February 17, 2019;
In India for every 1% rise in GDP, two million people come out of poverty.
Steven Pinker, in his book Enlightenment Now, relates an old Russian joke about two peasants named Boris & Igor. They are both poor. Boris has a goat. Igor does not. One day, Igor is granted a wish by a visiting fairy. What will he wish for? “I wish,” he says, “that Boris’s goat should die.”
The joke ends there, revealing as much about human nature as about economics. Consider the three things that happen if the fairy grants the wish. One, Boris becomes poorer. Two, Igor stays poor. Three, inequality reduces. Is any of them a good outcome?
I feel exasperated when I hear intellectuals & columnists talking about economic inequality. It is my contention that India’s problem is poverty – & that poverty & inequality are two very different things that often do not coincide.
To illustrate this, I sometimes ask this question: In which of the following countries would you rather be poor: US or Bangladesh? The obvious answer is US, where the poor are much better off than the poor of Bangladesh. And yet, while Bangladesh has greater poverty, the US has higher inequality.
Indeed, take a look at the countries of the world measured by the Gini Index, which is that standard metric used to measure inequality, & you will find that US, Hong Kong, Singapore & the United Kingdom all have greater inequality than Bangladesh, Liberia, Pakistan & Sierra Leone, which are much poorer. And yet, while the poor of Bangladesh would love to migrate to unequal US, I don’t hear of too many people wishing to go in the opposite direction.
Indeed, people vote with their feet when it comes to choosing between poverty & inequality. All of human history is a story of migration from rural areas to cities – which have greater inequality.
If poverty & inequality are so different, why do people conflate the two? A key reason is that we tend to think of the world in zero-sum ways. For someone to win, someone else must lose. If the rich get richer, the poor must be getting poorer, & the presence of poverty must be proof of inequality.
But that’s not how the world works. The pie is not fixed. Economic growth is a positive-sum game & leads to an expansion of the pie, & everybody benefits. In absolute terms, the rich get richer, & so do the poor, often enough to come out of poverty. And so, in any growing economy, as poverty reduces, inequality tends to increase. (This is counter-intuitive, I know, so used are we to zero-sum thinking.) This is exactly what has happened in India since we liberalised parts of our economy in 1991.
Most people who complain about inequality in India are using the wrong word, & are really worried about poverty. Put a millionaire in a room with a billionaire, & no one will complain about the inequality in that room. But put a starving beggar in there, & the situation is morally objectionable. It is the poverty that makes it a problem, not the inequality.
You might think that this is just semantics, but words matter. Poverty & inequality are different phenomena with opposite solutions. You can solve inequality by making everyone equally poor. Or you could solve it by redistributing from the rich to the poor, as if the pie was fixed.
The problem with this, as any economist will tell you, is that there is a trade-off between redistribution & growth. All redistribution comes at the cost of growing the pie – & only growth can solve the problem of poverty in a country like ours.
It has been estimated that in India, for every 1% rise in GDP, two million people come out of poverty. That is a stunning statistic. When millions of Indians don’t have enough money to eat properly or sleep with a roof over their heads, it is our moral imperative to help them rise out of poverty.
The policies that will make this possible – allowing free markets, incentivising investment & job creation, removing state oppression – are likely to lead to greater inequality. So what? It is more urgent to make sure that every Indian has enough to fulfil his basic needs – what the philosopher Harry Frankfurt, in his fine book On Inequality, called the Doctrine of Sufficiency.
The elite in their air-conditioned drawing rooms, & those who live in rich countries, can follow the fashions of the West & talk compassionately about inequality. India does not have that luxury.
by Amit Varma, ET