Inequality: looking at the 'beast', empirically

| Updated: January 12, 2023 21:29:01

Slums next to high-rise buildings in Dhaka symbols of widening inequality in the country. —BRAC Photo Slums next to high-rise buildings in Dhaka symbols of widening inequality in the country. —BRAC Photo

It is rare, if ever, for multi-lateral institutions like World Bank, Asian Development Bank (ADB) and International Monetary Fund (IMF) to go public on the state of global inequality, presumably on the ground of the subject being ideologically incorrect for them, if not an outright taboo. Instead, these watchdogs on global economic developments settle for estimates on poverty trends in different countries and globally. Poverty and its reduction appear to them as anodyne and a good substitute for a frontal assault on the politically sensitive subjective of inequality. It is no surprise then that surveys and reports on global and inter-country inequality are occasionally made by organisations like Oxfam, World Inequality Laboratory and other private research bodies.

But there is occasional exception to this broad trend in traditional practice, as has been the case with IMF's World Economic Outlook (WEO) for 2022.On page 62 of the report there is an intriguing little side bar about "Saving glut of the Rich" in the world. A decade ago, the concept of 'saving glut' was something usually discussed in the WEO only in  relation to China  because of its reported recycling of the vast export earnings into domestic financial system. But in this year's  WEO, IMF has observed that 'a substantial rise in savings at the very top of the income distribution in the United States over the past four decades has coincided with rising household  indebtedness  concentrated among  lower income  households and  rising income inequality'. The Report added that in advanced economies, the richest 10 per cent of households account for  most of aggregate savings, about twice that of middle class households. The poorest 50  per cent on the other hand, typically dissave,  at a rate ranging from 4 to 7 per cent of national income annually, consistently more in America than in Europe. According to the report, emerging market economies (EME) show broadly  similar saving  trends by the rich but slightly smaller dissaving  by the bottom 50 per cent because of more restricted access to bank credit. Among the EMEs, China with its mixed  market economy, stands out as an exception: middle class saving reaching 20 per cent of national income  while saving by the bottom 50 per cent is positive (no dissaving). But this assessment of inequality is partial, as has been revealed by a more recent report on the rise of the rich by the London based Hurun Report that tracks the rise of the rich in the world, particularly in China. According to this think tank, the super-rich in China  got US$ 1.5 trillion richer  during the pandemic (2020-2021), more than the past five years combined, as e-commerce and gaming boomed during pandemic lockdowns. During this period, an extra 257 joined  the billionaire's club, bringing the total number to 878 compared to 626 in America at the start of 2020 (The Financial Express, October 21, 2022). Though the Hurun Report reveals data on the number of the rich and super rich and their rise, it is a reliable proxy on the state of inequality also.

Another recent survey on the evolution of inequality in recent times has been made by Camden Consultants, specialising in family office eco system (non-listed private companies). Collating reports up to 2019, the think tank calculated that there were 7,300-odd family offices in the world, controlling US$ 6 trillion in funds, a 38 per cent increase from 2017. It is estimated by experts in the organisation that funds under management of family offices outside the formal institutions between 2020 and 2021, during the latest wave of Quantitative Easing (QE), increased on average by 61 per cent. It is possible that this trend in inequality will slow, now that central banks in developed countries have started winding down QE and with it asset inflation . Or maybe not, as the IMF Report points out a regime of stagflation risks and rising interest rates that will hurt  the indebted poor  far more  than it will the rich. The bleak future outlined in the WEO Report can become  moderated somewhat if the  family funds of ultra-rich step in to buy assets like treasury bills  as central  banks start winding down QE. Either way, the manner in which family offices, with their burgeoning funds, are contributing to a secular shift  from public capital markets to private ones will have  significant impact on incidence of inequality in the economies of developed countries. Since private funds can subvert democracy with dark money donations to political parties, it has the potential of influencing governance in favour of the  rich, a phenomenon that is already taking place as a matter of routine,  courtesy  the corporate world.

