Though the topics of inequality and poverty are often branded together as two sides of the same coin in discussions on distributive justice, the latter has always enjoyed a higher public profile in policy discussions than the former. As argued below, that may be about to change.
The empirical literature on poverty has a long history and was rooted in disciplines outside economics, typically sociology, though it gained a higher profile when economists turned to the topic and made methodological contributions to poverty measurement. The poverty literature can be traced back to the work of the British sociologist Seebohm Rowntree of the study of life in the English city of York that was published as Poverty, A Study of Town Life by Macmillan in 1901. A highly influential piece of work, Rowntree’s study led to a set of political changes that provided the foundation of the modern welfare state.
The topic of poverty has always occupied centre stage in both global and national discourses on welfare with targets set for poverty reduction. The UN Millennium Development Goals (MDG), for example, set the ‘eradication of poverty and extreme hunger’ as its number one target, with little or no explicit mention of inequality. The issue of inequality features indirectly in the MDGs only through the lens of ‘gender inequality and women’s empowerment’. This feature was maintained in the MDG’s successor – Sustainable Development Goals (SDG) – which continued to give primacy to poverty reduction, and inequality once again featured indirectly only through the lens of gender inequality.
World Bank gives priority to poverty over inequality
The World Bank has also given primacy to poverty ahead of inequality. If one looks at the spate of studies on distributive justice undertaken by World Bank researchers or funded by them, poverty has been one of the most intensely studied issues. In fact, the World Bank has developed the publicly available software called Povcal that makes it easy to calculate national and global poverty rates from the huge database that is available with the Bank. Recently, the World Bank convened a commission called the Global Poverty Commission that called for changes in the way we view and measure poverty. In the last few years, the World Bank has signalled a change in favour of greater attention to inequality by emphasising the role of ‘shared prosperity’ in its goal of poverty reduction. But it still has a long way to go.
The higher profile of poverty over inequality has also been evident in discussions on deprivation in India. With the significant exception of methodological and empirical contributions on consumption disparities led by the late Nikhilesh Bhattacharya at the Indian Statistical Institute in Calcutta (as it was then called), the literature on inequality in India has not witnessed as many high profile contributions as the literature on poverty. The classic studies by Dandekar and Rath, the contribution of Sukhatme and nutritionists to the poverty debate and, recently, the setting up of the Tendulkar and Rangarajan committees to update the poverty lines are all manifestations of the pivotal role that the subject of poverty has played in policy formulation in India. Like the World Bank in the global stage, the Planning Commission in India (until it’s disbandment) has paid greater attention to poverty over inequality in its focus on distributive justice.
The reason for suggesting that this is about to change is a combination of economic and political factors that have dominated recent events. The rise of India and China as economic powerhouses, the speed of globalisation that is still gathering momentum, and the rise of identity politics may appear unrelated, but they are all largely, but not exclusively, associated with rising inequality.
At the same time, there has been sustained economic growth and prosperity both in India and globally. Nearly all poverty measures that are anchored to an absolute poverty line have recorded a decline in poverty, though they disagree on the magnitude of poverty and extent of its reduction. This consensus disappears if we move away from the notion of an absolute poverty line and build in distributional considerations in the definition of a relative poverty line. The more the absolute view of poverty is abandoned in favour of a relative view of poverty, the weaker becomes the evidence in support of a reduction of poverty. Clearly, inequality is becoming more and more intertwined with poverty as signalled, for example, in the World Bank’s approach to ‘shared prosperity’ noted earlier.
Literature on inequality
The literature on inequality measurement can be traced back to the work of Corrado Gini and Max Lorenz in the early part of the 20th century. The former introduced the Gini coefficient that is widely used as a measure of inequality based on twice the distance between the actual income distribution and the hypothetical case of complete equality. The subject received new impetus from the work of Simon Kuznets in the 1950s and, more recently, from the work of Thomas Piketty.
