Growth vs. Inequality is a false dichotomy
Thomas Piketty in his paper on inequality on India has pointed out that inequality is at its highest since 1920s, with its lowest point in 1980s.
In response, Swaminathan Aiyar has counter-argued that lowest inequality of 1980s is worse than current inequality because keeping everyone at low incomes, thereby achieving equality is of no good.
This growth vs. inequality will go on but it’s a false dichotomy.
As growth picks up, inequality is inevitable. Increasing inequality by itself may not be much of an issue if the condition of the bottom also improves in absolute terms, for instance if all come out of poverty.
Similarly, pursuing only growth without concern for inequality is also incorrect. Achieving growth doesn’t necessarily mean that the condition of the bottom will improve. Just because there’s growth, we can’t brush aside the concerns of inequality.
Also, all redistribution may not be wrong and not necessarily be antithetical to growth. For instance, we spend much less on education and health care. To increase spending, we need resources for which we might raise taxes. We shouldn’t be averse to these kinds of redistribution.
In this context, instead of focusing on binaries — growth and inequality — we should hence be focusing on “growth elasticity of poverty reduction” — the amount of poverty reduced for 1% increase in growth.
The growth elasticity metrics for India are poor, far worse compared to China.
As I blogged earlier, research says that the growth elasticity worsens with increasing inequality and is enhanced with land redistribution and providing education, skills and health care.
In this process, if it’s necessary to increase redistribution, let it be. If some people get access to resources more than others and move up the income ladder faster than others, let it be.
As long as we are enhancing the poverty reduction potential of growth, while pursuing high growth policies, it should be okay.
Poverty reduction potential of growth should hence be a metric we should be more concerned with, not just inequality or growth. We can first start with implementing the stalled land reforms due to political pressures.