The Indian Economy Blog

June 21, 2006

The Inequality Question

Filed under: Basic Questions — Reuben Abraham @ 10:10 am

One of the key problems opponents of economic liberalization everywhere point to is the growth of inequality in newly liberalized economies. Some of this is real, while some is imagined. For example, India’s gini has not changed appreciably since the reforms of 1991. At the same time, China and the U.S. have seen a considerable increase in their gini in the last 15 years.

The fact is that gross inequality is generally bad news for both the wealthy and the poor and everyone in between. The question though is whether you can a perfectly equal society. I would say that’s impossible, as witnessed by the failed experiments at doing so within the Soviet spheres of influence. So, if inequality is inevitable in society, especially with increasing economic growth, the question is what are the parameters beyond which it becomes unacceptable? The Economist addresses the issue in its current issue and I could not agree more with their take on it.

Inequality is not inherently wrong—as long as three conditions are met: first, society as a whole is getting richer; second, there is a safety net for the very poor; and third, everybody, regardless of class, race, creed or sex, has an opportunity to climb up through the system.

Comments? Agree? Disagree?

19 Comments »

  1. “everybody, regardless of class, race, creed or sex, has an opportunity to climb up through the system”

    Class, race, creed, sex. What’s missing? Something very important: insert “economic status of their parents” into this list and then I’ll start to agree.

    Same old same old from the Economist, iykwim.

    Comment by AC — June 21, 2006 @ 10:21 am

  2. Reminds me of an adage ” Capitalism spreads unequal wealth – Socialism spreads equal poverty”. That is the real choice.

    Comment by Sid Kurian — June 21, 2006 @ 10:49 am

  3. I would argue for a very moderately-progressive tax system to not only help decrease inequality, but also to help social mobility. Some of the tax revenue can and should specifically be spent on providing the subsidies needed for helping those who may not be fortunate enough.

    I know subsidies may be a bad word there, but let’s subsidize the right things, effectively.

    The choice proposed by Sid isn’t necessarily correct, there are some excellent articles and talks by Robert Reich (Clinton’s Secretary of Labor) on this subject. He even has a blog. Most liberal economists (Krugman) think the rise of inequality in the US has been two fold, a growing economy which has benefited the very top as well as wages which have been held down. Society as a whole can be richer, but if the majority doesn’t share a significant part of the increase, there’s something wrong, because social mobility just decreased by the same amount.

    Comment by Devang — June 21, 2006 @ 11:10 am

  4. AC, I do believe “class” includes economic status of parents.

    Comment by Reuben Abraham — June 21, 2006 @ 11:14 am

  5. Agree wholly with Sid…
    Capitalism doesn’t necessaily remove gini, it comes out with a very conscious effort from the governance.
    It all goes in circles… govt, economics, society, prosperity….

    Comment by Piyu Roy — June 21, 2006 @ 2:09 pm

  6. So, if inequality is inevitable in society, especially with increasing economic growth, the question is what are the parameters beyond which it becomes unacceptable?

    Careful not to reinforce the false dichotomy between economic growth and equality. History suggests that the two are largely independent. 1940-1970 for the US was a period of substantial and also broadbased economic growth. Also Japan and many other East Asian nations developed while maintaining or increasing the their level of material equality.

    Comment by walker — June 21, 2006 @ 9:30 pm

  7. Agree, indeed.

    Comment by Venu — June 21, 2006 @ 10:39 pm

  8. Walker, good point about the dichotomy. I would however look at the gini coefficients for the U.S. and Japan as they went through rapid industrialization (and that means long before the 40s, by which time a certain level of economic prosperity had already been achieved)….I suspect we would see a pattern not unsimilar to what we see today in rapidly industrializing countries.

    That said, I am not wedded to the idea….but am looking for the evidence. Like I said, the gini in India says something, while the one for China says something else altogether.

    Comment by Reuben Abraham — June 21, 2006 @ 11:14 pm

  9. It’s inevitable in a trickle down capitalistic model the inequities will first increase and than settle down at much lower level. I think the inequity will always be large if you look at the top 1% and bottom 10% – even in socialist economy. But if one were to look at the inequity between middle income and bottom 10%, it would give a better picture. One reason why India’s gini is still low is because the middle income group is not significantly richer than say 70s or 80s. Indian growth has not generated any employment growth – it has been low and stagnant for decade and half. That may change in the next decade, but unless employment rates increase, India gini will continue to be low.

    With regards to Economist conditions: the first is hard to define – if the top 1% wealth makes up 80% of society’s wealth as is in Latin American (and increasingly in US) would that make it better society? One has to look at middle income group wealth growth. The second is hard to achieve without significant rent seeking (ie corruption) issues – India is prime example with tonne of poverty elevation safety nets but none of them work for whatever reason. The third is the only real way to achieve reduction in income gap but it has to come with free open competitive market place for talent and skills – again India is basket case with sorts of discriminatory attitudes and I am not sure these attitudes can be legislated away (it is another matter they are being currently perpetuated).

