Economic inequality is one of the most popular issues in our political and economic discourses. With the eruption of Occupy Wall Street Movement around the world, the debate has resurfaced in the global scenario too. In our context, where even totalitarianism is sought after for the sake of equality, economic equality through government actions are considered undebatable. The issue no matter how well-intentioned it may be, begs for a different perspective too.
Equality of Opportunities vs Equality of Outcome
The simple fact that economic equality debate has two aspects to it is invariably forgotten in the inequality debates. Equality of opportunity which includes equality of everyone before the law is indeed a prerequisite for a free society and the government can play a crucial role in ensuring it. Ensuring rule of law, property rights for every class of people, equal access to economic activities are things a government can do to achieve a prosperous society.
On the other hand, equality of outcome sought through government actions is not only antithetical to a free society but also counterproductive to economic growth and eventually for the upliftment of the very people such actions intend to help. Free people are not equal and equal people are not free is a practical reality which many intellectuals, politicians advocating equality tend to ignore during the debate. In a free society, economic outcome largely depends on the talent, intelligence and preferences of an individual.
Some people may prefer to work harder and choose a lesser luxurious lifestyle and put more preference on the income whereas some people may prefer a lesser paying endeavor and put more preference on luxury. Some may prefer the safety of a regular job with a secure income at the end of the month whereas some may prefer to take risks and start their own venture with the prospects of a larger but insecure income. Moreover, what a person earns is determined by the value society is ready pay for the services he/she offers.
So should it come as a surprise that some street vendors running food-stalls are earning way better than a teacher or a clerk? Entrepreneurs, no matter how small, generally earn better than a jobholder but the extra income is usually a compensation for the risk they take and the better value they are creating to the society through their services.
As the famous Peruvian economist , Hernando DeSoto has shown in his book “The Mystery of Capital: Why Capitalism triumphs in the West and fails everywhere else”, lack of equality of opportunity is more cumbersome to their upliftment than the lack of income redistribution efforts by the government.
Equality versus Growth
For a poor country like Nepal, the importance of economic growth is unquestionable. Higher economic growth would mean lower mortality rates, better living standards and longer lives. Countless revolutions have occurred already in the name of bettering people's lives but none has delivered so far. Agendas of increasing government's control over economy and lives of people in the name of equality and just society have been in the forefront of these revolutions which may explain why we haven't achieved expected economic growth so far.
Economic freedom which is a precondition for growth has largely been ignored in favour of cheap populist agendas like government providing food, shelter, education, health, employment, entertainment and what not.
Studies have shown that economic growth and economic equality (equlity of outcome) cannot go hand in hand. This tendency is shown by the increasing inequality in the rapidly growing economies like China and India too. Although, lack of equal opportunity to all segements of the population has more contribution to the increasing inequality but still economic growth has a part to play in the phenomenon. Income inequalities follow economic growth but in the long run everyone tends to be better off by economic growth resulting from the greater economic freedom. On the other hand, re distributive efforts by the government tend to retard economic growth resulting in making everyone equally poor. For example, in the study entitled Economic Freedom and the Trade-off between Inequality and Growth by Gerald W. Scully , professor emeritus of economics in the School of Management at the University of Texas at Dallas , it has been found that lowering a country’s Gini coefficient by 0.01 would require reducing the income share of the rich by 0.6 percent and redistributing it to others. However, this would lower the economic growth rate by 1.6 percentage points (from 2.3 percent to 0.7 percent). With the transfer, but a lower growth rate, average household income in the lowest group would reach only $8,050 after 25 years, instead of the $10,320 that would be achieved without the transfer.
The ineffectiveness of the government efforts to alleviate poverty is highlighted by the fact that foreign employment has lifted more people out of poverty line in less than a decade than the populist government programs for the past half a century.
High inequalities in a society can be disastrous though. High income inequalities encourage rent-seeking behaviors and social unrest. Crony capitalism which has been flourishing rapidly in Nepal is a prominent contributor to increasing inequality and one of the major causes of crony capitalism is the provision that allows government's extended intervention in the economy. Government intervention, regardless of their objectives, creates avenues for crony capitalism which in turn contributes for higher inequaities.
Hence, our obsession with inequality, in the long run is going to be counterproductive even if our actions are well-intentioned. During the political and economic discourses that intend to shape up our economy, it is necessary to bear the fact in mind that society trying to put equality before economic growth will end up keeping everyone equally poor whereas society putting economic freedom first will end up with a greater of growth and equality.
(Author is a research associate at Samriddhi, The Prosperity Foundation and can be reached at email@example.com )
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