The passionate national debates about inequality and oligarchy usually miss one very important issue: social mobility.
Like it or not, most countries tend to see a rise in inequality in their early years of accelerated growth. The reason is not very hard to understand. People gradually move from low productivity jobs on the farm to high productivity jobs in the modern sectors of the economy. Those who make the shift earlier see incomes rise faster than those who are initially left behind. Inequality increases in the initial years of fast growth and then tends to reduce, a process first empirically tested by the American economist Simon Kuznets.
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The more significant problem is when rigid economic and social structures tend to permanently condemn certain sections of the population to the bottom of the income ladder. A system of oligarchic capitalism creates a modern version of this problem. This is when hopelessness and ennui tend to dominate the lives of social groups who have suffered centuries of discrimination or in people living far away from regions of economic opportunity.
In a recent book of essays in honour of Montek Singh Ahluwalia, Suresh Tendulkar focused on the important distinction between inequality and inequity. Tendulkar noted that rising inequality during a high-growth period might not lead to a widespread feeling of inequity as long as people can see high mobility and aspire to climb the ladder. But there are instances when the system is not seen to be fair and there is a widespread belief that the economy is a zero-sum game where one person can benefit only at the cost of another.
The perceptions of fairness and opportunity are thus important. The rags-to-riches stories of many entrepreneurs have been lavished with a lot of attention in recent years; less attention has been paid to the rise of millions from poverty to the lower reaches of the middle class.
Such mobility is welcome. A new report from the Asian Development Bank (ADB) on the rise of the Asian middle class has already attracted a lot of comment. “Many countries start with a small group of rich people with huge poor masses. This is (typically) a very polarized society. The important thing is that the huge majority of poor people should move to the middle class,” ADB chief economist Jong-Wha Lee told this newspaper in an interview, adding that 200 million poor Indians have moved into the middle class in the past two decades.
The ADB report cites a lot of economic research on why a growing middle class is important for a country. Countries with a huge divide—between a narrow elite and a majority trapped in poverty—tend to be too focused on the politics of redistribution; they find it difficult to come to an agreement on policies that will lead to economic growth. These countries are also less likely to agree on the provision of public goods such as health, education and physical infrastructure. “The elites in control of a government in societies without a middle-class consensus tend to underinvest in such goods for fear they will empower opposing factions,” says ADB. Further, the middle class provides entrepreneurs to society, elevates values such as education and savings, and supports consumer demand by agreeing to pay premiums for high-quality consumer goods.
Indian public policy should then pay more attention to increasing mobility, so that more poor people can enter the lower rungs of the middle class through jobs in modern sectors. Their ability to get such jobs is deeply dependent on their access to public goods such as education and health. One chart in the ADB study shows where India could be getting it wrong. Only 15.1% of Indians across income categories have regular/permanent wage employment compared with 42.7% of China’s total labour force.
Being middle class is a state of mind. Where citizens subjectively place themselves in society is linked to the point that Tendulkar has made about the importance of perceptions about inequity.
Too few Indians see themselves as far better off than their countrymen, compared with how citizens in other Asian countries perceive their relative income. Only one-fifth of the self-identified Indian middle class places itself in the third income decile and only 4% places itself in the eighth decile, according to the World Values Surveys. The ADB offers two possible explanations: “This may reflect the fact that, due to rising prosperity, widening inequality and increasing consumerism, middle-class Indians feel poorer than they really are or they have a more liberal definition of what constitutes the middle class than other countries…”
One final question: Does this indicate that Indians are underestimating the advances they have made, thanks to economic growth and, as a corollary, do we, as a people, overestimate the importance of politics as an instrument of income mobility?
Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at firstname.lastname@example.org