The Indian Express COLUMNISTS

Thursday , May 16, 2002
This Unequal And Iniquitous World
India’s finance minister Yashwant Sinha held out the prospect of mass poverty being eliminated in Asia by 2015. Speaking at the recent Asian Development Bank’s annual meeting in Shanghai, he outlined a vision of an Asian century in which the faster growth in China and India will determine world economic growth. Actually, their dynamic influences not just global growth but trends in international income inequalities as well.

China and India were members of the gang of four fastest growing 31 large economies during the last 20 years. As both countries together account for 38 per cent of the world’s population, they have had an important bearing on recent trends in international income inequalities. China’s scorching growth, which narrowed its income gap with middle-income and rich countries, was a factor working to reduce global disparities in recent times.

But Sinha was looking ahead 15 years from now when both China and India will continue to grow rapidly and matter more in the world economy. Faster growth enables them to catch up with the middle-income and richer countries while widening their distance with developing countries, especially in Africa. While mass poverty may thus be eradicated, this Asian drama tends to worsen international inequalities.

For such reasons, China and India figure in a big way in the research on trends in global income distribution. A recent lecture in the capital by Professor Pierre-Noel Giraud of CERNA-Ecole des Mines de Paris outlined a long-term perspective whereby global inequalities in income widened, especially during 1950 to 1992. A year ago, Professor Robert Wade also collated authoritative numbers on such growing disparities between 1988 and 1993 in The Economist, which was very much in line with fin de siecle analyses by Eric Hobsbawm and David Landes.

In sharp contrast to this picture of widening disparities, a study by Xavier Sala-i-Martin — reported by Professor Robert Barro in The BusinessWeek — argued that world poverty has fallen dramatically during 1970 and 1998. That even international income inequalities have generally declined over this period, despite the fact that the ratio of highest per capita incomes to the poorest has dramatically grown.

That this is an iniquitous world is obvious enough: The gap between the richest and poorest countries in per capita income has risen to 429:1. This also happens to be the ratio of the remuneration of chief executive officers to the wages of manufacturing workers in richer countries. The studies mentioned above note that the ratio between the average income of 5 per cent of the richest and 5 per cent of the poorest increased to 114:1 in 1993 from 78:1 in 1988. That by 1993, an American with the average income of the poorest 10 per cent of the population was better off than two-thirds of the world’s people.

Of course, the data base and methodology adopted in these studies are vastly different but India and China happen to be important dramatis personae in their accounts. Not only have they mattered for world inequalities in the past but they also do so for the future. Despite his gloomy scenario, Giraud thus notes that these countries, especially China’s catching up with the richer countries, contributed to reducing international inequalities.

However, a caveat is in order. It is necessary to recognise that global trends in inequality are a combination of inequalities across countries and those within countries. The latter is not a focus of this essay as there seems to be a general acceptance among researchers that global inequality has been mainly determined by income differences across countries. These terms are therefore used interchangeably. A measure of such inequality is the Gini or Theil coefficient, which varies between 0 which denotes perfect equality and 100 in which one person has all the income.

In the world according to Wade, the two Asian giants are divided into their rural and urban parts and it emerges that urban China grew very fast during 1988-1993 which “reduced the gap between China’s average income and that of middle-income and rich countries, and so reduced the world Gini coefficient but the widening gaps between rural China and urban China and rural India increased world inequality by even more.” The Gini coefficient was 62.5 in 1988 and 66 in 1993 clearly indicating a worsening of global inequality.

Of course, Wade alludes to various factors responsible for these trends ranging from faster growth in rich countries compared to the poor, demographic disparities in the form of higher population growth in poor than rich countries and so on. But the slower growth of output in rural India and a widening gap between rural and urban China is also an important part of the explanation. This indeed sounds puzzling — world inequalities widening because of the growing distance between rural India and urban China. What, if, any is the connection between the two regions?

In Sala-i-Martin’s work, the role of the two Asian neighbours is even more striking. While there is no doubt that the spread of average incomes between the rich and poor countries has risen, these changes have been offset by faster growth in China (since 1978) and India (since 1990). As they account for a substantial chunk of the world’s population, their blazing growth trajectory has implied a substantial narrowing of international income inequalities from 1970 to 1998.

This line of thinking is futuristic as well: “Across-country reductions in inequality are driven mainly. but not fully, by the large growth rate of the incomes of the 1.2 billion Chinese citizens. Unless Africa starts growing in the near future, we project that income inequalities will start rising again. If Africa does not start growing, then China, India, the OECD and the rest of middle-income and rich countries diverge away from it, and global inequality will rise”, argues Sala-i-Martin.

All of this takes us back to Sinha’s vision for Asia. There is no doubt that both China and India will become a $2.5 trillion and $1.1 trillion economy respectively by 2015. That this faster growth path helps in eliminating mass poverty in the region and determining overall global growth dynamics. But the flipside is the possibility that the world becomes more unequal in the process. That denouement indeed appears to be the dark side of the promising Asian century.

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