Commentators have compared this victory to the “freedom movements” in the Middle East. But there are few comparisons and this may well prove to be Pyrrhic victory. For while battling the corruption endemic in India’s political and administrative systems is certainly laudible, the way by which Anna Hazare and his supports plan to do so will only undermine India’s political freedoms and the faith the majority of Indians still hold in the system.

To control widespread corruption, the proposed Lokpal bill forsees the creation of an independent ombudsman consisting of representatives selected through a “participatory process.” Such an ombudsman would have widespread powers to investigate and prosecute anyone, yet be neither representative nor accountable to any branch of government.

Middle class Indians will probably say that all branches of government have failed them and they will be at least partly correct. The average middle class Indian today prefers to avoid any contact with the public sector. This apathy also extends to elections, where the middle class rarely participates. For them, the easiest solution to corruption in the system is simply to create an independent ombudsman.

Yet, only utopian naivete can explain why Hazare and his supports expect that an independent ombudsman would be any less corrupt than a system that has at least some checks and balances. Rather than fixing corruption and rent-seeking, it would simply move the problem from one place to another.

Worse this approach highlights, and will likely broaden, the rift between the middle class and the rest of India.

For while the middle class may have tuned out of participating in India’s politics, the majority of Indians continue to believe in the political system. They participate in elections and regularly reward or punish their politicians with amazing acuity. It is this majority that kicked out the BJP for suggesting India was shinning, when they were not; and this very majority that re-elected the Congress with a strong majority last time around, for proposing the motto of “inclusive growth.” It is this political vitality that has led to a competition amongst the states to grow faster, and that has taken Bihar from being a basket case to a success story.

So while the political system may not be working for the middle class, it is working for the many that continue to believe in it. Therefore, this middle class revival should not be compared to the protest movements in the Middle East. Rather, it is a tamer version of the yellow shirt protest movement in Thailand in 2008, which split Thai society apart. And it is a reflection of the middle class’ desire to blame someone else for their own failures.

Middle class Indians tend to see themselves as victims of corruption. Yet, they have done little about it. Facebook, Twitter, and the efforts of a Gandhian make it easy for them to let their anger be known. But Gandhian ideals require personal engagement and sacrifice, which is lacking from this movement. If Indians opt out of the political system and condone corruption in broader public life, they should not be surprised when it becomes endemic. And without a change in that apathetic attitude, it is only a matter of time before the ombudsman itself becomes a source of corruption, rather than a solution to it.

Measuring the American Dream

Policy debate on economics has usually focused on economic inequality – which has been growing in America, together with many Asian countries, including India. The financial crisis has brought home this point in very simple ways, as reported in a Pew study:

Between 1979 and 2004, the real after-tax income of the poorest one-fifth of Americans rose by 9 percent, that of the richest one-fifth by 69 percent, and that of the top 1 percent by 176 percent.

That may not, in and of itself, be unfair. But it does become so if only a few people ever have a chance to be in that top one-fifth or top 1 percent. That is where socio-economic mobility becomes important. Americans believe they live in a particularly meritocratic society that allows its people to move up the ladder – the quintissential American dream. Ben Bernanke called it thus:

Although we Americans strive to provide equality of economic opportunity, we do not guarantee equality of economic outcomes, nor should we. Indeed, without the possibility of unequal outcomes tied to differences in effort and skill, the economic incentive for productive behavior would be eliminated, and our market-based economy — which encourages productive activity primarily through the promise of financial reward — would function far less effectively.

Yet, it is increasingly clear that the twin assumptions therein – that a) there is equality of economic opportunity, and b) effort and skill are the only or even the most important variables to success – are wrong. It turns out that economic mobility depends much more on our birth and our upbringing than our own effort and skill. One measure – the extent to which individual and parental earnings are correlated – suggests that:

…about half of the advantages of having a parent with a high income are passed on to the next generation. This means that one of the biggest predictors of an American child’s future economic success — the identity and characteristics of his or her parents — is predetermined and outside that child’s control.

