Addressing the challenge of economic inequality | The Daily Star
12:00 AM, March 19, 2013 / LAST MODIFIED: 03:45 AM, March 19, 2013

Addressing the challenge of economic inequality

Inequality in the distribution of income has increased.
Rising economic inequality (which may be manifested in different ways, e.g., through inequality in the distribution of income, wealth, assets, etc.) is a major challenge that the world faces today. Both developed and developing countries are facing this challenge although the nature and magnitude of the problem varies from country to country.
eco01There are different manifestations of the development, ranging from rise in the share of income enjoyed by a small proportion of the total population at the top to more dramatic indicators like the rise in the number of billionaires and opulent living enjoyed by the rich.
Nobel Laureate Joseph E. Stiglitz, in his 2012 book titled The Price of Inequality, calls it “America's 1 percent problem”. The weekly magazine The Economist (October 13, 2012) considers this to be “an extraordinary development” and says “it is not confined to America”.
The challenge of inequality is particularly daunting for developing countries where a rise in inequality needs to be prevented without creating an adverse effect on economic growth. Bangladesh also faces this twin challenge. Alongside the acceleration in the rate of economic growth since the early 1990s there has been a rise in the degree of inequality in the distribution of income. A widely used measure of inequality is Gini coefficient (named after the Italian statistician called Corrado Gini who devised this measure) which assumes values between 0 and 1, with higher values indicating greater inequality. Data presented in Table 1 are quite revealing.
During the 1970s and the 1980s, the degree of inequality in income was not very high in Bangladesh, and there was no major increase either. Indeed, compared to other developing countries of Asia (e.g., Malaysia, Philippines, Thailand), Bangladesh was a country with lower degree of inequality. That situation continued till 1991-92. But there was a sharp increase in inequality between 1991-92 and 1995-96. And there has been further increase during 1995-96 and 2005.
Indeed, Bangladesh can now be regarded as a country with high income inequality.
Some more interesting facts can be found about the nature of inequality in Bangladesh by going beyond the overall Gini coefficient figures and by comparing the shares of total income going to various population groups ranked by income (Table 2). First, the share in total income increased substantially only for the top 10 per cent of the households. The share of the ninth decile also did not increase. At the other end, the share of the bottom 40 per cent of the households declined considerably.
From these numbers, it is possible to get some idea about the kind of economic growth that is taking place in Bangladesh. Even amongst the upper income groups, it's only the very rich who have been able to increase their share in total income. Thus it seems that inequality may have increased among the richer households also.
Secondly, the share of the middle income groups in total income has also declined. It can thus be said that it's not only the poorer households who have lost out in the competition to benefit from economic growth during the last couple of decades, the middle income groups also appear to have lost out.
Can we become complacent in view of the fact that there has been no further increase in inequality after 2005? My answer would be in the negative, simply because inequality has remained at a high level and there seems to be no tendency towards an improvement (except in urban areas). The share of the bottom 40 percent of the population in 2010 remained substantially lower than it was in the 1980s and early 1990s. Moreover, in the absence of policies specifically aimed at reducing inequality, one cannot expect to see any significant change in the situation.


We need to worry about the rise in inequality
We are often told that there is no need to worry about a rise in income inequality because some increase in inequality is inevitable in a growing economy. After all, those who make economic growth possible need incentive, and in the process, their incomes are likely to increase at a faster rate than those of lower income groups. And at a higher stage of development, inequality should start falling again -- thus producing an inverted U shape for the relationship between level of economic growth and inequality (also known as “Kuznets curve” -- named after economist Simon Kuznets who first pointed to the relationship).
However, experience of the last four decades or so indicates that in reality this relationship does not always hold.
In many developed countries, after a decline in inequality, there has been a rise again, especially since 1980s. On the other hand, there are developing countries (e.g., Indonesia, Republic of Korea, Malaysia) where inequality did not rise even during the early stage of economic growth. Thus, neither a decline in inequality at an advanced stage of economic growth nor a rise in inequality at early stages of growth is inevitable. The outcome depends on policies that are pursued.
We need to worry about inequality on efficiency ground also. First, the poverty reducing effect of an increase in average income gets weakened by a rise in inequality. Incomes of the poor would rise at a faster rate and hence the impact on poverty reduction would be stronger if the share of the poor in total income increases compared to a situation where opposite is the case.
In Bangladesh, for example, if the share of the bottom 40 per cent of the population had not declined during the 1990s and 2000s, their incomes would have risen at a faster rate and more people would have been able to come out of poverty even with the same economic growth that was achieved.
Second, if the poor had a higher share of the total income, they would have been able to spend a larger amount on education and health care, and would thus have been able to improve the capability of the members of their workforce. That, in turn, would make a positive contribution to the growth of the economy.


