Inequality of income and interventions

It was nice to hear him after long years on a subject widely discussed but rarely researched in Bangladesh. It is about income inequality and its growth over time. We hear a lot about the growing income inequality but very rare pinpointed position seems to be in evidence. Professor Khan talked on: "Accelerating Growth and Poverty Reduction in Bangladesh" in a seminar organised by the World Bank in June 2003.

Income up, poverty down
The paper by Khan reports that the annual increase in per capita GDP doubled, from about 1.5 per cent to about 3 per cent, between the late 1970s and the late 1990s. Interestingly, "there was a significant reduction in the incidence of absolute poverty in the period after the mid 1970s even though the rate of increase in per capita income was modest during the time. In the decade since the mid 1980s the poverty-reduction effect of growth became much weaker. The rate of poverty reduction slowed down even though the rate of growth in per capita income was much higher in this period than in the preceding period". Available empirical evidences, by and large, point to a rise in per capita income and a fall in poverty level.

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Poverty down, inequality up
Professor Khan notes that change in any of the standard measure of poverty is completely determined by two things: (a) the change in the average value of the indicator (income or consumption) with respect to which poverty is measured and (b) the change in the Lorenz distribution of the indicator. Thus, "with the distribution unchanged, an increase in per capita income reduces the incidence of poverty measured by all standards e.g. headcount, proportionate poverty gap and the weighted poverty gap. If the distribution becomes more unequal, a part of the potential poverty-reduction impact of the increase in income may be entirely offset by rising inequality in the distribution of income." Given these premises, the author observes that over the decade, the inequality in the distribution of rural income increased steadily. The gini ratios rose from 0.276 in 1991/92 to 0.310 in 1995/96 and 0.359 in 2000.

Inequality sources
Delving deep into the dynamics, Khan observes that the increased inequality in rural income was propelled by a handful of factors. The sources of income growth are mainly non-farm enterprise, salary from non-farm employment, remittances, especially from abroad and property income.

Non-farm entrepreneurial income was an equalising source at the beginning of the decade where both the poor and the rich had access. By the middle of the decade it had become a mildly disequalising source and by the end of the decade, a strongly disequalising source. Another important source of income -- non-agricultural salary -- also appears to have turned to be more disequalizing over the decade. It means income of the 'white collar' or skilled job holders increased at a much higher rate than those with 'blue collar' or unskilled job holders.

Farm income -- factor returns to land, assets and family labour in crop production, livestock, and fishery and forestry -- was a moderately disequalizing source of income in 1991/92. By the 1990s, its concentration ratio rose slightly. "The impetus for increasing rural income inequality has been provided by four disequalising components of income that are highly GDP-elastic. This effect has been exacerbated by the fact that most of these components have been increasingly disequalising over the decade. The equalising components of income have either been GDP-inelastic or in the case of non-agricultural wages, relatively small as a proportion of income".

Policy points
Professor AR Khan then lands on the policy option to contain the growing inequality. He is of the view that in the absence of public interventions to arrest and/reverse these forces, rural inequality is almost certain to continue to increase. What kind of policy interventions?

Agricultural growth is strongly equalising. "An expansion of agriculture should exert a strongly equalizing influence on the distribution of income. Within agriculture, livestock is highly equalising source of income while fishery is a highly disequalising source of income. Is there a way to accelerate the growth of the livestock sector, which has been very low, by preserving the equalising impact of income generation of the sector? Is there a way to reduce the disequalising impact of income generation in fishery, a rapidly growing sector, without reducing the rate of the growth of the sector?"

Allow me to add here that rice income is relatively equalising -- although at the initial stage of green revolution it was not so with increased access of the rich to his technology -- with growing access of the poor peasants to this technology. Rice needs to be nurtured through policy interventions for more time to come, taking this point into consideration.

Rapid growth of non-farm sector appears both as a boon and as a bane. It is a boon as poor people tend to embrace it as a source of income in addition to agriculture. But it emerges as a bane in the wake of growing need for capital, skills and market access where the rich tend to have more access than the poor. There is very little that public policy can do to reduce the disequalising impact of remittances without sacrificing national welfare. But the use of the remitted money for productive pursuits e.

g. labour intensive investments could possibly stem the rot.

The property income in rural areas constitutes a small share but highly disequalising. It consists mainly of rents growing over time. The unequal distribution of land leads to inequality on this count. While public policy can do little in this regard, Professor Khan suggests to treat this inequality as a "limited blessing" implying that over the decade the share of tenancy went up.

Concluding observations
What follows from Khan's observations is that per capita income in rural areas increased with modest positive impact on poverty reduction. But the grave concern looms large on the growing inequality of income. The author identified some disequalising and equalising forces contributing to the income equality. Admittedly, the forces are changing over time, hence a watch on their movements are required. For example, and it is my personal view, income from livestock has historically been diseqalising since only the richer sections in villages had access to livestock. On the other hand, income from fish has traditionally been an equalising source since only the poorer section dealt in fish in the past. But over the decade or so, the situation reversed. In the forthcoming book on Rural Livelihoods Systems in Bangladesh: Changes and Challenges, Dr Mahabub Hossain and co-authors have also shown how and to what extent the changes in the sources of income in rural areas contributed to the changes in inequality. Many of the observations of Professor AR Khan are borne out by a study of 62 villages carried out by IRRI and BIDS.

By and large, education, credit and skill have been identified as the major areas of discriminatory access and hence of inequality. Public policies should see that access to these pockets are made easy for the poor. Growth with distribution could be an objective to live with.

Abdul Bayes is a Professor of Economics at Jahangirnagar University.