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.
Email: jamilnasir1969@gmail.com
The writer is a graduate of Columbia University with a degree in Economic Policy Management.