Breaking down wealth inequality in South Asia

Thursday, 9 April 2015 00:00 - - {{hitsCtrl.values.hits}}

Inequality in the distribution of wealth within populations has been at the core of social and political discord since the dawn of civilisation itself. In the wake of the global financial crisis, the wealthy 1% of the world re-entered the crosshairs of the 99% in demonstrations across America through the Occupy movement. Austerity across the European Union sparked off similar movements, however the South Asian region, which many would argue is home to some of the most uneven societies in the world, has remained relatively unaffected in terms of recent social upheavals targeting the wealthy. The Daily FT sat down with the World Bank’s Chief Economist for the South Asian region to have an in-depth discussion on the issue of inequality in the South Asian region from how it is defined and measured, to likely causes and solutions. Following are excerpts: Q: Could you start by telling us a bit about your background and your history with the World Bank? A: My name is Martin Rama and I’m the Chief Economist for the South Asian region of the World Bank where the South Asian region is focused on eight countries: India, Bangladesh, Pakistan, Afghanistan, Nepal, Bhutan, Sri Lanka and the Maldives. I have been in this position for two years, before which I was the Director of the World Development Report which is the flagship annual publication of the World Bank. I led the World Development Report on Jobs in 2013 and before that for many years I was based in Hanoi during which time I worked as the lead economist for Vietnam, and I was involved in the reform program there. My background is that I’m an economist and a researcher. I come from Uruguay, a country that is even smaller than Sri Lanka, where I worked in a think tank before taking up my position at the World Bank. Q: And when was your report ‘Addressing Inequality in South Asia’ first released? A: It was officially released in October last year at the annual meetings of the World Bank, but the release of this report is more of a process than an event so today I’m talking to you, and this afternoon I will be giving a talk at the University of Colombo. For us, these reports are a way to engage in a conversation or in multiple conversations across the region so we’re still in the launching phase of the report if you will. Q: I’d like to start by understanding how it is that you define and measure inequality – there seems to be a distinction drawn in your report between monetary and non-monetary inequality? A: I think that’s a very important question and in fact that distinction was really the motivation for our work. We started with the realisation that on the one hand you have multiple indications of high inequality within some countries in the region, not necessarily Sri Lanka but if you think about India, you have an extraordinary number of billionaires but you also see malnutrition worse than in some parts of sub-Saharan Africa so on some level there is already an intuitive perception of high inequality. At another level, when we use standard measures of inequality – what the economists use such as the GINI Index and comparisons between the top 10% and the bottom 10% of a population – they are relative measures of inequality and that tension [between intuitive perceptions and standard measures] was what motivated us to report on this subject. We wanted to understand the extent of inequality and how much of it is a matter for concern. How much of it is just an unavoidable part of development and is it even capable of having some positive effects? So that was the motivation behind our research and the conclusion that we came to was that if we just focused on the monetary dimensions of inequality, we would not get the full picture. Inequality has to do with things for which there sometimes are no real markers. On the one hand you have questions like what kind of healthcare did you get when you were a child, whether you got your immunisations, whether you have access to sanitation, but it also goes beyond those dimensions into factors that we’ve barely touched upon like empowerment. There are many ways through which we belong in society, how much we earn and how much we consume is one of them, but there are other ways too and inequality is about all of them together. In the report, we basically looked at monetary factors, health, education and sanitation but we also touched upon a few others as well. Q: And if you were to summarise, what were the approximate findings for the South Asian region? A: One is that the extent of inequality is very different depending on what you’re looking at. You cannot get the full picture just by looking at monetary indicators. You also need to take into account the other dimensions of inequality. Secondly, inequality is most likely going to increase in the coming years, not much, but if nothing else is done, that’s the direction in which it may go. This might not be the case in all countries, but at least in the poorer countries in the region it is most likely. Thirdly we have good news and bad news. We confirmed something that was already a presumption which is that when it comes to opportunity, not necessarily in countries like Sri Lanka, Bhutan or the Maldives, but in bigger countries, when it comes to opportunities, the region doesn’t fair very well. A lot of people do not have access to basic services and a lot of it is related to gender and where you live, so there is a lot of inequality which is inherited and that is not good thing. But there was also some very good news and that was when we looked at mobility. We define opportunity by asking questions like: what are your chances when you are a child? How well equipped are you for life? Mobility is what happens from that point onwards. Will jobs offset some of the disadvantages you had or will they reinforce them? Will urbanisation help you prosper or will you get stuck in a slum? This is an area where there hasn’t been