While both are associated with theories on inequality, neither could provide a full explanation of what we have observed in reality. Kuznets suggested that as an economy grows, inequality will increase initially, but will eventually decline. Piketty’s thesis is based on the ‘general rule’ that wealth grows faster than economic growth and that greater returns to wealth has led, and will continue to lead, to greater inequality. Neither of these theories fits the reality completely.
Kuznets’s hypothesis is unable to explain why some of the highest inequalities are recorded in rich countries which are well past the turning point in Kuznets’s ‘inverted U relationship’. Piketty’s critics, most of whom are based at his Paris School of Economics, wonder why inequality has grown in an environment of low interest rates, low return to capital and reasonably high rates of growth. Piketty’s thesis does not also account for the fact that much of the increase in inequality in the developed countries has been due to asset inflation, typically, in the prices of real estate which don’t involve any productive use of capital. Regardless of whether one agrees with Piketty in fine detail or not, one has to acknowledge that his work has put the topic of inequality at the centre stage of policy debates.
‘Between country’ inequality vs ‘within country’ inequality
Contributing to the increased profile of inequality in public and media discussions has been the work of the former World Bank researcher Branko Milanovic on trends in global inequality in the period since 1950. Milanovic’s results included an interesting finding which as we argue below could provide a partial explanation of the rise of sectarian and nationalist forces that have also been associated with the rise of identity politics in the US and India. Drawing a distinction between ‘within’ and ‘between country’ inequality, Milanovic’s work showed that the two haven’t moved in step or even in the same direction.
The former measures the inequality between countries, ignoring inequality within the country, while the latter measures the inequality between the residents in a country, ignoring what happens to that country’s aggregate standing or that of other countries. In the current millennium, while countries, most notably China and India, have moved closer to the richer countries due to their higher rate of growth leading to a decline in ‘between country’ inequality, ‘within country’ inequality has increased sharply in most countries.
Related to the latter finding is the feature of globalisation that households in the richest ventiles in the fast-growing developing countries are now level pegging in affluence with, if not enjoying a higher standard of living than, those in the poorest ventiles in the affluent developed countries. The empirical confirmation is contained in the observation that the ‘remainder term’ in the Gini inequality estimate that doesn’t fall into the ‘between’ and ‘within country’ components has been increasing steadily in recent years. In other words, the rich in the poorer countries are contributing to increased inequality between their countrymen, and also globally by overtaking the less affluent in the richer countries.
Milanovic’s results can partly explain why we are seeing so many conflicts within countries in the midst of increasing global prosperity. Households at the lower end of the economic spectrum compare themselves with those at the upper end inside the country and, even if they are doing better absolutely than previously, feel aggrieved as they are being left behind.
Ironically, those at the top end also feel aggrieved as they compare their lot with those in the more affluent countries and their inability to match the latter’s lifestyle living as they do in the developing countries, a comparison made easier by globalisation, social media and increased travel between countries. Such comparisons are fuelled by increasing migration and the feedback the migrants give to their relatives in the countries they are migrating from. The migrants themselves are contributing to identity politics in their destination countries by generally doing economically better than the locals leading to the fuelling of anti-immigrant sentiments.
Ironically, while after the fall of the Berlin Wall, and the end of the Cold War, there is now generally reduced tensions and conflict between countries, we see intensification of conflicts within countries, some of which can be explained by the contradictory movements noted by Milanovic between the ‘between’ and ‘within country’ components of inequalities. While the source of such conflicts is largely economic, they have led to the rise of nationalist forces and sectarian politics as evident, for example, in the coming to power of Trump in the US and Brexit in the UK. It is interesting to note that in case of both, the support has not been confined to the less affluent households providing some support to the conjecture that the dissatisfaction extends to the more affluent households as well.
