The Indian Economy Blog

August 8, 2007

Income Inequality In Asia – II

Filed under: Agriculture,Business,Education,Growth,Regulatory reforms — Dweep @ 7:09 pm

The ADB has just released a report titled “Key Indicators 2007: Inequality in Asia” (covered in IHT and BBC). The report concludes that the gini index, a measure of relative inequality had grown in all 15 countries studied, since the 1990s. More alarmingly, absolute inequality had grown even more. The bank identified the trend as “the rich getting richer faster than the poor”:

Indeed, underlying many of the cases of increasing Gini coefficients is a growth process in which those at the top of the distribution (top 20% here) have seen their expenditures/incomes grow considerably faster than those at the bottom (bottom 20% here).

This report is particularly fortuitous because it follows closely on my previous post on income inequality in India. In that I made some fairly basic points that a) income inequality was increasing in India (as measured by the Gini index), b) this was undesirable because income inequality reinforced social exclusion, (as a case I showed that inequality negatively impacted access to healthcare), and c) insofar as growth had not reduced, and possibly contributed to, inequality, India should revisit the kind of growth it engendered.

This report further strengthens the case for a more equal growth. It also indicates that our current growth path does indeed exacerbate inequality and how policy interventions could help. The following points, in particular, stand out.

First, why is inequality important? This being an economic report, it does not delve into the ethical choice inherent in that question, but it suggests two more practical reasons – because it damps the “poverty reducing impact of a given amount of growth”, and because it may hinder growth prospects (there is also a very readable introduction on measuring inequality, and how appropriate the gini index is to that measurement).

Second, is the inequality a result of growth? The report suggests it is not growth per se, but the kind of growth we are witnessing that is resulting in inequality, with three proximate causes: growth differentials between rural and urban divides, between sectors (agriculture vs. services and industry), and between the educated and those not. In fact, “widening differentials in earnings of the college-educated vis-à-vis less educated individuals appears to be the single most important observable factor accounting for increasing inequality.” Somewhat simplifying, the BBC quotes the report as saying:

The bank said the main reason for widening wealth gaps in recent years was the discrepancy in investment between urban and rural areas which favoured better-educated, better-off urban populations.

This is particularly important. In my previous post I had made a similar observation regarding healthcare – that inequality affected access to health, a key to equality of opportunity . This report suggests a similar dynamic leaves the uneducated poor in a vicious cycle of social exclusion. Since economic growth prospects favor the educated and the poor lack quality education, it is unlikely they will be able to benefit from those prospects and move up – leading to further inequality.

What role for policy? The ADB suggests increasing reforms that generate income and growth for the poor, as the way forward. The emphasis, clearly, needs to be on ensuring equality of opportunity, through for instance better access to finance, removal of social exclusion, and redistribution of wealth through public funding of rural education and basic health.

The discussion to my previous post was vigorous particularly on the last point. Some suggested that private healthcare (in this case education) is better. But that argues only for private operation of these services, not their funding (two separate debates). The second major criticism, that is countered here, is whether it is public spending – or spending in general – that is important, and the public sector should in fact stay out of funding healthcare. That argument is rather counter-intuitive – since the poor are, by definition, poor and pay a premium for most services, the only way for them to spend more on education (or health) is if someone else does it for them (say the government). I will grant, however, that given the scale of the challenge, it is more appropriate to talk of public and private spending. This is particularly true in agriculture, where distortionary public policies keep private investment out of the supply chain (a point reiterated by the ADB).

I have not seen the entire report, but even the summary makes fascinating reading. It should remind us that GDP growth is not the final measure of success. Since we compare India so often to China, here’s a statistic – China’s GDP increased the most amongst the economies studied, but so did its income inequality. Perhaps we can learn something from that too.


  1. As the saying goes there are lies, damned lies, and statistics. The GINI co-efficient between China and India being one of those. As an aggregate number of national level income inequality based on household expenditure surveys, then yes China is more unequal than India.

    Decomposing the gini figures to account for spacial and demographic differences reveals different results.

    I do not have the latest 2006 figures, but as 2000 WorldBank figures, urban inequality was worse in India than in China. Anecdotal evidence and trends in India’s recent growth rate would indicate that this likely holds true today. Rural inequality on the other hand is greater in China than it is in India and it likely remains true today. This is in part because of different demographic distribution. China’s rural population (at least according to the latest statistics) is 56.1% of the total population while India’s is 79% of total. More importantly however is the percentage of rural population engaged in agricultural production. I don’t have the figures off hand, but I recall reading in some paper that while over 60% of India’s rural population was still engaged primarily in agricultre, China’s is only about half that, with the majority of the rural population engaged primarily in non-agricultural economic activity.

    Likewise, inequality cannot be deduced from a single indicator such as income based on household expenditure surveys. Aggregates of other indicators such as a wealth, educational and medical availability, etc. all play a role in analyzing inequality.

    As I’m rather fond of folksy sayings, heres a final one. Who are you going to believe? Your filthy lieing eyes or a 3 digit number.