a lot of research because it requires you to follow a lot of people over a long period of time. This is a data requirement that is quite challenging, but we managed to do a lot of work and the news on mobility, based on the research that we did in India and Bangladesh, is that those countries were actually pretty good in terms of mobility. Despite the fact that jobs are often informal, and despite the fact that urbanisation is often quite chaotic, there is a lot more going on. People who are poor and came from disadvantaged backgrounds are getting a better chance to make it into the middle class and this is basically one of the main messages in our report. Q: I noticed that in your report there seems to be this perception that on the one hand inequality has lots of fairly obvious disadvantages for those affected negatively at the lower end of the spectrum, but at the same time the report suggests that inequality could also be a positive thing. Could you elaborate on that point? A: One of my colleagues has this analogy that inequality is like cholesterol. There is good cholesterol and bad cholesterol – and I know that for some people it might sound shocking to talk about good inequality but think of the following: Think of the system that the Soviet Union had where there was something very close to full equality but that ended up destroying incentives. When you look at education, if getting an education gets you more earnings, then you have an incentive in getting an education, of sending your own children to school and so on. That is the kind of good inequality that creates incentives to save, to learn, to invest, and to work. The bad kind of inequality then would be where people who are better off than most – and not because they worked hard and saved – but because they are well connected people who were given privileges; that is not good inequality and that can in fact be very demobilising. It can be very frustrating since it creates a sense of unfairness. You can see it even with billionaires, there is a very different perception of rich people when it comes to inventors, people like Bill Gates and Steve Jobs who can be rich but people feel that they have contributed something to society, and then you have the perception that people have about ‘the one percent’ and inherited wealth. Broadly speaking we looked into how inequality affects aspirations and how it affects the provision of public goods. It’s very clear that we don’t want an unfair society; that we don’t want an exclusionary society, but at the same time, I think it would be naive and economically insensible to think that absolute equality is what one should aim for. Q: Is it possible to get an understanding of how many billionaires are self-made entrepreneurs and how many of them come from old money and inherited wealth in the South Asian region? A: It is very difficult to tell but I would not want to be unfair in the following sense. South Asia, as in the case of India, has extraordinary wealth in billionaires relative to other countries at the same level of development. But it also has extraordinary entrepreneurs, and it would not be correct to try and caricature them as being one or the other. But again what was encouraging, going back to mobility, is that we looked at whether the ability to get out of poverty and into the next group, and into the middle class, for people from low castes, or different minority ethnicities; the groups that are generally considered to be at a disadvantage, and what we saw is that over time, there has been a change. In India, these groups who used to have less mobility relative to majority demographics now have equal, if not slightly higher, mobility. So even where there is inequality, when you have mobility, it is quite encouraging. I think inequality really becomes the bad inequality when you’re stuck where you are. Q: What are the drivers of inequality? Your report mentions urbanisation and periods of fast economic growth as having a tendency to increase spikes in inequality; are there others? A: There has been a traditional argument that as you transition from a say an agrarian society into a modern society, not everyone would be able to make that transition at once. There would be a time in the middle where you will have more inequality almost naturally. When you look at cities and the kind of wealth you can develop in those cities, that would be very far from the kind of wealth you can have in the countryside and a lot of people will remain in the countryside for perhaps a generation or two more. That argument has taken different forms and economists often form different kinds of analysis about it like the Kuznets Curve and others. Whether it is completely true or not is debateable but there is some element of truth to it perhaps. The point that is that if this is so, then where you live – particularly in the context of urbanisation – becomes an important part of the story, after all people often migrate to different places for access to better opportunities. Sometimes when we think of inequality, we think about just the individual, about their health and about their education, but then there is a much bigger picture. That is where this this connection as to what you make of your human capital assets comes in. This in turn depends mainly on jobs. The main source of income for mostly everybody is some kind of labour, and jobs depend on where you live, whether you’re living in a vibrant city or a slum matters. What we really tried to emphasise with this report was that if you only look at opportunity, we will be thinking only about education and health which are of course important. But that too does not make up the entire picture. Urbanisation and jobs, we think are critical drivers of mobility and they can co-exist with phases of relatively high inequality but if mobility is high and if there are chances for people to move. That I think that’s a very positive thing. Q: The debate around wealth inequality appears to be gaining greater momentum to the