Some developing countries have been able to reduce income inequality through deliberate policies
Mention has already been made of countries in Asia that were able to combine high growth with no increase in inequality. In addition, there are examples from Latin American countries who have been able to reduce the degree of inequality through conscious policies.
Of course, countries in that region have been and remain places of high degree of inequality, with the Gini coefficient around 0.5. However, the average has gone down from 0.54 in 2000 to 0.5 in 2010. Three factors have played a major role in this regard.
eco04First, steady growth in many countries has been associated with a rapid growth in the demand for low skilled jobs in sectors ranging from construction to services. Second, surge in secondary education has led to an increase in the supply of literate and reasonably well educated workers, so that they could get access to the new jobs that were created.
More significantly, the bias in favour of tertiary education (which benefited the rich more) was corrected and education spending was made more progressive through an expansion of public secondary education amongst the poor. These two developments have led to a narrowing of the gap in wages between workers with high and low skills.
Third, governments in many countries implemented pension schemes and conditional cash transfer programmes -- the latter offering payment to poorer families in return for meeting specific conditions like enrolling children to schools and ensuring their attendance.
A good example of cash transfer that succeeded in reducing not only absolute poverty but also income inequality is Brazil's Bolsa Familia. Under this programme, families with an income below a certain amount and having children under the age of 15 are entitled to receive a certain amount of cash per month -- the amount depending on the number of children up to three.
Of course, the money is given on a few conditions that include: (i) families will have to show that children aged less than 6 years have been vaccinated and are being taken to public health clinics to check on their nutrition, (ii) children aged 7 – 15 must be attending school, and (iii) adults must participate in literacy classes. About a quarter of Brazil's population now gets some money from this programme.
eco05Programmes of the kind mentioned above were accompanied by increases in governments' expenditures on basic health and education services. The result was significant improvements in the capabilities of lower income people to access better quality jobs with higher wages and incomes.
Another example of how conscious public policy can produce positive impact is provided by China if one compares the period of increase in inequality from the late 1980s to mid-1990s and a decline (at least in rural areas) between 1995 and 2002. During the earlier period, inequality increased due to a variety of reasons that included the following.

First, after the introduction of economic reforms and the adoption of open economic policy, investment and output grew at high rates in the coastal areas of the country, resulting in a rise in regional inequality.
Second, focus of policies on industry and other modern sectors of the economy resulted in a neglect of agriculture and increase in rural-urban inequality.
Third, while economic reforms resulted in retrenchment of workers, the absence of appropriate social protection measures resulted in a decline in incomes of workers.
Fourth, a combination of tax and subsidy policy pursued during that period resulted in a reverse transfer of resources to higher income groups.
Thus, China's example during that period shows that unless care is taken, public policy can lead to a rise in inequality.
In contrast, a number of policies were pursued during the second half of the 1990s that helped, at least to some extent, reverse the adverse effects of growth on incomes of the lower income groups. For example, a major project was undertaken to develop infrastructure in the western region of the country. That investment not only led to the creation of jobs directly in the construction of infrastructure, but also had an indirect effect on economic activities in the region. Second, a number of restrictions on rural-urban migration were gradually relaxed, as a result of which possibilities of increasing incomes in rural areas through migration and remittances opened up.
On the other hand, a few measures of social safety nets were introduced for migrant workers. Although China has not been fully successful in reversing the trend of rising inequality, the experience mentioned above shows that if there is political will, there are policy instruments that can be employed to reduce inequality.

A variety of means are available for reducing income inequality
In broad terms, two types of measures may be employed to reduce or prevent a rise in income inequality. One is through redistribution of income or wealth and the other is to find ways and means of raising the incomes and wealth of the lower income groups at higher rates than of the higher income groups.
One way of redistributing income is to augment revenues through a progressive tax system (i.e., by taxing the upper income groups at higher rates) and to spend the revenue in those sectors and areas through which incomes of lower income groups can increase at higher rates. Examples of such expenditures include strengthening (both in terms of wider coverage and effectiveness) of social safety nets, augmenting of expenditures on social sectors like primary and secondary education, primary health care, etc. Cash transfers given to the poor in many countries (e.g., those in Latin American countries mentioned above) are examples of this type f expenditure.
Another way of helping the lower income groups in accelerating the rate of increase of their incomes is to augment expenditure for assisting the small and marginal farmers. Expenditure for strengthening services (e.g., training and linking with inputs and markets) to assist those engaged in rural non-farm activities and urban informal sector also fall in this category.
Redistribution of productive assets like land may also help in reducing inequality in the distribution of income. But this is not without its problems. Apart from the question of the availability of land for redistribution, this may raise a number of other issues. First, if land is redistributed amongst the poor, how efficiently they will be able to cultivate it and benefit from it is an important question. Given their limited access to other complimentary assets like farm equipments and ability to buy the required current inputs like fertilisers, water for irrigation, etc., the ultimate impact on their income and the overall income distribution may remain uncertain. The second important issue is that of political feasibility of the measure. Since redistribution of land is not considered to be politically practical, a more practical way may be to find ways and means of augmenting the wealth of the poor. And that brings one to the second broad category of measures -- that of accelerating the growth of incomes and wealth of the poor.
Labour is about the only asset possessed by the poor. Hence, measures that can help more effective use of this asset and raise the returns from its use -- both in terms of wages and income from self-employment -- can be an important means of reducing or at least preventing a rise in income inequality. Growth of productive employment, rise in real wages of workers alongside increases in their productivity, and improvements in the conditions of work are critical in this regard. Also important is an overall increase in the level of education and skills of workers which in turn would enable them to get access to better jobs as the economy grows and jobs requiring higher levels of education and skills are created.

