Rising inequalities under crony capitalism
It’s a sign of the pathology of much of India’s mainstream media that it displays the rise of the speculative-trader-<wbr>industrialist Hinduja brothers to the top of Britain’s (not India’s) billionaire list on the front page, as many papers did on 12 May, while blacking out the shamefully persistent phenomena of grinding poverty and rapidly growing income inequalities in this country.
It’s also a sign of our middle class’s intellectual disconnect from the rest of the world that it celebrates the bloating wealth of India’s Ultra-High Net-Worth Individuals just when rising inequalities have become a political issue worldwide, which occupies the centre of mainstream economic discourse. Many economists identify inequalities as one of the key 'fault lines' in the global economy, which caused the financial crisis and the Great Recession beginning in 2008.
A spate of new studies demonstrate that economic inequalities have widened in most countries of the Organisation for Economic Cooperation and Development (the rich nations’ club), and emerging economies like China, Brazil and India. In developing Asia, 12 economies, which are home to 80 per cent of the region’s population, have seen inequalities rise steeply over the past decade.
India’s record here is especially disgraceful. It has seen an explosive growth of income and wealth inequalities since neoliberal policies were launched 23 years ago. The OECD recently said, 'Inequality in earnings has doubled in India over the last two decades, making it the worst performer on this count of all emerging economies. The top 10 per cent of India's wage earners now make 12 times more than the bottom 10 percent, up from a ratio of six in the early 1990s.'
Even the International Monetary Fund and the World Bank warn of the enormous social costs imposed by rising inequalities. The IMF’s Christine Lagarde says, 'In India, the net worth of the billionaire community increased 12-fold in 15 years, enough to eliminate absolute poverty in this country twice over'.
India’s National Sample Survey figures on disparities in per-capita consumption expenditure also tell a sordid story through a measure called the Gini coefficient. (This ranges from zero to one: zero represents perfect equality, and one total inequality.)
Between 2004-2005 and 2011-2012, the Gini coefficient rose in urban India from 0.35 to an all-time high of 0.37. And in rural areas, it increased from 0.26 to 0.28 — the first rise in almost 35 years. (These are probably underestimates because the rich don’t fully disclose their incomes, and the tax administration has stopped compiling detailed statistics, and only collates self-reported figures.)
These reports should deeply shame us. They give the lie to the widely held belief that 'a rising tide lifts all boats' — that if there’s rapid GDP growth, not only will the rich prosper, even the poor will do better. They also demolish the 'trickle-down' theory, in reality merely wishful thinking typical of economists who have been called the 'witchdoctors of the 20th century', that growth will eventually percolate to the poor. Yet, Manmohan Singh has followed these very policy prescriptions.
Sensible economists have long questioned Milton Friedman’s view that the free market 'distributes the fruits of economic progress among all people', bringing about 'enormous improvements in the conditions of the working person'. We know that this hasn’t happened in India during the last two decades, the fastest-growth period in the country’s recorded history.
Now, solid theoretical and empirical refutation of such theories has been provided by Thomas Piketty in his just-published Capital in the Twenty-First Century, described as 'a political and theoretical bulldozer'. Branko Milanovic, an economist in the World Bank’s research department, has declared it as 'one of the watershed books in economic thinking.'
Piketty, a professor at the Paris School of Economics, conducted a comprehensive analysis of inequality since Antiquity, especially the past 200 years, to conclude that worsening inequality is an inevitable outcome of free-market capitalism.
There is a tendency for the rate of return to capital to exceed the rate of output growth. That’s because entrepreneurs become increasingly dominant over those who own only their own labour, and corner a disproportionate share of total national income.
The rise in inequality reflects markets working precisely as they should. “This has nothing to do with a market imperfection”: the more perfect the capital market, the higher the rate of return on capital or profit in comparison to the rate of growth of the economy, and to the share of wages and salaries.