point where our current Government has also co-opted the rhetoric of the ‘one percent’. In that context, how useful are comparisons between the bottom 10-20% of society and the top 1% and what other factors should we be taking into account when analysing inequality? A: Inequality touches on almost everything, whether its health, education, urbanisation, jobs, taxes, transfers, or social protection. You can put practically everything in there so that it becomes so large that it becomes very difficult to disentangle. What we tried to do in the report – and I believe it is a useful way to start – was we thought about the lifecycle of a person. We thought about three aspects in that lifecycle. One is the phase of your life where you are not making the decisions, society is making the decisions for you, and that’s where opportunity comes in and where you really want to make sure that you’re not missing out and that your kids aren’t left behind. The second one is what we call the mobility phase, which means where do you go from there? And that to me is very much a story about jobs. And the third one is what we call support. If you get a bad health shock, are you insured? Are you taxed? In what ways are Government programs mediating this trajectory? Just going into numbers – the top 1% versus the bottom 20% and so on – may not give you much insight. As an illustration consider the message of Thomas Piketty’s book ‘Capital in the Twenty-First Century’. The book looks at the extremely wealthy and studies how, over time, they have only become richer. These findings come from some very good research based on studies carried out in developed economies. Since that book came out, there has been an almost mechanical application of that kind of thinking into developing countries as well and that may not necessarily be helpful in the following way. The kinds of arguments that Piketty makes are based on taxation and redistribution and that may work in countries with effective tax systems where evasion is more difficult and where there are greater incentives to pay your taxes. However if you try to apply that thinking to a developing country, it is often found that many of the wealthier classes know how to evade or even avoid paying taxes altogether since people with a lot of clout can secure special exemptions. When you think of a country like Sri Lanka which has low tax revenues as a percentage of GDP, the question becomes more about how you increase the tax base in general and how you use the money. In fact what we found on this subject in the report is that a lot of the money is being used in South Asia for subsidies that are very regressive which again is not necessarily getting to the poorest people in society but instead is more helpful to the middle class or above. It may be debatable but in general there are certain shortcomings in the taxation and distribution systems of most developing countries. That’s why I think it is important that when we consider inequality, that we look beyond this area. The issue of increasing tax revenue is certainly important, but again, it is jobs that will really make the difference and that is related to urbanisation. Q: What is the impact of inequality on factors like food security or the access to and quality of education? How do the issues change depending on where you fit on the income scale? A: Sri Lanka has a long tradition of social policies so when it comes to education it’s a bit different from other countries in the region. However, in general, we have seen enormous progress on equality when it comes to completing primary school in the South Asian region. But there is also inequality in secondary education, particularly for girls who have been found to complete secondary education at much lower rates than boys in the same country, and then we have to consider the uneven nature of the quality of education itself. Even where there is full coverage in education, we need to ask what kind of learning is taking place. So from an inequality perspective looking at education I would say that the focus should be on quality of education for primary level so that its more even, and we need to focus on getting more girls into school, especially in countries like Afghanistan and Pakistan all the way through to completing secondary education, that would result in huge improvements over time. When it comes to food security, many countries in the region have different kinds of food security programs. Some of them have been effective while others have had considerable leakage and there are probably more efficient ways of delivering the same kind of support and I think this is one of the issues on the agenda for the region going forward. Increasingly, technology like smart ID cards, and mobile phone banking which allows transfers even with older generations of phones, will enable us to consider revamping how we organise support so that part of the leakage and wastage that we see today can be removed. Q: Your report also mentions certain social programs unique to the South Asian region that have actually gone on to be quite successful. Could you go over a few of those examples? A: Yes, it’s good that you’ve pointed this out because while there may be many instances where we have seen waste or miss-targeting, we didn’t want to just stick on to the idea that everything has been bad. Overall I think a couple of programs really stand out as being success stories. The one that we mentioned in the report is the Female Secondary Schools Stipend for girls in Bangladesh. That program was created decades ago by NGOs working in the country and it was then taken to scale by government. This program has been instrumental in increasing the education attainment levels and empowering women in Bangladesh. Over time Latin America came to do the same things too but they were better at packaging it so now everyone knows of the programs in Latin America, everybody talks about conditional cash transfers to use that jargon. This refers to schools in Brazil and