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Opinion

June 21, 2015

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Rising tide of inequality

In recent years virtually all statistical measures point to a tendency towards increased income and wealth disparities in most countries. Branko Milanovic, a leading researcher on income and wealth inequality, points out that between the mid-1980s and the mid-2000s income inequality increased in 16 of the 20 Organisation of Economic Cooperation (OECD) countries.
Professor Milanovic also indicates that rising inequality is also a characteristic of the fast growing economies of China and India which have seen a spate of billionaires added to Forbes magazine’s periodic list of the wealthiest. The only region where inequality seems to be decreasing is Latin America particularly in Mexico, Brazil and Argentina where income transfer programmes to the poor and increased access to education account for some lessening of disparities albeit absolute levels of inequality are still depressingly high.
As many observers have lamented, income and wealth distribution in Pakistan is also highly unequal and some indication of this is given by the results of the latest Household Integrated Economic Survey (HIES) conducted under the aegis of the Federal Bureau of Statistics (FBS) of the government of Pakistan. This report gives information on household income and consumption expenditures by dividing the sample of households into quintiles (or five subsets of all households arrayed from the poorest 20 percent to the richest 20 percent). The results indicate that the top 20 percent of households consume on average four times more than the poorest 20 percent and earn more than five times as much (after adjusting for household family size as the data show that lower income groups have larger family sizes). Since richer households generally tend to understate their income when speaking to government-sponsored survey teams this ratio is if anything an understatement of the true difference in living standards between the richest and the poorest households.
The data also show

that urban households have about the same per capita consumption levels as their rural counterparts in the same quintiles except for the richest 20 percent of urban households which have higher per capita consumption levels than the richest 20 percent of rural households. A revealing finding from the data is that, while average rural household incomes for the lowest three quintiles grew at a lower cumulative rate than their urban counterparts, average household incomes for the top two rural quintiles handily outpaced income growth relative to the two upper urban quintiles.
For instance, the top urban quintile saw household incomes grow by around six percent over the two year period which was far lower than the 17 percent growth experienced by the top rural quintile. Nonetheless household incomes in the top 20 percent of urban households still exceed that in the top 20 percent of rural households by a significant margin despite the faster increase in incomes experienced in this time period by the latter group.
The data reported lead to the following inferences: (1) no significant differences exist, on average, in per capita consumption levels among urban and rural households for the lower four quintiles or 80 percent of households; the difference becomes significant when comparing per capita consumption levels of the richest 20 percent of urban and the richest 20 percent of rural households. This is where the income and consumption differential in favor of urban households is most acute; (2) rural income distribution became more skewed during this time period as the top 40 percent of rural households enjoyed the largest share of gains of increases in rural incomes; and (3) on average, households were worse off in real terms in 2013-14 than in 2011-12 since the average income increase during this time was exceeded by the cumulative inflation of over 18 percent in these years. In other words, the standard of living for the average Pakistani household declined indicating that poverty must have increased.
Why should we care about inequality? An important reason is that relatively equal income distribution is key to education being more accessible to the majority of the population. Education is a vital factor in propagating social mobility and increasing a country’s standards of living with higher worker productivity a prerequisite for raising per capita income levels. There is no example in history of a country reaching developed country status with a largely illiterate and uneducated population!
Social philosophers also point to the corrosive effect of inequality in weakening and severing community bonds that in turn lead to all kinds of social problems including mental and physical illness, law and order breakdown and, in extreme cases, the unravelling of the state through violent insurgencies. The ideology about ‘trickle-down effects’ that favours the rich because they supposedly account for most saving and capital formation that is a major factor underlying growth in GDP has been discarded by most development economists who now believe that inequality can be harmful for the economy.
The fact that some Latin American countries have been able to reduce inequality in recent years is largely due to deliberate policy interventions such as income transfer programmes that have also been highly effective at broadening educational access. In Brazil for example under a programme called ‘Bolsa Familia’ (Family Grant) a monthly allowance of about $13 is given to poor families for each child under 15 attending school up to a maximum of three children. Families are also given a monthly allowance of $19 for each 16 or 17-year-old child still in school for up to two children. Some fifty million Brazilians have benefited from this programme. Evaluation studies have found that the Bolsa programme increases school attendance and school completion (and also improves child weight, vaccination rates, and use of health facilities by mothers).
Measures to reduce inequality would, inter alia, have to involve efficient governance, which means reducing corruption at all levels of the administration and improving delivery of services such as nutritious meals free of cost to schoolgoing children so that they can focus on their lessons rather than on stomach pains due to hunger. A large part of the solution rests on redistribution of incomes through better targeted government transfer and subsidy programmes for the poor as well as spreading and widening of the tax net.
One of the economic missteps under the Musharraf regime was the abolition of the wealth tax, which has resulted in large amounts of undeclared and illegally obtained income being channelled into real estate. The end result of land and property hoarding including that by non-resident Pakistanis has been sharp surges in real-estate values putting home ownership out of reach of the majority of Pakistanis while increasing wealth disparities. Similarly, large increases in the value of agricultural land has meant increased concentration of wealth among the feudal classes increasing their ability to dole out political patronage and to extract ‘rents’ from the state.
Perhaps it is time to resurrect the wealth tax with some provision for offsetting the wealth tax payable by the amount of income tax currently being paid by individuals. This would be justifiable on the grounds of equity since it would broaden the tax base and would push back against the increasing concentration of wealth in the country. The fly in the ointment is the possibility of accelerating capital flight to tax havens –but that calls for increased vigilance in enforcing capital controls, not for caving in to tax evaders.
The writer is Group Director for Business Development at the Jang Group.
Email: [email protected]

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