Malcolm Gladwell called this “accumulative advantage” in his book Outliers – the phenomenon of the rich getting rich and the poor getting poorer. Such accumulative advantage should not be a surprise – even if the extent of its influence is. Yet, if we are to strive for a meritocratic society that offers everyone a chance at success a critical question must be to what extent does a state manage to shield its population from the ravages of destiny?

On this point there is much evidence within the OECD showing that America falls far behind European and particularly Nordic countries. On the previous measure (earnings elasticity) the USA is just below Italy and the UK, with the least correlation in Denmark, Australia, Norway, Finland, and Canada.

Overcoming “accumulative advantage”

There are, then, two ways to measure a society – to what extent is it equal (more economic equality), and to what extent is it just (providing economic mobility). America hopes to be just, providing equal economic opportunity while accepting higher levels of economic inequality. Europe, meanwhile, believes that economic opportunity will never be truly equal and thus seeks to overcome or protect from hereditary disadvantages. Ironically, Europe’s model proves not only to be more just, but also more equal (with sufficient correlation between equality and mobility).

Ironically, though, as Europe’s model proves to be better, its very existence is threatened for being financially unsustainable. European governments, faced with massive debt, must choose which social programs to cut.

India is thus offered two models – one that fails to sustain itself, while the other that fails to deliver on the goal of an equal and just society. What do the policy choices of Indian politicians reveal about their preferred model?

India has since liberalization in 1991 been trying to seek high growth. Such growth ensures some form of economic mobility – incomes of successive generations increase along with overall growth. Put another way as the pie gets bigger everyone gets a bigger absolute part of the pie.

Yet, policy emphasis on growth itself resulted also in a more unequal society as those with a privileged birth – with at least well-educated parents – benefit disproportionately from the opportunities provided by liberalization. They do better than their parents. Meanwhile, the farmer in the hinterland – without the means to send his children to an English speaking school – must see his children continue to toil the land or seek opportunity in low-paid manual labor. Both equality and relative economic mobility thus go down.

In recent years, however, India has recalibrated its policies to be more welfare focused. In particular, a realization that the country cannot survive united nor compete unless everyone benefits, has brought forth some interesting compromises.

For one, government is starting to accept its welfare role in some areas – as illustrated by the rural employment guarantee scheme. Second, there has been some political pressure on competitive capitalism – this explains the edict of Andhra Pradesh’s politicians to the population not to pay back microfinance loans. And finally, companies and their wealthy seem to be taking some responsibility for good governance into their own hands – evident in the massive philanthropic efforts of individuals such as Azim Premji who focuses disproportionately on strengthening public schools, rather than creating a more efficient, but perhaps more expensive, private system.

Thus, India returns ever so often to the left, while seeking to convince the world it is the future of capitalism, with Ambani’s multi-million dollar mansion a clear reminder to those that may forget.

There is, therefore, hope that the disadvantaged in India will still see the benefits of growth. But a sustainable middle path requires combining two hard to reconcile social preferences – people must be highly motivated for the spoils of success (as in America and Asia), but hold a healthy regard for the welfare of others to allow for the redistribution of those spoils (as in Europe). To date no society has managed to do so, though the voluntary redistribution of wealth by the newly wealthy may provide some temporary relief.

India’s growth over the past several years has certainly raised wealth. But it has also led to a more unequal and a more unjust society. Of course, no society can be expected to completely shed its bias towards aristocratism. That would be against human nature. But the purpose of a state is not necessarily to change human nature, but rather to help those disadvantaged by some elements of it. In that, the American Dream has failed to become reality for too many people. India, looking for a dream of its own, can certainly promise – and ask – better to its citizens.

How different is this philanthropist? And what does it say about philanthropy and society?

The first question is answered by Kramer himself, who sees this as a new approach that brings together four elements – taking responsibility for the change they seek, engaging others to build coalitions, using structures and partners from outside the non-profit sector, and creating knowledge to influence the behavior of others.