progress in Mexico, but it is still interesting to note that this was first invented in Bangladesh. Another program of note is the Benazir Income Support Program in Pakistan. It has good coverage and good administration. Others have more mixed records but again we didn’t want to leave with the impression that everything is flawed, there is a lot that is good in the regional programs, and the message there would be that we should try to go from bad programs to good programs, and we should not to try and get rid of them all together. Q: What steps should be taken at the level of Government to resolve inequality? Where should they start and what should they look at? I’m sure education would be one area of importance but could you elaborate on some of the other areas as well? A: We consider opportunity, mobility and support to be the three pillars at the base of any solution to resolve income inequality. If you start by focusing on these areas, over time the agenda can be built up. Certainly education, particularly in terms of getting girls into secondary education and improving the overall quality of education is a good place to start. The same approach can also be taken healthcare. This is a difficult area in terms of how a healthcare sector should be organised to allow better access to healthcare. It’s certainly easier if you have a lot of money or if you are insured but sometimes public systems may cover you but fail to provide adequate care. Different countries in the region have been trying different approaches and I think we’re still looking for an ideal solution to this problem. Access to basic sanitation should also form a basic part of the inequality agenda. We also wanted to look at systematic bias so we considered whether people from specific ethnic groups were less likely to get the services they needed. Of course there are shortages from time to time and no system can ensure 100% coverage but it is important to understand whether coverage is uniform or whether it is concentrated on certain groups within the population. The second part of the agenda then would be on mobility. As I mentioned earlier, I was the Director of the World Development Report on Jobs and I firmly believe that jobs really drive development; that’s where all the action is. Anything that gets you to jobs where you can use your skills and talent and where you can progress is extremely important. In fact if I had to pick just one factor that we could improve on, it would have to be jobs. Looking at countries that have done better than expected in the region, like Bangladesh, we see how they managed to get the garment industry going and get women into wage work, even if these are not perfect jobs, and they are far from that. The other thing that we found was that while the private sector is important in creating jobs, in the end it is really cities that are the most important. How your cities work, how inclusive and dynamic and competitive your cities are is extremely important. And then there is the third pillar which is support. It is difficult to help people when you have very limited resources. When you have 13% of GDP in government revenue, there is not a lot that you can do. The region does not spend as much as other countries at the same level of development in other regions. Sri Lanka again spends more than some but we see only limited amounts of money going into such subsidies that ultimately do not make a huge difference – such as subsidies for electricity or gasoline. Most countries probably spend 2-3% of GDP on these things, which is a waste in the sense that 2-3% of GDP is typically the entire spending of most countries in the region on social programs. Keeping that in mind, such countries have the potential to double their social programs. Reforms of such systems would have to be considered in order to implement progressive, not distortive taxes, thereby ensuring that public money is spent in a useful way. Q: If we were to redirect money that we spend on subsidies into better education and healthcare, would such actions have a quantifiable effect on social mobility? A: Probably it would have an impact on inequality, if you can say that I will take money that goes to our middle class through subsidies and instead give it to kids who are out of school or towards improving the quality of education for poorer children, then yes; that would have a notable effect on inequality. Q: The report also touches on the relationship between inequality and social turmoil. Special mention was made of situations with Naxalite rebels in India and a few others in Pakistan as well. How does this relationship work? A: Again that is a very good question but it is a complex relationship and I certainly would not want the report to be interpreted as saying that when you have high poverty or high inequality, people will resort to violence. In fact when we reviewed surveys that we did in Pakistan, we found that the poorest people are often the ones who are most angry at the militants because they’re the most vulnerable and violence disrupts their lives much more. So I think that one should not come to the conclusion that if you are very poor you are therefore more likely to become a violent person. On the other hand there are some connections that I think are quite important. For example: when you have idle young men who don’t see opportunity or don’t see a future; that is a potentially dangerous situation. We’ve seen quite a lot of that happen in the Middle East and countries in North Africa, where people have got an education but feel immense frustration because jobs are equated with privilege in societies where you need to be connected to get an opportunity. These factors brew discontent and violence is typical of young men in such situations, make no mistake about that so the impact of income inequality needs to be looked at from this social perspective as well. But I think it is more important is that a society displays that through mobility any one can aspire and one can channel their