Consequences of unequal distribution
May 06 2014
If you can fill a bigger rice bowl, it is contended then there will be enough for all. Otherwise, you will be equitably rationing shortages. The protagonists of equitable distribution do not buy that. They argue that even if the size of the rice bowl increases, more rice will not be available to all. The avaricious rich, with larger spoon sizes will double or triple dip and grab a disproportionate share of the rice leaving the poor hungrier.
At present, the economic policy debate focuses on various growth models such as Gujarat, Kerala and Bihar. They all ultimately hinge on the two issues of growth and equity. A large part of our population lives below the poverty line. Almost 9 per cent — primarily tribal Indians — live in abysmal poverty even after more than six decades of independence. The pattern of geographic disparity in income and wealth is quite scary.
The term ‘east of Kanpur’ (EOK) drives home this point. It has been famously said that if you drop an imaginary line from north to south in India through Kanpur, you will find more than 90 per cent of the troubled Maoist areas in EOK. Ironically, EOK is rich in minerals and includes some of the most fertile lands in the nation. Yet, the fruits of growth and increase in GDP have eluded the denizens of EOK.
West of Kanpur has relatively prospered on the back of capital investments and growth of service industries. But the gap between the ‘have mores’ and the ‘have lesses’ has widened. There are many more ‘nouveau poors’ today. The debate on growth and equity should, therefore, be at the core of our economic policy choices. The consequences of inequality are nightmarish.
Our economic and financial strategies often focus on GDP growth. Our businesses, in their quest for maximising shareholder value, concentrate on making money at the bottom of the pyramid. Yet, such a wide base of poor people at the bottom of the pyramid in perpetuity is not sustainable; certainly not in a large and diverse country like ours. The central strategy should be to change the shape of the pyramid.
The debate on inequality is not unique to us. It is raging in every nation including the US and prosperous parts of western Europe. Yet there is no agreement as to why inequality happens and what should be the policy prescription to arrest and reverse a trend that may spin out of control.
Most debates on equality and growth in India quickly lead us to rival political camps. Each camp has its own set of favourite economists providing advice from the cooler climes of University of Columbia or Harvard. But most of the argumentative discourse continues unabated in a data-free environment.
A French economist has attempted to change all that. Thomas Piketty of Paris School of Economics (PSE) has written a 685-page tome titled Capital in the Twenty-First Century that has vaulted to the top of Amazon.com bestseller list. The starting premise of his argument is: “Intellectual and political debate about distribution of wealth has long been based on an abundance of prejudice and a paucity of facts”.
Paul Krugman, while reviewing the book for New York Times, has said, “This is an extremely important book on all fronts. Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the way we used to.”
Piketty has done painstaking research. He has collected data over 15 years from 20 countries poring over government statistics and tax records. Often, his research goes back to the 18th century. His diagnosis is simple: People who can make large investments in capital or equity grow richer because the gains on capital and growth on investments always outstrip GDP growth. While consumption and wages grow slower than investment gains, a disproportionately greater share goes to the rich who can invest. There are exceptions, of course. In times of war or depression, the rich lose money faster than the poor. But over the long haul, the story holds.
Krugman summarises the central idea brilliantly, “The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to 19th-century levels of income inequality, we’re also on a path back to ‘patrimonial capitalism,’ where the commanding heights of economy are controlled not by talented individuals but by family dynasties.”
Economists will differ with Piketty on his prescription of imposing wealth taxes and restraining the growing power of inherited wealth. But it will be hard to fight him on data and facts. If wealth continues to cascade up and not trickle down, people’s faith in our economic system will be undermined leading to social conflicts. In India, we are already seeing the first signals. In our poverty-stricken areas, there are armed uprisings by Maoists. In the din of the debate on various models of growth, it would be dangerous, even for the rich, to risk excluding the poor from the feast of development.
(The writer is managing director of Deloitte Consulting, India. These are his personal views)