Economic inequality is a curious phenomena. The gut feeling when you hear
about economic inequality is that it is wrong and an non-equal society is
not right. So the typical response is to take the money from where it is in
excess and give it to the place where it is less. But when you sit back and
think about it, you then understand that inequality is a fact of life.
There is absolutely no reason why everybody has to be equal, there is no
physical, mental, sociological, economic or financial reason to be so. But
given that we are civilised, we calibrate that law of the jungle. So what
we make sure that some human systems treat everybody equally. Such as our
legal system, such as our election system, such as our hiring system, such
as our money raising system, such as our bank account system, our traffic
system. Everybody has an equal right to participate within that system but
within that system, you have inequality such as having a bigger or more
expensive car than the other. So as long as everybody has a car, nobody
minds that you have a Porsche while I have a 10 year old ford mondeo. But
we are not talking about cars or access to a job when referring to vast
swathes of the world where people live on incomes which are below $1 per
day. That is grinding poverty, at starvation levels, one meal away from
deep delimitating hunger without a safety net or access to clean drinking
water, health care or a roof over your head.
A recent report from the Asian Development Bank talked about one region of
the world, Asia, where we have severe poverty. One measure of inequality is
called as the Gini Coefficient, which measures a ratio of the incomes /
consumption (take your pick) of the top layer versus the bottom layer.
There are gigantic debates behind this simple ratio, whether or not you
measure absolute or relative incomes, top and tail the 1% or 10% or 20%,
whether you go for income or consumption, whether you adjust for the
exchange rate or not, and where do you get the data from. But let us leave
those debates aside for the journals of academia. As long as we are
consistent in measuring the ratio and people accept it by and large, we are
ok. As it so happens, we see that the Gini coefficients are highest for
Nepal and China, India is somewhat in the middle while Pakistan and Kyrgyz
republic are at the bottom. In other words, inequality is highest in Nepal
and China while Pakistan is doing comparatively well.
As the report mentions, this doesnt mean that Pakistan or India is doing
well, the % of severely underweight children is much higher in these
countries but that is a fault of the ratio, that it doesnt consider the
base. What do I mean by the base? A base is what I explained above. A base
level of service, like everybody having access to a car, is what you define
as the minimum level of income/consumption. In other words, you might be a
purist and very hard hearted, but you will never allow anybody to starve in
your country. At the bare minimum, you are happy that everybody has 2
square meals per day, 2 sets of clothing every 6 months and a basic
shelter. Or provide taxes so that the government can provide this bare base
level. Which means, you have immediately raised the bottom layer of
inequality to a common base level.
But overall, as long as the base level is handled right, and this base
level will differ from country to country, time to time, inequality isnt a
problem. At least as far as economics are concerned, but go back to what I
said at the beginning, your gut feeling revolts at the idea of inequality.
And unequal treatment, when taken to the extreme, is very conducive to
rebellion, revolution, terrorism and insurgencies. Study after study has
shown that conflicts are disproportionately skewed towards countries or
regions where there are inequalities or economic problems. For example, you
are more likely to see a revolution or conflict in Pakistan and India
compared to Sweden or Luxembourg.
So if you can manage to have the base level right, remove or control
corruption (which is a huge driver of inequality), have some
re-distributive ability (like sending funds and help to regions where rains
have failed or there is basic issues relating to economic development like
poor schooling, etc.), we are ok. But crucially, the solution is to have
equality in opportunity. As long as you give everybody the same
opportunity, it is good for the country. That means good schooling, good
access to capital, good courts to control and manage violations.
All this to be taken with a grain of piquant salt!!!
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