Revisiting income inequality and poverty in Bangladesh

Muhammad Mahmood | Published: December 03, 2017 19:54:43 | Updated: December 05, 2017 21:21:06

Since my article on the same topic was published on  November 12, 2017 in this newspaper, the Preliminary Report on Household Income and Expenditure (HIES), 2016 has been made available in the public domain. Therefore, it is important to look into the data to see what further changes that took place beyond 2010 to enhance our understanding and dynamics of  income inequality and poverty in Bangladesh.  As readers may be aware that all data on income distribution in Bangladesh come from this particular survey conducted on a fairly regular interval  by the Bangladesh Bureau of Statistics (BBS). These survey data remain the key source to make any informed discussion on the issue of income inequality and poverty in Bangladesh.

The issue of income inequality now is a global phenomenon and empirical evidence is available that inequality has been on the rise over the last four decades in developed countries. A report by the Organisation for Economic Cooperation and Development (OECD) suggests that the overall rise in income  inequality is driven by  the top rich 1 per cent who have seen their incomes accelerate away from the average. Income inequality and poverty are directly interrelated; as such even  small changes in income distribution can have a profound effect on poverty. Living in poverty causes a  person to miss out on financial resources  to enable him/her  to access opportunities available to other people. This may even lead to social exclusion.

While recognising the fact that income inequality is a global phenomenon, changes in income distribution have far more severe effects on the depth of poverty in poorer countries like Bangladesh than in richer countries.  Also rising income inequality has much more deleterious effects on women than men in terms of earnings.

It has always been advanced as an argument that economic growth will reduce income inequality by creating employment opportunities.  But the main source of income inequality in developed countries is primarily due to differences in wages. In a  highly stratified society like  Bangladesh there is also an added factor to it - inequality of opportunity. Wage differentials can be largely attributed to wage earners' levels of education and skills. In recent times highly skilled and educated persons have seen faster wage growth than unskilled persons adding to rising income inequality. 

GINI COEFFICIENT AS MEASUREMENT OF INCOME INEQUALITY: Furthermore, some societies are more geared towards equality of opportunity like in the USA and others more towards equality of outcomes like in Scandinavian countries. Whatever might be a society's preference, the static measure of income inequality is just part of a story - not the full story. The Gini coefficient is a statistical measure used  as a gauge of income inequality. It should not be mistaken for an absolute measurement of income inequality. It is possible for a very high income country and a very low income country to have the same Gini coefficient if the income distribution follows a very similar pattern as we will see later in this article.

The accuracy of the Gini coefficient  is dependent on reliable Gross Domestic Product (GDP) and income data. Underground  economic activities are present in every economy and in Bangladesh the size of the underground economy is estimated to be about a  quarter of GDP.  Reliable wealth data is even more difficult to gather and that problem is further exacerbated by the existence of tax havens where sizeable amount of income and wealth can be stashed away.  Profit shifting also known as Base Erosion and Profit Shifting (BEPS) is a common phenomenon and  used by multinationals and very large domestic firms to shift earnings to tax havens or to  very low tax jurisdictions.  Therefore,  the estimated Gini coefficient  at a particular point in time ( it must be remembered that the Gini coefficient is a snap shot)  has a  tendency  to  underestimate the extent of income inequality in a country like Bangladesh. Also the Gini coefficient does not offer much information on poverty. But there is no suggestion here that income inequality and poverty are not interrelated. In fact, the Gini coefficient can be the starting point to undertake any further detailed study of poverty.

HIES, 2016 FINDINGS: The HIES, 2016 provides us with latest statistical information on income inequality and poverty in Bangladesh. The survey report gives the good news that the population  below the upper poverty line declined  from 31.5 per cent in 2010 to 24.3 per cent in 2016. Also people below the extreme poverty line declined from  17.6 per cent to 12.9 per cent during the same period. If we track back in time to 2000, people living under  the upper and lower poverty lines  were 48.9 per cent and 34.3 per cent respectively.

