Development, Inequality and Poverty: The Evolving Narrative
Received wisdom on the evolution of incomes within and across nations is that over the last several decades differences in income per capita across developed and emerging/less developed countries are decreasing. Thus, their per capita incomes across the world are converging. However, concurrently there is broad consensus that inequality within countries is increasing over time. This has caused a major upheaval in academic and policy circles and inequality has emerged as a major political issue in many parts of the world.
Economic data since at least the end of the Second World War has shown us that as incomes rose in many less developed countries income inequality within them rose. However, this phenomenon did not arouse much interest as it was considered inevitable that, as incomes rose in poor countries, inequality would rise, then stabilize and finally fall as incomes kept rising. Indeed that had been the experience of the major developed countries in Western Europe and North America. However, when inequality started rising in these developed countries alarm bells rang. Particularly significant was the fact that the top 10% and even 1% of the population increased their share in national income at rates much higher than those with median income. Indeed, while the shares of these affluent sections rose sharply during economic upturns, these shares did not record commensurate reductions during downturns, including the recent Global Financial Crisis of 2008-2010. Thus, the current mega interest in rising inequality is largely the result of such happenings in the developed countries, although less developed/emerging market countries have been experiencing rising inequality for very long periods.
Furthermore, redistributive policy in developed economies (also applied uncritically to many developing countries) assumes relatively homogeneous societies and well-functioning tax/transfer mechanisms so that inequalities could be kept within reasonable bounds. However, these assumptions do not hold in most less developed/transition economies. In the case of India, for example, some states (particularly those in the East such as Bihar and Odisha) have had the lowest per capita incomes in the country for decades. Indeed, the gap between the per capita incomes of such states and mean per capita income in India has been growing over time. One reason for this, as discussed in my two-volume treatise Facets of India’s Economy and Her Society, is that during the era of state-led development (roughly prior to the early 1990s) government policy kept regional inequality within ‘acceptable’ bounds. After the reforms of 1991, market-led development replaced state-led development and regional inequality was exacerbated. Also contributing to this was the fact that in the 1970s and 1980s technical progress in rice (staple crop of East India) was much slower than wheat (major crop of North-West India).
Because of India’s enormous social and ethnic diversity and historically high levels of inequalities between some ethnic groups, social inequality is a very important concern. This includes not just the traditional notions of income, consumption or wealth inequality but also inequality of opportunity when members of some groups were excluded from certain occupations. Thus, public policy has the task of improving access for traditionally disadvantaged groups through affirmative action policy. How India is meeting this challenge and attempting to redress gender inequality are also major concerns of the volumes.
That said, the volumes emphasize the fact that poverty reduction in India, and more broadly in the developing world, has been associated with higher economic growth. In the case of India, high agricultural growth in the 1980s and high GDP growth since the 2000s have led to sharp drops in poverty, despite increases in inequality, particularly, urban inequality. Further underscoring the importance of economic growth to poverty reduction is the fact that although in 1990 India had slightly higher GDP per capita than China in purchasing power parity (PPP) terms, higher economic growth in China has led to Chinese per capita GDP in PPP terms becoming 2.5 times that of India’s in 2016. This illustrates the spectacular importance of economic growth to attaining higher living standards and flows onto the poverty data. Between 1983 and 2012 India’s Head Count Ratio (HCR) of poverty fell from 53.86% to 20%, whereas Chinese HCR fell from 75.76 % in 1984 to 6.47% in 2012. Hence, growth is central to poverty reduction. A corollary is that rising inequality should definitely be a matter of concern for all countries including low income/emerging market countries. However, the overwhelming importance of poverty reduction in countries such as India means that inequality reduction should not come at the cost of lowering economic growth.
My two-volume work: Facets of India’s Economy and Her Society Volume I (Recent Economic and Social History) and Volume II (Current State and Future Prospects) published by Palgrave Macmillan earlier this year addresses these and many other issues.
Raghbendra Jha is Professor of Economics at the Australian National University. He has previously taught at Columbia University and Williams College, USA; Queen’s University, Canada; University of Warwick, UK; and Delhi School of Economics, IIM Bangalore and IGIDR (Mumbai) in India. He has published extensively in the areas of macroeconomics, public economics and social welfare, with a country focus on India.