    Comment by Jing — August 8, 2007 @ 10:57 pm

  2. Income inequality as measured by household income distribution or differential consumption that the NSSO does is one way of arriving at inequity. IMHO, the percentage of population with lack of access to basic services is however a more important indicator. Let me explain-

    As economic growth leads to higher incomes, it also allows more productive individuals to earn disproportionately more and to an extent, this explains why more developed countries have higher Gini coefficients than India. At the level of developed country like the US, should it matter that Bill Gates earns so many times more than the average? Especially, if (a big if maybe) everyone has uniform access to drinking water, law & order, education, basic healthcare, sanitation, etc. this is probably irrelevant. So, given certain conditions the Gini measure could lead to a misinterpretation of social exclusion, tensions, or social welfare in general.

    I would argue for deriving a list of services that we identify for uniform access and then develop a strategy (public/ private spending or mode of delivery, etc.) that we execute.

    Also, I was thinking that the one service we all have near uniform access to now, is mobile telephony. A case of deregulation, private delivery and open source funding leading to a virtuous outcome! I do not have definite views on funding, but there seems little support for increased public delivery of services!

    Comment by little Ram — August 9, 2007 @ 1:07 pm

  3. Jing, I’m sure you know a lot about Gini coefficients and statistics. But do you have a point?

    Ram, you are absolutely right – we do not need to be concerned so much about those at the top, but those at the bottom, and identify the services that enable them to move up (see a related post on my blog, that looks at inequality in the US and draws parallels).

    But I hasten to point out that you cannot extend telephony to all services. First, you are simply wrong to think everyone has access to telephones. Rural telephony is now being rolled out – and I might add public funding through the universal service fund is the trigger (the market would not work without that subsidy). Second, telecom and education differ in that access to education (& health) is subject to several exclusionary factors beyond money. Finally, in poor and rural areas you will get monopoly operators, so there is no reason to believe a private operator will be better than a public one. What is certain is that the private operator will set sub-optimal prices.

    I am no lover of big government. But its rather obvious that privatization has its own drawbacks. Propogating it, just because it is fashionable, does not prove its efficacy in all cases – at least not without very careful policy design.

    Comment by Dweep — August 9, 2007 @ 1:45 pm

  4. I may be mistaken, but from my reading of your earlier post on income inequality and health care, all that you stated Dweep was that there appeared to be a correlation between rising income inequality and access to health care. You didn\’t prove any causality. Is that correct?

    Even on the access to health care, there are some issues w/ the measurement as Ravi, Himanshu et al pointed out– not sure if I completely buy your metrics.

    On another note, as a long-time consumer of health care services in the US, both as an individual and more recently as an employer, couple of observations
    a) Yes, the US health care system is fairly messed up
    b) Is this faulty system because of the private sector? That may be so. However, the government intervenes in a big way as well. And they may be also to blame.

    Regardless, my point is that blaming the ills of the US health care system on the private sector needs to be backed up by rigorous evidence — Michael Moore makes entertaining documentaries but unfortunately, his assertions fall apart when you look at them for more than five minutes. Blanket statements about (ahem) \”bigoted\” market believers may not be the way to go.

    Comment by Prashant — August 9, 2007 @ 4:11 pm

  5. Thank you Prashant. Yes, i did not prove causality, but suggested a strong possibility it existed. The ADB report seems to strengthen – if not prove – that causality.

    What metric do you not buy – that access to health depends on income? Himanshu, Ravi, et al make several points, but they do not address this fundamental thesis. Their criticisms belong to a separate debate – of whether private or public operation of such services is better.

    Note also that NOWHERE do I blame the private sector for the ills of US healthcare, for which I am sure the public sector is also to blame. I use the example only to show that privatization comes with its own set of problems. I hope we can agree on this one.

    Since I\’m clearly in the minority on this point, let me make it clear that I\’m not a staunch defender of the state. But I am also a skeptic of markets and \”blanket statements\” about the beauty of markets. Or just a skeptic.

    Comment by Dweep — August 9, 2007 @ 6:30 pm

  6. I am trying hard to understand just what you established in your previous post. How does an increase in inequality worsen social exclusion and how does it affect health care? Are you saying that because I am 10 times richer than the poorest rather than just 5 times two decades back, I am more likely to vote for government measures that reduce healthcare?

    Comment by Ravikiran — August 10, 2007 @ 1:04 pm

  7. Dweep, Since you proclaim to write mostly on some special markets such as Health Care, Climate Change solution (at least you believe them to be so) which you claim are vastly different from other markets, Can you please tell us why these markets are different? Why the usual economic concepts of “People respond to incentives only and nothing else” don’t work in these areas, or why people always should make the worst choices as a whole in these sectors?

    You may be absolutely justified in arguing against Markets but you’ve got to give causal relationships for justifying yourself. I won’t talk about Health care again, but this article in Financial Express talks about Civil Service Reforms definitely suggests the reason, why public spending in Health Care as a percentage of GDP can decline with positive outcomes:

    If we start the Civil Service Reforms exercise by reducing the quantity of government, it often leads to a decrease in the quality of government services (economists call this a negative supply shock phenomenon). Yet, attempts to increase the quality of government service usually lead to a concomitant decrease in the quantity of government. The most obvious example of this phenomenon is the introduction of e-government to improve public services. In most cases, if done properly, they also lead to a quantitative reduction in the government apparatus required to deliver these services.