Policy making in Bangladesh needs to be more pro-active in reducing income inequality
Denial of the existence of the problem or hoping that somehow it will take care of itself is not a good strategy. Any discussion of ways and means of reducing inequality has to start from the premise that political leadership acknowledges the existence of the problem and the importance of addressing it.
Assuming that this will dawn on policy makers at some point, the next question would be where we stand and what can be done.
On the issue of better and more effective utilization of the major asset of the low income people, a good deal has been written -- including by the author of the present article and in the present newspaper. Policies needed in this field are relatively better known, and yet, there has been very little by way of effective implementation of a well thought out employment strategy. Employment in the formal sector of the economy has been the by-product of growth in output that has taken place in various sectors. Outside the formal sector, large numbers are simply eking out a living by doing something or the other. Wages and incomes from such employment can hardly be adequate to reverse the rise in inequality that has been observed over the past two decades.
Take the case of the garment industry of Bangladesh -- the fastest growing and perhaps the most employment generating of the industries. The quality of employment in the sector has always been questioned, and there has been very little improvement either in terms of the level of wages or other conditions of work. As for wages, there has not been any revision without violent demonstrations, and there is no provision for wage adjustment on a regular basis. Even the payment of wages on a regular basis cannot be taken for granted (as is illustrated by this becoming an issue every time a festival approaches). Also, one is not sure if wages have followed productivity in the sector, not to speak of the minimum requirement for living. In a situation where even regular and timely wage payment cannot be taken for granted, other aspects like severance benefits in case of retrenchment and retirement benefits for older workers remain a far cry. But we shall need to gradually move towards that level as well.

Ranak Martin/ Drik News Ranak Martin/ Drik News

In many countries of the world, the share of wages in total income has fallen over time despite the existence of trade unions. In the garment industry of Bangladesh, workers don't have basic rights like freedom to form their associations and to bargain collectively with their employers -- although the country has ratified the relevant ILO conventions. The overall situation is so pathetic that the idea of trade unions is even considered by some to be alien!
During a talk show on a private TV channel in the wake of a devastating fire in a garment factory, I was struck by the moderator insinuating that trade union is an imported idea. The same talk show was questioning whether the existence of trade unions would have helped prevent such incidents. It's unfortunate that after more than forty years of independence, we are still looking for justifications for allowing freedom of association.
Given the situation mentioned above in one of the major growth industries of Bangladesh, the plight of workers in the vast informal sector may be easily surmised. Employment of the kind that we see may be just enough to keep one from starving, but not what is required to lift one from poverty and enable him/her to prevent inequality from rising.
What about education? Bangladesh has made significant progress in terms of enrolment at the primary level and in eliminating the gender gap at that level. Policies and programmes adopted by successive governments, e.g., girl students' stipend programme, have made a major contribution in this regard, demonstrating that appropriate policies can help in achieving the desired results.
However, that progress needs to be consolidated through interventions in at least two directions. One is to extend the stipend programme to male students coming from lower income groups (say, the bottom 40 per cent of the population). The usual retort to a suggestion of this kind may be that we don't have the necessary resources. But while talking about resources, we should remember that Bangladesh is a country where the ratio of revenue to GDP is one of the lowest in the world and there is potential for raising this through careful tax planning and effective implementation.
Second, investment needs to be made to improve the quality of education for the poor and low income groups. At present, the quality of education provided by public sector institutions (where the children of low income groups study), especially those located in rural areas, is not adequate for purposes of raising the capability of the poor sufficiently for narrowing the gap between them and the rich.
How can the low income people be helped to build up productive assets other than their own labour power? One example is the ownership of poultry and livestock made possible through micro-credit.
While this appears to have helped many to get out of poverty, whether this level of asset ownership is adequate from the point of view of tackling inequality remains a question. It is time to think of a quantum jump in the level of asset ownership of the poor, and mechanisms have to be found for attaining that goal. Credit and other assistance for small businesses and cottage industries could be one such way.
Of course, one has to remember that conventional mechanisms of credit for such enterprises would not work for the poor and low income people. Innovative approaches need to be developed to provide them with easy access to credit for such economic activities that will help develop their asset base. And that has to be accompanied by assistance in finding markets for both inputs and the products.
Political will is extremely important when it comes to addressing challenges like income inequality. If there is political will, it should be possible to find a variety of measures, some of which have been briefly discussed above.

The writer, an Economist, is former Special Adviser, Employment Sector, International Labour Office, Geneva.

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