank and the IMF have done very little to significantly reduce poverty and narrow

existing inequalities.

CSOs including the church have been advocating a tempering of the push for market

oriented reforms in order to less the adverse impact of neoliberal economic reforms.51

This essay attempted to show that different ways of perceiving the world yield

different ways of intervening to bring about positive social change. A neoliberal worldview

sees social change in terms of increasing aggregate wealth which then is redistributed by

inhuman market forces to bring about a convergence in living standards between the rich and

the poor. This way of perceiving the world has been found wanting. Economic growth does

not necessarily lead to poverty reduction and declining inequality. The evidence adduced

above suggest that in some cases economic growth does very little to change existing poverty

situation and inequalities. Neoliberalism with its stress on individual action as a precursor to

group welfare has not fared well in Zambia. Much of the failure of neoliberalism can be

located in its universalist pretensions of what works in one place can work everywhere. The

one –size fits all approach has now been discredited even though the fall of communism

appeared to give a thumbs up to capitalism. In recent times, the once derided economic

planning has made a comeback and the State has been reinstated in order to curb the excesses

of the market and strengthen the distributive dimension of human well being.

12
 Endnotes

1
T.E. Woods, Catholic Social Teaching and Economic Law: An unresolved tension, Suffolk Community
College, 2002
2
M. Naim, “Fads and Fashion in Economic Reforms: Washington Consensus or Washington Confusion”,
Foreign Policy Magazine (1999)
3
R. Wade, Making the World Development Report 2000: Attacking Poverty in World Development Vol 29, No
8
4
Allen and Thomas, Poverty and Development in the 21st Century, (Oxford: Oxford University Press, 2000)
5
ibid
6
C. Longley “Free markets rely on social capital but they are not its source and they can easiy erode it” in The
Tablet, 14 November 2009.
7
V. Seshamani, “Why and how should we be concerned about Equity in Zambia”, in Equity and Development
in Zambia, (Lusaka: Economics Association of Zambia, 2009)
8
C.R. Laderchi, R. Saith, F. Stewart, “Does it matter that we do not agree on the definition of Poverty?
Acomparison of four approaches”Oxford Development Studies Vol 31, No 3 September 2003.
9
Allen and Thomas, 2000
10
Lardechi et al, 2003.
11
Amartya Sen, Development as Freedom, (Oxford: Oxford University Press, 1999)
12
Larderchi et al, 2003
13
The World Bank, World Development Report, (Washington: The World Bank, 2001)
14
Alfredo Saad-Filho, “From Washington to Post-Washington Consensus” in Saad-Filho, Johnson,
Neoliberalism, A Critical Reader, (London: Pluto Press, 2005)
15
Allen and Thomas, 2000
16
G.M. Meier and J.E. Rauch, Leading Issues in Economic Development (Oxford: Oxford University Press,
2005).
17
Evans, 2002
18
Meier and Rauch, 2005
19
S. Kuznets, “Economic Growth and Income Inequality,” in The American Economic Review, Vol 45, No 1
March 1955
20
United Nations Developmnent Programme, Human Development Report, (Washington, UNDP, 2006)
21
Republic of Zambia, Living Conditions Monitoring Survey Report, (Lusaka: Republic of Zambia, 2006).
22
UNDP, 2009
23
Economic Association of Zambia, Equity and Development (Lusaka: EAZ, 2009)

13
24
(www.actsa.org/17January 2010
25
Republic of Zambia, Midterm Review Fifth National Development Plan 2006-2010, (Lusaka: Republic of
Zambia, 2009)
26
EAZ, 2009
27
Humphrey Mulemba, Responding to climate change through development (Lusaka, unpublished, 2009)
28
Republic of Zambia, 2006.
29
F.A. Hayek, “The Use of Knowledge in Society” in The American Economic Review, Vol 35, No. 4
September 1945.
30
EAZ, 2009
31
Laderchi et al, 2003
32
Jesuit Centre for Theological Reflection, The JCTR Basic Needs Basket: A comprehensive Overview (Lusaka:
JCTR, 2009)
33
Allen and Thomas, 2000
34
Helen Hunt, Economic Theories of Development, An analysis of competing Paradigms, (Hertfordshire:
Harvester Wheatsheaf, 1989)
35
Saad-Filho, 2005
36
Wade, 2001
37
Joesph Stiglitz, Markets and Development (Cambridge: NBER Working Paper, 2961)
38
Megan McArdle, Misleading Indicator: Will the Great Recession finally end our misguided obsession with
Gross Domestic Product? The Atlantic, November 2009
39
Stiglitz, 1988
40
Gerry O’Hanlon, The Recession and God, (Dublin: Jesuit Centre for Faith and Justice, 2009)
41
Hayek, 1945
42
Allen and Thomas, 2000
43
McArdle, 2009
44
Allen and Thomas, 2000
45
Ibid
46
Allen and Thomas, 2000
47
Frank Turner, “Financial Crisis: Rebuilding Trust and Solidarity: Jesuit Reflections on the Financial Crisis”,
in Promotio Iustitiae, No 1010, 2009/1
48
Edward P. DeBerri, James E. Hug, Peter Henriot, Michael Schultheis, Catholic Social Teacing, Our Best Kept
Secret, (New York: Orbis Books, 2003)
49
Longley, 2009

14
50
O’Hanlon, 2009
51
Wade, 2001

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Hunt D., (1989), Economic Theories of Development, An analysis of competing

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Kuznets, S., (1955) Economic Growth and Income Inequality, The American

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Laderchi, C.R., Saith R., Stewart F., (2003) Does it matter that we do not agree on the

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Longley, C., (2009), “Free markets rely on social capital but they are not its source

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Meier G.M., Rauch J.E., (2005), Leading Issues in Economic Development Oxford:

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15
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16