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How to deal with growing inequality?
-Live Mint


Reducing poverty through growth matters more than reducing inequality

Income inequality is back on the radar of politicians and policymakers, if it had disappeared in the first place. The World Economic Forum's Global Risks 2014 report highlighted severe income inequality as one of the top 10 global risks. In a speech in London on Monday, Christine Lagarde, managing director of the International Monetary Fund (IMF), paid special attention to inequality as a leading cause for global instability. Many more influential voices have raised the issue since the global economic and financial crisis of 2008.

In her speech Lagarde said: "In the past, economists have underestimated the importance of inequality. They have focused on economic growth, on the size of the pie rather than its distribution. Today, we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential."

These are not empty concerns; they have real world impact. Lagarde highlighted the skewed income distribution in the US where the richest 1% of the population captured 95% of all income gains. In India, the net worth of the billionaire community increased 12-fold in 15 years, enough to eliminate absolute poverty in the country twice over.

The facts are clear. What needs to be done is not so clear. The policy response to rising inequality depends on where anybody stands on three big issues. First, is rising inequality the result of technological change or the greed of the rapacious global elite? Second, should global leaders focus on the good news that inequality among individuals on a global scale is falling or the bad news that inequality between citizens within the boundaries of individual nations is growing? Third, do countries that are rapidly growing consider inequality as an inevitable problem that has to be dealt with later when mass poverty is abolished?

In the US, for example, the historic collapse in real wage growth from 1973 was accompanied by rising poverty. It is a trend that has not halted since, and from 2000 to 2012 the number of poor has galloped. In 2012 the absolute number of poor (46.5 million) is the highest since 1959. This has forced policymakers there, for example, the US Fed in the Alan Greenspan years, to keep cheap money flowing to spur demand and growth. That has had its own consequences. The global financial crisis that began in 2008 can be blamed in part to these steps.
In India, the effect has been different. It is fashionable to point to the growing band of billionaires and how their wealth can be used to eliminate poverty. But what is ignored is that for nearly seven years now, the Union government has launched extraordinary programmes to shield the poor from ill-effects of income deprivation and inequality, however modest they may be. Even in India, such programmes have had adverse macroeconomic consequences but their nature is different: Inflation in India; growth collapse in the US.

There is no doubt that inequalities of wealth, access to healthcare and education have real effects apart from the fact that they are morally unacceptable. But can something be done about them? It sounds misleading to say growth helps. But does it not? Over the past two decades, the availability of cheap, mass produced goods from China has helped. Much of what China produced-consumer goods-resulted in cheap goods being available for the vast mass of people globally. That has helped check inequality globally.

Inequality within countries is a far tougher challenge. Appropriately designed fiscal policies-especially taxes-can help. But the key problem is designing such policies. Very often, pressures of electoral democracy make policymakers take shortcuts to get results that are politically gratifying even if their long-run effects are not so beneficial. How should the proceeds from such taxes be spent? Should there be direct handing of cash to the poor? Or should the government use such money to build health and educational infrastructure? India has grappled with these issues for a while now. Its choices over the past years, and the resulting experience has not been encouraging. While poverty has come down, inequality does not show a very heartening decline. For countries such as India that have the potential to grow fast, eliminating poverty deserves greater attention than reducing inequality. Not because it is not morally justified but because there is no clear solution.