Piketty argues that this tendency was countermanded briefly in the 60-year period 1914-1974. Inequality declined — not because of a natural law of capitalism, but because of the two World Wars, the Great Depression, physical destruction of capital throughout Europe, higher taxes (especially on high incomes) to finance the wars, high rates of inflation that eroded creditors’ assets, Keynesian welfare-state policies and a strong labour movement, which achieved higher wages and other gains.
The owners of capital suffered major blows, including the loss of credibility and authority as markets crashed. Besides, major industries were nationalised in Western European countries, and many newly independent countries embraced policies of public investment and state intervention.
This period saw the emergence of what John Kenneth Galbraith termed 'countervailing power' based on a liberal social policy consensus, captured in Roosevelt’s 'New Deal'. Inclusive approaches based on this enlightened consensus provided uniquely strong resistance to the more deeply rooted tendency of growing inequality. But the pattern is highly unlikely to be repeated.
The 'countervailing power' unravelled under a shift towards free-market fundamentalism under the Thatcher-Reagan counter-revolution. Since 1980, the return on capital has been rising, producing growing income and wealth inequalities. Thanks to free-market policies, inequalities in the US in the first decade of this century were higher than the extreme disparities of the pre-World War I period.
Real wages for most US workers have virtually stagnated since the 1970s, but the incomes of the top one percent have risen 165 per cent, and of the top 0.1 per cent by 362 per cent. The top marginal tax rate in the US has declined from 70 to 35 per cent over the past four decades. The biggest tax breaks have gone to corporate honchos (under a 'CEO-led' management model) and the owners of capital, including those with inherited wealth, which has grown much faster than overall output.
This perverse income distribution isn’t limited to the US. As Lagarde said, 'Seven out of 10 people in the world today live in countries where inequality has increased over the past three decades.' The world’s richest 85 people own the same amount of wealth as the bottom half of the population.
'When pay-setters' like CEOs decide their own pay-packets, 'there’s no limit,' says Piketty, unless 'confiscatory tax rates' are imposed. Piketty advocates a global progressive tax on wealth to prevent the transfer of assets to tax havens, and restrict the concentration of wealth and limit the income flowing to capital. Piketty also argues that diffusion of knowledge and skills can mitigate inequality. But these too depend on state policies, which are vulnerable to elite capture.
Piketty’s prescriptions for a global wealth tax have been declared 'unrealistic', even 'utopian'. But they have at least sparked off a serious debate on how to limit the concentration of wealth. This concentration has resulted in a global economy of exclusion, which criminally wastes precious human potential. Rising inequalities are not only socially undesirable; they eventually harm the quality, pace and sustainability of growth itself.
That’s why many economists hold inequalities in the developed capitalist countries to be a major cause of the Great Recession and oppose the imposition of 'austerity' measures, which further impoverish the mass of the population, as a solution.
India has much to learn from this debate. India’s class and regional inequalities have turned truly obscene. The top 10 per cent of India’s wage-earners make almost five times more than the median 10 per cent, but this median earns just 40 per cent more than the bottom tenth.
Inequalities in India result from a severely skewed distribution of assets, including land and capital, unequal access to education, coupled with growth imbalances, painfully slow job creation and worsening income distribution which favours the rich.
India is becoming an increasingly inequitable, 'rich-take-all' society marked by exclusion and immobility, where an individual’s circumstances of birth, and class and caste privileges, matter more than his/her effort. This has grave consequences for democracy.
Without inclusion and a degree of social cohesion — or at least the prospect of cohesion —democracy becomes merely procedural, formal and hollow. It’s only when all citizens acquire an equal sense of ownership in a collective national project that a substantive, healthy democracy flourishes. We are all but destroying that prospect.
If India is to achieve genuine progress rather than just GDP growth, it will have to radically redistribute assets, institute land reforms, and provide good-quality healthcare, education, food security and social protection to all. We must raise wages, further tax the rich, and impose ceilings on profits and executive incomes. This means embracing an anti-neoliberal policy paradigm. IPA