Prosperity through inequality?

Economists are generally fond of using curves, graphs, and models. These tools help in explaining economic concepts and theories, sometimes acquiring a dogma-like status with economists. This is also true in the case of the ‘Kuznets curve’, which describes the relationship between inequality and prosperity as an inverted U, meaning thereby that inequality first rises during the early stages of development, reaches a peak, and then declines. The development experience of western Europe lends empirical validity to this relationship.

Historically speaking, inequality has not remained on the priority list of those economists who were more concerned about output, GDP, growth, savings, and investment etc. Traditional economic thinking emphasised that increasing the pie was the real issue. Its distribution was not that important. The poor will benefit automatically with the increase in the size of the cake and inequality will go down, as postulated by Simon Kuznets. However, during the last 30 years inequality has risen globally and “the inverted U has turned into something closer to an italicised N, with the final stroke pointing menacingly upwards” as described by The Economist in one of its reports on the subject.

On the face of it, the Kuznets curve is a simple description of a complex development process. It, however, gives rise to important questions like why does inequality rise in the early stages of development? Is the rise in inequality inevitable? Does inequality decline automatically after reaching the peak? Does the pace of fall of inequality predict something about the nature of dispersion of power in the country?

Economics literature says that inequality arises due to the dual nature of the economy. When a society undergoes a metamorphosis from an agrarian to an industrial economy, there are both losers and gainers. The industrialists and the middle class gains, while in a world of ‘mechanisation and desperation’, the labourers work only for subsistence wages due to obvious reasons. They live in pitiable conditions as depicted vividly by Charles Dickens in Hard Times. Once industrialisation becomes the predominant mode of economy, pressure mounts on the government for redistribution due to heightened awareness of rights – and consequently inequality declines.

But here is the catch. The decrease in inequality is not automatic. Redistribution of resources and decline in inequality depends on the power structures and arrangements in the society. If real democracy is lacking, it will simply be a case of elite capture. The elite will be more interested in perpetuating their hegemony over power and resources. Political reforms or wide sharing of power will be possible only if there is threat of revolution or change of status quo, which in turn requires the civil society to be vibrant and coherent in its demands. Further, people are least polarised on ethnic, linguistic, biradari or geographical lines. If they are voiceless and do not feel empowered to change their destiny either through the ballot (democracy) or threat of bullet (constant pressure on the elite for reforms to avert a bloody revolution), such a society will experience high inequality and the redistribution of resources will be weak.

Moreover, the rise of inequality in the early stages of development is not inevitable. The development experience of East Asian countries is a big exception. According to Daron Acemoglu et al, “the distinguishing feature of East Asian economies is the mass land reforms that took place in the late 1940s, 1950s, and 1960s.These reforms fundamentally altered the subsequent relationship between growth and inequality”. So the point here is that, if the state takes care of inequality through strong redistributive policies, a rise in inequality with prosperity is certainly avoidable.

The economic case against inequality is mainly on two grounds. First, less income inequalities increase aggregate demand. If income and wealth is concentrated in the thin minority at the top, spending will be low and, hence, aggregate demand will be low. On the other hand, if income is widely distributed in the society, aggregate demand will be high due to high spending, leading to high economic growth. Thus economic growth can be ignited via reduction in income inequalities.

Second, acute inequalities reduce happiness. Initially, the economists here also had a very different opinion. They argued that inequality was the very basis of diversification in the society. It incentivised people to work hard and achievement gave a sense of satisfaction and success, hence it was happiness-enhancing. This strand of thinking is now changing. It is being argued, and rightly so, that inequalities in the society reduce happiness since happiness levels in a society are determined more by the relative income and not by absolute income.

Professor Emeritus of Political Economy at Warwick University and member of the House of Lords, Robert Skidelsky, put it very succinctly in his article titled ‘Happiness, equality and the search for economic growth’ (Guardian, Oct 22, 2012): “we constantly compare our lot with that of others, feeling either superior or inferior, whatever our income level; well-being depends more on how the fruits of growth are distributed than on their absolute amount. Put another way, what matters for life satisfaction is the growth not of mean income but of median income – the income of the typical person”.

The route to prosperity, growth and happiness lies in more equality in the society. Reducing inequality should, therefore, become an important plank of the state’s policies. But the question is: how can we go about it in Pakistan? First, structures responsible for perpetuating inequalities need to be revisited and reconstructed. For example, the agrarian structure still enjoys prominence in our economy; unless fundamental reforms are undertaken to change the existing agrarian structures, inequality and poverty cannot be tackled especially in the rural areas. Thus any inequality reduction strategy should focus on land reforms, taxation of big farms and non-farm economy.

The second area of focus should be education. Currently, our educational system is a victim of class apartheid of an acute nature. A clear-cut education policy, incorporating uniformity and relevance, is the need of the hour. Improvement of education standards in all public schools should be the focus. Selective interventions will not work and meritocracy will become a farce if all children, irrespective of class and gender, do not have access to quality education.

Third, wide ranging taxation reforms, especially in the area of direct taxation with a view to make it really progressive, are needed. The progressivity of our current taxation system is highly doubtful as the rich who should pay taxes are out of the tax net. As a result, redistribution of resources is not taking place in the real sense.

Such changes will, however, not be forthcoming unless the civil society and media help articulate the issue of structural inequality in Pakistan. People should organise themselves on class lines rather than voting on considerations of ethnicity, biradari, caste, sect and linguistic affiliations etc, as such factors do not and cannot promise improvement in their lot. Such polarisation in society only helps the so-called elite perpetuate their hegemony over power and resources for want of any threat to the status quo. The ultimate loser is the person on the street.

The writer is a graduate of Columbia University with a degree in Economic Policy Management.


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