Economists frequently cite economic growth as the surest way out of poverty for the developing world. In this context, China is an often mentioned example, where double digit growth has brought over 300 million people out of extreme poverty over the past few decades. But closely tied to growth is the question of equality – of growing the pie, as opposed to distributing it.
In discussions of equality, India usually does better in comparison to China. Proponents of India’s path to development often point out that income inequality in India has historically been relatively low. The UN Human Development Report 2006 estimated the Gini Index – an indicator of income inequality – for India to be 32.5 in 2000. This compares favorably with much of the world, including the USA and OECD countries (Sweden: 25; Norway: 25.8; USA: 40.8; China: 44.7; Brazil: 58 – low numbers are better).
Yes, India’s income distribution is relatively equal. But inequality is rising – fast.
A plot of several countries’ Gini Index (at Wikipedia) illustrates growing inequality in both India and China. To further prove this point, I drew data from the World Income Inequality Database (WIID) and prior UN Human Development Reports for India. The plot below shows the Gini Index from 1951-2000 (note: not all years are available; only figures from the National Sample Survey for consumption were used).
For observers of the India-China debate, indeed for observers of economic growth, this plot is illustrative because income inequality has exacerbated considerably, rising from a historic low of 29.6 in 1990 to 32.5 in 2000 (a rise of 9.7%).
Why Income Inequality is Important: The Case of Healthcare
The obvious question to ask, of course, is if income inequality is even important? After all, if absolute poverty is dropping, relative inequality may be acceptable? Not so, because relative inequality manifests itself in many ways – most of all by reinforcing patterns of social exclusion.
One example of this is healthcare. I had noted previously that the rate at which India achieved improvements in life expectancy slowed considerably in the post-reform era. A similar trend was evident in China. I suggested two reasons for this inverse correlation with economic growth:
- As GNP rises, the resulting income inequality may be negatively impacting overall life expectancy. As fewer people earn more the GNP rises, but the large majority that gets relatively poorer are worse off.
- Another ugly truth may well be that a market-oriented India and China provide far less for their people than did socialist India and China. Under the guise of reform, governments in both countries are not only withdrawing from the market but also from public services.
The correlation between GNP growth and income inequality seems to support both these reasons. But there is one final reason to believe income inequality negatively impacts health. A study of seven African countries, published by the World Health Organization in 2000 concluded that it is the wealthier citizens – not the poorest – that benefit most from public healthcare, because health facilities are better in rich, urban areas. In Ghana the richest quintile directed almost 60% of its health spending to the public sector. In all countries, except South Africa, the best-off groups mainly used publicly subsidized health care, while the poor – less likely to seek medical help anyway – generally turned to the private sector simply because it was more accessible, though also more expensive.
A correlation between growth and inequality does not by itself disprove the need for economic growth. Growth may well be a necessary condition for reducing poverty, and in India it has indeed brought millions out of poverty. But surely, bringing people out of absolute poverty cannot be the ultimate goal and the only barometer of development. What India must strive for is to improve the quality of life of people – which means providing better health, education, and other services to the poor and the rich. In this objective, income inequality matters in very tangible ways, and insofar as economic growth increases inequality it may make many worse off. Now if only the economists could come up with a solution for that conundrum.
An earlier version of this post appeared here.