By Dana Sookdeo
No society can surely be flourishing and happy, of which by far the greater part of the numbers are poor and miserable.~ Adam Smith, 1776
Income inequality has the potential to be poison in the pool of economic success. While the gap between the rich and the poor has been widening globally, it is still deemed unacceptable as numerous studies have now found that income inequality not only bears negative social consequences, but is now affecting economic growth (OECD 2014).
Trinidad and Tobago, like other developing countries, has been known to have severe income inequality and policies which induce this socio-economic condition.
Income inequality in Trinidad and Tobago
Wealth distribution has been known to be highly uneven in Trinidad and Tobago since the 1950’s. Though the economy is made up of a large middle class, there are extremes of wealth and poverty that persist. The minor upper income class consists of those who are involved in private-sector manufacturing and can be associated with corporations and high involvement with political parties, while the poor and vulnerable consists of those individuals who may face unemployment and poor socio-economic situations.
Income inequality is most commonly measured using the gini coefficient, which ranges from 0-1. According to the OECD, a gini coefficient of 0.40 and above demonstrates high income inequality. Although lacking sufficient data, income inequality levels in Trinidad and Tobago has been proven to be high, ranging from a gini coefficient of 0.43-0.51 from 1950’s-1990 (Bourne 2008). The gini coefficient continued to hover around the mentioned range up until 2006 when it decreased to approximately 0.40. However, due to the continuous economic decline within the past five years, and the devastating fall out effects of the COVID-19 pandemic, it can be gauged that income inequality in Trinidad and Tobago has certainly increased by the year 2020.
The role of the state and income inequality in Trinidad and Tobago
Before one can assess the economic and social implications of income inequality, it is important to get to the root of it. Given the paternal role of the Government of Trinidad and Tobago, the level of income inequality can be largely attributed to the environment which they create through policy implementation.
Many developing countries have often justified high levels of income inequality based on the popular notion, the Kuznets Curve, which demonstrates that in order to achieve economic growth, countries must first experience high levels of income inequality, to have it decreased after. Countries therefore guided policy decisions in line with the theory. However, the popular economic notion has been debunked by several organizations such as the IMF and OECD who argued that income inequality harms economic growth, and is not just a pit stop to the destination of nominal economic success. These policies, partnered with supply-side economic policies (also referred to as trickle down economics) have created an environment that has exacerbated income inequality in the country.
Over time, Trinidad and Tobago has exhibited confidence in trickle down economic policies, where the government has stimulated the income of the wealthy in hopes that it would provide opportunities for the poor.
Trickle down Economics and Income Inequality
One of the most known and possibly earliest cases of utilizing trickle-down economics policies is that of United States President Ronald Regan in 1981. Having cut the corporation tax rates by more than half, the corporation tax rate fell from seventy percent to twenty-eight percent. However, these trickle down economics policies failed to generate the outcomes that it was implemented to achieve, such as economic growth. Instead, due to the wealthy not reinvesting their income into the country, income inequality sky rocketed and employment growth fell (Etebari 2003; Akinsi 2018). According to the Organisation for Economic Co-operation and Development, implementation of the trickle down economic policies in the 1980s by the United States resulted in the richest ten percent of the population earning 9.5 times the income of the poorest ten percent, up from seven times in the 1980s (2014).
It is no doubt that utilizing trickle down economic policies in Trinidad has been resulting in more bad than good. Though the lack of data makes it impossible to carry out scientific research to prove this, based on the evidence from other countries, it can be argued that the high levels of income inequality and trickle-down economic policies have exacerbated the already alarming levels of poverty that existed, and quite possibly, have been hindering the economic growth of the country. Knowing that there is a strong link between economic development and growth, it is therefore important to examine and rethink the trickle-down economics policies that are implemented, as they are responsible for the economic success of the country.
Visual income inequality in Trinidad and Tobago
Since there is a lack of substantial data on income inequality and poverty, income inequality can be seen through visual comparisons with other developing countries which also have high income inequalities.