It would appear from this that what venture philanthropy did at the level of the institution, catalytic philanthropy does at the level of society. Venture philanthropy focuses on addressing the fundamental challenges facing institutions – lack of long-term funding, organizational limitations in expertise, etc. Similarly, the common thread amongst catalytic philanthropists seems to be that they are addressing a single societal challenge (such as meth addiction in the example used by Kramer).

Seen in this light the catalytic philanthropist is not new, but is still rare. Carnegie’s initiatives to address education, the Rockefeller Foundation’s support of research into high-yielding varieties of seeds, and the Gates Foundation’s efforts to address fundamental shortcomings in public healthcare in the developing world all follow that same trend to varying degrees. If that is the case the catalytic philanthropist is not that different from the subject of the book Philanthrocapitalism: How the Rich can Save the World.

The rise of such a philanthropist may be heralded as a good thing. But is it?

As Kramer says, traditional donors “delegate to nonprofits all responsibility for devising and implementing solutions to social problems.” But by putting faith in catalytic philanthropists, society also delegates responsibility for improving its lot to wealthy individuals, rather than to the elected representatives in government that are usually mandated that task of ensuring societal progress. That, certainly, cannot be a good thing for it implies that either governments have been unsuccessful in meeting society’s demands or that the ambitions of wealthy individuals exceed the capabilities of government.

The real reason for the rise of the catalytic philanthrocapitalist (to combine terms) is probably a mix of those two. But the correct response to a failure in governance is not to delegate the responsibility to another unaccountable individual. And the ambitions of individuals can just as easily do harm as good.

This is not to say that such philanthropy is bad. The basic premise that meaningful, long-term social change cannot happen via check-book philanthropy is correct. But when philanthropists engage in transforming society to match their visions, they must critically ask themselves if changing society is indeed their responsibility? And if they conclude that it is they must still be careful and understand there is a fine dividing line between visions and mirages.

Much of Moyo’s argument in the book Dead Aid, including her statement that aid is “no longer part of the potential solution, it’s part of the problem” follows from other books such as The White Man’s Burden by William Easterly. But I find her suggestion that democracy is a luxury for growth personally offensive. It is misguided at so many levels, I don’t know where to begin.

First, the benevolent dictator is an oxymoron. Yes, China and Singapore may have grown through dictatorial regimes but China also had the Cultural Revolution. If anything, the list of countries that have suffered under dictators is far longer. It is disingenous of Ms. Moyo to suggest that dictators can be benevolent, without acknowleding the very real and more likely downside of such a system.

Second, how likely is it that a dictator would cede power to a democratic system once economic growth had taken off? More likely, he will milk that economic growth for personal gain and prevent the creation of strong, independent, institutions – critical to long-term stability and growth. Few, if any, examples exist of a peaceful and successful transfer of power from dictator to democracy.

Finally, Ms. Moyo is particularly wrong in using a study “showing that democratic governments survive longer as per-capita income increases” to bolster her case. The suggestion that any correlation between the two variables (income and democracy) is actually a causation from the former to the latter is not only simplistic but wrong. In a 2005 paper “Income and Democracy,” Acemoglu et. al (from MIT and Harvard) find that “the long-run evolution of income and democracy is related to historical factors. Consistent with this, the positive correlation between income and democracy disappears, even without fixed effects, when we control for the historical determinants of economic and political development in a sample of former European colonies.”

The belief that democracy can only exist in rich countries is a myth. A similar argument was made in 1947 on the prospects of India’s democracy surviving. India’s political system survived, despite low economic growth rates. Indeed, India’s one experiment with dictatorship in 1975 was a huge failure – rejected by the populace despite promises of a better quality of life.

If anything entrepreneurship – a key element for increasing incomes – is more likely to thrive in a society that values free-thinking, freedom of expression, and has institutions for disemminating knowledge to the majority rather than a small elite. Dictatorships, by contrast, are likely to have none of this, suggesting that in the long-run autocracy will inhibit growth.