A recent book by Branko Milanovic (Global Inequality: A New Approach for the Age of Globalisation, 2016) synthesised estimates on inequality within and among countries since the Industrial Revolution. In contrast  to Thomas Piketty, who  believes inequality  widens inexorably under capitalism, Milanovic argues  that it moves in secular waves or cycles under the influence of what he calls 'benign' and 'malign' forces. According to his study, in advanced economies income disparity widened in the 19th and early 20th centuries until the malign forces of war and hyperinflation reduced it by destroying wealth. After the second world war, benign forces such as progressive taxation, powerful labour unions, and more widely accessible education forced inequality down. More recently, the fall of Berlin wall in 1989 brought the Soviet bloc states into the global economy at a time when China was also opening up. These countries' economies, along with the developing ones,  grew rapidly, narrowing inequality  among countries while widening  it in the developed  world, where middle class incomes stagnated as  the wealthy prospered. But Milanovic's prognoses for the future about the EMEs and developing countries have not turned  out true as these countries, though  experiencing rapid growth, have also seen inequality  rising, as in the developed countries.

The global charity, Oxfam prepared a report captioned Inequality Kills on the eve of the World Economic Forum held virtually on January 17-21, 2022. The report observed that while  unprecedented  accumulation of wealth continued unabated during the pandemic which in effect contributed to the death of 21000 people each day. The Oxfam Report further added that pandemic had pushed over 160 million people into poverty and an estimated 17 million people died while the world's 10 per cent rich people doubled their income.

Echoing Piketty's thesis of shareholder capitalism contributing to inequalty, Prof Kiwoon  Lee, Vice Chairman, National Economic Advisory Council  of South  Korea, recently wrote an article for Project Syndicate, observing that the weak investment, slow rate of growth and high degree of inequality under the Anglo-Saxon model of shareholder capitalism have contributed  disproportionately to  higher income for  the rich who constitute 10 per cent of population in USA, Europe, Japan and Korea. According to his estimate, their share in national income in the decade leading up to 2020, was  above 45 per cent in the USA, nearly 45 per cent in Korea and 40 per cent in Japan. Quoting World Inequality Report of the World Inequality Lab, he showed that the 10 per cent rich in South Korea earn 14 times more than the 50 per cent of population. The figures for America, Japan, France and Sweden are  17,13,7 respectively.

The economies of low income developing countries in Asia and Africa received a severe jolt in 2020 when the pandemic stopped the wheels of industries, closed down the  service sector and took away the livelihoods of millions among  low  and  middle income groups. The World Bank forecast soon after the outbreak that nearly 100 million people could become unable to fulfil their basic needs during 2020 and warned that  acute hunger could double, affecting 260 million people. In 2022, the  World Bank estimate put the additional  number of people living in extreme poverty at 71 million  by the end of 2020, compared  to additional 11 per cent increase in 2019.It was estimated that without the pandemic, there would be close to 20 million people moving out  of  extreme poverty by the same period. As a result, the net impact of the pandemic has been an additional 90 million people moving into extreme poverty in 2020. Taking into account the two global events of inflation and the Ukraine war that are still evolving and have potentially negative implications for poverty and inequality, the World Bank has outlined a downside scenario  for 2022.This scenario assumes that the higher food prices observed during the first half of 2022 affect the bottom of the income distribution more than the top in the short run. Assigning a 3 percentage point higher impact of food price increases on the incomes of the bottom 40 per cent compared to those of the top 60 per cent, the projections made by the World Bank suggest that two years after the pandemic, there has been little success in wiping out the historic rise in poverty due to the pandemic. The World Bank does not explicitly  mention about the worsening inequality ( for reasons cited earlier) but  it cautions that countries are on a new and challenging path  and more needs to be done if the course the pandemic has put them on has to be corrected. The just released Poverty and Shared Prosperity Report for 2022, offers insights into how the course can be corrected through progressive and growth- inducing fiscal policies and for those countries with limited fiscal space, fiscal support from external sources.

The IMF, on its part, estimated that the world economy contracted by  4. 4 per cent during 2020 - the sharpest contraction during modern history-throwing millions into unemployment and poverty. But the world's billionaires grew wealthier compared to 2019, according to data compiled by UBS, the Swiss financial institution, and quoted by the IMF. The trend, observed across regions from Brazil and China to the US and Germany, was further indication the pandemic could deepen inequalities.