energies in a way that is good for society and good for yourself. This is very difficult to accomplish when you have extreme depravation. Q: The report cited a rather interesting study which found that school children from different economic backgrounds in India would score relatively even scores on tests but when asked to state their names and the social caste from which they came, it would have a negative impact on test scores of children from underprivileged backgrounds. In that context, can we say that inequality creates some kind of emotional trauma? How does that affect an individual’s prospects? A: Yes that was a very nice piece of analytical work and it informed our most recent World Development Report on Minors and Culture which is precisely on the point you made. When you think about incentives, it’s a very mechanical consideration. Where I can make more money if I do this or that thing? But for incentives to translate into action you need the aspirations that go with it and I think what the experiment that you cited suggests is that there are ways in which society can supress aspirations. If you think that you are in an inferior position and you are most likely to stay in that inferior position, you may not have the drive to get out of it and that I believe is the main take-away from this exercise. That’s what makes extreme inequality and extreme lack of mobility socially dangerous – the fact that on some level, you don’t have the energy to get out of it. Q: Another finding from your report suggests that inequality tends to repress the ability of disadvantaged groups of people to collectively organise whereas it helps wealthy people to organise themselves better. Does this in essence create a negative feedback loop or what we would normally refer to as a vicious cycle? A: There was a very nice work done into this question in Pakistan. We looked at the provision of public goods, things that are good for everybody like a road, a school that type of thing. We also looked at the level of provision of public goods in villages with different levels of inequality and to make sure that we were being accurate, we looked at land inequality and what was interesting was that this hypothesis can go in both directions. If there is more inequality, people at the top are richer. If they are richer they can have more clout and get more things done. At the same time, if there is more inequality, people at the top may want to secede and may not want to share with the other members of that society. What that study found was that for some public goods, higher inequality was good, while for others, it was bad. As an example of public goods affected positively by inequality, it was roads. Whether you’re rich or poor, everyone in that village needed a road because that is what allows you to get around. If the rich have more clout, they may be able to mobilise someone in government to build a road. So we found that villages with more inequality had more roads. The bad example was education. In education, unlike with roads, the wealthy can opt out and secure a better quality of education through a private school or private tuition. What we found therefore was that the quality of education public schools in the villages was actually much worse in areas of higher inequality. So again, it’s not the case that inequality can be considered consistently bad or good for the provision of public goods, instead it depends on what factors we focus on. Nevertheless, this helps to highlight another one of the dangers of inequality: secession. When one part of society lives apart from the rest of society, it has the potential to negatively affect public goods. Q: Generally speaking we consider the plight of people living on or below the poverty line to be unacceptable so you can say that we have a floor for what we consider acceptable. But what about the other end of the spectrum? Past a point, how much money does a person really need? What is the contribution of billionaires to a society and should we be thinking about an income ceiling as well? A: That’s a very good question and it brings me back to my earlier point. Nobody had a problem with Steve Jobs being a billionaire, why? Because, there was the perception that his wealth was derived through something from which we all benefited. On the other hand I think when you see big bonuses for other people it makes us wonder if they’re actually making a contribution or not. Now in the report we wanted to go into a new direction by saying that a lot of the debate on inequality has been focusing on the issue of opportunity only –as long as everyone is equal from the first day of life, whatever happens after that, Governments should not have a say. We went in different direction that contradicted that approach in two ways. Firstly, we said very clearly that every society, every faith, and every secular ideology has views on inequality and it is up to those societies to decide on such issues. We can help of course with the analytical work but it is up to each society to determine how much is too much and how much is okay. Second was that in order to inform policies it is important to know more not just opportunities but also about outcomes. We looked at instances where we have seen extreme wealth linked to privilege or a systematic correlation between billionaire wealth and sectors with limited competition or cronyism. If you see a systematic correlation between extreme wealth and innovation, then we could say that this is working but we went in with an unusual approach to inequality in that we went into inequality of outcomes and that is one of the main areas of discussion in this report. Q: Staying on this theme just a bit longer, at some point we have to accept that we’re living in a world with limited resources. Therefore, past a point, doesn’t it become somewhat of a moral obligation to channel excess wealth into investment, to the upliftment of society as a whole? And if that wealth is not channelled but is just being stored up in