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South Asian region used to be described as one of the
less unequal in the developing world, particularly in
contrast with Latin America, and more recently even
in contrast with China, which has experienced rapid
increases in income inequality during its period of
rapid growth. This perception was always contested by
those who felt that inequality particularly in India
has been underestimated. But in any case recent increases
even in recorded inequality suggest that the earlier
complacency is unwarranted.
South
Asia is clearly a region in which the period of globalization
has been associated with greater income and consumption
inequalities. This is generally described as the result
of the combination of the forces of globalisation (more
open trade and capital flows, greater economic integration
at different levels) with the forces of technological
progress that reduce demand for labour per unit of output.
Both of these forces are described as reducing the bargaining
power of workers relative to capital, and in addition
the process of economic growth has itself been described
as one that requires higher levels of inequality in
the high accumulation phase.
However, when the region is compared to other parts
of the developing world, it is evident that this explanation
is simplistic. Rather, the recent more unequal outcomes
in South Asia appear to be also very much determined
by policies and broader choices of economic growth strategy.
All this is particularly evident in the case of the
largest economy in the region, India. The only available
large-scale survey data in India relate to consumption
expenditure, which tend to understate the extent of
inequality by underestimating the tails of the distribution
(excluding the very rich and the very poor) and because
the poor are more likely to consume as much or even
more than their income while the rich are more able
to save.
Indeed, the first detailed income distribution estimates
for India (described in Sonalde B. Desai, Amaresh Dubey,
Brij Lal Joshi and Mitali Sen, ''Human Development in
India'' Oxford University Press, 2010) reveal quite high
income inequality, with a Gini coefficient of 0.54 –
or around the same as Brazil. Estimates based on village
surveys derive even higher Gini coefficients: on average
0.645 across households and 0.595 across persons even
within villages (Madhura Swaminathan and Vikas Rawal
''Is India Really a Country of Low Income-Inequality?
Observations from Eight Villages'', Review of Agrarian
Studies 2011).
Even consumption data suggest increasing inequality
of consumption, in both vertical and horizontal terms.
The national Gini coefficient for consumption increased
from 0.31 in 1993-94 to 0.36 in 2009-10, while the ratio
of urban to rural consumption went up from 1.62 to 1.96.
The largest increases in consumption expenditure were
concentrated in the top decile of the urban population:
between 1993-94 and 2009-10, the income of the top urban
decile went from 7.14 times to 10.33 that of the bottom
urban decile and from 10.48 to 14.32 times that of the
bottom rural decile.
The movement of factor incomes corroborates the tendency
towards greater inequality: the wage share of national
income fell from 40 per cent at the start of the 1990s
to only 34 per cent by 2009-10, while in the organised
sector the wage share fell from 69 per cent to 51 per
cent in the same period. Meanwhile, even though the
unorganised sector continues to account for the overwhelming
majority of workers in the country, including the self-employed,
its share of national income fell from 64 per cent to
57 per cent.
So the gains from Indian growth were concentrated among
surplus-takers, including profits, rents and financial
incomes. A major reason for this is that the growth
has not been suffficiently employment generating, and
therefore around half of the work force continues to
languish in low-productivity agriculture (even though
that sector now accounts for around 15 per cent of GDP)
and in low remuneration services. The growth was driven
by internal and external liberalisation measures that
attracted global financial investors. Capital inflows
sparked a domestic retail credit boom, which combined
with fiscal concessions to spur consumption of the better-off
sections. This led to rapid increases in aggregate GDP
growth, even though compressed public spending on basic
needs, poor employment generation and persistent agrarian
crisis reduced wage shares in national income and kept
mass consumption demand low.
Similarly, Bangladesh moved from being a developing
country with relatively low inequality in the early
1990s to one with moderately high inequality by the
middle of the first decade of the 21st century, as the
Gini coefficient for income (based on extrapolating
from consumer expenditure survey data) increased from
0.276 in 1991-92 to 0.404 in 2005. This increase was
''steady, uninterrupted and pervasive.'' (Khan 2008) Farm
incomes dwindled as proportion of total income over
time. The growth of tenant farming increased access
to land, but the increasingly concentrated nature of
landownership made the distribution of rents from land
very unequal. Increasing wage differentials in non-agricultural
activities (between relatively less skilled wage workers
and relatively more skilled salaried workers) added
to the inequality. Growth in remittance incomes, especially
those from workers abroad, also had a strongly inequalizing
effect in Bangladesh.
Measurements of income inequality in Pakistan can vary
widely. Most estimates suggest relatively stable Gini
coefficients just below 0.4 for the 1980s and 1990s
and slight increases thereafter. Consumer surveys indicate
that consumption inequality decreased in the first half
of the 1990s and then increased for the next decade.
In the first period, the poorest quintile gained significantly
in their consumption share while that of middle 60 percent
and the richest quintile reduced. From 1996-97 to 2004-05
the consumption share of the poorest 20 quintile and
the richest quintile increased, while the share of middle
60 percent decreased.
Both trade openness and financial instability have been
linked to this pattern of greater economic inequality.
The relatively low employment generation continues to
trap around two-thirds of the work force in agriculture,
while inadequate public investment in infrastructure
and essential social services has added to the problem.
It has been argued that these reflect the combination
of globalisation with ''an institutional structure that
excludes a large proportion of the population from the
process of economic growth as well as governance.'' (Husain,
Akmal, Haris Gazdar and Asad Sayeed ''Power dynamics,
institutional instability and economic growth: The case
of Pakistan'', The Asia Foundation, Islamabad 2008)
Sri Lanka was the first country in the region to engage
systematically in greater global integration. The government
liberalized the economy and adopted market-oriented
reforms in 1978, but initially, in the 1980s inequality
remained relatively low. But by the mid 1990s Sri Lanka’s
inequality was higher than its neighbours, and the IMF
even estimated that it recorded the highest increase
in the Gini index among selected Asian countries between
1990 and 2004. By the mid 2000s, the Gini for consumption
was 0.46 and that for income was 0.5. Inequalities in
Sri Lanka have strong regional, sectoral and ethnic
dimensions. Rising inequality reflects two components:
first, growing vertical inequality within the fast growing
modern industrial sector and region, driven by asset
and differences in skill levels; and second, between
the modern industrial fast-growing sectors and regions
and the traditional agricultural lagging sectors and
regions.
Just because this is common across these four countries
in the region does not mean that it is inevitable. Other
highly globally integrated regions and countries, such
as those in Latin America, have actually shown that
it is possible to reduce inequalities, albeit from high
pre-existing levels, through active policies designed
for redistribution, and that this can be done at more
than respectable rates of income growth. Clearly, the
region has much to learn from proactive policies for
equity elsewhere in the world.
*
This article was originally published in the Frontline,
Vol. 29: No. 15, Jul 28-Aug 10, 2012.
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