Did lib­er­al­iza­tion lead to lower in­come growth for the poor?

Mint Asia ST - - Inside - Re­spond to this col­umn at

One of the strong­est jus­ti­fi­ca­tions for the eco­nomic lib­er­al­iza­tion that be­gan in the 1980s is that it not only raised growth rates, but that growth per­co­lated down to the poor­est peo­ple.

True, lib­er­al­iza­tion has in­creased in­equal­ity, but that is ra­tio­nal­ized as the price to pay for higher growth. Af­ter all, it wasn’t just us staunch mem­bers of the bour­geoisie who said these things—even Com­rade Deng Xiaop­ing ad­vised the Chi­nese peo­ple to “let some peo­ple get rich first”.

Folks unim­pressed by Deng may choose to be­lieve econ­o­mist Si­mon Kuznets in­stead, who said that in­equal­ity will in­crease ini­tially as an economy de­vel­ops, but will ul­ti­mately drop.

The re­sul­tant Kuznets curve, as this de­pic­tion of the tra­jec­tory of in­equal­ity is named, is an in­verted ‘U’. So a rise in in­equal­ity is per­fectly fine, it’s just the ef­fect of high growth in the economy. Those of us who are in the best po­si­tion to profit from that growth, ei­ther by virtue of higher ini­tial wealth, or higher ed­u­ca­tional op­por­tu­ni­ties, ben­e­fit the most, of course. But the im­por­tant point is that ev­ery­one gains, even the poor­est.

The French econ­o­mist Thomas Piketty had poured cold wa­ter over this ar­gu­ment in his best-sell­ing book, Cap­i­tal in the Twenty First Cen­tury, which de­bunked our cher­ished be­lief that a ris­ing tide of eco­nomic growth will nec­es­sar­ily lift ev­ery­body’s boats.

Even so, we as­sumed that while this may be true for the de­vel­oped economies as their fac­to­ries are in­creas­ingly au­to­mated and their jobs van­ish to emerg­ing mar­kets, it was dif­fer­ent for de­vel­op­ing economies. Surely, the ev­i­dence was all around us, as vast pop­u­la­tions were able to move above the poverty line, thanks to the higher growth ush­ered in by lib­er­al­iza­tion?

Surely the for­est of satel­lite dishes in slums, the mo­tor­cy­cles parked in front of thatched huts, the ubiq­uity of mo­bile phones all pointed to ris­ing pros­per­ity even among the poor?

Ap­par­ently we were all de­ceived. A much-dis­cussed re­cent paper by Piketty and Lu­cas Chan­cel ti­tled In­dian RICH GAIN, POOR LOSE In­come growth has fallen for the bot­tom half of the pop­u­la­tion since the eight­ies. THE RICH HOG FRUITS OF GROWTH The share of the poor and mid­dle classes in the ben­e­fits of growth has shrunk dra­mat­i­cally since lib­er­al­iza­tion. 50 40 30 20 10 0 in­come in­equal­ity, 1922-2014: from Bri­tish Raj to Bil­lion­aire Raj? de­nies that lib­er­al­iza­tion has been ben­e­fi­cial for the poor in India. Baldly stated, their paper finds that while av­er­age real an­nual per adult in­come growth for the bot­tom half of the pop­u­la­tion was 2.2% be­tween 1951 and 1980, it fell to 1.94% be­tween 1980 and 2014 ( See chart 1). In other words, the bot­tom half of the pop­u­la­tion saw higher in­come growth in the decades be­fore lib­er­al­iza­tion than in the decades af­ter it. Sure, their in­comes too have gone up af­ter lib­er­al­iza­tion, but at a slower pace than ear­lier. Were those sup­pos­edly so­cial­ist decades re­ally bet­ter for the poor?

Nor is the paper up­beat about the sit­u­a­tion of the “mid­dle class”. It finds that what it calls the mid­dle 40% of the pop­u­la­tion (this is some­what of a mis­nomer be­cause it de­notes in­di­vid­u­als above the bot­tom 50% and be­low the top 10%) hasn’t done too well from lib­er­al­iza­tion ei­ther.

Av­er­age an­nual real per adult in­come growth for this “mid­dle 40%” was 1.9% dur­ing 1951 and 1980, which went up to 2.02% be­tween 1980 and 2014.

The in­crease was a mere 0.12% per year, an in­cre­ment any self-re­spect­ing worker in the for­mal economy would laugh at. The sav­ing grace is that growth has been above 2% from the mid­dle of the last decade for the bot­tom half of the pop­u­la­tion and from around the year 2000 for the “mid­dle 40%”.

Piketty and Chan­cel do not deny that over­all growth went up af­ter lib­er­al­iza­tion.

Ac­cord­ing to the paper, av­er­age an­nual real per adult growth for the en­tire pop­u­la­tion in the 1951-1980 pe­riod was 1.7%, well be­low the 3.25% growth notched up in the 1980-2014 pe­riod.

So the ques­tion is: in spite of over­all growth be­ing so much higher, how is it that peo­ple in the lower 90% of the pop­u­la­tion saw a de­cline in in­come growth or just a mi­nor im­prove­ment?

The rather ob­vi­ous an­swer is that the top 10% of the pop­u­la­tion hogged the lion’s share of the growth in in­come.

Of the to­tal in­come growth be­tween 1951 and 1980, the bot­tom 50% of the pop­u­la­tion cap­tured 28%, the “mid­dle 40%” got 49%, while the top 10% had to re­main sat­is­fied with ap­pro­pri­at­ing 24% of the growth ( See chart 2). But these pro­por­tions changed dra­mat­i­cally af­ter lib­er­al­iza­tion be­gan in the eight­ies.

Dur­ing 1980-2014, the bot­tom half of the pop­u­la­tion got a mere 11% of the growth, the mid­dle 40% cap­tured 23% and the top 10% of peo­ple cap­tured two-thirds of growth. With the top 10% ap­pro­pri­at­ing so much of the in­crease in in­come, it’s lit­tle won­der that the rest of the pop­u­la­tion saw lit­tle ben­e­fit from lib­er­al­iza­tion.

It’s also worth not­ing that the top 1% of the pop­u­la­tion cap­tured 29% of the growth in in­comes be­tween 1980 and 2014.

In­ter­est­ingly, China, which too went in for lib­er­al­iza­tion af­ter 1980, saw its mid­dle 40% cap­ture 43% of the growth in in­comes be­tween 1980 and 2014.

Growth there has been much more egal­i­tar­ian than in India, al­though this may partly be the legacy of the ear­lier Maoist era.

What is in­come in­equal­ity now in India? The paper has data for 2014, which shows that the av­er­age in­come of an adult in the top 1% is about 70 times the av­er­age of the bot­tom half and 35 times that of the “mid­dle 40%”.

The paper con­cludes that ‘“Shin­ing India” cor­re­sponds to the top 10% of the pop­u­la­tion (ap­prox­i­mately 80 mil­lion adult in­di­vid­u­als in 2014) rather than the mid­dle 40%.’

These find­ings will be very con­tro­ver­sial as it up­sets the es­tab­lished nar­ra­tive on growth af­ter lib­er­al­i­sa­tion. It is cer­tain to start a lively and heated de­bate. The full paper is avail­able at bit.ly/2vlyuou.

Manas Chakravarty looks at trends and is­sues in the fi­nan­cial mar­kets.

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