Where India stands
In India, the rising inequality in the midst of declining poverty has resulted in the rise of ‘identity politics’ where identities are forged on the basis of caste and/or religion. In a comprehensive recent study on Indian income inequality based on data obtained from a range of sources including tax returns, Lucas Chancel and Thomas Piketty (Indian Income Inequality, 1922-2015: From British Raj to Billionaire Raj?) have noted that while during 1950-1980 inequality in India fell, the situation reversed itself drastically during 1980-2015 with the top 1% pulling away from the rest: ‘the share of income accruing to the top 1% is at its highest since the creation of the income tax act in 1922’.
There has been a sharp polarisation between the income groups at both ends of the income distribution with the top 0.1% receiving a higher share of growth than the bottom 50%. This has generated considerable tensions within the country. The lack of political stability and the rise of sectarian forces in India from the mid-1980s accelerating in the decade of the 1990s and intensifying in the new millennium is not unrelated to the rising inequality.
The increasing failure to match the lifestyle of the rich by the less affluent inside the country and a similar dissatisfaction by the rich as they try to mimic the lifestyle of their counterpart in more advanced countries means that such identity politics is not restricted to the less affluent classes. The focal point for comparison by the upper-middle classes has shifted from other such groups inside the country to their counterparts in the affluent countries. The rise in tensions has therefore permeated right across the income spectrum. The members of the minority groups and marginalised communities are easy targets to vent the economic frustrations from rising inequality even though such groups are also falling behind in the economic ladder.
Rise of identity politics
Notwithstanding their contextual differences, there is a parallel all rooted in identity politics and fostered by increasing intra-country inequality between the rising anti-immigrant sentiment in the US, the attacks on Dalit and minority religious communities in India and the anti-indigenous policies proposed by the right-wing and populist One Nation Party in Australia.
Unlike previously, such identity politics are not forged on the basis of economic class and that explains the decline of the Left and progressive forces both in India and abroad. With the middle-class splintering into economically differentiated subgroups, identity with one’s economic class is less easy to forge than that based on such easily identifiable characteristics as religion, caste, ethnicity, race or language.
The rise of identity politics can harm the marginalised communities in other ways as well. In an excellent piece entitled, ‘Identity politics traps the indigenous mind in cycle of grievance’, the noted indigenous Australian commentator Stan Grant has observed that the indigenous people in Australia reacting to the rise of anti-indigenous and racist sentiments have retreated to isolation that prevents their integration with the rest of the society and economic upliftment.
Referring to such isolation as ‘solitarist tendencies’, Grant quotes Amartya Sen to claim that such tendencies ‘can be a good way of misunderstanding nearly everyone in the world. When we divide ourselves, he (i.e. Sen) writes, our shared humanity gets savagely challenged’. There is similar danger in the recent attacks on Dalits and minority groups in India. The danger can be greater in India if, as we have seen recently, such groups organised themselves in militant reaction that could plunge the society into serious crisis. The mixing of identity politics with electoral politics has never been greater in India.
There is no easy answer to the question on how to stem these developments. They suggest that inequality is a complex phenomenon that needs to be addressed both globally and nationally. A good start could be the increased access to education since illiteracy and lack of social awareness are often significant causes of the spread of hatred and victimisation. With an increase in inequality, educational inequality also tends to increase and that needs to be targeted along with other initiatives to reduce inequality.
The pendulum has indeed begun to swing from poverty to inequality. The authorities in India need to recognise the threat that rising inequality poses to social cohesion. It could set up inequality commissions on the lines of the Tendulkar and Rangarajan poverty commissions and facilitate greater research on inequality by allowing easier access to distributional statistics. Work on inequality in India has relied on sample survey data which is heavily biased downwards in the inequality estimates they yield due to their missing out on the very rich households. There is clearly need to address this issue to enable researchers to assess the true nature and extent of inequality in India. Facilitating easy access to more reliable information to base distributional studies on will help to swing the pendulum away from an exclusive preoccupation with an absolute view of poverty towards a greater focus on inequality.
Ranjan Ray is Professor of Economics at Monash University in Australia. He holds a MA from the Delhi School of Economics, and a PhD from the London School of Economics.