Friday, May 05, 2006

The politics of poverty and inequality -- An article from July 2005


Sukumar Muralidharan
July 2005

The discovery of the poor as a political resource is perhaps an abiding contribution that Indira Gandhi has made to Indian democracy. Her invocation in 1971 of the slogan of “Garibi Hatao”, was a moment when electoral politics in India, which had sunk into a low-level equilibrium of recrimination and strategic stasis, acquired a new energy.

The discovery of the transformative potential of the poor remained incomplete. Indira Gandhi was eager to recruit them to her political cause but disinclined to undertake the kind of radical redistribution that would make a significant dent on poverty. Her anti-poverty programmes were financed out of a burgeoning budget deficit. And with the agricultural economy then being in a state of stagnation, the increase in purchasing power in the hands of the poor was not matched by a growth in the availability of their items of staple consumption. The consequence was an inflationary spiral, considerably aggravated by speculative hoarding by private trade. When international oil prices exploded late in 1973, inflation in India acquired crisis proportions, compelling first, a rapid scaling down of the ambition with which “Garibi Hatao” was being pursued, and then, under the Emergency regime, an actual reversal of course.

It is yet unclear what lessons, if any, have been taken on board from this experience. The Employment Guarantee Act that both houses of Parliament recently passed, has since been signed into law by the President. Early indications from Prime Minister Manmohan Singh and Finance Minister P. Chidambaram, are that the outlays necessary to operationalise the law will be found from existing heads of expenditure, by reclassifying the allocations already committed for subsidies, rural development and employment generation programmes. This would politically be a hazardous course, to withdraw benefits and entitlements from certain regions and social sections in order to guarantee employment in 200 of the country’s more impoverished districts.

Failing a significant additional effort at taxation, which would in effect reverse the course of fiscal policy followed over the last decade-and-a-half, the prognoses is for an unrelenting rise in the budget deficit over the next few years. There is a viewpoint that this need not necessarily engender inflationary pressure as in past years, for a variety of reasons. Unlike the early-1970s, buffer stocks of food with the government and its agencies, are now a veritable embarrassment of riches. Far in excess of prescribed norms, their carrying costs have become a major burden on the public exchequer. If the rise in purchasing power among the poor were to lead to a depletion of these stocks, the net effect would be not an increase in the budget deficit, but quite conceivably, a decrease.

As with food, so also in several others sectors catering to the consumption demands of the poor, there is substantial excess capacity available in the economy. Rising demand for these items of consumption could easily be met by merely ramping up production, without the slightest risk of inflation.

If the growth experience of the 1990s and beyond were to be considered, there would be ample reason to be cautious about these arguments. The enormous accretion to food stocks has happened in spite of a steep decline in the growth rate of agriculture in the 1990s. The excess of supply in other words, has been achieved only by suppressing the demand for food amongst the poor. This has also been key to understanding the low-inflation experience of the last decade or so.

A further complication is likely to arise in the labour market once the employment guarantee kicks in. A vast sea of unemployed workers has been an assurance for agricultural capitalists that wage rates will remain low. But with the working population likely to enjoy fresh livelihood options once the employment guarantee comes into effect, wage rates paid by larger farmers who hire in labour, are likely to rise. This is likely in turn, to engender a demand from their side for higher support prices, creating its own dynamic in terms of the budget deficit, the issue prices of food, and the inflationary process.

Indications are strong that no serious dent can be made on poverty today, without an effort at the redistribution of income and wealth. It was a fundamental premise of the decade-and-a-half of globalisation, that growth will on its own, create a momentum down the scale of income and wealth, enabling increasing numbers of the working population to migrate out of poverty. That premise is now increasingly recognised as deeply flawed. Final confirmation came from the World Bank, one among the two principal missionaries of globalisation, in its recent World Development Report, which was evocatively titled, “Equity and Development”. Its message was summed up by chief economist Francois Bourguignon, with an appropriate economy of words: “Equity is complementary to the pursuit of long-term prosperity. Greater equity is doubly good for poverty reduction. It tends to favour sustained overall development, and it delivers increased opportunities to the poorest groups in a society”.

There is a hint of revisionism about the World Bank’s recognition that the high growth rates registered in India and China have not quite been as salutary for the removal of poverty as earlier assumed. The picture of global inequalities may have been somewhat mitigated, it argues, but “the best available estimates suggest that inequality in India has been rising, but with no solid assessment of by how much”.

This undoubtedly represents a rather late awakening for the World Bank. It has for long been argued by economists who have chosen to look at the evidence with some rigour, that the growth processes of the last decade and more, have been profoundly unequal in their implications. Personal consumption has undoubtedly been increasing in the two countries – China and India – that are today identified as canonical instances of growth driving a rapid decline in poverty. But rising consumption cannot be assumed to be an index of diminishing poverty. It could indeed, be merely an indication that inequality is increasing.

