The author talks about having a competition policy that brings about a balance of power across business segments. However, Indian experience shows that it does not always work and there is concentration in most sectors, with entry barriers erected by larger players
Inequality: What Can Be Done?
Anthony B Atkinson
Harvard University Press
THE SUBJECT of inequality has come back on the discussion table after Thomas Piketty raised this issue in his seminal work on capitalism (Capital in the Twenty-First Century), which, though questioned it in terms of interpretation, has nevertheless made us rethink the subject. Closer home, before the government headed by Narendra Modi came to power, there was an acerbic debate on whether reforms in the country have delivered for the poor.
To fight inequality, Amartya Sen favoured direct intervention, while his counterparts Jagdish Bhagwati and Arvind Panagariya preferred the growth-oriented, trickle-down path. Against this background, Anthony B Atkinson, in his book, Inequality: What Can Be Done?, carries forward this discussion with 15 solutions.
Most solutions given are not really new, but when put together, offer a comprehensive package for countries like India, where inequality pervades to a large extent. In fact, we have implemented quite a few of these schemes, which, ironically, have often been attacked quite viciously by mainline economists and analysts so much so that the government has not scaled up these operations. Or they have run against that cliff called fiscal deficit, which prevents the government from doling out the benefits. Atkinson has also put forward arguments backed by data to show that the objections raised against these programmes may not necessarily hold. Let us see how the story line goes.
He begins with the argument—like Piketty had shown—that after World War II, the level of inequality had come down. But since the Eighties, it has increased, especially in the western developed countries. Based on the proliferation of this phenomenon, Atkinson has forwarded 15 solutions to reduce inequality, with the onus on the government to take action. He rightly argues that technological change should increase the employability of workers, as technology is normally labour-replacing. For this, we need to create new skill sets, which can be in tune with technology. But the challenge is to reskill the labour force. This has become an issue with most professions, where existing staff is not upgraded and instead replaced with new staff with ‘elite’ skills, the best example being the IT sector.
Second, the author speaks of having a competition policy that brings about a balance of power across business segments. The Indian experience shows that it does not always work and there is concentration in most sectors, with entry barriers erected by larger players.
On employment, Atkinson talks of both providing jobs to the needy, as well as setting a minimum wage. The former looks a lot like our own MGNREGA programme, which has been criticised for doling out free money. The suggestion of a higher minimum wage rate is what the present Conservative government in Britain is looking at too, so that the burden on the government comes down. But this leads to other problems for factories that may not have the wherewithal to pay the wage, with the result that companies outsource or use informal labour to escape these clauses. Hence, while it is progressive in view, it could have several escape routes for employers.
Atkinson also talks of governments offering a savings bond with minimum real return with a maximum holding per holder. Here again, we can look at our own small government savings schemes that give this return to holders. But in all our discourses, there is criticism of these schemes, as bankers lament that the high rates come in the way of their lowering deposit rates. Therefore, at the practical level, acceptance of such schemes will be resisted. To this, Atkinson adds minimum inheritance or capital endowment for all adults.
Atkinson also talks of a progressive tax system with a top marginal rate of 65% that looks unlikely to be implemented, as most countries are trying to lower the highest marginal tax rate. The suggestion is also for a similar increase in tax on inheritance and gifts—something that’s been done away by most governments. In fact, Atkinson also talks of a special tax on wealth, like what we levied recently on the super-rich.
On the expenditure side, Atkinson argues for child benefits transfers in the form of cash that get taxed by the government. This could work in developed countries, but would be hard to implement in India, where the government has few resources. Social insurance is another add-on proposed by Atkinson, and the recent steps taken by our own government to provide insurance to all are exactly in this area. Finally, he talks of rich countries passing 1% of GDP to the poor. This can only be voluntary and a progressive step, but the challenge is really to ensure that it is spent on the right purpose, as recipient regimes could be self-serving.
To balance the discussion of his suggestions, Atkinson also raises three objections to his bouquet of solutions. The first is whether it will come in the way of efficiency if the rich pay more and the largesse increases from the government. He proves with data that this has not happened, as experience shows that when some of these measures were adopted, resulting in the Gini coefficient improving, it was not at the expense of growth.
The second issue pertains to whether this can be afforded by the government. Here, he shows how the higher expenses for the poor are actually self-financing, as once they become more viable economically, they will contribute to growth and government revenue. Third is the challenge of globalisation and whether it would come in the way of invoking such programmes, as countries cannot remain behind today vis-a-vis others. Here, he says this is more of a political decision than an economic one. This could be a signal to how countries like India react to rating agencies and are hesitant to follow pro-poor policies for fear of criticism.
Atkinson has done a very good job by making suggestions that are actually being professed, albeit hesitantly, by governments. By taking head-on the basic apprehensions of doing so, he shows that if we do not employ these solutions, we are probably making excuses and do not want to shake the present equilibrium due to vested interests.
For one who agrees with Piketty, this book will get a big nod, and for those who are not sure, it should probably remove some doubt. Further, if we look at the steps taken by our own government over the years, it appears that we are moving in the right direction, and this should be commended.
Madan Sabnavis is chief economist, CARE Ratings