Globalization and the Trickle Down Theory: Does it Work ?

The underlying premise behind globalization is that the transfer of wealth from the developed countries to the developing countries would eventually result in a scenario where those at the bottom of the ladder in the developing countries would benefit from the wealth flowing into their economies. The theory behind this is that if a Billion Dollars were invested in a country X, it would result in setting up of a manufacturing plant or a service sector company, which in turn would create jobs for the locals. Even after assuming that the jobs would increase the opportunities for the locals, there would be trickle down effects wherein the new rise in incomes of these members of the workforce would be spent on consumer durables, houses, visits to hotels and malls, as well as employing those who are not part of the formal economy like launderers, security guards, domestic helps etc.

This is the trickle down theory, which posits the view that wealth created at the top trickles down to the bottom of the ladder. This is the theory that has been used to justify neoliberal policies and globalization and is the driving force for all entrepreneurial activities in countries like India.

For instance, the founders of the iconic Indian IT company, Infosys, believe that when jobs are created for the middle class or the educated, the process would also benefit the entire ecosystem of support services for these employees since they have to spend money on their basic necessities and everyday needs. Moreover, the creation of wealth would not be restricted to capital gains alone (which is anyway a good sign for a healthy economy) but would also benefit those who produce goods and services for consumption.

The effects of this trickle down theory can be seen in cities like Bangalore, Gurgaon, and Pune where the presence of multinationals and Indian service sector companies has led to a flourishing economy for the locals. However, this theory is now being questioned as the trickle down effects are now being held as negligible with those at the top earning more and more and those at the bottom earning less and less. Hence, there is now a tendency to question the basic tenet of globalization and neoliberalism and it remains to be seen as to which theory would ultimately stand to gain.

The point here is that the widening income inequality has led to protests from those at the bottom since they do not see any marked improvement in their lives even when they support the army of educated and skilled employees of the manufacturing and service sector companies.

However, the battle is not lost as the benefits to the local economy outside of those who actually work are huge and it is understood that trickle down economics might not have been very wrong. Instead, what is needed is a greater flow of wealth to the bottom and this can be done by equitable growth and democratic policies that strive for betterment of all. In conclusion, true growth manifests when all sections of the society benefit and not only those at the top.