Income inequality

Abdul Bayes     | Published: May 07, 2018 22:31:31

While Bangladesh has done remarkably well in terms of some socio-economic indicators, the country continues to grapple with rising gini ratio of income inequality. All our celebrations of success conceal the cruel reality that poverty-stricken Kuril slum lies in the heart of posh Gulshan area of the capital. Attempts have long been made to address the issue of inequality but to no avail.

Empirics show that a redistributive land reform in Bangladesh cannot be an answer to the question of inequality. The success of oft-quoted experiences of Japan and Korea are exceptions. Over time, the share of large land-owning households in Bangladesh has been declining while about two-thirds of the households are considered to be landless households. "The government is the biggest land-holder and some redistribution has been attempted from time to time with limited success owing to governance problems due to land grabbers" - says the Seventh Five Year Plan document.

But that does not mean that land reforms have outlived utility. There is an important need to shift attention from drastic to soft reforms. This could possibly be achieved by strengthening the land administration regime and related land market through an array of institutional, regulatory and fiscal reforms such as proper land ownership surveys, digitisation of land records, simplification of land transactions and land records etc. Imposition of proper capital gains tax on land transaction would add to revenue, reduce windfall capital gains and help stabilise land prices. Again, reforms in tenancy market could help sharecroppers who are increasingly dominating agricultural production. By and large, the soft approach in terms of reforms in land administration and transaction might impart limited success in reducing inequality led by land ownership.

Perhaps the Plan rightly finds a major way to help income distribution through human capital formation of the poor. Arguably, this will equip the poor to get better and higher paying employment. An educated and healthy labour force can also help increase the rate of growth of gross domestic product (GDP) while improving income distribution. The increased enrolment in primary and secondary schools from poor segments of the society are paying dividend. Thus the Plan aims to raise the share of public spending on education and health from 2.2 and 0.8 per cent in FY 2015 to at least 3.0 and 1.2 per cent respectively in 2020. Admittedly, the allocation has to be supported by "major improvement in the delivery of public education and health services through education policies, governance and institutional reforms," as envisaged in the Plan.

There is no doubt that at the end of the Plan period, Bangladesh would witness a reduction in inequality over next five years as more of the children from poor groups would attend schools and access health services. But in a regime where the rich gets quality education and health services compared with the poor, inequality may not wane but widen. Thus a girl from kindergarten in urban areas could end up in software services, while a girl from rural school would groan in a garment factory. To nip educational inequality in the bud, the society needs to have same type of schools across the board with the same curriculum. This is a tall order task and can hardly be expected to be accomplished by policy makers and politicians whose children are believed to be enkindled in kindergartens, private universities at home or abroad. Again, in rural areas, solvent parents can pay for tutors while poor parents lack the capacity thus resulting in inequality in accessing education.

However, the Plan is also to pour public spending on rural infrastructure such as rural roads, irrigation and flood control. Availability of rural credit could be another important way to address inequality but the Plan document remains silent on the modus operandi except for a line of appreciation of micro-credit revolution that helped the poor with consumption and asset accumulation. The role of public sector in providing rural credit has remained peripheral.

Another important area relates to the spending on social protection to go up from 2.0 per cent of GDP in 2015 to 2.3 per cent in 2020. One can hardly disagree that spending on social protection is a must for addressing inequality but there are also important concerns about the quality and targeting of this spending that needs urgent reviews and reforms. By and large, higher spending on education, health, rural infrastructure and social protection would cost additional 2.5 per cent of GDP - a seemingly tall order in the present environment of public resource constraints.

The government spends roughly 3.0 per cent of GDP on subsidies, of which 2.0 per cent of GDP is on energy. The Plan document assumed that about half of the energy subsidy could be saved through price increases and better targeting for use in social services. Increase in personal income tax, value-added tax and local government revenues would be needed to mobilise additional resources for reducing inequality.

While the fiscal policy package could help with additional resources, the on-going 'political policy package' under the umbrella of governance remains no less important. We should not be oblivious of the fact that major sources of inequality are loan defaults, land grabbing and tax evasion. Hence, income distribution can be improved through better governance. The additional generation of 2.5 per cent of GDP required for social spending would only be effective in a regime of less corruption, better targeting and quality improvement in public service delivery system.

Abdul Bayes is a former Professor of Economics at Jahangirnagar University.

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