Income inequality and poverty in Bangladesh

Muhammad Mahmood | Published: November 11, 2017 21:44:44 | Updated: November 13, 2017 19:25:41


There has been a sharp rise in income equality over the last four decades in developed economies but the process has been accelerating since the global financial crisis (GFC) of  2007-08. This rise in income inequality is also causing increased levels of poverty as reflected in rising unemployment including disguised unemployment, working poor and rising homelessness. These economic woes are compounded by the impact of climate change which in the aftermath of Trump's withdrawal from the Paris accord can only cause further deterioration of the current economic climate.  In a way, the global economy is still struggling to get back to pre-2007-08 economic situation.

But Bangladesh, one of the least developed countries, has been lauded for its economic performance as reflected in in its accelerating economic growth during this period. As a consequence, the country has been able to improve the material quality of life for its people. This is the consequence of the rapid transformation in the structure of the economy. Bangladesh was primarily an agrarian economy at independence, marked by largely subsistence farming. Agriculture has now largely become more commercialised and accounts for only 15 per cent of gross domestic product (GDP). Manufacturing and services now account for the bulk of output.  Economics Nobel Laureate Amartya Sen  also lauded Bangladesh's social development in many fields, such as gender equity, women's empowerment, mortality rate, life expectancy, immunisation and others relative to India,  a country with double per capita GDP than Bangladesh.

Despite such significant improvement in Bangladesh's economic performance, formidable economic challenges still lie ahead. With per capita income of US$ 1088.00, country still remains one of the least developed countries in the world.  An estimated 63 million people live under the poverty line in a country of 163 million people. Bangladesh has also witnessed rapid urbanisation with more than a third of population now living in urban areas and continuing. Despite the population growth rate has come down to 1.2 per cent per annum, the country remains one of the most densely populated countries in the world. This urbanisation has been spurred by the structural changes in the rural economy resulting from the increased commercialisation of the agriculture sector and widespread rural poverty. But this rapid urbanisation has caused heightened urban poverty with extremely poor living conditions for these rural migrants and also serious urban congestion.

This is now widely recognised that despite sustained economic growth over the last four decades, the issue of income inequality and poverty remain major challenges facing the economy. Income inequality in developed economies is primarily an issue of wage inequality but in Bangladesh, there is another pervasive factor that also contributes to income inequality - inequality of opportunity.

The Gini coefficient or Gini index is a statistical measure (the value of a Gini coefficient varies between 0 and 1 where a value of zero signifies perfect equality and 1 indicates maximum inequality) generally used to examine a country's degree of income inequality that exists at a particular point in time. The Gini coefficient for Bangladesh fluctuates around the trend line, but the overall trend is downward declining from 48.9 in 2000 to 31.5 in 2010 indicating declining income inequality.

But a much clearer picture of income distribution emerges when one looks at the income distribution between the poorest 10 per cent and the richest 10 per cent. The picture that emerges is:  the income share of the poorest 10 per cent is 3.85 per cent compared to 26.92 per cent for the richest 10 per cent in Bangladesh. In effect, the income share held by the highest 20 per cent is 41.48 per cent. This is clearly indicative of a situation where the very little of the benefits of economic growth are trickling down to the very poor, the people who needs it the most.

More alarming is the steadily declining share of wages in total personal income in Bangladesh. According to the IMF's latest World Economic Outlook (October, 2017), labour income shares have been trending downward since 1980s in advanced economies also and are now 4.0 per cent lower than they were in 1970. The report further added that labour's share of income declines when wages grow more slowly than productivity resulting in growing share of productivity gains going to capital. Since capital tends to be concentrated at the upper ends of income distribution, falling income shares are likely to raise income inequality. Something along that line appears to happening in Bangladesh, but exactly not the same way. 

 In effect, it can be argued that the share of the highest income bracket has been underestimated in Bangladesh. All data on income distribution have come from the Household Income and Expenditure Surveys (HIES) conducted by the Bangladesh Bureau of Statistics. There are reasons to believe that these surveys could not capture much of the income of this group because they are impossible to access for a variety of reasons. If we just take, for example, Bangladeshi citizens' accounts maintained in Panama (as revealed in the Panama papers) alone not to speak of other similar locations or other overseas bank accounts, the question naturally arises why this money has flown out of the country and what are the sources of this money? There appears to be no satisfactory answers available to these questions. If this type of money in all shapes and forms is taken into account, then a much bleaker picture for income distribution will emerge.

It is estimated that the underground economy in Bangladesh is equivalent to a quarter of the country's GDP.  Income tax accounts for about 11 per cent of total revenue (most of this tax revenue comes from corporate income tax, not much from individual income tax). Therefore, the government relies on indirect taxes and the burden of these taxes is disproportionately borne by the poor. This further adds to depressed consumption by the poor.

 An estimated 38 per cent of people in the country live below the poverty line (i.e. people earning US$ 2.00 a day at 2011 Purchasing Power Parity (PPP)) of which almost a third live in extreme poverty. The poverty rate is higher in rural areas than in urban areas.  However, it must be noted that the use of PPP clearly indicates the poor in Bangladesh are assumed to be consuming only non-tradables, which is not true, the poor also consume some tradables. Therefore, the estimated number of people living under the poverty line is seriously underestimated. Furthermore, the consumption bundle has been rapidly changing over the last three decades and so also the relative prices. This can have consequences for the consumption bundle for the poor.  It is also estimated that the calorie intake by the rural and urban poor has been decreasing over time. Food remains the single largest item of expenditure for the poor, therefore the current food price, in particular rice price, inflation will lead to additional number of people moving below the poverty line.

In the global context, rising poverty in developed countries is definitely blamed on globalisation - breakdown of barriers between countries, contributing to the surge of populism. An open economy can make both losers and gainers (as in a closed economy also) and winners must do their bit to compensate the losers but that did not happen, instead tax avoidance (sometimes tax evasion also) has become a very big industry. In the case of Bangladesh, the rich hardly pay their due share of taxes to enable the state to effect a certain degree of redistributive justice. In effect, the state itself appears to be responsible for helping the very rich to amass wealth through rent extractions. The rich also uses invisible avenues to appropriate rent by using various state apparatus. Money and politics have become very intimately entwined in Bangladesh over the last three decades or so, thus giving the rich control over various state apparatus. These surpluses amassed by the rich in most cases find their way out of the country rather than being reinvested in the country. Such a behaviour on the part of the rich further reinforces the belief that no one cares about the poor. Such a belief can lead to diminished trust in state institutions.

Open economies and societies need open participatory, inclusive and egalitarian institutions to effect fairness and to avoid political backlash against economic inequities. In a longer term context Bangladesh is also at risk from the impact of climate change, therefore single-minded rush to stimulate growth at the cost of environmental degradation will only lead to increased income inequality and poverty. Therefore, very fundamental rethink of the role and the nature of the state and its economic growth philosophy is urgently required and to bring in appropriate reform measure to give effect to a state structure which will create an environment for an egalitarian society and pursue an environmentally sustainable growth path.

The writer is an independent economic and political analyst.

muhammad.mahmood47@gmail.com

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