People can choose to have a free political system even when their economic choices are limited. And in times when the economy suffers, as is inevitable in a cyclical, globalized world, it is political freedom that helps prevent conflict. To suggest the relation is inverted is flat out ridiculous.

This is, of course, complete nonsense. The neo-malthusian argument that population growth cannot continue forever has been repeatedly disproved. It is surprising that immigration conservatives are trying to use the environment as their new rallying call. What is worrying, however, is that they are succeeding – and the Christian Science Monitor is asking if “immigration is an ecoissue.” Nor are their efforts new – in 1998 the Sierra Club membership was forced to go to the ballot on the issue; two years ago the CSM reported on a widening (and possibly imaginary) rift amongst environmentalists.

Who is Behind this Argument?

Before addressing the argument, it is interesting to evaluate who is behind this “population-growth” environmentalism. A quick search reveals two organizations that frequently pop up - Population-Environment Balance (or BALANCE) and the even more right-wing Federation for American Immigration Reform (FAIR).

Their agendas are straightforward, alarmist, and (contrary to the name), completely unbalanced. An alarmist article on BALANCE calls for an immigration “moratorium,” claiming that “since 1945 the U.S.’s population growth rate has equaled that of India’s.”

Such statements reveal both the line of attack being deployed by these groups and its weakness. The arguments are targeted at a traditionally liberal group. After all, who would not be concerned about the “War on Poverty,” or on America’s carbon footprint. But they implicitly associate the environmental failures of the US on a single bogeyman – population immigration. Yet, that link between population and environment has been repeatedly disproved.

But first, is immigration event a problem? According to the Pew research center, 82% of US population growth has been due to immigration. But in this era of aging populations and underfunded pension systems in much of Europe, a large and young population is, in fact , an asset. So if America’s population is growing like India’s – American’s should rejoice at their own demographic dividend.

At the micro-level however, BALANCE’s two arguments deserve credible responses.

The Neo-Malthusian Thesis

The first argument is an absolute one – that America cannot afford more people, given the limited natural resources available. It is, in this view, critical to “stabilize” the population to preserve American’s quality of life.

Yet, this argument has been repeatedly debunked. Donald Boudreaux, from George Mason University, did it well in 2006, in his article “Absorption Nation“:

I agree that America’s ability to absorb immigrants has changed: it’s higher today than at any time in history.

Only by naively supposing that a country’s ability to absorb immigrants is determined chiefly by the availability of unsettled land do people conclude that America today is less able to absorb immigrants. It’s true that more land was available for settlement in the 19^th century. That land, however, was never much of an attraction to immigrants. Historically, most immigrants settled in cities — think, for example, of Manhattan’s Little Italy and San Francisco’s Chinatown.

Also, of course, we’re better able to feed ourselves today, even though the amount of land used for growing crops and pasturing animals is no larger now than in 1900. Higher agricultural productivity enables farmers and ranchers to produce more output on the same amount of land.

What about workers? A measure of ability to absorb workers is capital invested per worker. Today, the amount of capital invested per worker is nine times greater than it was just after World War I. Because a worker’s productivity rises when he has more capital to work with, and because his pay is tied closely to his productivity, workers today produce and earn more than workers did during the open-borders era.

If there is no particular “absorption limit,” there is also no correlation between population density and environmental degradation:

Holland, for example, is one of the most densely populated countries in the world, with 4,500 people per 1,000 hectares. It is also one of the most ecologically strong, devoting 10% of its land to ecological protection. Compare this to Brazil with only 170 people per 1,000 hectares and an unprecedented rate of rainforest destruction and it becomes clear that corporate and government policy, not population density, accounts for environmental degradation.

Clearly, the ability to absorb immigrations has little to do with natural resources. Land is abundant – only 3% of America’s landmass is urban; agriculture is flourishing; and quality of life keeps rising. Immigration does not pose a threat to the sustainability of American’s quality of life.

