Economics | Society and Culture | South Asia

Inequality in the US: India’s Choice

I have written a lot recently on inequality - in India and in Asia. The basic point has been the same - that inequality is bad from a social and moral point, but (as the ADB argues in its report on Asia) also from an economic point of view. In the same vien I pulled up an article from the NYTimes I had saved a few months ago.

Roger Lowerstein writes, at length, about inequality in the US, its drivers and solutions (The Inequality Conundrum, June 10). It is a long article, and one I will not quote here - but every word is worth reading (mirrored at The Economist’s View, if you do not have a Times subscription).

The observations I have made in the past week on inequality - which is growing in India and Asia - and the historical evidence from the US brings forth many points. Answering them is for another post, but I put them forward for reference and reflection:

• The theory that inequality would subside once an economy has reached a certain level of growth has not been borne out. It seems more likely that once a certain level of inequality is reached, it will persist or even be self-perpetuating, given the nature of white-collar driven growth we have. Reducing it will, therefore, require intrusive policy interventions.
• Is it really equality (of incomes) that we should be worried about, or fairness (of opportunity)? I take the latter view, yet recognize that equality of incomes is one component that retards fairness. The poor do not have the same skills or opportunities. “Unfairness” has many problems, all related to social exclusion. Income inequality is one of them and indeed reinforces those very drivers.
• As an aside, the previous point is a particular rebuttal of proponents of privatization. Privatization of education or health will have little impact on improving the outcomes of the socially excluded because they are socially excluded. Usually that exclusion is social and economic - and privatization will do nothing to remove either. The poor will remain poor and they will remain discriminated against.
• There seems to be a tradeoff between growth and equality. Certainly, too much equality leads to sloth. Yet, too much inequality becomes self-perpetuating and may also hinder growth. The choice of what the balance of growth and equality should be is for each society to decide. America seems to prefer more growth, Europe seems to prefer more equality (Switzerland, I can vouch is an extreme case, where ostentatious public displays of wealth are frowned upon).
• Finally, the best way to reduce inequality seems to be to reduce the incomes of the bottom. But we do not want to simply increase their incomes. If we want “fairness”, we want to give them the opportunity to increase incomes and move up the ladder. Redistribution seems to be the way to go. But it will only work when that redistribution leads the poor into more education and better jobs. Scandinavia is an excellent example, where education is extensive and good.
• Finally, it is important to note that in this debate social mores count, though the true economist may not get what that word means. Essentially, economic incentives are not all that matter. For instance, Indian family’s preference for education for their children is a good thing - it makes it easy to get children in school (the problem here is that we don’t have schools).

These points are very important for India as a society. Our economy is growing, but is relatively equal. That means we still have a choice as to what kind of growth we want. Do we want to go along at a comfortable pace and more or less within shouting distance of each other, or travel forth at a screeching pace but with many eating dust?

Ultimately, this decision will be taken by politics, but again I offer two perspectives:

• From the viewpoint of the ostentatious dollar millionaires (and billionaires) there is every sign we will go the American way, naively happy thinking there is equality of opportunity simply because we did well.
• From the perspective of those that did not see “India Shining”, the picture will not be so rosy, and so governments will resort to short-term but ill designed schemes such as the rural guarantee scheme, or quotas that do nothing to combat the root causes of social exclusion.

Neither portends well for India. Perhaps there is a more rosy picture, but that would require a more enlightened and uniform public and certainly more competent politicians. I fear we have neither.

© 2007 The Discomfort Zone.