Dasarathi Mishra
In India, Policy Makers are appropriately aiming at inclusive growth and introducing special Government Schemes that will reduce inequality.
IMF Annual Report 2018 observes that “Global Inequality-income difference among countries has been declining”. This is a positive signal. But intra-country position is not so comforting, as the Report states that “the picture within countries varies depending on income group and country specific factors”. It depicts that income and wealth inequality in societies is wide-spread and it can hamper growth and impinge on financial stability.
Income inequality is the gap between rich and poor i.e. is the differences in the distribution of economic assets (wealth) and income within or between populations or individuals. Income inequality generally computed within a country to make it meaningful.
An Organisation of Economic Co-operation & Development (OECD) survey shows that income inequality in OECD countries has increased in the last half century. The average income of the richest 10 per cent of the population is about nine times that of the poorest 10 per cent, up from seven times in the earlier era. Another study by World Institute for Development Economic Research reported that 1 per cent of world’s richest persons own 40 per cent of global assets. Notably, the top three richest persons possess more than the combined financial assets of the lowest 48 countries.
Oxfam Inequality Report 2018 released in January 2019 reveals certain startling facts. It reveals that only 26 richest people on earth in 2018 had the same net worth as the poorest half of the world’s population, some 3.8 billion people. The report also states that 2,200 billionaires of the globe saw their wealth grow by 12 percent, even as the poorest half saw its wealth shrank by 11 percent.
Many economic studies have gone into the root cause of inequality in a society. The main causes have been identified as globalization and technological progress, supplemented by widespread deregulation, resulting in increased competition and political economy. Jan Tinbergen, a Dutch economist, winner of 1969 Nobel Memorial Prize in Economy, had stated that inequality is the result of race between technology and education. In rich countries, particularly in USA, UK, rapid change in technology necessitates highly educated work force to accomplish the work and the supply of such qualified workers does not match to the expanding demand, placing a premium, called “college premium” on such work force. China has been experiencing tremendous economic rise after its accession to World Trade Organisation (WTO) and its successful export-led growth model. This has given rise to spectacular development in coastal belt and urban areas, resulting in increasing disparities in income between urban and rural areas. Government intervention can reduce the inequality as is experienced in Latin American countries, particularly in Argentina and Mexico.
The IMF report says that inequality perpetuates social polarization. Lack of social cohesion leads to more demand by the have -nots on public funds, rent-seeking efforts; thus scuttling welfare -enhancing measures by the government meant for long term inclusive growth.
Even the sub-prime crisis in housing mortgage sector, in USA, which snowballed to global financial crisis in 2007-08, to a large extent had origin in growing inequality. Raghuram Rajan in his famous book “Fault Lines” puts it very succinctly: “Growing income inequality in the United States stemming from unequal access to quality education led to political pressure for more housing credit. This pressure created a serious fault line that distorted lending in the financial sector”.
Successive financial crises such as Asian Financial Crisis (1997), Global Financial Crisis (2007-08) shows that inequality can lead to macro-economic instability or meta-stability.
A recent IMF Paper “Stranded! How Rising Inequality Suppressed US Migration and Hurt Those Left Behind” ( Tamim Bayoumi and Jelle Barkema ) published on June 3, 2019 states that : In USA, an Increasing house price and income inequality has reduced long distance migration, the type most linked to jobs. The stunted mobility has diminished the chance of entering into a better job market.
Sustainable Development Goal 10 (SDG-10) of United Nations General Assembly stresses to reduce inequality. NITI Ayog observes that: on average, income inequality has increased by 11% in developing countries between 1990 and 2010. A significant majority of households in developing countries – more than 75% – are living today in societies where income is more unequally distributed than it was in the 1990s.
OXFAM Inequality Report for India shows that wealth inequality is on the rise. The Gini wealth coefficient in India has gone up from 81.2% in 2008 to 85.4% in 2018, which shows inequality has risen. “Inequality in India: A survey of recent trends” by Parthapratim Pal and Jayati Ghosh mentions that “one of the reasons behind the increased income inequality observed in India in the post-reform period has been stagnation of employment generation in both rural and urban areas across states”. Although there is tremendous employment generation in services sector for skilled people, the country is set to create vast manufacturing base to deploy un-skilled and semi-skilled workers for productive purposes.
There is a vast improvement with launching of Pradhan Mantri Kaushal Vikas Yojana (PMKVY), Government of India. The Scheme has set up an ambitious target for up-skilling/re-skilling 400 million people by 2022. 18 ministries of the Government are engaged in various targeted skill development and employment generation programs. National Skill Development Policy (NSDP) was first launched in 2009 and was revised in 2015 to meet the challenges of skilling at scale, speed and with quality.
One striking development in the recent past is that the regional disparity has reduced; hiatus between rich and poor states in India has narrowed down, as the economically weaker states have achieved strong economic growth. However, certain districts remain still economically backward, several of which are located. Special schemes of the government are designed to pull them up to reduce the inequality. Appropriately, attainment of inclusive growth is what our policy makers are aiming at.
(The writer is a former central banker and the Managing Partner of Abhyutthana Financial Learning Centre LLP, an organization working in the area of spreading financial literacy.)