The Impact of Immigrants in America

There is a second argument. Since Americans consume more than others, a lower population is desirable by itself in order to keep overall consumption low. And, since immigrants use more resources in America than they would in their home country, less immigration implies a better planet. A Carry Capacity Network article states:

As an example consider the impact of a typical family of seven, immigrating from a country where their owning a car was highly unlikely. When they come to America they are likely to acquire cars (0.76 cars per family member). For every mile they drive, they pollute and deplete resources that could have been relatively unaffected had they continued their prior lifestyle. The act of border crossing enables them to make lifestyle changes that adversely affect the environment; by becoming Americans they adopt the consumption and pollution patterns of the world’s most environmentally destructive lifestyle.

In evaluating this argument, it is useful to view environmental impact as a combination of three variables – population, consumption, and technology. America has higher consumption – thus it should have a lower population.

First, this argument is egregiously elitist, for it condemns immigrants – who have the natural right to seek a better life – to misery and poverty. Indeed, the natural extension of this argument would be to force people outside America to live in utter deprivation, so that American’s can continue their polluting ways.

This argument is misguided, overlooking the actual problem – the high consumption lifestyle of Americans. Real environmentalists would convince Americans to consume less.

Finally, this argument focuses attention on the least important of the three solution variables – technology. It is technology that helped humanity avoid a malthusian famine by increasing food and worker productivity. It also offers solutions to problems such as energy, waste generation, and water conservation. True environmentalists would recognize both the true problem (consumption), and the potential solution (technology), and focus efforts there.

The Ugly Truth

The population-growth environmentalist’s arguments hold no water. Yes, America’s population is increasing and “far from stabilized.” Yes, this is largely due to immigration:

[Hispanics] are 14.3 percent of the overall population, but between July 2004 and July 2005, they accounted for 49 percent of US population growth. Of the increase of 1.3 million Hispanics, the Census Bureau reported, 800,000 was because of natural increase (births minus deaths), and 500,000 was due to immigration.

“The Hispanic population in 2005 was much younger, with a median age of 27.2 years compared to the population as a whole at 36.2 years. About a third of the Hispanic population was under 18, compared with one-fourth of the total population,” according to the Census Bureau report.

In view of humanity’s ability to adapt and develop new technologies, there is no known limit on the Earth’s “carrying capacity.” And while environmental degredation is a phenomena, it is occuring not because of large populations or higher density, but because of overconsumption in America, by native-born Americans. Ironically, it is these immigrants which will pay the pensions of the population-growth environmentalists that oppose them.

These pseudo-environmentalists would do well to reveal their true agenda of preventing immigration. This love for environmentalism is old wine in a new bottle – and the environment has nothing to do with it.

Thus far, the issue of Kosovo’s independence has generally been considered one of sovereignty versus stability. Russia claims that Kosovo’s independence would serve as a precedent for other separatist movements worldwide, including in Spain, Northern Cyprus, and Georgia. Conversely, the US argues that this independence will provide stability and closure to the region. Recognition follows on the basis of internal and external political compulsions.

Recognition of Kosovo, however, leads to another troubling contradiction that no one has acknowledged. During the Balkan wars atrocities were committed by all sides of the conflict. In recent history Serbia was willing to go very far to accommodate an autonomous Kosovo. That Kosovo has become independent implicitly suggests that Kosovars cannot ever co-exist peacefully in Serbia – and in so doing fundamentally weakens the case for multi-ethnic societies themselves.

Such an understanding of nation states is highly Euro-centric, which holds that to be viable a nation must have a common identity of ethnicity, language, and religion. It is this limited perspective that led Churchill to claim, “India is merely a geographical expression. It is no more a single country than the Equator.” This is also why Europe continues to struggle with “integration” of immigrants.

Large European countries, which today face an influx of immigrants, must face up to the contradiction inherent in their support of Kosovo. They cannot have diverse “integrated” societies at home while espousing that ethnic groups elsewhere form small independent states rather than put in the effort needed to make multi-ethnic societies work.

