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Column Does inequality matter?

Aug 16 2008, 21:43 IST
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SummaryInequality in India is way below the Latin American average, and even below the most equal society in America-tiny Uruguay, that is famed for its extensive social insurance system.

Should we care about inequality? Many would see this as a dumb question. But there are two, opposing views on why it may be considered dumb. The first is that inequality is so obviously central an issue, so pervasive in Indian society that it is transparently the case that tackling inequality is central to the development process. Indeed, the long history of both rhetoric and action by the Indian state is, ostensibly, in line with this view.

A second view is that inequality is a big diversion. India is still a poor country. The first order question is sustaining growth, while ensuring the poor participate in that growth. (And, indeed, in most growth episodes, most of the time, the income of the poor grows more or less as fast as the average.)

Moving from Latin America to India a year ago (as I did) casts this question into relief. At first glance the contrast seems to support the view that inequality is a second order question here. Latin America is the region of inequality par excellence. Measured inequality in India (from the National Sample Survey) is way below the Latin American average, and even below the most equal society there—tiny Uruguay, famed for its extensive social insurance system. It is also lower than in China, Malaysia and Thailand. Sustaining rapid growth looks much more important than any feasible redistribution, not least for the poor.

But there are problems with this view. Let’s first look at dimensions of inequality.

First, the NSS numbers are almost certainly misleading. They show a modest rise in inequality between 1993-94 and 2004-05 to still modest levels. Yet the real action lies outside what the NSS measures. There has been a sharp rise in salaries of the skilled, especially at the very top. (This also occurred across Latin America in the past 20 years despite a large rise in the production of university graduates.) And there has been an even bigger surge in the wealth of the truly rich. Based on Forbes estimates, the wealth of India’s billionaires is equivalent to some 22% of GDP this year, compared with less than 3% in 2001, and 0.2% in 1996. The same ratio is currently around 6% in Mexico, that has same GDP as India in US dollar terms, and is well known for its billionaires.

Second, the distribution of incomes is often not the most important aspect of inequality. There is a strong ethical case—reflected in the founding aspirations of the Indian nation—that what really matters is inequality of opportunity. In India such inequalities are profound, and importantly shaped by group-based characteristic—caste, tribal status, religion—and location. Even the restricted view of change provided by NSS is not encouraging on these grounds. Household expenditure per capita of scheduled castes is growing at roughly the average rate; that of scheduled tribes is slower. This is real progress, but looks like a poor harvest from decades of attempts to equalise access to basic goods and provide affirmative action for the disadvantaged. Spatial differences have also diverged: in 1990 Tamil Nadu’s per capita income was less than twice Bihar’s; by the mid-2000s it was three times.

Third, there is a good case to expect pressures on inequality to rise. Given the parlous state of the education system—and the long lead times even with effective efforts—the pressure on the market for skills is likely to rise. The economics of agglomeration and institutional inertia will continue to put pressure on spatial differences. The outlook for group-based differences is less clear, but the trends just noted provide only weak encouragement.

Many societies like India decry the persistence of inequalities of opportunity, bred of circumstances out of the control of the individuals—and especially the children—affected. But it is important to go beyond this, and explore the ways in which particular inequalities—of power, status and wealth—can actually distort the pattern of development, and sooner or later undercut the dynamics of growth and structural change. Take a country like Mexico, that, like India, had periods of rapid income growth, but now has an income per person some three times that of India’s (after adjusting for purchasing power differences), and has also suffered stagnation or slow growth for some 25 years now. Many observers see Mexico’s struggles over growth and competitiveness as being intimately linked with the entrenched interests associated with historically shaped inequalities—whether linked to big business, organised labour, a poorly functioning government apparatus or the inferior social status of indigenous groups. India is, of course, different from Mexico, but there may be an important lesson: specific inequalities can affect the performance of the state in ways that have a profound effect on both the aggregate growth process and the dynamics of inequalities of opportunities. The first step lies in exploring and understanding these processes.

The author is at the Harvard Kennedy School, Institute of Social and Economic Change and the Centrefor Policy Research

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