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Source: media reports

Poor man, rich man

Poor man, rich man
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First Published: Wed, May 30 2007. 12 03 AM IST
Updated: Wed, May 30 2007. 12 03 AM IST
I have recently discovered that I am the fifty-one million, two hundred and sixty-three thousand, five hundred and third richest person in the world. At least that’s what a smart little website called tells me. That puts me in the top 1% of the world’s income pyramid.
On this website, you enter your annual salary and a calculator tells you where you stand in the global income rankings. It is very likely that most readers of this newspaper, too, will find themselves at the top of the global income heap. Try it out.
Though such information will not help us with our monthly bills, it does give us direct insight into the fact that incomes and wealth are unequally distributed. After all, the inequality debate is back. Prime Minister Manmohan Singh set the cat among the pigeons with the recent speech he made at the annual meeting of the Confederation of Indian Industry (CII). He spoke there of how “rising income and wealth inequalities… can lead to social unrest”. While some economists do use traditional measures of income inequality (such as the Gini coefficient) to insist that inequality has not gone up in India, the anecdotal evidence clearly points to the opposite direction. Rather than debate the morality of growing inequality, it would be more useful to ask why inequality could be rising.
Way back in 1963, economist Simon Kuznets showed that inequality increases as a country develops and then starts decreasing after it reaches a certain level of development. Higher inequality could actually help initial growth, since income gets concentrated with those who have a higher ability to save and invest. The data can be laid out in a graph that looks like an inverted V. This is the Kuznets Curve.
At what point does inequality crest before it starts dropping? Kuznets suggested that inequality drops after 50% of rural workers move to urban jobs. Another way of putting this is that inequality reduces after half the workforce moves from low productivity to high productivity jobs. So distribution of income changes in tandem with changes in the composition of labour.
A more modern approach is to also consider the returns on capital, and how they are distributed and taxed. Take the drop in inequality in the US between 1914 and 1945. “Income inequality dropped because capital owners incurred severe shocks to their capital holdings during the 1914-45 period such as destructions, inflation, bankruptcies and fiscal shocks for financing the wars… Note the idea that capital owners incurred large shocks… and that this had a big impact on income distribution is certainly not new. Kuznets already mentioned this factor,” say Thomas Piketty and Emmanuel Saez in a working paper published in January 2006 for the National Bureau of Economic Research.
It is very likely that India is still in the ascending half of the Kuznets Curve. There is little analysis of how far we are from peak inequality. And how much of the growing inequality is due to the fact that millions are still trapped in low-productivity jobs, especially in agriculture. Nor is there clarity on how capital and the gains from it are distributed in India.
The PM did not allude to these issues in his now-famous homily, perhaps because he was speaking to an audience of successful businessmen rather than a group of economists. But there are some intriguing facets to his speech.
Look at how he juxtaposed issues. When the PM spoke of the returns to capital (“Even profit maximization should be within the bounds of decency and greed”), it was vaguely linked to the problem of inflation. And his comments on the price of labour (“resist excessive remuneration to promoters and senior executives”) were in a paragraph on inequality.
A close reading of the PM’s speech suggests that he was pointing out links between profits and inflation, on the one hand, and between CEO compensation and inequality on the other. This is radically different from the usual analysis in India, where high wages are linked to cost-push inflation while profits have been linked to inequality. The PM seems to have turned the debate around. This is a very different type of inequality debate, akin to the one that is raging in the US and some other western nations, and it perhaps tells us something about the changing nature of Indian capitalism.
Is excessive compensation for some types of labour driving the growth in inequality? There is a huge skills gap in India, which is why there are labour shortages in certain jobs despite a huge potential labour force. We just don’t have enough well-trained workers and managers. Those who are qualified can demand very high salaries. The solution is to close this skills gap by investing in education, so that many more millions can compete for senior jobs in industry and business.
Has the nature of inequality in India changed, with wage differentials rather than asset ownership fuelling the gap? Do write in with your views.
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First Published: Wed, May 30 2007. 12 03 AM IST
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