    Comment by Chandra — June 21, 2006 @ 11:26 pm

  10. Rueben, I suspect this will turn yet again into “capitalism is good” vs “socialism is good” argument, which you will agree is quite boring. So, a free-style literary perspective to frame this problem. Given that inequality aversion (behavioral economics) is innate in human beings, I would say any inequality (where you become poorer *relatively*) will hurt no matter how benign the goals are. It is hard to predict what turns such petty personal aversions into a system wide chain reaction leading to signed petitions or revolutions. It is not so much a absolute threshold more like the final straw that breaks the camel’s back. At a personal level attempts to set a threshold above which everthing is OK is a mirage, very minor inequalities hurt. Also, abstract improvements (gini coefficient is better) don’t cancel real pains (gaaah, my neighbours house is so big).

    Toy problem:
    Person A makes $50,000 a year and his neighbour Person B makes $60,000 a year. Would Person A prefer this situation to one in which he makes $100,000 but Person B makes $350,000? If A is like most people he will prefer the current poorer situtation (unless you are B). In the new “richer” situation, the fancier car B has, the expensive decor in B’s house, the exotic vacations B takes, the upscale schools B’s kids go to – all hurt and jab A in a real sense. He doesn’t care that everybody is growing richer, about safety nets or equal opporutnity.

    Ok, so the gini-like coefficient (income ratios) massively decreased from 0.83 (60K/50K) to about 0.28. No wonder A is unhappy and grumpy. If we keep increasing the gini-like coefficient we might end up with a point (Rueben’s threshold) where A is equally happy. At this point the toy game ends. However, given his evolutionary makeup, unless candiate A has been brainwashed by society it is likely that he will prefer to better the gini-coefficient all the way to 1.00. Also, based on literary analysis, what the “breaking point” gini is depends on what the current brainwashing scheme in vogue with perfect equality (gini 1) being the only steady state.

    Best of brainwashing theories:
    the poor are gods most loved children (pretty much all religions)
    the rich did good karma in their previous lives (upper castes in india), the rich are divine (kings),
    the rich are merely doing gods work (rockefeller),
    the rich are the fittest as nature intended (social darwinism),
    the rich are patriots who sacrifice for their country (weapons makers)
    the rich trickle down their benefits to the society (reagan),
    the rich lead to growth across the society (reagan)

    Comment by Naveen Palli — June 22, 2006 @ 1:28 am

  11. Naveen,

    Going by your logic, the grasshopper (in the Ant and the Grasshopper fable) should be aggrieved about the ant. That may very well be. But I dont see why society has a responsibility to assuage the grasshopper when his/her relative status is entirely the result of differential effort? To judge whether “inequality aversion” itself is “fair” or just one can take the simple device of Rawl’s of veil of ignorance and do a thought experiment on that. It seems to me that “inequality aversion” is pure case of envy, something that should hardly be encouraged let alone be the basis for public policy.

    In real life, things are a bit more complicated of course. All reward is not entirely due to effort and all effort is rewarded (see Somerset Maugham reversing Aesop’s conclusion in his short story of the same name). Nonetheless, as long as there is a link between effort cum ability and reward, to try and assuage “inequality aversion” is a poor basis for public policy, one with disastarous consequences for society.

    However, “inequality aversion” is something that can be potently exploited by demagogues. In the U.S., such demagogery has generally failed mainly because, despite enormous inequality, the “perception” is that one can make it on ones own blood and sweat. This perception is especially strong among immigrants, who are typically fleeing opressive and stangnant economic environments. On the contrary, among African Americans, there is a strong perception that the system is “unfair” and the game is rigged (I am of course indulging in gross generalization).

    Perceptions are important becasue reality is messy. The function mapping rewards to efforts in a market-based economy is not a straightforward one even if there were no cases of nepotism. One may work very hard but market conditions may change leaving us with very little demand for products/services. Needless to say, it is further complicated by the existence of “soft” nepotism in the form of references, networking, legacy seats in colleges, and so on. No system in the world is going to be perfect in terms of mapping reward to work. One can always find egregious examples to demogogue against any system. Using perfection as a standard we are letting it become the enemy of the good.

    Comment by srinivas — June 22, 2006 @ 6:58 pm

  12. I am aware that holding America as a model is definitely uncool in the sophisticated Indian circles, but if we can analyze the American socioeconomic phenomenon very clinically, without any of the unsavory political baggage America comes with, we might find some answers to India’s inequity problem. Having suggested America as a model to follow, I will then question whether it is even possible to emulate America’s past in a completely changed present and furure.

