India’s (overvalued) inequalities

A recent Oxfam International report on income inequality caught everyone’s attention. What made headlines in various news outlets in India is a small piece of a very big report. Flashes such as “Income inequality is worsening; Richest 1% in India invest 73% of the country’s wealth, Oxfam says»Designed to scare people and increase the number of hits.

Indian media has a long-standing problem with fueling mass unrest, creating confusion and subjective reporting, but that’s not why we shouldn’t panic. Income inequality has a lot to do with regulation, regulatory capture and rent seeking, but these are the things you will see assigned the least blame. If regulation is mentioned, you will hear people arguing for more regulation, which in turn creates a more opaque system with such complexity that only those with the know-how will benefit.

Responses to inequality typically range from tirades against globalization, immigration and Wall Street. You may be perfectly entitled to blame all three, but they don’t come close to having the rent-seeking effect on inequality. It is a subject that must be discussed at length until a solution is found.

The reason we shouldn’t worry too much about the Oxfam report is the Kuznets curve. Named after Nobel Prize-winning economist Simon Kuznets, it hypothesizes why high growth will first lead to increased inequality, then flatten and eventually decline in an inverted U-shaped trajectory. One explanation for the curve involves investment opportunities that are primarily available to those who have wealth during the initial phase of a developing economy and therefore have a wealth multiplier effect for those who have already invested (a first-comer advantage). The multiplier / first-mover effect is even deeper considering the role inherited wealth plays in India.

The majority of India’s richest 1% inherited their wealth from previous generations, and therefore a significant portion of their current wealth was created when India was in this initial stage of a developing economy. The second explanation takes into account the rural-urban divide you see when the center of an economy shifts from rural (mostly agricultural) areas to a more urban environment, where wages in rural areas decline accordingly.

Kuznets’ work has received a lot of criticism recently, due to rising global inequalities in developed economies, but as you have probably understood, rather than questioning Kuznet’s work, I am more inclined to blame rent seeking. Particularly because the “scale” of rent-seeking we see today in developed economies and a few developing countries is unprecedented. The developing economies in question are those whose beneficiaries of growth are the oligarchs. The trends of increasing oligarchies and rent-seeking were not so evident in the 1950s, but Kuznets’ work has largely stood the test of time. While you might see a lot of articles written over the next week attributing the inequalities to the economic policies of the government and to the Prime Minister himself, keep in mind that rising inequality is a natural progression.

While India’s Gini coefficient (a measure of income distribution) increased from 45 to 51.4 in 2016, signaling an increase in the income disparity between rich and poor, China’s Gini coefficient rose from 33 to 53 over the same period, a surprising number even in absolute terms. . You can also see reports that during the UPA years the gap was not that wide, but if you take Kuznets’ work into account, that’s not necessarily a good thing. It could simply mean that during the second term of the PAU, growth was not high enough to cause an absolute increase in the incomes of the rich, but growth was not low enough that they lost some of it. massive either, hence the stagnation.

India most certainly came out of the financial crisis better than most developed economies in relative terms, where a third of the lower / poor middle class ended up with zero or negative wealth, but that’s not the case. thing to congratulate. We still have a lot of work to do to realize our potential, but inequality should not give us sleepless nights yet.

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