ExplainSpeaking: Should India reverse economic reforms to reduce growing inequalities?

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Dear readers,

Last week the The World Inequality Report (WIR) 2022 has been published and it created quite a stir. This is because the report asserted that: “Contemporary global inequalities are close to the levels of the beginning of the 20th century, at the height of Western imperialism.”

What led to these alarming results? the report, which was authored by economist and co-director of the World Inequality Lab, Lucas Chancel, along with economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman, blamed the policies of economic deregulation and liberalization that have proliferated across the world (including including India) since the 1980s.

“Income and wealth inequalities have increased almost everywhere since the 1980s, following a series of deregulation and liberalization programs that have taken different forms in different countries,” the report said.

He goes on to say, “The rise (in inequalities) has not been uniform: some countries have experienced dramatic increases in inequality (notably the United States, Russia and India) while others (countries Europe and China) experienced relatively smaller increases. “

He thus concludes that inequality is not inevitable but a “political choice”. In other words, if a government wants to fight inequality, it can do so by choosing to tax the rich and redistribute that wealth among the poor.

He also challenged the idea that higher economic growth usually leads to higher inequalities, especially in the initial phase. “Average national incomes tell us little about inequality,” he said. Indeed, according to the report, average national incomes are “bad predictors of inequality”. For example, “among high income countries, some are very unequal (like the United States), while others are relatively equal (like Sweden). The same is true in low- and middle-income countries, some with extreme inequalities (e.g. Brazil and India), fairly high levels (e.g. China), and moderate to relatively low levels (e.g. Malaysia, Uruguay).

As a result, many of you must have read or heard several economic commentators berating economic liberalization around the world – and India in particular – and suggesting that India or the world has been doing much better with the political choices of the years. 1960 or 1970, etc.

Should India reverse so-called economic reforms? Should the world do this?

Let’s look at the evidence from the World Inequality Report 2022 itself. The graph below is taken from WIR 2022. It traces global income inequality between 1820 and 2020. This inequality is calculated by looking at the ratio – T10 / B50 – the average income of the richest 10% and the average income of the poorest 50%.

As the graph shows, this ratio actually increased between the 1960s and 1980s and, more importantly, it has declined since. So while global income inequality is where it was at the height of Western imperialism, it is also true that income inequality has been declining since the 1980s.

Global income inequality between 1820 and 2020

Another graph, which details what happened to the top 10%, middle 40% and bottom 50% income share, also gives similar results. As you can see, since 2000, the income share of the richest 10% is declining while that of the middle 40% is increasing at almost exactly the same rate.

These two graphs, both of which are included in the summary of the report, weaken the case of anyone arguing that the economic liberalization policies adopted since the 1980s are in themselves responsible for the increase in inequality.

Global income inequality between 1820 and 2020

It is also important in this context to examine what happened to the levels of poverty in the world and in India when the policies of economic liberalization were implemented in full force.

Look at the graph below which gives the share of the world’s population living in abject poverty. As the slope of the graph shows, between 1980 and 2015, the share of the population living in abject poverty (i.e. living on less than $ 1.9 per day) fell most sharply over the past decade. this phase.

Share of the world’s population living in abject poverty

The graph below shows that it is not only in percentages that abject poverty has decreased since the 1980s. The yellow arrow points to the year 1981 and it is clear that since then there has been a decline in absolute number of people living in abject poverty.

Share of the world’s population living in extreme poverty, 1820 to 2015

The process of poverty reduction has been particularly rapid for India and its neighboring countries such as China and Bangladesh.

Look at the graph below which shows the share of the population living in extreme poverty (less than $ 1.90 international per day) in the world, India, China and Bangladesh. In India, this share has increased from almost 60% to around 10%. In China, it fell from 89% to less than a percentage point.

Share of the world’s population living in extreme poverty, 1981 to 2019

The graph below shows that these poverty reduction trends are not limited to the poorest. This shows how much the share of the population who lived on less than 3.2 international dollars per day has also declined.

Share of the population living on less than $ 3.2 international per day

The graph below zooms in on India. It gives the share of the population on different income / poverty thresholds. In 1981, only 13% of the Indian population earned more than $ 3.2 per day. In 2017, this proportion was around 55%.

Share of population on different income / poverty lines in India

What these data show is that the same policies that many blame for worsening economic inequalities in India are also responsible for the sharpest decline in levels of abject poverty in the country and elsewhere.

The question to ask is: “What would be my priority: To reduce levels of abject poverty or to reduce inequalities?”

In other words, just because we want to reduce inequalities does not mean we are getting rid of the economic reforms that have by all accounts greatly reduced poverty levels. Wanting to go back to the policies of a time when India had less inequality because almost everyone was equally poor is like throwing the baby out with the bathwater.

The average annual national income of India’s adult population is Rs 2,04,200 in 2021.

If inequality continues to grow rapidly, it only implies that the government needs to introduce more economic reforms, as such alarming levels of inequality could easily slow domestic growth.

What could such reforms be?

A 2015 publication titled “In It Together: Why Less Inequality Benefits All” by the Organization for Economic Co-operation and Development (OECD) provides some guidance.

* Increased role of women in the economy: “Governments must pursue policies aimed at eliminating the unequal treatment of men and women in the labor market and removing obstacles to female employment and career advancement. This includes measures to increase the earning potential of low-paid women and to tackle the glass ceiling, ”he says.

This is especially true for India which has one of the lowest female labor market participation rates. One way to improve women’s participation in the economy is to improve the law and order situation. The second is to invest in public transport. The third is to invest in their education. The list is long.

* Promotion of employment and quality jobs: “Policies must emphasize access to employment and integration into the labor market. The emphasis should be on policies for the quantity and quality of jobs; jobs that offer career and investment opportunities; jobs that are stepping stones rather than dead ends ”.

* Skills and education: More needs to be done to equip young people with the skills they need to get off to a good start in the workforce. In a rapidly changing economy, further efforts, with the close involvement of business and trade unions, should be made to promote continuous upgrading of skills throughout working life.

* Tax and transfer systems for efficient redistribution: “Well-designed redistribution through taxes and transfers is a powerful instrument to contribute to more equality and more growth. Over the past decades, the efficiency of redistribution has weakened in many countries due to the fact that working-age benefits have not kept pace with real wages and taxes have become less progressive. Policies must ensure that the wealthiest individuals and multinational corporations pay their share of the tax burden. The large and persistent losses of low-income groups underscore the need for well-designed income support policies and countercyclical social spending ”.

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A crucial element here for India is to reform its tax administration system. In their excellent book “In the Service of the Republic”, Ajay Shah and Vijay Kelkar write that “The marginal cost of public funds in India is high. The cost to the economy for Rs 1 of public spending is Rs 3. ”If our tax administration system is more efficient, it will be able to collect more money from the same tax base. If our spending mechanism is more efficient, the additional tax revenue money will be better spent.

Share with me what you think India should do to reduce inequalities without necessarily reverting to failed policies. Write to me on Udit.Misra @ expressindia.com

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About Natalee Broderick

Natalee Broderick

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