Focus on poverty, not inequality

– This article was originally published by Ashesh Shrestha in the Himalayan Times on the June 23, 2019.

The unequal distribution of income and wealth has alarmed economists from around the world. The issue has been taken with serious consideration as some of the most prominent economists from top economic departments of various universities have warned about the growing disparity between the rich and the poor. French economist Thomas Piketty’s magnum opus ‘Capital in the 21stCentury’ analysis of inequality through pile of data sketches the evolution of inequality since the beginning of the industrial revolution. Beginning from the industrial revolution till 19thcentury western European societies depicted increasing level of inequality. Wealth was concentrated into the hands of few rich families which was distorted after the two world wars and the great depression. The shocks of the early 20thcentury has now faded and the distribution of wealth is showing patterns similar to that of pre-shock period. 

Piketty from his historical analysis of data provides a theory of capital and inequality. His analysis suggests that when the rate of return on wealth or capital grows at a higher rate than the rate of the overall economy, the labour’s share of the national income decreases. He further suggests that income from capital is far less evenly distributed than labour income, leading to the concentration of wealth and increased inequality.

Another distinguished economist and nobel laureate Joseph Stiglitz also fears unequal distribution of wealth and income. He claims that the gap between the rich and poor has been increasing for a past few decades. He believes that inequality of outcomes is associated with inequality of opportunity. The lack of equal opportunities in terms of access to education and health leads to high difference in productivity intensifying the gap between rich and poor. Inequality of opportunities and inequality of outcome have a cyclical relationship. Both of them depict mutually causal relationship (one affecting another). Moreover, these economists claim that most part of the wealth which the rich have been able to accumulate is because of their inheritance of capital and rental income derived from the monopoly power which they have been able to acquire through lobbing and influencing the policies in their favour. 

It is inarguably true that inequality of income caused because of the monopoly power derived through lobbying and inequality of opportunity needs to be tackled. However, the presentation of inequality inherently as a problem seems to be overly hyped. The increase in the income of the rich has been portrayed in such a manner that it is perceived to be a bad thing by majority of the people. However, economic principle does not suggest so, if not the opposite. One of the principles to judge desirability of a particular policy is to see if it makes someone better off without making anyone worse off or not (Pareto principle). Increase in the income and wealth of the rich can be considered bad if it happens at the expense of the poor. Increased income of the rich does not come at the expense of the poor. The poor do not get worse off when the rich get better off. Hence, principally, if inequality increases the material well-being of some individual, without reducing the material wellbeing of others, it can be considered good or at least not bad.

Harvard economist Martin Feldstein also supports the view that inequality is not the actual problem that needs the huge attention that it is currently receiving. The actual problem that we need to look into is poverty, which has declined from 36 percent in 1990 to 10 percent in 2015. The estimates could be still high because of the underestimation of income of poor as large part of their income is obtained through informal employment. Hence, the problem that we actually need to focus seems to be being resolved itself. However, we need to acknowledge the fact that these people who have just risen out of the extreme poverty are vulnerable to external shocks. Also, they are not receiving access to good quality education and health which have made them less productive and impede them from earning higher levels of income.

Therefore, we should focus on increasing income and living condition of these poor people rather than worrying about the rich earning more. Rather than directly redistributing the wealth, we should focus on increasing poor’s access to health and education. Improving their skills will have positive impact in their long term earnings and they will be less vulnerable to shocks. Many of the poor who are working in the informal sector should be brought to the formal sector so that they can enjoy all the benefits that the formal labour enjoy.