‘India’s income inequality is far lower than that of China’6 min read . Updated: 06 Nov 2007, 12:22 AM IST
‘India’s income inequality is far lower than that of China’
‘India’s income inequality is far lower than that of China’
Vinod Thomas is director general, Independent Evaluation Group (IEG) at the World Bank Group. As the head of IEG, he is entrusted with the task of evaluating the Bank’s work at a time when the Bank is going through very challenging times, which include a change at the helm—Robert Zoellick being appointed the new president. During a recent visit to India, Thomas spoke to Mint on some of these issues and also dwelled on some of the challenges facing India’s rapidly transforming economy. Edited excerpts:
The dramatic changes at the World Bank Group are really twofold. On the external side, the greater liquidity that the capital markets are providing to developing countries has meant that the World Bank, while an important player, is in the aggregate a smaller player. You have more than $600 billion (Rs23.58 trillion) in private capital, as compared to the Bank Group lending roughly $34 billion, which includes IFC (International Finance Corp.) and the MIGA (Multilateral Investment Guarantee Agency). The value of the Bank more and more will be the combination of lending with knowledge and lessons of effective lending. So, externally, there is a change in the role of the Bank that obliges it to be far more agile, flexible, effective not only in the middle income countries (MIC), but covering countries across the spectrum.
Internally, as you also know, the Bank went through a difficult period recently which led to changes at the top. With a new leadership, the question of the Bank’s strategy going forward is attracting central attention. Among the various issues, governance and anti-corruption would be one; and, there will be focus on the internal work relating to the Bank’s own programmes, but equally on the work of the effectiveness of programmes in countries, which will always be relevant. No one ever says that corruption and governance are not important.
The question is how best to influence and how best to support it and who and when and how. And, there we have some interesting lessons.
One is that some of the programmes that have taken a high profile view of the issue and taken on loans that are meant to address corruption have not produced the expected results. Some of the loans that have gone to particular sectors and addressed corruption in that process, on the other hand, have been more successful. For example, in the case of energy reforms, when as a by-product, you bring buyers and sellers of energy into the same market with less of government role and opportunity for corruption, there can be greater transparency, and also a bigger impact. Based on our evaluation, Turkey is a good example; with an effective lending for energy (reform), and with a valuable side effect of less corruption. We have a series of examples like that from Uganda, Bulgaria and so on. So, the importance of corruption in governance will continue.
One of the concerns that is cropping up across countries is the issue of income inequality. While poverty is coming down, even in countries such as India, inequalities are widening. Do the experiences of the middle income countries (such as China, Brazil and Russia) in this respect hold lessons for countries such as India?
Absolutely yes; and I would say it is a two-way link. I say that because India’s income inequality is far lower than that of China. But the trend in India (as with China) is worrisome. And, there are at least two aspects of learning. One, in India, the regional differences are a big factor. You would expect that states which are poorer or lagging, have a much better chance to grow faster; because you are so far inside the so-called production possibility frontier, and there is so much scope to grow faster. But this has not applied to regional differences in India and China at the moment, although it is changing in India.
In China though, the richer states have grown faster than the average, and poorer states have grown slower than the average. Conclusion: inequality widens. In India, there are some qualifications now. But over the last 10 years, without doubt, states such as Gujarat, Andhra Pradesh and so on have grown much faster, while Bihar, Uttar Pradesh and a couple of other states have grown much slower.
Brazil has been different. In that it has had worse inequality than India and China. But over the last five years, inequality has been coming down.
For countries like China, the experience of India with employment guarantee scheme should not be ignored. It targets those who are working. But Brazil has an experience which targets those about to work. They have what you call conditional cash transfers, a successful programme initiated earlier in Mexico. Under this, you transfer cash to those below the poverty line on condition that their children go to school and get vaccination. The cost (of the programme) is reasonable considering that you only target the lowest income strata. Its benefits are different from a simple transfer in the sense that it is an investment into the future; you have to show educational and health investments. So poverty in the next generation is likely to be lower.
Are there lessons for India?
Yes. Employment guarantee schemes with conditional cash transfers can be a quick win-win; the downside (avoiding poor targeting and leakages for example) needs to be addressed. Politically it is great. (Luiz Inacio) Lula (da Silva) won his second term (as President of Brazil) partly on the basis of the conditional cash transfer programmes. It also can be good economics.
Furthermore, neither India, China nor Brazil have begun to seriously tackle income inequality among the older generation. So, how does one provide effective social safety nets, which have not yet been built into any schemes. So, these are the lessons that can be learnt by each of these countries from each other.
What about urban poverty; in India, urbanization is fast gaining momentum?
Demographics and urbanization, for which answers are not clear and adequate attention is not being given, are among the top development challenges going forward. Typically, rural poverty dominates in India and China; but urban poverty dominates Brazil and Latin America. This is because urbanization is over 80% there (Latin America), while it is 30% in India and 40% in China. But India’s urbanization will go up by 10 percentage points by 2030. Already, the urban centres are excessively crowded. The issues of poverty as well as environmental pollution are not luxuries to be dealt with; they will determine whether the growth is sustainable. In that sense, it is urgent.
Immediately, the number of poor in rural areas are far greater, but the urgency of urban poverty is growing and is becoming more intractable. The rural poor can somehow be connected to some asset base, however weak it is. But the urban asset base is harder to put your finger on. Presumably, the government and the Bank will in future lend more attention to this problem.
Because of growing inequalities as well as other factors, there is growing social unrest in India. What do you make of it, in the light of your experience in watching other economies undertake a similar transition?
If you were to compare the Bric countries (Brazil, Russia, India and China) along with Mexico, Indonesia and South Africa, then you would find that inequality in India and Indonesia is lower than that of China, lower by a large margin when compared to Brazil, as well as to South Africa and Mexico. But the trend is going the wrong way. But it is not yet a huge publicly demonstrated issue as it has been in Brazil, where President Lula began to reverse course.
But the sheer size of the population involved, and the difference among states—the fact that you have half a dozen growing well above the national average and several large states growing well below the national average—raises a special issue in India, that others don’t have in quite the same way. It is a point of discomfort. Unless this is dealt with, both through rural and urban programmes, India may have a bigger concern regarding poverty and income differences in the face of 9% growth. So while inequality per se is less, its visible part and some of the related socio-regional issues can be quite pronounced in India.