The Key to Making Economic Development More Equitable

by May 18, 2018 0 comments

The Key to Making Economic Development More EquitableOur interest with the American lifestyle has set us on a path that our densely populated nation can neither withstand economically nor afford its intrinsic sociological and political consequences.
A recent issue of the magazine Prospect, published in the UK, carries many pages devoted to the subject of a new economics. The cover of this issue displays the statement “Rip it up and start again: The case for a new economics”. There are several reasons why the world and decision-makers, in particular, should think in terms of a new structure of the economy and bring about major corrections in what exists today. The sway that neoclassical economics holds, particularly in US policy, is not only causing major distortions and related concerns in that country, but also in other parts of the world. Typically, values and aspirations in other countries, including India, are becoming a replica of what has evolved in the US, perhaps over the past 75 years or so.

There are several flaws, and, therefore, a need for change in the state of economics today. There are growing disparities between rich and poor across the globe, particularly in the US, one of the most disparate societies in the world in terms of distribution of income and wealth. Another major flaw in the current system is the continuing neglect of negative externalities, which nobody pays for. In general, the global commons are regarded as a dumping ground which are damaged and degraded without concern for the huge costs imposed on society at large. Recent changes in US policies would only serve to expand income and wealth disparities and add to environmental damage globally and locally. Reversing these policies would be very difficult for future Governments.

There is corresponding debate in several parts of the world questioning the directions in which democracy has been moving in recent years. One major concern arises from the fact that powerful vested interests and lobbies now have enormous influence on decision-making even in established democracies, resulting from disproportionately large wealth in a few hands. What has come to pass was foreseen by President Dwight D  Eisenhower, who while laying down office, warned against the power of the “military-industrial complex”.

Inequality in different countries is a subject of regular assessment by the World Inequality Lab which brings out an annual World Inequality Report (WIR). The 2018 report meets the stated objectives behind this annual publication of contributing to a more informed global debate on economic inequality. Any such debate would have higher quality if based on analysis of trends and developments from year to year.

The findings of the WIR 2018 are that inequality varies greatly across regions.  One important indicator used in the report is the share of total national income accounted for by just a particular nation’s top 10 percent earners. In 2016, this was 37 per cent in Europe, 41 per cent in China, 46 per cent in Russia, 47 per cent in US-Canada, and around 55 per cent in Sub-Saharan Africa, Brazil and India. The highest level of inequality was seen to be prevalent in the Middle East, where it was estimated that the top 10 per cent holds 61 per cent of national income.

In the case of India, income inequality reached historically high levels with India’s top one percent earners touching 22 per cent in 2014. It appears that deregulation of the economy and opening up of reforms in India since the 1980s led to significant increase in inequality. In 2014, the top 0.1percent of earners continued to capture a greater share of economic growth than all those put together in the bottom 50 percent of the country. The bottom 50 percent has about 15 percent share in the total income. This contrasts sharply with the 30-year period following India’s independence when income equality was reduced across the board and the incomes of the bottom 50 per cent grew at a faster rate than the national average.

Globally, it can be anticipated that income and wealth inequality will continue to rise if countries follow the conventional path of development. Growth in emerging markets like India is likely to remain strong, but if inequalities are to be contained, then effective policies are required to democratise access to education and jobs which require diverse skills, and such policies would certainly be required in richer countries as well.

In the case of India, we cannot ignore the divide between urban and rural communities. And, despite two-thirds of our population living in villages, the provision of infrastructure, education, health services and connectivity lag what is available in urban locations.  Unless this basic disparity is addressed, income inequalities will continue to grow not only between urban and rural areas, but also among the population in urban centres, where a large number of unskilled and uneducated workers migrate in search of jobs and basic livelihoods.

The discussion in the recent issue of Prospect faults the approach of neoclassical economics which its adherents treat as the gospel. It is suggested that economics needs to be pluralistic, because for the last half century, neoclassical economics has been gradually “colonising” other social science disciplines such as sociology and political science. In fact, the growth of the branch of economics called the ecological economics and some other recent departures promise to move the economics profession in the direction of pluralism. The last Nobel Prize for Economics went to Professor Richard Thaler for putting forward knowledge that economic behaviour can be nudged away from the rigid assumption of unalterable economic patterns pursued by consumers, a given belief which has traditionally formed the basis of neoclassical hypothesis.

Coming close to home in India, we need to be aware of the fact that if economic disparities follow the trends of the last 30 years and more, then Indian society would display instabilities of various kinds. Historically, there have been various movements and even violence when large numbers of people feel deprived of economic opportunities and standards of living which are available to only those who constitute the privileged few.

Marxist revolutions were based on and driven by this reality. That may not be a valid fear in India, but we cannot minimise the danger of creating conditions of disparity, which would be a blight on any democratic system and which over time would be very difficult to neutralise.

Unfortunately, there has never been a proper and informed debate on the economic strategy that India should pursue, involving the participation of all sections of society. Economic policies are generally discussed in isolation either by politicians or economists or those who understand neither politics nor economics.  Our fascination with the American way of life and adoption of everything that glitters in the US has set us on a path that a populous nation like ours can neither sustain ecologically nor afford for its inherent political and sociological consequences.

(The writer is former chairman, Intergovernmental Panel on Climate Change, 2002-15)

Writer:  RK Pachauri

Courtesy: The Pioneer

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