The Tunnel Effect – By Prof. Abhinay Muthoo, Visiting faculty at MDAE and HOD Economics, Warwick University

The Tunnel Effect – By Prof. Abhinay Muthoo, Visiting faculty at MDAE and HOD Economics, Warwick University

Imagine you are driving in a two lane tunnel with both lanes headed in the same direction. All traffic is jammed as far as you can see – which is not very far. Suddenly the lane next to you starts to move. Initially you feel better, even though you are still stuck, because this signals to you that the jam has ended and your own lane will soon start moving too.

But after waiting at a standstill and watching the other lane moving for some time, your feelings change. You become envious and furious. You and others stuck in the lane begin to suspect foul play. You begin to search for a way to address the injustice of the situation by drastic action – including making illegal moves, such as crossing the double line that forbids moving from one lane to the other.

This is a parable for the economic times in which we live. In economic terms, we are all driving in the tunnel, and in every society – whether developed or developing – some people are surging forward, while others are stuck in a seemingly endless traffic jam.  The question is when their optimism about being on the cusp of progress will turn into the anger of being left behind.

The “tunnel effect” was first articulated decades ago by Albert Hirschman, one of the world’s most original economic thinkers, who died in December 2012 aged 97. Fortunately for us, Hirschman’s keenly observed insights live on. Government leaders throughout the world would do well to consider the lessons that stem from this, Hirschman’s powerful parable of social and economic tension. There is something for us all – for the emerging economies with high but uneven growth, and for the developed economies, where growth has stagnated.

In the developing world, leaders need to address the situation through investments of various kinds such as in education, skills and infrastructure. Such investments should be focused in particular on those groups in society who are not really benefitting from the growth, such as the poor. Dealing with high and growing levels of income inequality – a separate but not unrelated matter – should also move up the policy agenda. At the same time, governments need to create an enabling environment. Incentives are needed to lead the private sector to invest and create jobs, and to engage in innovation.

One might be tempted to think that the tunnel effect does not apply to the world’s richer countries, in part because there is no growth taking place. It might be tempting to think that in such times, we are all held back by the traffic jam. But there is plenty of evidence that the tunnel effect is more relevant today than ever before in the OECD countries, such as in the UK and the US. Income inequality has risen considerably in these countries over the past decade or so. Income inequality among working-age people has risen faster in Britain than in any other rich nation since the mid-1970s, according to a 2011 report by the OECD. Income of the top 10 per cent of earners in the UK is 12 times the income of the bottom 10 per cent – a ratio that is up from a ratio of eight to one in 1985. Social mobility remains an intractable problem. Investment in schools, colleges, universities and training programmes are critical to address these matters of inequity and poor social mobility.

At the same time, the on-going traffic jam must be cleared. More than seven years have passed since the financial crises erupted, and still, significant economic growth continues to elude most of the main OECD economies. This is deeply worrying. What is worse is that there are no real signs of this changing anytime soon. This is in part due to government policies in many of these countries that are overly focused on dealing single-mindedly with the relatively poor state of the public finances. In particular, we have yet to see a serious growth strategy developed or implemented. What is missing is a policy that would underpin much needed investments in education and skills, in infrastructure and in innovation. These are some of the key areas that are crucial for sustainable growth.

Economic growth continues apace, and at high rates, in many non-OECD countries such as in China and India, but also in countries in Africa and Latin America. However, some of the same worries of the stagnant developed world also plague these developing markets that seemingly have the world’s momentum. Growth in these countries is almost without exception significantly uneven. That is, growth is taking place in limited numbers of sectors, regions, and markets, with the benefits from such growth being concentrated on the upper and middle classes. This, too, is deeply worrying. No one expects all lanes of traffic to suddenly surge forward, but, eventually, the people in the lane that has been at a standstill will find a way to vent their envy and fury. They may confront the situation with peaceful protests, or they may turn to serious, collective violence. The one sure element is that they won’t be content to remain in the stalled lane, stuck in the dark tunnel, forever.

Inclusive growth is what all nations need to promote, and design policies and institutions to make that type of growth happen. Sustained uneven growth, on the other hand, is a recipe for potentially serious social conflict.

Yet, this dark tunnel isn’t a fitting tribute to the sunny Hirschman, whose signature optimism was evident in his personal life and in his academic work. During World War II, the German-born Hirschman worked with journalist Varian Fry’s operation to help refugees flee France after it fell to the Nazis. Fry nicknamed his friend Beamish for his unflagging optimism during such dark and dangerous times. Beamish was able to smuggle key messages in toothpaste tubes and to find escape routes through the Pyrenees mountains.

This same optimism – a sense that ‘where there is a will there is a way’ – is evident in Hirschman’s social science research. He believed in the power of a kind of chaotic capitalism called disequilibria. Hirschman believed that this kind of chaos creates “problems that you have to solve — and that’s a good thing,” Jeremy Adelman, the author of a recent biography of Hirschman, told The New York Times.

As the biographer noted, Hirschman believed “that even the most seemingly immutable, impossible situations could be solved; that you could change things that seemed unchangeable.”

Both his research and his determination seem well worth remembering.

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