    As America, and most Americans, started to become wealthier after WWII, this society spawned numerous institutions, groups and government policies designed to force some “trickling down” of wealth. In other words, it was not left to Mother Nature or Ronald Reagan, the “trickle down president,” to bring the bounties of growth to the poor, the underprivileged, the handicapped, the old and infirm. This society understood that while unbridled capitalism was a great tool to produce wealth, it was not always a reliable tool to create a civilized society. No, America did not necessarily give Galbraith and the Kennedy’s a carte blanche to plan this country out of all inequities. America just tempered its fierce capitalism with some of the kinder, gentler stuff that is the hallmark of a civilized society.

    Some of the examples of this benevolent human intervention in the US were: unions that demanded middle-class wages and got it without striking or resorting to violence as in the pre WWII era, minimum wage laws that were actually followed, social security and medicare for the retired, food stamps and welfare for the poor and unemployable people, free government-managed school education directly funded by tax dollars and in most areas of the country actually equal or superior to private education, and so on. America also saw a tremendous growth of what in India are called NGO’s. These massive organizations focused on specific missions such as cancer research, eradication of polio and muscular dystrophy, and channeled billions into solving these social ills.

    My point is: India’s economic growth must be accompanied by similar social and governmental reforms that ensure some trickling down of the nation’s newfound wealth. This is not a reversal to planned economy, which we all know was India’s undoing. This is merely an admission of the fact that free market principles should not obscure social principles, and neither can they be expected to completely run a society.

    Now I am going to turn negative. It may not be possible for countries such as India to recreate America’s social practices of the past fifty years. We no longer live in the same world. America most certainly does not. Again, if America is a precursor of things to come everywhere else, there is a paradigm shift in America from institutions to individuals – no to company pensions, yes to personal savings; no to long-term employment, yes to skills that ensure continuous employability; to name a few. The new trends are highly skewed towards free market principles and sometimes at the expense of social welfare.

    Which path would India take? The old America or the new America? I hope it would be the old. I bet it would be the new.

    P.S. I apologize for sounding a little “socialistic.” Actually, based on what I do, I could pass for a poster boy for American capitalism.

    Comment by Sarat — June 22, 2006 @ 8:58 pm

  13. It’s inevitable in a trickle down capitalistic model the inequities will first increase and than settle down at much lower level. I think the inequity will always be large if you look at the top 1% and bottom 10% – even in socialist economy. But if one were to look at the inequity between middle income and bottom 10%, it would give a better picture. One reason why India’s gini is still low is because the middle income group is not significantly richer than say 70s or 80s. Indian growth has not generated any employment growth – it has been low and stagnant for decade and half. That may change in the next decade, but unless employment rates increase, India gini will continue to be low.

    With regards to Economist conditions: the first is hard to define – if the top 1% wealth makes up 80% of society’s wealth as is in Latin American (and increasingly in US) would that make it a better society? One has to look at middle income group wealth growth. The second is hard to achieve without significant rent seeking (ie corruption) issues – India is prime example with tons of poverty elevation programs but none of them work for whatever reason. The third is the only real way to achieve reduction in income gap but it has to come with free open competitive market place for talent and skills (it is another matter that India is currently trying to perpetuate discrimination legally).

    Comment by Chandra — June 23, 2006 @ 12:29 am

  14. Sorry for the double post. I thought my previous ones got gobbled up as it didn’t appear after I submitted it.

    Comment by Chandra — June 24, 2006 @ 12:20 am

  15. Inequality is bad when we have over 50% of our(India) population not having the basic necessities of life such
    as nutritious food, a roof above them, clean water, primary education, proper health facilities, employment etc. If all these people were to have the basic necessities of life in an economy and even if there existed extremely sharp
    inequalities it wouldnt matter!
    Moreover, all the citizens should have opportunities to the necessities.

    Comment by Alex — July 27, 2006 @ 9:30 pm

  16. Let’s hope Ford has a better idea
    Is there a future in your Ford? Today, as we celebrate Labor Day, the specter of layoffs and alliance leicester closings hang alliance leicester the area, which depends more heavily than we sometimes realize on Ford’s Chicago Assembly Plant in the city’s Hegewisch neighborhood and the stamping plant in Chicago Heights.

    Comment by alliance leicester — September 8, 2006 @ 10:33 am

  17. Agreed

    Comment by Dr. Rajat Sant — April 30, 2007 @ 3:27 pm

  18. Agreed, but as Amartya Sen would point out, income should not be the only factor to measure one’s wellness. We also have to take into account the level of freedom (which is quite broad including education, health, political freedom, etc) one enjoys.

    Comment by Jacky — September 3, 2008 @ 1:57 pm

  19. I really do not know what has happened to the Economist and BBC. Their standards have really declined–

    Comment by larissa — June 11, 2009 @ 9:01 pm

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