Persistently high rates of income or wealth inequality are bad for social cohesion, political inclusion and crime. The evidence for this is overwhelming. Often, stubbornly high income inequality partly reflects deep historical injustice. Fortunately, history also provides some clues to how we might tackle it.
In some Western advanced countries income inequality is a lot higher than it was 37 years ago. In 1980 it had been stable and low in the UK for three decades . The period after World War II was one of inclusive economic growth. This Golden Age of low inequality is a reference period for many of us: it is when we grew up. But few can now remember the times that lead to it. The 1930s are too long ago.
The statistical record on inequality before the 1950s is quite thin, though research is continuing to improve it. We are fairly certain that income inequality fell and stayed low in most Western countries roughly between 1910 and 1980. What made it fall? Of course there was more than one cause, and surely different causes in different places. But some common features are present.
War and wages
In the earlier years of the 20th Century there was a clear trend of state intervention in the economy, albeit institutionalized differently across countries. It was generated by a mix of factors: social solidarity engendered by the wars, wartime experience of governing the economy, unemployment in the 1930s and the rise of socialist ideas. It accelerated for a decade or so after World War II.
Key features were nationalization, increased provision of welfare, public health and education, and the development of public amenities. Scholars have discerned regional variants: the Nordic Model, Rhine capitalism and so on. Arguably the most important aspects that directly affected income inequality were state involvement in wage setting and redistributive taxes and transfers.
In many countries there were moves to centralize collective bargaining over wages and conditions of work. In the UK, Wages Councils which controlled wages in low pay sectors were introduced in 1909, and national wage setting was introduced during both world wars. From 1945, government-imposed ceilings on pay rises, agreed with unions and employers, were in place much of the time until 1979.
In other countries the process was different. In Sweden, national level bargaining between employers’ federations and unions was agreed initially in 1938 to avoid government intervention. In West Germany after World War II, employers’ confederations and unions were restructured along industry lines and wage bargaining took place nationally, by industry. In France, unions and employers organizations, together with government, were brought together in Le Conseil Economique in 1946.
Mood shift
You are getting the picture by now. Even in the US, the Treaty of Detroit of 1945 created a tripartite system aimed at maintaining industrial peace. Moderation and duty were virtues to be applauded. Historians record how in the 1960s the White House might publicly criticize executives granting themselves large pay rises. In the 1970s this interventionist tendency was criticized, with some justification, as being a partial cause of the stagflation of that decade. By the mid-1980s the political mood had shifted, particularly strongly in the UK and US.
The new mood in those countries was anti-interventionist, especially in industrial relations. Both President Ronald Reagan and Prime Minister Margaret Thatcher faced down unions rather than seeking compromise. In Britain the institutions of consultation were wound up. In the US, minimum wages were allowed to fall against average earnings.
Inequality in labour earnings rose quickly though the 1980s in both countries. The trend was slower in the rest of Western Europe where, mainly, the wage setting institutions remained more intact. Most commentators argue that the inequality rise was due to the slow-moving forces of technological change and globalization which favoured skilled and educated workers. But in the UK and US the shift in political climate meant that the wage setting institutions no longer worked to moderate those forces.
Taxation was changing as well. In most Western countries, income tax became a major revenue source in the early 20th Century. As the political tide changed, both Reagan and Thatcher heavily reduced the progressivity of income tax – the extent to which the rate of taxation increases with income.
The Organisation for Economic Co-operation and Development (OECD) calculates the extent to which taxes and transfer payments moderate income inequality in its member countries. Their calculations illustrate what economic historian Peter Lindert calls the Robin Hood Paradox, which is that the highest levels of redistribution occur in countries with the least pre-tax inequality. For instance, among OECD countries, the highest levels of redistribution occur in the Scandinavian countries and the lowest in Mexico and Chile.
Fashion statement
Can we infer from this that redistribution works? Could the Mexican government eliminate massive inequality with deep historical roots simply by increasing the progressivity of taxes and transfers? Their Progresa and Prospera programmes have made cash transfers to the poor conditional on them ensuring their children attend school and that the family receive preventative health care. Analysis of these programmes tell us they work well.
There is also international evidence that increases in tax and transfer progressivity do reduce income inequality directly. My own calculations have shown that changes in progressivity and changes in income inequality across the OECD countries 2007-2014 are strongly negatively correlated.