Worse, such a position requires that we also consider the converse. If Kosovo has a right to independence, rather than accommodation within a multi-ethnic Serbia, then why does Serbia not have the inverse right to choose to be a single-ethnicity nation of Serbs? Without condoning the horrible atrocities that took place during the Balkan Wars, this reasoning unfortunately would bring us full circle back to the Wars themselves and, at least in theory, Kosovo’s independence would end up validating the atrocities that led to that independence.

A proposal to force firms to hire more workers from the dregs of Hinduism’s caste system (see article) would be different. It would be a disaster…

Extending into the private sector a policy that has been a disaster in the public sector is lunacy.

The Economist is a bit late to the party – this controversy has been around for a year. But this coverage is notable because it comes from a publication better known to cover US and European domestic politics. And if the Economist’s criticism of the policy proposal is unequivocal, it is not without explaining the real problem and the real solution:

Reservations in companies would not just damage business. They would also distract attention from the real source of the problem. Responsibility for lower castes’ lack of advancement does not lie with the private sector. There is no evidence that companies discriminate against them. The real culprit is government, and the rotten educational system it has created.

Originally, reservations were supposed to be needed only for a decade. After that, it was reckoned, they would be unnecessary, because primary education would be universally available. Nearly six decades on, it is not. And the quality of much of India’s higher education is execrable. By one reckoning, only a quarter of engineering graduates, the raw material of a booming computer-services industry, are employable. The government should concentrate on sorting out schools and universities, not piling new burdens on business.

There’s another effective weapon against ancient prejudices: growth. As Indians get richer, their caste biases fade. Middle-class urban Indians are less likely to marry within their caste than the rural poor, and less likely to wrinkle their noses at a dalit. Happily, the ranks of the middle class are swelling in a fast-expanding economy—for which India has its businessmen to thank. Hobbling them with quotas will only make it harder for them to help the country change.

Well said, all around.

Not surprisingly, what they tell you about China’s remarkable economic development is true. The infrastructure is excellent, the skyscrapers plenty, and the shopping extravagant. Shanghai’s Pudong airport, while hardly world-class, is good, and the maglev train exceptional in avoiding the gridlock above. Through its economic success and achievement, China has, in a sense, thrown a gauntlet at “the west”, and largely done so from a position of self-confidence. For the west, there is a lesson here in how not to underestimate, or prevent the rise of the “third world”.

That success story, however, is not what should interest India. Rather, for India and other developing countries, it is China’s social achievements that should be notable. Four, in particular, struck me.

First, while almost nobody on the street spoke english, absolutely everyone was educated and literate. It is evident that China achieved a very high level of primary education decades before it achieved economic success. Second, there is a curious lack of extreme poverty. While there is, no doubt, poverty in the villages, at least in the cities it is not overwhelming – the begger on the street is the exception, rather than the rule; even in small villages (that my mother visited as a sociologist) schools were well equipped and children healthy and well fed. Third, and perhaps related, China provides a feeling of safety lacking from most developing countries. Even at night, I felt safe traveling alone around the city, as appearently did many single women. Even taxi drivers, much maligned throughout the world, were friendly and unaggressive – a pleasant change from Delhi. And finally, I noted a remarkable level of gender equality on the street. Admittedly bias does exist (e.g. the retirement age is lower for women than for men), yet, it does not exhibit itself very often. Women do many of the same jobs and do not seem to be subjected to the degrading stares they often complain of in India.

Despite its economic achievements, I am not starry eyed about China’s growth simply because it has come at a great cost to a great many people – one can barely start to imagine how many houses were razed at the altar of Shanghai’s Pudong skyline. India may yet build that skyline and embrace special economic zones – or it may reject both forms of economic organization. But it will be a choice of the people, not one forced down its throat by the governing elite – even an educated and benevolent one.