The IMF staffers computed a post-Covid summary measure of income distribution using Gini coefficient for 2020 for 106 countries and computed the percentage change. It was found that estimated effect from Covid-19 on the income distribution was much larger than that of past pandemics. It also provided evidence that gains for emerging market economies and low-income developing countries , achieved since the global financial crisis of 2007-2008, could be reversed. The analysis shows that the average Gini coefficient for emerging  market and developing countries  could rise to 42.7, which is comparable to the level in 2008.The impact of the pandemic was expected to be larger for low-income developing countries despite slower progress since 2008.

BANGLADESH CASE: Coming to Bangladesh, according to the  preliminary report on the  household census by Bangladesh Bureau of Statistics (BBS) published in 2022, the percentage of poor in 1972-1973 was 82 per cent which came down to 20.5 per cent during  2018- 2019  and the extreme poor were only 10.5 per cent. Centre for Policy Dialogue (CPD) carried out a study to assess the impact of the pandemic on the Gross Domestic Product (GDP) growth for 2020 fiscal. The estimate made by CPD suggested that GDP growth would come down to 2.5 per cent under the most optimistic scenario. Using the unit-level data of the Household Income and Expenditure Survey (HIES, 2016) of BBS, the analysis showed an increase of national poverty rate of 35 per cent in 2020 , compared to 24.3 per cent in 2016. At the same time, consumption inequality, measured by Gini coefficient, rose from 0.32 in 2016 to 3.5 in 2020. A similar analysis with a disaggregated income shock  resulted in an increase of the income Gini coefficient from 0.48  in 2016 to 0.52 in 2020 (The Financial Express, June 8, 2022). According to an earlier estimate by CPD, based on BBS data in 2005, about 5 per cent of the extreme poor had monthly family income of Tk 1109 which declined to Tk 733 in 2016. This means that during the period between 2010 and 2016, the income of the ultra-poor decreased. On the other hand, 5 per cent of the ultra-rich among the wealthy families had monthly income of Tk 38795 per household in 2005. This rose to Tk 88941 per month in 2016.The rate of increase in monthly income of the ultra-rich was more than double than that of the poor. This differential in the monthly income between the rich and the poor is indicative of growing inequality on a continuous basis in Bangladesh which was aggravated during the pandemic years.

An excellent overview of the incidence of inequality in Bangladesh  has been made by a former lead economist of the World Bank, Dhaka, giving a historical perspective of the issue (Zahid Hussain, The Daily Star, March 13, 2020). Using the HIES data of BBS, he has tracked the change in income share by deciles of population and has shown a S-shape (incidence of poverty) at the bottom and an elephant shape (concentration of income) at the top. He has then estimated, using the BBS data, that the income shares  of the bottom 5O per cent declined  from 9.25  per cent in 2010  to 7.95 per cent in 2016, while the share of the top 10 per cent increased from 35.85 per cent  to 38.09 per cent. The process through which inequality has taken place has been explained by the slow, sometimes negative, growth of income rate for the bottom 30 per cent and the accelerated rate at the top 10 decile of population. The middle 40-60  per cent had modest growth and the upper- middle ( 70-90 per cent)  even less so, resulting in a skewed distribution of income, overall.

END NOTE: Income and wealth inequality can be addressed either through various redistribution and welfare programmes  or enhancement of empowerment of the poor through education and health that makes their access to employment market  not only broad based but also remunerative enough to afford a decent standard of living.  Compared to empirical works on the incidence of inequality, globally and across countries, similar works and  findings on the redistribution and empowerment enhancing measures are fewer. Moreover, there is a tendency to focus on redistribution measures for mitigation of income and wealth inequality, with relatively little attention to the empowerment enhancing measures (education, health). This imbalance in empirical works on the redistribution and empowerment enhancing measures,  as against the incidence on inequality in general, need to be redressed because these are more important than the diagnostic studies and surveys on income and wealth.

With regard to redistribution and empowerment enhancement measures, the latter being an enduring and more dignified manner of reducing inequality through education and health for the poor and low income families, more emphasis should be on this. Empirical works on cross-country experiences and individual countries should, accordingly, reflect this relative importance.

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