Why trickle-up works… and trickle-down doesn’t

2022 was the year in which trickle-down economics reemerged as a preeminent political ideology in the UK, only to combust spectacularly – from trickle-down to burn-down. But what if, rather than asking whether empowering those at the top can generate growth for everyone, we focused more on empowering those lower down the pecking order? What if we could make 2023 the year of ‘trickle-up’ economics and show how financially empowering local merchants and entrepreneurs can create wealth that flows right the way up the chain?

The Truss Government’s experiment with ‘trickle-down’ economics came to an abrupt end in late 2022 when ideology slammed up against the cold reality of markets. Indeed, the resounding failure of Trussonomics has brought the efficacy of ‘trickle down’ into sharp focus. In an apparent rebuke at the time, President Joe Biden tweeted: “I am sick and tired of trickle-down economics. It has never worked. We’re building an economy from the bottom up and middle out.”

And yet, while the UK may seem like an isolated example, trickle-down still exerts a surprising hold over policymakers in both rich and poor economies worldwide. How else to explain tax breaks and indulgence of anti-competitive practices by some of the world’s largest technology companies? 

Monopolistic positions are tolerated in the hope that wealth will spread. Tax breaks are handed out – and tax avoidance overlooked – in the hope that investment will be stimulated, with opportunity and capital trickling down to everyone else in the economy. 

Yet a recent paper from the London School of Economics and King’s College looked at 18 countries over a 50-year period, analysing their tax policies and the resultant economic outcomes. It showed economic growth and unemployment rates were largely unchanged after five years in countries that slashed taxes for the wealthy, compared with those that didn’t. 

A different approach is needed to ‘grow the pie’

Trickle-down is a dubious policy in affluent markets such as the US or Europe. And it is wholly unsuited to markets where local economic development is an essential antidote to the current high levels of extreme poverty and food insecurity. 

As the recent strains on the Argentinian banking system demonstrate, when the economic storm clouds gather, the wealthy can’t get their money out fast enough. Similarly, South Africa has a long history of putting controls in place to prevent capital flight. The wealthy have responded by holding more and more capital offshore, preventing it from being put to work within the country itself. 

So what happens if, rather than empowering wealthy individuals and companies, we put more money in the hands of those on lower incomes who work at the heart of their local communities? 

Through our work in countries like South Africa and Argentina, we’re seeing powerful evidence that a ‘trickle up’ strategy is a far more effective growth generator. Financially empowering those at the bottom of the ladder is helping to create wealth that flows right the way up the chain to some of the largest consumer brands. 

Boosting SMEs’ economic contribution

By encouraging smaller enterprises to flourish and empowering local entrepreneurs, we get what economist John Maynard Keynes referred to as the ‘fountain’ effect – individuals, communities and, ultimately, their home countries as a whole, creating self-sustaining growth.

The starting point is to address the entrepreneur gap in lower-income economies. In most larger economies, SMEs contribute more than 50% of GDP (in some, it is as high as 70%) and create the vast majority of private employment. However, it’s far less in lower- and lower-middle-income countries – the International Labour Organisation (ILO) puts it at 29% and 23%, respectively. In South Africa, for example, smaller enterprises contribute just one-third of GDP. 

Closing this gap is vital to realise the trickle-up effect. Microfinance organisations recognise this and have had some success in allowing individuals to develop small businesses, but there are other factors that could make a difference. The ILO identifies stronger supply chains, better access to finance and improving data as key to bottom-up development of private enterprise in lower-income countries. 

Supply chain digitisation provides the perfect trickle-up case study

At RedCloud, we see these problems first-hand. Supply chains have been significantly disrupted by Covid, but in truth, they’ve been under growing pressure for decades. The market for consumer goods can’t work effectively because supply and demand are not effectively matched. In 2021, there were just under $2 trillion worth of products that weren’t available in stores for customers who wanted to buy them. This is a significant brake on local economic development. 

Even when products are available, local merchants and retailers can’t build stock in the right areas because they can’t access working capital solutions. These businesses typically trade in cash, making it impossible for them to build up a formal trading history to show the banks. Hence, they’re forced to replenish stock reactively, as and when they have sufficient cash in the till, leaving them forever running to stand still, regardless of how much unmet demand there may be in their local communities. 

This is why we’re focused on digitising the B2B supply chain, enabling more merchants in more markets to access more products, quickly and easily, without the trading problems caused by over-reliance on cash. By getting merchants and retailers onto an online trading system – accessible via their smartphones with minimal red tape – they can build a digital trading profile for the first time, regardless of where they’re based or what they’re selling.

Once their trading activities are digitised, these local retailers and merchants can give banks the information they need to make decisions on financing, allowing access to working capital, and finally start growing their businesses. At this point, the fountain effect happens at great speed. Distributors shift more products, develop a better understanding of the merchants, and form more efficient trading partnerships. And the FMCG brands at the top of the supply chain not only start seeing an uplift in sales, but because everything is digitised, for the first time, they can see exactly which products are being sold where – helping them tailor their marketing to achieve further growth.

The future is open commerce.

Our trickle-up approach forms an important part of the open commerce movement – a blueprint for frictionless, free, and fair trade across the globe, with any supplier able to connect to any seller. 

Trickle-up can be a powerful source of growth for lower-income countries, but it will not happen accidentally. At the moment, aspiring private enterprises face real barriers in getting their products to markets effectively and at the right price. Only by embracing open commerce and digitising trade – locally, regionally, and globally – can these barriers be overcome