“The richest citizens of Trinidad are to be seen in the hillside suburbs of Port of Spain, where large villas boast satellite dishes and swimming pools. Trinidad and Tobago’s rich tend to live a transnational lifestyle, with assets and interests in the United States. The other extreme is to be found in deprived inner-city ghettos such as Laventille, where the poorest members of society live. It is here, in areas of ramshackle shacks and self-built cinder-block houses, that the worst problems of poverty, unemployment, and crime grow unabated.” (Ramdhan 2010)
To compare this, we show what high income inequality looks like in Mexico City, with a high gini coefficient of 0.53 and Cape Town South Africa, with a gini coefficient of 0.62
Source: Johnny Miller
Source: Johnny Miller
Policy recommendations to reduce income inequality
Reducing income inequality must be a priority to the government of Trinidad and Tobago. Trickle-down Economics policies must be abandoned, and focus must be placed on the poor and vulnerable. There are several policy approaches which the government can take, to begin reducing the persisting levels of income inequality in the country.
- Data Insufficiency must be addressed.
Improving the characteristics of income inequality data, and determinants, through increasing efficiency in regional partnerships to collect, share and examine data is critical in tackling the problem of income inequality.
- Cut trickle-down economics policies.
The policies have been proven harmful and counterproductive numerous times by other countries. Instead, focus should be placed on implementing policies that are evidence based, informed by results from the evaluation of valid, timely and reliable data.
- Economic Diversification.
Over the past few decades, Trinidad and Tobago has successfully managed to vertically diversify in the energy sector. However, diversification attempts in other sectors have been rendered unsuccessful. Though the economy has achieved some level of diversification over the past three decades, it has yet remained highly undiversified when compared to a group of average countries with similar characteristics (Carneiro et. al. 2014, 2). The unsuccessful attempts at diversification are often attributed to the Dutch Disease and the Resource curse that hinders investment in non-booming tradable sectors. However, any attempt to delve into these sectors will aid in redistributing wealth and lessening income inequality and poverty levels.
- A highly progressive taxation system
A highly progressive taxation has great potential to generate an equitable economy, ceteris paribus, as it has a direct impact on income inequality. Though it is just one of the instruments that can be used to reduce income inequality, this type of taxation has been proven to reduce income inequality through placing emphasis on equity, rather than equality. This system will result in the wealthy paying a higher tax than the lower class, a system that has been found to positively contribute to economic growth in the past.
While formal education in Trinidad and Tobago is highly attainable, there is a need for more investment in non-formal education such as TVET programmes and proper entrepreneurial skills development to effectively address the existing labour market issues.
Bourne, Compton. “Economic Growth, Poverty, and Income Inequality.” Caribbean Development Bank, September 26, 2006. https://www.caribank.org/sites/default/files/publication-resources/Sir_Arthur_Lewis_Conference_Lecture_Dr_Bourne_Sept_2008.pdf.
Caribbean Development Bank. “The Changing Nature of Poverty and Inequality in the Caribbean ,” May 2016. https://www.caribank.org/sites/default/files/publication-resources/Study_The-Changing-Nature-of-Poverty-and-Inequality-in-the-Caribbean-New-Issues_-New-Solutions.pdf.
Campos , Anna, Oriol Aspachs, Javier García Arenas, and Adrià Morron Salmeron. “How Does Inequality Affect Economic Growth?” CaixaBank Research, September 1, 2020. https://www.caixabankresearch.com/en/economics-markets/activity-growth/how-does-inequality-affect-economic-growth.
Etebari, Mehrun. “Trickle-Down Economics: Four Reasons Why It Just Doesn’t Work.” United for a Fair Economy. United for a Fair Economy , June 17, 2003. http://www.faireconomy.org/trickle_down_economics_four_reasons.
Olinksy, Ben, and Asher Mayerson . “Trickle-Down Economics and Broken Promises.” Center for American Progress, December 4, 2013. https://www.americanprogress.org/wp-content/uploads/2013/12/trickledownecon6.pdf.
Ramdhan, Stacy. “‘In Trinidad the Rich Get Richer and the Poor Get Prison.”.” GRIN, 2010. https://www.grin.com/document/175785.