Inequality and poverty are different problems, requiring different, even opposite, solutions. India’s problem is poverty.
Let me begin this column with a question, dear reader, which I urge you to read carefully and answer before reading on:
In which of these two countries would you rather be poor: the USA or Bangladesh?
Most people I ask this to go, Duh, of course I’d rather be poor in the US than in Bangladesh. Well, here’s something I’d like you to consider: the USA has far greater inequality than Bangladesh does. A measure called the Gini Index measures inequality across the world, and the USA, Hong Kong, Singapore and the United Kingdom all have greater inequality than Bangladesh, Liberia, Pakistan and Sierra Leone. And yet, that second group of countries is by far poorer than the first group
It has become fashionable these days, especially in elite, privileged circles, to agitate about inequality. But as my question and the data above make clear, inequality and poverty are very different things. Some of the poorest countries in the world are among the most equal. (Some Communist countries of the last century came close to achieving equality in poverty.)
So here’s my contention, in three propositions:
One: India’s big problem is poverty.
Two: The more we reduce poverty, the more we are likely to increase inequality.
Three: It is perverse, therefore, to worry about inequality. We should only keep our eye on poverty, and not worry if inequality goes up.
There is a fundamental fallacy at the root of the obsession with inequality. We think of the world in zero-sum ways. That is, we behave as if there is a fixed pie, and the rich can only become richer if the poor become poorer. In this vision of the world, the more inequality increases, the more abject the suffering of the poor. Redistribution is the only solution.
And yet, this narrative is wrong. The world is not zero-sum but positive-sum. The size of the pie increases with every voluntary transaction. Every time I buy a cup of coffee from a café, both the café and I are better off – otherwise we would not have transacted to begin with. The amount of value in the world has gone up.
The more you allow and enable such voluntary exchange, the more people trade to mutual benefit, and we all become better off. And the larger these economic networks of voluntary exchange, the greater the scope for such mutual enrichment. That is why people migrate to cities from villages, and rarely the other way around.
In fact, within a country, cities are far more unequal than villages are. If inequality was such a bad thing, why would so many poor people vote with their feet by migrating to cities? They embrace this greater inequality because they want to escape poverty.
The reason India remained a poor country for so many decades after Independence is that, with the zero-sum vision of our leaders, we frowned upon free markets. While the rest of Asia shot ahead, we restrained the natural ingenuity and enterprise of our people with our mai-baap vision of politics. We did reform a bit in 1991, but too little and too late. Our poverty levels did go down a bit, though, even as we grew more unequal, illustrating the fact that there is no correlation at all between poverty and inequality.
I don’t want to talk only in terms of abstract ideas, so let me illustrate one way in which reducing poverty would raise inequality. There is consensus among economists today, even left-wing ones, that we have crippled our manufacturing sector for decades with a series of bad laws, such as our labour laws, which don’t allow small businesses to grow, and force much of our nation into the informal sector. These regulations stopped us from becoming a manufacturing superpower like China. What would happen if these restrictions were to magically disappear one day?
You would have growth in the manufacturing industry. There is no question that there would be far more employment generated, which would reduce poverty. You would also have some of these businesses achieving scale and becoming behemoths. Poverty would go down and our per-capita income would go up; but because of the winners at the top, inequality would also go up. Would this be a bad thing? I don’t think so.
The zero-sum instinct is ingrained in us: we evolved in prehistoric times when we lived in small tribes amid scarcity, and the positive-sum view of the world would have been unintuitive. It is also natural to resent the super-rich among us, especially when they behave in ostentatious, obnoxious ways, and game the system with their money, which happens a lot in our crony socialist state. Maybe a country that has eliminated poverty can have the luxury to think about Inequality. But not us.
It is a moral shame that seven decades after Independence, we still have millions of people living in poverty. We need to fight this. We should not be distracted by false metrics.