Why equality is better for all

Tim_Harford_in_2012Tim Harford
Inequality is become a hot topic – but what’s really going on? Let’s start with looking at rich countries. The figures vary depending on who is measuring, and when, but France’s Gini coefficient is around 33 per cent, Finland’s 27 per cent, and it was 34 per cent in the UK and 45 per cent in the US. To put this in perspective, a Gini of 0 implies total equality of incomes; a Gini of 100 per cent means that one person has all the dough.
Then let’s move to Brazil, China and India – often lumped together, especially by European and American analysts, but of course they are hugely different in many ways.
Brazil is a notoriously unequal society, so one might expect it to have a very high Gini coefficient. The CIA’s
World Factbook reported that the Gini coefficient for Brazil was 61 per cent in 1998 – the sort of extreme inequality that we might expect, given the country’s reputation.
But here’s the thing: Brazil’s Gini is now down to 52 per cent. That’s still high but it’s a big fall, a quarter of the way to becoming ultra-egalitarian Finland in just fifteen years. It shows that in the right circumstances inequality can be tackled: Lula da Silva, the Brazilian President from 2003 to 2010, was regarded as a revolutionary firebrand when elected, but turned into a pragmatist who was happy to court international business investment, yet was keen to redistribute some of the rewards of Brazil’s commodity boom.
China is still ostensibly a communist country, but it is rapidly taking over from Brazil as the poster child for income contrasts. The CIA Factbook puts the Gini coefficient there at 48 per cent. That is already higher than the level in the United States, and given that China is still much poorer than the US, such income inequality implies tremendous hardship for poorer families. A more recent study found a Gini coefficient of 61, which if true is pretty serious. No wonder China’s leaders are nervous about social unrest, even though the country is still growing very quickly indeed.
Finally, India. India’s gini coefficient is in the high 30s and seems stable at that level. Notorious examples of glaring inequality, such as Mukesh Ambani’s billion-dollar house, towering at the height of a forty story building over Mumbai, turn out to be the exceptions, not the rule.
Should we conclude that all is well in India, then? Not necessarily. The latest concept in inequality economics is the “inequality possibility frontier”. Here’s a way to think about it: in a pure subsistence society, significant inequality is impossible: if resources are unevenly distributed then people will simply starve. The richer a country gets, the greater the proportion of resources that could, in principle, go to a small number of people – and so the more unequal it could become.
There’s every reason to believe that India’s levels of income inequality, already above European levels, are just foretaste of a winner-take-all society to come.
But Indian policymakers must not panic. Consider the attitude summed up by China’s first great economic reformist, Deng Xiaoping, who took power in 1978 following the end of the Maoist era. One of his much-quoted maxims was ‘Rang yi bu fen ren xian fu qi lai,’ or ‘Let some people get rich first’.
Deng had a point. Economic growth isn’t a steady automatic accretion of wealth – it comes from tearing up old ways of doing things and replacing them with something new. This process of creative destruction is highly likely to create some inequalities in the short term. China’s growth model has been very experimental, loosening different restrictions on different industries in different parts of the country – and in particular creating globalisation-friendly industrial zones on the coast. It is almost inevitable that such experiments, if successful, would produce winners and losers. (If unsuccessful, of course, they produce only losers.) Not everywhere can develop at the same rate.
India is going to have to embrace similar experiments and inevitably, inequality will be the result. What, then, is the right response?
The first is to give some space for Indian business to grow. The World Bank’s “Doing Business” project uses standardised case studies to measure regulatory burdens; it currently rates India 134 out of 189 economies – and slipping down the rankings. Obviously the rule of law is necessary and businesses cannot be entirely untouched by government, but there is clearly tremendous room for improvement in making it simpler and cheaper to set up a legal business, register property or get a construction permit. It can hardly be a surprise that India’s growth industries have been those that were hard even for government officials to imagine existing – and of course if you cannot be imagined you can fly under the radar until you’re big enough to defend yourself.
The second is to focus on primary education to help equip India’s people to take advantage of new economic opportunity. India’s very best universities are legendary. India’s primary and secondary education does not enjoy the same glowing reputation.
The third element is to improve social programmes, to make them as generous as possible within the resources of the Indian state, and – importantly – to target them better. I am no expert on the Indian welfare state but the stories I am told are of waste, duplication, and fraud. This is a triple tragedy: people who desperately need help aren’t getting it; the state is spending money it cannot afford on people who may need no help at all; and the welfare state, which should be a bedrock of any developed economy, is discredited.