    Again, your point against the income inequality rising vis-a-vis Urban and rural areas doesn’t holds firm. I’m sure that you read other articles in Pragati too besides your own article and You must have read Atanu Dey’s series on “Can India afford its villages?”. Obviously, the best of the lot in villages are migrating from villages to cities making cities more richer compared to villages. Are you against that? Also, the cost of living too is rising in cities. So, while you can live happily in 2000 Rs. in a rural village, You would be no where with this amount in Mumbai. Why do you always think of purchasing power parity when comparing between countries? Why not talk of the same indicators when talking of areas inside a country?

    Also, Sumeet (above) made a very insightful point about the difference between India spending and Indians spending. If most people living in Mumbai choose private clinics over public government hospitals, then why you’ve a problem. Even the Pratham report on education found that even the poor would rather send their children to private schools than send them to public schools. In fact, your point of linking child mortality rates with decreasing health care expenditure is same as saying that, since Maharashtra Government isn’t spending more on plying more buses and local trains, it’s leading to more incidents of deaths of people falling off from trains (which actually is a failure of security mechanisms). The increased rate in Child mortality rates (reported from figures in public hospitals) is due to falling standards of public service which has different causes than income inequality.

    Finally Dweep, You do not support absolute State. You do not support Markets. But you absolutely and fully support centrally planned policies. Why mistrust people so much Dweep, who have without much state support made us the fifth biggest economy of the world since the era of 1990s. Or are you saying that all this growth was useless which created income inequality only and nothing else?

    Comment by Himanshu Gupta — August 10, 2007 @ 10:31 pm

  8. I am suspicious of policy interventions. While it may sound righteous to talk of educating the poor etc but how exactly does one go about helping the poor? The fact is government machinery has been stealing from the poor all along. Any policy however well intentioned will not go through unless it lines the pockets of the government machinery.

    Much of the economic growth that has come India’s way can only be accessed by those who have a decent education. Period. We have companies sending recruiters to junior colleges recruiting kids to work part time. Most top colleges have 100% recruitments. IT is absolutely guzzling up “talent” but it can only absorb kids with formal education.

    Manufacturing – automotive, steel, pharma, etc – as mentioned on here before offers immense potential of absorbing much of rural India’s talent. The incentives offered to manufacturing is hardly anything when compared to the IT industry but I think governments can learn something from it. If any policy intervention needs to be done manufacturing deserves a look.

    The manufacturing industry has a track record of developing rural India. Take towns like Jamshedpur (Tata Steel), Aurangabad (Bajaj Auto etc), Pithampur (Bajaj Tempo, Hindustan Motors, Eicher etc) and now Rudrapur (Mahindras, Tatas, etc) IT would never work in those places back then but the manufacturing industry has.

    Comment by Nikhil Nayak — August 11, 2007 @ 12:26 am

  9. I’m still trying to find out who said that GDP growth was the final measure of success. Nice straw man argument. This ‘analysis’ has about as much depth as the “growth with a human face” or “inclusive growth” mantras of the Congress Party.

    Comment by Krishna — August 11, 2007 @ 2:14 am

  10. Dweep,

    After my last post I did a little bit of digging and found that the government, through the Minister for Heavy Industry and Public Enterprises, has indeed released a new auto policy which has been called the Automotive Mission Plan (AMP) 2006-2016.

    Thanks for getting me on started on this topic as I probably would not have found it if I hadn’t bumped into this post.

    For more information:

    Comment by Nikhil Nayak — August 12, 2007 @ 5:55 pm

  11. Increase in inequality is not avoidable in the short to medium term, when a major revolution is happening. When industrial revolution happened in Europe, suddenly people who adopted technology could process much more foodstuffs or transport more efficiently or could increase production. This technology adoption couldn’t become universal, so soon, and hence temporarily there was be an inequality which is eventually sorted out now. Same with India. After 1991, teh opening up created a lots of new opportunities and most of them materialized in the last 10 years. In such a short time, you cannot expect 1.1 billion people to make use of them and rise up. So, temporarily there would be those haves who integrated with the global economy and have nots who still depend on agriculture. But, given enough time to carry on the reforms, I’m sure the inequalities would smoothen out and the call-center employee or a banker might not earn much more than a teacher or a farmer.

    With just 15 years of half-hearted reforms it is too much of the Equality-Ayatollahs to expect that all the ills of ignorant economic policies of the yesteryears will be cured. Give Indian economy the time it deserves and in the meantime be steadfast in expanding reforms.

    Comment by Balaji Viswanathan — August 16, 2007 @ 1:52 am

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    Pingback by InsiderThings » Blog Archive » How can India stem the current tide of rising income inequality? — February 15, 2009 @ 9:03 pm

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