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Outgoing American President Barack Obama has dwelt at length on the problem of inequality in an article he has penned in The Economist. Titled ‘The Way Ahead’, the article talks about four issues his successor will have to focus on. In this, he talks about inequality increasing across the world, and more so in the United States, how 1 per cent of humanity controls as much wealth as the remaining 99 per cent and how CEOs (chief executive officers) are now taking home a salary that is 250 times that of the average worker (against 20-30 times at one time).
The article will be waved around by the anti-LPG (liberalisation, privatisation, globalisation) brigade as a vindication of their stand and to push for a slowing down of these three trends (though globalisation is slowing down any way in the face of increasing protectionism).
Even those who sensibly argue that some inequality is needed in society – if everyone is perfectly equal, why should anyone strive harder than the next person – will readily admit that extreme inequalities (though that may be hard to define) may not be desirable. But is inequality actually growing?
Some facts from a recently released World Bank report, Taking on Inequality. This plots data since the 1990s to show that there has been a reduction in income inequality worldwide. This, it says, is the first such reduction since the Industrial Revolution; inequality rose steadily between 1820 and the 1990s.
The global Gini index (a measure of inequality), the report shows, kept rising since 1820, but started to drop in the late 1980s and early 1990s – the period of increasing globalisation. The sharpest drop came between 2008 and 2013, when the Gini index fell from 66.8 to 62.5. This was largely because rising incomes in India and China brought about a convergence in average incomes across countries.
However, this reduction in inter-country inequality was not mirrored within countries. The report notes an increase in inequality within countries, especially in developing countries. It looks at the Gini index of four countries – Argentina, China, India and Indonesia – and points out that while inequality in India has been more muted than the other countries, it has been moving up since the second half of the 2000s.
The report attempts to measure shared prosperity, defining it as the growth in the average income or consumption of the bottom 40 per cent of the population. If the incomes of the bottom 40 per cent grow faster, it is an indication that prosperity is being shared with them faster too.
It also works out a shared prosperity premium – the difference between the growth of the bottom 40 per cent and the growth in income at the mean in each country. This, it says, gives a sense of the share of prosperity going to groups other than the bottom 40 per cent. A positive premium shows that the prosperity of the bottom 40 per cent was higher than that of the mean (and are, therefore, better off); a negative premium will indicate just the opposite.
The report finds that between 2008 and 2013, the bottom 40 per cent in 60 out of 83 countries that were monitored (representing 67 per cent of the world’s population) showed positive income growth. Of these 60 countries, 49 reported a positive shared prosperity premium. However, the incomes of the bottom 40 per cent declined during this period in 23 countries.
The report flags the fact that the shared prosperity premium, though in the positive zone overall, was negligible. The average annualised growth in the income or consumption of the bottom 40 per cent, it notes, was 2 per cent worldwide between 2008 and 2013; but the the average shared prosperity premium was only 0.5 percentage points. It also points out that India is one of the countries in which the share of the top 1 per cent in total income has been increasing.
So how is the gap to be narrowed? The report looks at five countries which have seen sharp reductions in inequality – Brazil, Cambodia, Mali, Peru and Tanzania – and India can, perhaps, take some tips from each of them. Each of these countries has seen a significant reduction in the Gini index between 2004 and 2014.
What stands out is that most of the countries, especially Brazil and Peru, ensured macro-economic stability and followed prudent fiscal policies as well as structural reforms.
The curbing of fiscal profligacy allowed these countries to invest more in social infrastructure, especially health and education, as well as other basic services. Brazil, the report points out, had achieved almost universal access to electricity by 2014 because of a huge push to rural electrification. The share of households in the bottom 40 per cent with a toilet connected to a sewage network increased from 33 per cent to 43 per cent between 2004 and 2013.
Redistributive policies too had a role to play, but the form such redistribution took was not always price-distorting subsidies that still find favour in India. The report notes that Brazil’s conditional cash transfer programme, Bolsa Familia, saw a three-fold jump in coverage between 2004 and 2014 and explains 10-15 per cent of the reduction in income inequality. But how social spending is done is important. In Peru, the report says, public transfers are responsible for less than 10 per cent of poverty reduction in the last decade, though it too has a conditional cash transfer programme, Juntos.
A burst of job opportunities outside agriculture also played a role. In Cambodia, regular wage employment opened up in garment and apparel exports, tourism, real estate and construction. Tanzania saw a surge in retail trade and manufacturing, especially in food processing. These are sectors which do not require highly skilled workers. This is something extremely relevant to India and enabling these sectors to grow is what the government should be focusing on.
In Peru, too, the report found that the opening of the labour market was the main contributor to the reduction in poverty and inequality. And even though restrictive labour laws have ensured that Peru has one of the highest levels of informality in Latin America, the share of employed in the formal sector doubled between 2004 and 2014, and there was a narrowing of the wage gap between formal and informal workers.
There is no getting away from the fact that growing inequality will lead to social tensions. India is already seeing some of those tensions as the aspirational class finds itself increasingly dissatisfied. The only way to address this is through this simple message from the World Bank report:
The building blocks of success [of reducing inequality] have been prudent macroeconomic policies, strong growth, functioning labor markets, and coherent domestic policies focusing on safety nets, human capital, and infrastructure.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.