Technology and inequality

Published: August 9, 2015
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The writer is a former caretaker finance minister and served as vice-president at the World Bank

The writer is a former caretaker finance minister and served as vice-president at the World Bank

I don’t have a great deal of confidence in the numbers the government in Pakistan puts out about the economy and the state of society. I believe that the estimates of the GDP and its recent growth don’t reflect the real picture: both the size of the economy and its rate of increase are underestimated. Since the country has not held a population census for 17 years, we are proceeding on guesswork about the size of the population, its regional distribution, the size of the urban population and the rate at which it is increasing. There are no reliable estimates of the distribution of income among different segments of the population. The claim that Pakistan has the lowest income inequality in the South Asian region is hard to accept. Sometimes, it is better to trust one’s eyes than official data. The levels of consumption one generally sees in the large cities suggest significant inequality.

Economists generally consider three forms of disparity: wealth (wealth inequality), income (income inequality), and consumption (consumption inequality). Of these, income inequality is the most frequently discussed subject. It has two important aspects: interpersonal and regional inequalities. The issue of economic inequality leads to concerns about equity, equality of outcome, and equality of opportunity.

There was considerable and an excited discussion of the causes of inequality in the West following the publication of the French economist Thomas Piketty’s book, Capitalism in the 21st Century. Institutions such as the IMF and the World Bank have also given a great deal of attention to the subject. According to a June 2015 report of the IMF, “widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in emerging markets and developing countries, with some countries experiencing declining inequality, but pervasive inequities in access to education, health care, and finance remain.”

The interest in the subject of equality is not only on moral grounds; as social scientists began to emphasise decades ago, perception of discrimination that leads to inequality can have diverse consequences. The economist Albert O Hirschman pointed out in his book, Exit, Voice and Loyalty published decades ago, that unfair treatment on the part of a segment of the population can lead to one of three reactions: those unhappy with their situation can choose to stay within the system hoping that corrections will be made from within; or they may raise their voice, drawing attention to their situation; or they may exit from the system altogether. We have seen examples of all three in our own history.

On a number of occasions, the country’s citizens have raised their voices against what they regard as built-in biases against them in the systems of governance. The most recent example of this was the politics of dharna practiced by Imran Khan and his PTI. This campaign attracted a fair amount of attention, in particular by the middle class that was persuaded that the political and economic systems that governed their lives did not provide them with the space they needed. They shouted for change. There are secessionist elements in the country — in particular in Balochistan — who want an exit, since they don’t believe that without having a geographic place of their own, they will not be able to get social, political and economic justice. Pakistan’s creation was an example of the exercise of the exit option as was the emergence of Bangladesh. Most of the time, however, the citizenry has been loyal to the system. The prolonged energy crisis has tested the citizenry’s patience, but the people have remained generally loyal to the system.

What are the many reasons for persistent inequality in the country? In neo-classical economics, income inequality is the result of the differences in value added by labour, capital and land. Within labour income, distribution is due to differences in value added by different categories of workers. As Piketty observed on the basis of data collected and investigated from some of the more advanced countries, the return on capital is much higher than from labour. Unless the state begins to tax those who earn their incomes from the use of capital and to raise resources that would increase the productivity of the poor, inequalities will continue to increase.

The most important contribution to inequality is the failure of the state to provide basic needs — not just goods but also services — to the poorer segments of the population. Economists and sociologists in particular now recognise that poor educational and health systems create long-term problems for those who have no available alternatives. The country’s public educational and health systems have collapsed, brought down by a combination of a dearth of resources and corruption. The upper classes have alternatives available since they have the means to pay for the services the private sector can provide. Poor education, the absence of skills and recurrent problems of health mean that large segments of the population will remain trapped in poverty.

Pakistan at this delicate time in its history needs to address the problem of inequality. The state should concentrate on improving the quality of governance, taxing the rich to increase the resources available with the government, and concentrating the government’s attention on providing services that the poor need. Only then, will there be some assurance of achieving social and political stability. 

Published in The Express Tribune, August 10th,  2015.

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Reader Comments (4)

  • pk
    Aug 10, 2015 - 6:35AM

    In Pakistan more than 80% live below poverty line, 60% never attend even primary school, Polio is rampant, country is in top 10 failed state index. Indeed challenges are enormous. Recommend

  • Srinath
    Aug 10, 2015 - 7:04AM

    The headline was enticing. But missing from the write-up was the technology dimension. The author’s reluctance to believe that income inequality is the less than in countries like China and India is perhaps because of mughal-like opulence seen among the elite. Empirical evidence suggests that Gini coefficient, a measure of income inequality, has more to do with the volume of economy which is why it is greater in China, an ex-communist state, than India. Recommend

  • Vectra
    Aug 10, 2015 - 1:22PM

    @Srinath:
    What do you mean by China an ex-communist state?.It is still a communist state.Recommend

  • Srinath
    Aug 10, 2015 - 10:08PM

    @Vectra:
    OH, REALLY! Only Rip Van Winkle can agree with you Here’s the latest from Forbes:
    A total of 213 people from mainland China landed spots on the 2015 Forbes Billionaires list, an increase of 61 from last year. Familiar faces including Wang Jianlin and Jack Ma topped the list, but 71 among the 213 are newcomers to the world of billionaire-dom.Recommend

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