Prioritizing growth over welfare spending – A Kuznets U-curve approach in the Indian context


Plotting the Kuznets curve in order to prioritize the goals can be a difficult task because the relevant variables must be selected to represent the inequality.

By encouraging enterprise and innovation and by prioritizing the overall objective of long-term growth over short-term well-being, it has its share of strengthening an economy’s chances of making it right. the Kuznets curve.

In the late 1950s, Harvard professor and economist, Simon kuznets came out with an assessment of the relationship between growth and economical inequality, using the cross-national data available at that time. He felt that the curve took a “U” form meaning initial rise and later decline. His conclusion was that in the early stages of development of any economy, inequalities would increase due to the accumulation of capital in fewer hands and as growth would occur, the standard of living would rise through better equipment and technology. cheaper, thus reducing the inequality gap. This implies the existence of an inherent assumption that growth would be ‘run off‘to all sections and thus raise the standard of living. This could have applied to the United States, UK, and India of the 1950s but the fact, in today’s world of free trade and era of globalization? Is growth still the priority or should inequality be focus of today’s economic policy?

In the era of free trade, economic inequalities are expected to decrease and more growth to be achieved through the transfer of knowledge and technology from developed to developing countries. But such a transformation is not quick. A glance Kuznets U-shaped inequality curve tell the story. The curve also appears to be true in today’s era of globalization, as the data available world Bank shows that from 1990 to 2011, inequalities in India, measured by the Gini coefficient, fell from 0.40 to 0.47. It was supposed to be the period of rapid growth after the reforms of 91! This simultaneous increase in growth and increase in inequality is analogous to phase 1 of the Kuznets inverted U curve. A similar trend can be seen in yet another developing country – China. Despite record growth, Gini’s data for China shows an average of 0.49 between 2000 and 2010. However, when we look at countries like the UK and Japan having a high per capita income, the Gini index is between 0.2 and 0.3, indicating less inequality. This implies that we are now at the other end of the inverted U curve predicted by Simon Kuznets. So this is true on both sides!

Finding that collecting data on income distribution was a huge problem, other studies starting with Paukert began to use the Gini coefficient as a measure of inequality.

Drawing the Kuznets curve in order to prioritize the objectives can be a difficult task because the relevant variables must be selected to represent the inequality. Historically, Kuznets has undertaken a cross-national analysis and compared the ratios of income distribution and GDP levels based on per capita. Finding that collecting data on income distribution was a huge problem, other studies starting with Paukert began to use the Gini coefficient as a measure of inequality. The coefficient the value lies between 0 and 1 where going towards 1 implies greater inequality.

Coming to the larger question of which is the most important issue to address – Enabling growth or tackling inequality is logic and safer choose growth over growth. This is because no matter how much investment we invest in wellness projects, the problem will persist as there is no additional factor to take people away from their existing configurations and lifestyles. Despite the improvement in well-being, unless there is creative disruption, rapid change cannot occur. Investing in social protection will help the elderly and improve health care, etc. But reduces funds to undertake new projects – innovative and infrastructural by nature, which can bring much more comfort and well-being into people’s lives. If the United States hadn’t invested in the development of local defense technology in the 1940s, GPS and apps like Uber and Google Maps wouldn’t even have been created. The benefits of choosing growth as the primary objective by creating a culture of innovation, allocating adequate funds and encouraging business growth will last for a long time. Growth creates a condition for reducing inequalities by giving people something to work on do theirs lives better than them. This trend is also observed in the latter part of the Kuznets inverted U curve. After a certain level of growth, the benefits of updated technology, new production methods, and better connectivity start to hit everyone. It inspires people of all classes to work for something new and earn, thereby closing the inequality gap.

The argument rarely heard in a discussion of the above question would be that growth is an unbalanced priority because it involves a factor of time and the long-term effects are unpredictable. Suppose we are trying to improve growth only and neglect the finances involved on different sides, it would entail huge cost and unnecessary economic burden. A similar argument has been found in the case of Indian railways – Why bring in high speed trains now; emphasis should be placed on improving the existing network and maintaining safety, punctuality and cleanliness. That is, rather than going for a totally new system, let’s correct the shortcomings of the existing set of programs and work to make them more focused and monitor progress after using the system. However, it is more important to have creative upheavals and focus on growth in order to improve basic living standards from time to time purely driven by innovation. Well-being involves the provision of basic necessities while the growth factors in the type of lifestyle in place and the products to be produced. Growth is like a general equilibrium effect affecting every section of society by influencing their behavior and choices and pushing them in new directions. It is Therefore necessary to focus on investments in new technologies and in R&D to successfully take people out of their daily lives and reach the right side of the inverted U-curve of Kuznets.

Therefore, by encouraging enterprise and innovation and prioritizing the overall goal of long-term growth short-term well-being has its share of increasing the chances of an economy proving that the Kuznets curve is correct.

To note:
1. The opinions expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

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