the hands of a few, doesn’t that have an overall negative impact on an economy? A: In general wealth is not just stored but it is consumed in different ways and in many cases, wasted in different ways. The question is what are the returns on what is being done? Again if this wealth is a reflection of extraordinary talent and entrepreneurship, these people are then investing well but if its wasted on having a good time then probably not. In the end there is also an element of judgement involved and that decision belongs to each society and it is not for us to say how much is too much in any specific category. In Sri Lanka it is a decision for Sri Lankans to make and so on. We can help provide information to support that analysis but that is all. Q: From a sectoral perspective, are there certain types of jobs that are more closely linked to inequality than others? If a country was to put greater emphasis on information technology or services for example, would that promote a more equitable society? A: There are some elements of truth when we look at things from a sectoral angle. For example: it’s difficult to imagine that farming will lead to high levels of income. Perhaps after a significant period of time or if there is a fundamental transformation in the way that an agriculture sector operates it is possible but in general, long-term farming jobs do not have huge scope for mobility. Broadly speaking though what we have seen is that it is not so much the sector that matters, whether that is IT, banking or trade or manufacturing. Some would argue that manufacturing jobs have something to them that allows for greater mobility and creates, more spillovers and so on, but again even with manufacturing, it’s a mix bag. What we really found was that the type of job was more relevant than any particular sector. So if I had to say what the good jobs for development and movement into the middle class would be, I would have to go with regular wage-based employment. Q: There seems to be a growing consensus that climate change will have a drastic impact on people’s lifestyles and, at a macro-level, on entire economies as well. Has your analysis into inequality yielded any insights into the connection between climate change and inequality? Can we expect to see spikes in inequality relative to shifts in the global climate? A: It is difficult to tell because there is a granularity with which climate change affects a region which we are still working on understanding in terms of how a society fares as it undergoes changes in temperature, precipitation and so on. We have now an analytical program that is aimed at analysing the data in respect of the granularity of what we expect; more rainfall in some areas and less in others for example, and what that will do for living standards but for this report we didn’t go in that direction. Q: How much of a challenge was it in terms of gathering data for your report? For example, India is said to have a massive informal sector and on the other end of the spectrum, the report notes that there is extensive underreporting of wealth among the richer classes in society. Given these facts, how accurate is our understanding of inequality? A:That’s a very good question. For our purposes, we have made extensive use of household surveys. Basically how this works is that we would randomly select a household or through some process of sampling, we would select a group of people and in doing so, we were able to capture a part of the informal sector as well. But you cannot capture the very rich through this process. Many of them would not want to bother with a two hour session of questions. For the poor, typically you offer them some form of compensation for their time so they are not sacrificing their income for the purposes of answering your survey. But for the wealthier classes, that compensation is ridiculously low and even when they respond, these surveys are often better at capturing the consumption of a poor person, so for example how much rice, how much cassava, potatoes that you ate, than it is for capturing for example, how much time you spent in Bangkok. That being said it is important to note that this is a common problem across all regions, not just South Asia. Another issue is that if you want to trace mobility, you have to be able to follow a group of people over time. Many of these surveys track one group of people in one year and another group of people in the next year so you don’t know who is who and you don’t know what kind of progress they have made. You can count one group of the poor in one count and a different group of poor people on another count and you won’t know if yesterday’s group was the same as today’s and that is creates a real challenge. The other challenge – and this is something that we’re working hard to overcome – is to use other sources of information. Big data and technology is one area that is promising. Everyone, even in poorer parts of society has access to cell phones so if you can follow their progress in some way without intruding into privacy about for example: how long people talk for – the poor send text messages while the rich tend to use roaming – we could use this to bring in other metrics. Again I think we’re in a phase of transition and we’re working on what we call a spatial database for South Asia in order to have much more of these other sources of information, not necessarily on a person so much as on a location. Just to give you an idea of how this might work: satellite imagery allows us to get a view of the planet and particular locations. So you can see where there are people there is light and where there is more light you can infer that people have the money to pay their bills and you can see that some places will have more light than others. In this way you can be quite precise sometimes to a square kilometre about how a given region is faring. So there is a data agenda which is enabled by new technology which in the future should help us to improve our understanding much further.