But it is in its cultural and social outlook that China beats India hands down, and where one finds the real success of the former and the failure of the later. China allows its people social freedoms they are denied in India, by creating a secure and safe environment. And it has succeeded in providing much of what a state is expected to provide – basic education, health, and a minimum standard of living.

It is fashionable to compare China and India on economic grounds, and talk of Chindia. To do so, however, is to take a limited view both of China’s achievements and failures, and India’s needs. Indeed, that is a decidedely western perspective that looks at economic issues as paramount. The real lessons for India are not how China achieved its economic growth. Rather, it is to establish what the role of the state is to be in social and national construction. China presents a counterpoint to those that reject a role for the state in social and national construction. And it shows how a leviathan can provide a level of governance that ensures people have what they need.

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.

Indeed, underlying many of the cases of increasing Gini coefficients is a growth process in which those at the top of the distribution (top 20% here) have seen their expenditures/incomes grow considerably faster than those at the bottom (bottom 20% here).

This report is follows on my previous post on the IEB on income inequality in India. In that I made some fairly basic points that a) income inequality was increasing in India (as measured by the Gini index), b) this was undesirable because income inequality reinforced social exclusion, (as a case I showed that inequality negatively impacted access to healthcare), and c) insofar as growth had not reduced, and possibly contributed to, inequality, India should revisit the kind of growth it engendered.

This report further strengthens the case for a more equal growth. It also indicates that our current growth path does indeed exacerbate inequality and how policy interventions could help. The following points, in particular, stand out.

First, why is inequality important? This being an economic report, it does not delve into the ethical choice inherent in that question, but it suggests two more practical reasons – because it damps the “poverty reducing impact of a given amount of growth”, and because it may hinder growth prospects (there is also a very readable introduction on measuring inequality, and how appropriate the gini index is to that measurement).

Second, is the inequality a result of growth? The report suggests it is not growth per se, but the kind of growth we are witnessing that is resulting in inequality, with three proximate causes: growth differentials between rural and urban divides, between sectors (agriculture vs. services and industry), and between the educated and those not. In fact, “widening differentials in earnings of the college-educated vis-à-vis less educated individuals appears to be the single most important observable factor accounting for increasing inequality.” Somewhat simplifying, the BBC quotes the report as saying:

The bank said the main reason for widening wealth gaps in recent years was the discrepancy in investment between urban and rural areas which favoured better-educated, better-off urban populations.

This is particularly important. In my previous post I had made a similar observation regarding healthcare – that inequality affected access to health, a key to equality of opportunity . This report suggests a similar dynamic leaves the uneducated poor in a vicious cycle of social exclusion. Since economic growth prospects favor the educated and the poor lack quality education, it is unlikely they will be able to benefit from those prospects and move up – leading to further inequality.

What role for policy? The ADB suggests increasing reforms that generate income and growth for the poor, as the way forward. The emphasis, clearly, needs to be on ensuring equality of opportunity, through for instance better access to finance, removal of social exclusion, and redistribution of wealth through public funding of rural education and basic health.

The discussion to my previous post was vigorous particularly on the last point. Some suggested that private healthcare (in this case education) is better. But that argues only for private operation of these services, not their funding (two separate debates). The second major criticism, that is countered here, is whether it is public spending – or spending in general – that is important, and the public sector should in fact stay out of funding healthcare. That argument is rather counter-intuitive – since the poor are, by definition, poor and pay a premium for most services, the only way for them to spend more on education (or health) is if someone else does it for them (say the government). I will grant, however, that given the scale of the challenge, it is more appropriate to talk of public and private spending. This is particularly true in agriculture, where distortionary public policies keep private investment out of the supply chain (a point reiterated by the ADB).

I have not seen the entire report, but even the summary makes fascinating reading. It should remind us that GDP growth is not the final measure of success. Since we compare India so often to China, here’s a statistic – China’s GDP increased the most amongst the economies studied, but so did its income inequality. Perhaps we can learn something from that too.

This post originally appeared on the IEB.