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Resource centre on India's rural distress
 
 

Give us growth and we’ll handle the inequality-Manas Chakravarty

Deng Xiaoping, the architect of modern China, had a sharp, snappy way of putting across what he wanted to say. Some of his eminently quotable quotes include: “It doesn’t matter if the cat is black or white so long as it catches mice” and “Poverty is not socialism. To be rich is glorious”. But there’s another, less well-known and even more controversial quote also attributed to him: “Let some people get rich first.” Deng doesn’t seem to have been too bothered about inequality.

Not so the Asian Development Bank (ADB). Its recently published Asian Development Outlook has as its subtitle “Confronting Rising Inequality in Asia”. Deng’s words about allowing some people to become richer appear to have been embraced with gusto, not just by the Chinese, but by most Asian countries.
 
ADB acknowledges that rapid growth in Asia has lifted millions out of poverty. But it frets that inequality has been rising in the region. The Gini coefficient is a widely used measure of inequality. A Gini of zero denotes absolute equality, while a value of 1 (or 100 on the percentile scale) means absolute inequality. For China, the Gini coefficient for per capita expenditure worsened from 32.4 to 43.4 between 1990 and 2008. For India, the Gini deteriorated from 32.5 in 1993 to 37 in 2010. Incidentally, the Gini for Taiwan was a low 34.2 in 2010, much lower than for the People’s Republic of China, which makes one wonder which is the real people’s republic—China or openly capitalist Taiwan?

But let’s shift our attention to India. Neighbours Bangladesh, Nepal and Pakistan all have lower Gini coefficients than us. The expenditure share of the top 1% of the Indian population increased from 6.5% in 1993 to 9% in 2010—incidentally, that’s much more than the share of China’s top 1%. India’s top 5% spends 21.3% of total expenditure in the country, up from 17.7% in 1993. Moreover, inequality in the distribution of wealth and assets is much higher than inequality in income or expenditure and the ADB estimates India’s Gini coefficient for wealth distribution at around 65—wealth inequality in China is much lower.

Each percentage of employment growth now requires a higher percentage of output growth than in the past—this is technically known as a lower employment elasticity of growth, which, in India, has declined from 0.53 in the 90s to 0.41. This is the famous “jobless growth”. Real wage growth has lagged behind productivity growth and, in India, the average annual growth rate of labour productivity was 7.4% during 1990–2007, while the average annual real wage growth rate was only 2%. Capital has gained at the expense of labour.

The numbers given above are a small sample of the impressive, albeit rather dismal, data on inequality in Asia given in the ADB report. But let’s get on to the nub of the report: Why is inequality so bad? For starters, says ADB, had inequality not increased, “In India, the poverty headcount rate would have been reduced to 29.5% in 2008, instead of the actual 32.7%.” For the 11 economies with rising inequality, the cost of that widening comes to 240 million more people trapped under the $1.25 per day poverty line. That’s apart from the other ills arising from inequality listed by ADB, such as a political backlash, higher crime rates, misallocation of human capital, hollowing out of the middle class and a negative impact on institutions.

But consider the reasons for widening inequality. The report says that technological change, globalization and market-oriented reform are the key drivers of inequality in the region. But these factors are equally the reasons for the growth spurt in the region. Could it not be, as the astute Deng perceived, that growth and inequality go hand in hand? Consider, for instance, those countries in Asia that have reduced inequality between the 1990s and the 2000s. These include Pakistan, Nepal and Thailand. They aren’t really the poster boys of the region. True, Latin American countries are seeing lower Gini coefficients,but they used to have much higher levels of inequality and are in any case middle-income countries. High-growth countries such as China, India and Indonesia have all seen rising inequality.

Of course, there can be no blanket endorsement of inequality—many regions with high Gini coefficients have no growth to speak of. And many developed countries have low levels of inequality—they have reached a stage where they can afford it. But the rise of inequality may not necessarily be a bad thing when coupled with high growth and a reduction in absolute levels of poverty.

If low inequality is all that desirable, consider rural India, where the Gini coefficient increased modestly from a very low 28.6 in 1993 to 30.5 in 2010. If the equality there is so attractive, why do millions of migrants from the villages throng our cities? Equality can sometimes be synonymous with stagnation. In short, as the ADB report itself says, “There appears to be a positive and statistically significant relationship between the increase in the Gini (rising inequality) and gross domestic product growth.”

In the inimitable words of Deng, it is important to “Seek truth from facts”. Give us Chinese growth rates and we’ll happily take their Gini coefficients as well.

Manas Chakravarty looks at trends and issues in the financial markets. Comment at capitalaccount@livemint.com