- The release recently of the World Inequality Report 2018 has brought into focus an aspect of economic progress in India. This is the continuous growth in inequality here since the mid-1980s.
- To grasp this, consider the reported finding that the top 1% of income earners received 6% of the total income in the early 1980s, close to 15% of it in 2000, and receives 22% today. As this is a report on a global scale, we can see the trend in inequality across the world, providing a comparative perspective across countries.
- India and China Comparison:
- In particular, it enables a comparison of economic progress made in India and China. This is not flattering of India. Since 1980, while the Chinese economy has grown 800% and India’s a far lower 200%, inequality in China today is considerably lower than in India.
- The share of the top 1% of the Chinese population is 14% as opposed to the 22% reported for India.
- The authors go on to emphasise that growing inequality need not necessarily accompany faster growth, observing that inequality actually declined in China from the early 21st century.
- By then China had grown faster for longer than most countries of the world ever did.
Basket of indicators:
- The findings in the World Inequality Report serve as grist to the mill that is the study of the progress of nations. But before we proceed to reflect on them we may pause to consider their underlying methodology.
- First, the results are based on the share of top incomes. This is not invalid but some of the findings may alter if we adopt measures of inequality that characterise the entire distribution.
- To be precise, the inequality ranking of China and India may now reverse. But this need not hold us back as it is evident that China’s performance is far superior all round to that of India. China has grown faster, has far lower poverty and far higher average income, and its income distribution is less unequal at the very top.
- The World Development Indicators data released by the World Bank show that per capita income in China was five times that of India in 2016 while the percentage of the population living on less than $1.90 a day was about 10 times less at the beginning of this decade. India has a forbidding gap to traverse in all directions, but for now let us focus on inequality.
- It is the comparative perspective contained in the Report that makes it useful. India-based researchers have for some time now pointed out that the country is becoming less equal since 1991.
- Also, we need not turn to the experience of China to recognise that growth need not be unequalising.
- We know independently that inequality in India declined for three and a half decades since 1950 even as the economy grew steadily, though maybe not spectacularly. It is important to comprehend this outcome if we are to understand the source of inequality in India, not to mention why India lags China.
- Now, is a comparison of the progress made in China and India meaningful at all? Yes it is, for though representing different political systems, they had both been large agrarian economies at similar levels of per capita income when they had started out in the early 1950s.
- Moreover, the absence of democracy in a society does not by itself guarantee faster economic growth and greater income equality. For a populous poor country to lift itself to a higher growth path and stay there requires imaginative public policy and a steady governance. We can see this in the divergent economic histories of North and South Korea.
So what is it that China did better than India?
The Chinese clue:
- If there is to be a meta narrative for China’s economic development, it is that its leadership combined the drive for growth with the spreading of human capital.
- Human capital may be understood as a person’s endowment derived from education and robust health. When a population is more or less equally endowed, as it was in China when it began to draw ahead, the human capital profile of a country may be represented by a rectangle.
- Now the returns to labour would be relatively equal compared to the country in which the distribution of human capital is pyramidical, which is the case for India. To see the latter better, note that the share of the Indian population with secondary schooling is less than 15%.
- China had by the early 1970s achieved the level of schooling India did only by the early 21st century.
- The spread of health and education in that country enabled the Chinese economy to grow faster than India by exporting manufactures to the rest of the world. These goods may not have been the byword for quality but they were globally competitive, which made their domestic production viable. The resulting growth lifted vast multitudes out of poverty.
- As the human capital endowment was relatively equal, most people could share in this growth, which accounts for the relative equality of outcomes in China when compared to India.
- An ingredient of this is also the greater participation of women in the workforce of China, an outcome that eludes India.
- While concluding this brief account of China’s progress, two points may be made.
- China is no exception to the general history of progress made in East Asia, right down to the authoritarianism, only that China has remained even more authoritarian. This makes it appropriate to term progress in the country as growth through human capital-accumulation for there can be no human development without democracy, whatever may be the health and educational attainments of a population. Recent revelations suggest that the massacre of pro-democracy protesters at Tiananmen Square in 1989 was far greater than believed to be.
- This brings us back to India. India has lower per capita income, persistent poverty and by all accounts rising inequality. It may be said in the context that economic progress here has been neither efficient nor equitable. Democracy per se cannot be held responsible for this.
- There are States in India with superior social indicators than China. This shows that not only is democracy not a barrier to development but also that similar political institutions across India have not resulted in same development outcomes across its regions. Nor can we remain complacent that democracy is combined with superior social indicators in some parts of India when income levels are lower here than what China has demonstrated is achievable.
The Way Forward:
- Given the growing inequality in India, the direction that public policy should now take is evident.
- There is need to spread health and education far more widely amidst the population. India’s full panoply of interventions, invariably justified as being pro-poor, have not only not spread human capital, but they have also not been able to prevent a growing income inequality.
- A ritualistic focus on the trappings of democracy, from frenetic election campaigns to stylised skirmishes in the legislatures, has not worked to deliver its promise.
- We now need to reorient public policy so that the government is more enabling of private entrepreneurship while being directly engaged in the equalisation of opportunity through a social policy that raises health and education levels at the bottom of the pyramid.