So in a decade and a half much has been achieved to get people out of poverty. However, the Gini coefficient went  up to 0.483 ( HIES) in 2016. This is very apparent   very modest rise - but a rise nevertheless,  compared  to 0.458 in 2010, can translate into far-reaching consequences for income distribution.

The Gini coefficient has been trending upward since the mid-1990s, with some fluctuations around the trend. According to the estimates made by the Policy Research Institute (PRI) in Dhaka  the top 5 per cent of households earn 27.9 per cent of total income which is  121 times the income going to the bottom 5 per cent households in 2016 relative to 32 times in 2010. Further more, the PRI also indicated that the current Gini coefficient of Bangladesh is similar to that of the USA.  However,   such a  comparison must be put in the proper perspective; while the poor in both countries get a similar share of the median income, the very rich in Bangladesh are likely to  have a much higher share of the reminder than the very rich  in the USA because of the taxation system in the USA. This clearly indicates economic growth over the last three decades in Bangladesh largely benefitted the very rich  indicating incomes of the rich have been rising at a much faster rate than that of the poor.

INCOME INEQUALITY: The HIES report also highlights the regional dimension of income inequality. The northern region seems to lag far behind the central and southern regions in Bangladesh. Bangladesh has maintained a steady growth path achieving around 6.0 per cent growth per annum since the early 1990s. Despite the drumbeat of Bangladesh being on the cusp of  a 'middle income country' implying the emergence of millions of middle income earners, the reality  appears to be that the economic growth of the last three decades has overwhelmingly benefitted the top 5-10 per cent of the income earners.   

In neighbouring India, the situation has also been taking a similar turn. A recent report (October, 2017)  prepared by two French economists Lucas Chancel and Thomas Piketty ( Paris School of Economics) entitled  Indian income inequality, 1922-2014: From British Raj to Billionaire Raj, informs us that the top 1 per cent income earners   pocket 23 per cent of all income nearly raising their income share by four times from the early 1980s. If the base is further expanded to top 10 per cent income earners, their share goes up  to 55 per cent of all income.  In a regime of such staggering income inequality along with gross social inequality, life for the very poor must be very difficult in India. To put the rise of India's middle class in the proper perspective, the authors further stress that  this just corresponds to the top 10 per cent of the population rather than the middle 40 per cent.

The choice of a definition of poverty reflects a set of value judgements which  by the very nature of value judgement can be arbitrary or even subjective (e.g. US$1.90 a day on the purchasing power  parity (PPP) basis). Economic growth is considered  sine qua non for sustained reduction in poverty but the question naturally arises, how much the poor should benefit  from growth? The answer lies in part  in subjectivity such as personal and cultural values  and also in certain objective criteria as Amartya Sen argues that poverty has an irreducibly "absolute'' component which gives the goal of poverty alleviation its moral dimension.  Therefore, to address  the issue of poverty the two  principal sources of poverty -  unemployment and a  low level of earning capacity - must have to be addressed. Also income inequality can not be effectively dealt with in a highly stratified society like Bangladesh  unless the underlying inequality of opportunity is decisively addressed.

PROGRESSIVE TAXATION: All political parties, especially the two major political parties  in Bangladesh, are publicly committed to alleviate poverty yet there has not been any concerted efforts to implement any system of progressive taxation.  But given the sharp inequality of income in the country, economic growth over the last three decades can not be termed as "inclusive growth''. What people are more concerned  about  is the dysfunctional inequality which is  linked  to amassing wealth through rent extractions, inherited wealth , political connections, tax evasion and similar underhand activities rather than functional inequalities where people create wealth through personal endeavour and risk taking.

There is nothing inevitable about growing income inequality if one looks at Scandinavian countries. The government can intervene to promote equity through taxation and transfer payments. The government should use this rising income inequality as the reason

  • to bring in an  increased progressivity in the direct taxation system and further extending its scope   to  property including benami  property, wealth,  inheritance  and gifts ( e.g.  Heba is one of the conduits for owning  benami property) and 
  • also to review and where possible to remove various tax deductions and tax incentives available to tax payers such as exemptions, deductions and incentives which amount to 6-8 per cent of tax revenue foregone.

The writer is an independent economic and political analyst.

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