This message of the last 100 years is unfashionable. In Britain and the US few political parties today with serious electoral ambitions would embrace a collectivist approach to the setting of wages and salaries or increasing tax and transfer progressivity. Even fewer would speak out against high salaries. Fashions do change, though.
How to use this editorial-
The editorial gives a specific time frame – When inequity fell, why it fell and why it is rising now, and this time frames can be used in your answer.
Take the report and data and show which countries are doing better and why they are doing better in your answer. This can give your answer an objective approach rather than arguing subjectively on the basis of only statements without any data to vindicate your stand.
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In a diverse country like India, where each State is socially, culturally, economically, and politically distinct, measuring Governance becomes increasingly tricky. The Public Affairs Index (PAI 2021) is a scientifically rigorous, data-based framework that measures the quality of governance at the Sub-national level and ranks the States and Union Territories (UTs) of India on a Composite Index (CI).
States are classified into two categories – Large and Small – using population as the criteria.
In PAI 2021, PAC defined three significant pillars that embody Governance – Growth, Equity, and Sustainability. Each of the three Pillars is circumscribed by five governance praxis Themes.
The themes include – Voice and Accountability, Government Effectiveness, Rule of Law, Regulatory Quality and Control of Corruption.
At the bottom of the pyramid, 43 component indicators are mapped to 14 Sustainable Development Goals (SDGs) that are relevant to the States and UTs.
This forms the foundation of the conceptual framework of PAI 2021. The choice of the 43 indicators that go into the calculation of the CI were dictated by the objective of uncovering the complexity and multidimensional character of development governance
The Equity Principle
The Equity Pillar of the PAI 2021 Index analyses the inclusiveness impact at the Sub-national level in the country; inclusiveness in terms of the welfare of a society that depends primarily on establishing that all people feel that they have a say in the governance and are not excluded from the mainstream policy framework.
This requires all individuals and communities, but particularly the most vulnerable, to have an opportunity to improve or maintain their wellbeing. This chapter of PAI 2021 reflects the performance of States and UTs during the pandemic and questions the governance infrastructure in the country, analysing the effectiveness of schemes and the general livelihood of the people in terms of Equity.
Growth and its Discontents
Growth in its multidimensional form encompasses the essence of access to and the availability and optimal utilisation of resources. By resources, PAI 2021 refer to human resources, infrastructure and the budgetary allocations. Capacity building of an economy cannot take place if all the key players of growth do not drive development. The multiplier effects of better health care, improved educational outcomes, increased capital accumulation and lower unemployment levels contribute magnificently in the growth and development of the States.
The Pursuit Of Sustainability
The Sustainability Pillar analyses the access to and usage of resources that has an impact on environment, economy and humankind. The Pillar subsumes two themes and uses seven indicators to measure the effectiveness of government efforts with regards to Sustainability.
The Curious Case Of The Delta
The Delta Analysis presents the results on the State performance on year-on-year improvement. The rankings are measured as the Delta value over the last five to 10 years of data available for 12 Key Development Indicators (KDI). In PAI 2021, 12 indicators across the three Pillars of Equity (five indicators), Growth (five indicators) and Sustainability (two indicators). These KDIs are the outcome indicators crucial to assess Human Development. The Performance in the Delta Analysis is then compared to the Overall PAI 2021 Index.
Key Findings:-
In the Scheme of Things
The Scheme Analysis adds an additional dimension to ranking of the States on their governance. It attempts to complement the Governance Model by trying to understand the developmental activities undertaken by State Governments in the form of schemes. It also tries to understand whether better performance of States in schemes reflect in better governance.
The Centrally Sponsored schemes that were analysed are National Health Mission (NHM), Umbrella Integrated Child Development Services scheme (ICDS), Mahatma Gandh National Rural Employment Guarantee Scheme (MGNREGS), Samagra Shiksha Abhiyan (SmSA) and MidDay Meal Scheme (MDMS).
National Health Mission (NHM)
INTEGRATED CHILD DEVELOPMENT SERVICES (ICDS)
MID- DAY MEAL SCHEME (MDMS)
SAMAGRA SHIKSHA ABHIYAN (SMSA)
MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME (MGNREGS)