The evidence that global inequality increased during the 1990s is now considered fairly compelling. Globalisation, in fact, has been a polarising process, increasing the gaps between industrialised and developing countries on one side, while sharply widening the disparities within classes in each of these countries. This issue, which has been little considered in the last quarter century, is now recognised as an integral part of the battle against world poverty. As the economist Robert Wade put it in 2001: “Many analysts apparently take it for granted that global inequality is falling. Others think it sufficient to focus on poverty, and ignore inequality as such. Both these views need to be challenged. New evidence suggests that global inequality is worsening rapidly. There are good reasons to worry about that trend, quite apart from what it implies about the extent of world poverty”.

An innovation that Wade makes is to classify the urban and rural parts of China and India separately in estimating trends in economic inequality. Though his study covers only a limited number of years ending in 1993, the trends it highlights have undoubtedly persisted since. The reasons for growing income inequality that he identifies are several:
faster economic growth in the advanced countries of the Organisation for Economic Cooperation and Development (OECD);
faster population growth in the developing countries;
slow growth of output in rural China, rural India and Africa; and
rapidly widening output and income differences between urban China on the one hand, and rural China and rural India on the other.

The economists Thomas Piketty and Emmanuel Saez, in introducing their pioneering work on income inequality in the U.S., mention in passing, as a curiosity, that few studies since Simon Kuznets’ work in 1953, have really been concerned with this issue. There have clearly been some ideological barriers to research on economic inequality in recent times. And the reasons though not part of the focus of the Piketty-Saez study, are inferentially established by its conclusions:
a sharp increase in the share of the top 10 percent of the U.S. population in total income, has been a feature of U.S. growth processes since the early-1980s.
The trend indeed, begins to accelerate in the mid-1980s and gains further momentum in the mid-1990s.

A similar increase in the share of the top one percent of the U.S. population is also evident. Indeed, if 42 percent was the share of the top 10 percent in the national income, the top one percent alone accounted for 14.5 percent in 1998. And even though the Piketty-Saez study does not cover this period, it is a reasonable conjecture that the degree of inequality should have increased with the sweeping tax cuts that were among George Bush’s first policy initiatives since assuming the U.S. Presidency in 2001.

The U.S. experience, as Piketty and Saez indicate, has been rather different from that of France, which witnessed a relatively more equal distribution of income through the 1990s and beyond.

A similar estimation of income inequality using individual income tax returns data for developing countries is impossible, since tax administrations in these countries typically cover no more than a minute fraction of the population. A recent study attempted the much more modest exercise of computing income inequalities within the top one percent (or top percentile) of the Indian population using income tax returns data. The results though perhaps not definitive, are nevertheless important signposts to what could have been happening to Indian society under a regime of globalisation.

The study reveals a rapid increase in top income share since 1980-81, an increase that indeed, is sustained through the decade of the 1980s and picks up fresh momentum in the 1990s, with perhaps fewer fluctuations. A striking feature of income distribution in the 1980s was the relentless increase in the share of the top 0.01 percent of the population in total income. From 0.40 percent in 1980-81, the figure increases to 0.64 percent in 1990-91, before finishing the decade at 1.57 percent.

The “gradual liberalisation of the Indian economy”, the authors conclude, “did make it possible for the rich (the top 1 percent) to substantially increase their share of total income”. However, the 1980s and the 1990s were significantly different, in that in the former decade, “the gains were shared by everyone in the top percentile”, while in the latter, “it was only those in the top 0.1 percent who made big gains”. “This suggests the possibility”, the authors surmise, “that the ultra-rich were able to corner most of the income gains in the 1990s because they alone were in a position to sell what the world markets wanted”.

The claim that poverty has diminished is not inconsistent with the picture of growing inequality. The figures that have been officially adopted by the Government of India though, are considered rather infirm, overstating by a large degree, the extent to which poverty may have fallen. It is now the official orthodoxy in India that between 1993-94 and 1999-2000, when the 50th and 55th rounds of the National Sample Survey on consumption expenditure were conducted, the number of people living in poverty declined by the order of 60 million, with the poverty rate itself falling to 26 per cent. Apart from the fact that this narrative is inconsistent with the larger picture – of falling agricultural growth rates, growing “casualisation” of employment, and declining per capita availability of basic subsistence goods – there is strong reason to believe that it is a statistical illusion, engendered by a change in survey methodology in the 55th round. Indeed, the economist Abhijit Sen, now a member of the Planning Commission, has concluded after a careful reevaluation of the survey data, that the second half of the 1990s and beyond, may have been a period when progress was halted or perhaps even reversed, in India’s battle against poverty.

The economist Angus Deaton has observed, that the economic reforms introduced in India in the 1990s have remained controversial, as have “their effect on poverty”. This debate is not unique to India, says Deaton: “The worldwide controversy about globalisation and its effects on poverty and inequality has followed much the same lines as the internal debate in India”. Because India “accounts for about 20 percent of the global count of those living on less than $1 a person per day”, what happens in India “is not only a reflection of the worldwide trend, but is one of its major determinants”. With the Employment Guarantee Act, the Manmohan Singh government now has an opportunity to decisively influence the global debate and chart a new path out of the poverty trap. Whether it will succeed in discarding the old nostrums about growth being an adequate antidote for poverty, and break out of the stifling straitjacket of fiscal conservatism, remains to be seen.

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