I’m fascinated by the possibilities of direct cash transfers. Recent randomised trials of cash handouts to low-income entrepreneurs in Sri Lanka after the 2004 Tsunami, of to poor women in post-conflict Uganda, and even to homeless petty criminals in Liberia, suggest good results. At a bare minimum the money tends to be spent on useful consumption – buying food and clothes rather than alcohol and drugs. In many cases is used to buy investment goods with excellent rates of return. In most cases the most effective welfare program is going to be not free rice or milk, but cash.
The question, then, is how to distribute that cash properly in India. Mobile phone networks are starting to make electronic transfers feasible, but a fundamental issue is identifying the correct recipient. It’s encouraging to see India pioneering an ID system for the entire population – a massive social, institutional and technological challenge. I’d like to point to examples elsewhere in the world of this kind of system being used successfully, but the truth is that the scale and ambition of India’s ID program is utterly unprecedented. Well-wishers across the world are watching and hoping that it will work.
Of course, some people ask why inequality matters. Who cares if the super-rich are getting super-richer, as long as the poorest are enjoying some increase in living standards too? I have a degree of sympathy with this view: certainly I am not someone who thinks it’s intrinsically harmful for Mukesh Ambani to get a little bit richer, as long as this is at nobody else’s expense. My priority is poverty rather than inequality itself.
But that said, I don’t think we can dismiss inequality entirely. For one thing, the money now accruing to the richest members of societies across the world is not trivial. The vast majority of income gains in the United States, for instance, have gone to the richest, leaving the majority of Americans suffering very limited growth in their incomes for the last thirty years or so. That’s not to say that the rich “stole” the money – economic growth doesn’t work like that. But it does make the point that the sums involved are very substantial. It’s not just a matter of envy.
There is some research suggesting that inequality has harmful effects on crime, mental health and growth. I don’t find it totally convincing – but one has to consider it a risk. Some intriguing recent research from the IMF suggested that when countries enjoyed episodes of strong growth, those episodes were more likely to end quickly in highly unequal societies. One possible explanation of these tendencies is the political economy of highly unequal states. The more unequal a society, the more resources an oligarchic elite can deploy to seize political control and defend their wealth. Oligarchs don’t like free markets: they like barriers to entry provided by political cover. Even the relatively saintly Bill Gates, who has devoted much of his fortune to economic development, built his billions on the back of his (perfectly legal) monopoly of the Windows system, backed up by global intellectual property law.
Many other plutocrats have less laudable intentions and rather starker ways to maintain their wealth. Look at China. Almost one in ten of China’s richest thousand people sit in the National People’s Congress – a body of almost three thousand lawmakers. Their average net worth is four times the average net worth of the richest politicians in the US Congress, despite the fact that the US itself is a far wealthier nation. Many people worry that the US is subject to too much influence from plutocrats; if that is true then the situation in China looks even worse.
At the very least one must recognise that there’s likely to be some degree of redistribution from the rich to the poor that will improve welfare as a whole.
A final point: inequality isn’t just a case of the super-rich versus the super-poor. It has an impact on the middle classes too, and the way we conduct ourselves. I count myself as middle class and I expect most people reading this article see themselves the same way, so I hope they empathise with my position. The more unequal the society that surrounds us, the higher the stakes: the more we have to invest in giving our children that tiny extra advantage, or to defend ourselves from crime.
We find ourselves devoting disproportionate effort to choosing the perfect neighbourhood, school, or tutor. More equal societies – we look with admiration at Denmark, Finland and Sweden – have lower stakes. Middle class families relax, knowing that any school is likely to be good, and that the gap between the highest achiever and the also-ran is not so very great. The tragedy of inequality for the poor is obvious to all. But inequality is also a prison for the middle classes – we find ourselves trying to run up an escalator that is always, albeit gently, threatening to drag us downwards. No society can be truly prosperous unless people feel a sense that their economic lives are secure. That is something to which India – and every country around the world – should aspire.
Tim Harford is an economist, journalist and broadcaster. He is the author of “The Undercover Economist Strikes Back” and the million-selling “The Undercover Economist” and a senior columnist at the Financial Times)
This as told to column originally appeared in the Business Today edition dated January 19, 2014

(as told to Vivek Kaul)