The Financial Express

Redistribution with growth: The key word is 'alleviation'

Hasnat Abdul Hye | Published: December 28, 2019 21:24:02

Redistribution with growth: The key word is 'alleviation'

Intelligentsia, economists included, have a sort of love-hate relationship with economic growth. They love it because growth means increasing volume of goods and services that help to uplift standard of living. But they don't like that much the income inequality accompanying growth. In recent years income inequality has been the most constant issue in economic discourse, nationally and globally. Bangladesh has seen a fair share of this critique even while basking in the glory of posting a steady rate of growth that has been applauded as an epochal event.

To be candid, economic growth is not neutral in terms of rewarding different income groups. It unabashedly distributes a greater share of benefit of growth to those who own assets, physical and human. Among the physical assets the prominent ones are land and capital. Human capital, on the other hand, consists of skills and entrepreneurship. The former are almost inevitably inherited or corralled through  subterfuge. Skills are acquired through education and training that are not accessible to all. Only entrepreneurship is owned by birth, but that too has a genetic background. The ownership pattern of these assets points to their exclusiveness, leaving the majority beyond the pale. In market economy where production of goods and services takes place on the basis of ownership of land and particularly, capital, distribution of income becomes skewed in favour of the few who own the assets.

Once growth is embedded in a particular pattern of ownership it becomes difficult to change the resultant distribution of income. In other words, there is very little automatic about levelling or attenuating unequal distribution of income that comes with growth in a market economy.

Yet, economists like Simon Kuznets concluded, based on a historical data of selected developed countries in 1955, that income inequality at first increases and then declines with economic growth. Later, Oshima presented this as a characteristic of the development process of developing economies as well, basing his findings on a study of income distribution in Cuba in the fifties and in selected Asian countries (1961). Arguably the share of lower and middle income groups in a country increases with growth after some time but the degree of the benefits depends on how fast they improve their skills as wage earners or have access to capital to engage in productive investment themselves. Where higher education and skill formation depends on income and status, the extent to  which unequal distribution of income is mitigated is not great. Minuscule improvement in the share of national income by the middle and lower income groups is far outweighed by galloping rise in the share of income of those in the higher income bracket. As time goes by, the cumulative advantage of the top income group widens the income differential between them and the rest of the income groups. Demographic change that results in more being born in the middle and lower income groups aggravates the distribution of income.

Income inequality is also structurally determined as some sectors like agriculture receive a lower share of national income than manufacturing and the services sectors. People bogged down in the laggard sector/s can hardly compete with those in the front line sector/s in terms of earning incomes. Crossing over from one sector to another, for enhancement of earnings, is limited by education, skills and existing wealth (land capital).

Market economy can not be faulted for the results embodied in income distribution. It proceeds towards the end for which it is meant, viz promoting economic growth within the institution of private enterprise. Growth, on the other hand, as has been pointed out, is biased towards those who have command over factors of production. It rewards the income earners proportionate to their ownership of assets. Growth by itself does not change the pattern of income distribution nor is it concerned about how the ownership of assets came into existence in the first place. Following the cue from the institution of market it abides by the status quo as regards ownership.

Status quo in income distribution is being challenged by many and targeted for change. Obviously, if change has to come, the invisible hand of market has to be replaced by the visible hand (grabbing hand, according to some) of government, at least in respect of income distribution. A government can do this in either one of the two ways or through both that are open to it. Firstly, asset can be redistributed even while the growth process within free market is at work. For instance, through land reform land can be redistributed so that the landless, marginal and the small farmers have a viable size of land in ownership. Business and manufacturing activities can be brought within the framework of co-operatives, at least some of these. Secondly, government can transfer income to the lower and middle income groups by taxing the top income earners. Such income transfer can be through cash as in the case of social safety net programmes for the poor or in kind like subsidised health and education programmes. These are just illustrations of what can be done to alleviate income inequality and does not exhaust the possibilities in this regard.

The key word  here is `alleviation'. There being a trade-off between growth and equity, it can never be proposed that income differentials should be abolished. Even the doctrinaire socialist countries did not do away with unequal income distribution for the sake of giving incentives. Savings and investment by the top income earners being the drivers of economic growth in a market economy incentive through higher income than the rest of the income groups has to be assured. But this does not mean top income earners should be allowed to get away with the lion's share of national income. It is not only immoral, but counter-productive as well. Who will buy their products and services if the majority have to make do with dwindling income? The challenge for policy makers' intent on reducing inequality of income is to determine the level of income of the rich that satisfies both the ends of equity and growth. Obviously, the level will depend on the stage of economic development of a country. There cannot be a hard and fast rule which may be applicable to all countries across the board. What is important is the emphasis on the strategy of economic development that has equitable distribution of income with growth as the overarching goal.


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