GDP growth and income inequality

The PM claims that efforts are being made to strengthen democratic institutions and ensure good governance and the rule of law. She did not forget to mention about the "show and tell" institutions of Anti-Corruption Commission, office of Tax Ombudsman, and independent human rights commission soon to be constituted. The PM added that separation of the judiciary from the executive is underway.

The PM tried to depict a positive image of her country, as expected. But why was she required to do that? Why claim things that cannot be backed up with evidence? Anyway, she probably failed to mislead anyone. Otherwise why would she return home with a legal notice from the International Committee for Human Rights for possible violation of human rights? Why would prominent US lawmakers including Senators Edward Kennedy and John Kerry send a letter to Secretary of State Condoleezza Rice to ask President George Bush to raise the issue of political violence in Bangladesh at the summit?

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The US lawmakers asked for initiatives to prevent "catastrophic terrorism" and the possibility of Bangladesh becoming "a failed state and a base of operations for international terrorist organizations." Might this be the reason why Secretary of State Rice made a courtesy call on Prime Minister Khaleda Zia at Grand Hyatt hotel New York on September 15? The PM must be credited for all the successes of her government and she must equally take the blames for all her failures. Unfortunately, her failures are staggering and indefensible.

On progress in attaining the millennium development goals of halving the poverty level she said her government has set a target to achieve it by 2015. An NGO report released to the press on September 13 underscored that at current rate of poverty alleviation it would take some 81 years for Bangladesh to eradicate poverty, and reduction of poverty by half will take nearly 24 years. By official admission nearly half the population (70 million) is living below the poverty line.

When the PM claims that the economy has been growing over 5 percent for the last 10 years, the poor families do not understand what it meant for them, and where this growth goes. This sustained real growth of 5 percent is questionable. It seems the government wants to keep it at 5 percent whether it rains or shines, droughts or floods, inflation or deflation. It is laughable that the politicians quote real GDP growth at 5 percent when the inflation rate is 3 percent; they still quote it as 5 percent although the inflation rate has increased to nearly 8 percent.

The May 15 Poverty Monitoring Survey Report (2004) of the Bangladesh Bureau of Statistics indicated that per capita income increased 17.51 percent at the national level, but the share of the growth attributable to the non-poor is a disproportionate 19.38 percent, and that of the poor is a mere 4.82 percent. This explains why the plight of the poor is becoming worse. More specifically, where does the GDP go? The GDP is a demand-side accounting, which is expended approximately as follows:
- Government expenditures;
- Private consumption and business profits;
- Foreign imports;
- Investments (generated through personal savings);
- Maintaining prisons and feeding the criminals (who contributes little or nothing to future GDP);
- Payoffs to corrupt officials and politicians;
- Default loans;
- Misuse of government properties by ministers and high officials (travels, vehicle use, telephones etc);
- Remittances and shopping in foreign countries;
- Non-vocational and non-GDP contributing educational endeavours;
- Money laundering across national borders for non market traded goods;
- Labour union activities (protests and lock-outs);
- Opposition destroys part of the GDP (about 2.5 percent) by recurrent and whimsical hartal observance.

Many non-economists and politicians obscure the fact that a simple arithmetic mean such as per capita GDP fails to represent average level of income. The per capita GDP is only one indicator of a country's economic strength. The World Economic Forum has recently formulated what it calls the Growth Competitiveness Index, which is based on defining three factors as being critical to economic growth: the quality of the macroeconomic environment, the state of a country's public institutions, and a country's technological readiness. All three factors are remarkably lacking in Bangladesh.

The hypothesis that GDP per capita is representing real average income less and less becomes obvious when one finds that social progress is improving slower than economic progress. Social progress manifests the overall quality of life in a nation, and is measured by "International Index of Social Progress" (IISP). IISP examines and assesses 40 desirable aspects of life including quality of health, education, environment, level of democracy, military spending, etc -- it is the grade of a country's ability to provide a good standard life. IISP reflects a life standard both qualitatively and quantitatively in a way that is superior and more revealing compared to GDP per capita, which merely and misleadingly refers to quantitative standards.

The United States, the richest country with highest average income in the world in terms of GDP per capita, ranks only 27th on IISP criterion (using 2003 GDP data). As hypothesised, the top 10 countries displayed in the table with a more evenly distributed national income have highest life standards according to IISP. Using the "GINI Index," which reflects the level of income inequality, these countries show a lower income inequality than in other developed countries like US and UK (source: The World Bank).

As the statistics in the table indicate, lower social progresses of the nations where incomes are shared unequally (US, UK) indicate GDP per capita overestimates average incomes in these countries. Living standards that remain relatively constant is a strong sign of GDP per capita's lessening meaning. Based on IISP criterion, Bangladesh would rank with the poor African nations as one of the states failing to meet the aspirations of its people.

Growing income inequality has major economic and political ramifications:
- It aggravates the misery of lower income groups (which constitutes the majority) more than others. They become frustrated with their income status, and therefore join or support movements to change government and regimes. The resulting political unrest increases the risks and uncertainty of investment and discourages foreign capital flow. Lower inflow of capital undermines a nation's growth potential.
- It deteriorates business confidence in domestic markets. It discourages economic entities about commitment and trust. Higher risks of conducting business and higher costs of enforcing contracts impede economic transactions and hence depress investment.
- It handicaps economic policy makers from using some policy instruments at crisis times. For example, "pricing" -- a public finance tool loses its functionality in highly unequal income distributions. As the need for energy efficiency arises, unequally distributed national incomes would turn off authorities to raise prices due to fear of poverty and mass upsurges.
- It is, therefore, no surprise that Bangladesh has been experiencing all three ramifications with increasing vulnerability to worsening economic and political fallout.

There is evidence which claims that some pro-poor growth (PPG) policies may lead to higher income inequality and higher poverty levels in the short horizon. For example, if the adoption of capital intensive projects increases the demand for skilled workers (relative to the unskilled ones) inequality will likely increase. There are published case studies which showed that PPG is likely to be different in different regions of the same country depending on the variability of farm productivity, amount of land ownership, basic education, health service, and cultural diversity.

Growth theorists contend that the distributional impacts on income may not be discernible during the initial phases of development, as an economy transforms from a rural culture to an urban environment and from agro-base to industrial frontier. Over time, inequality would show positive signs of convergence as the labour force in the industrial sector expands and that of the agricultural sector contracts. Unfortunately, we do not see such signs of convergence in Bangladesh for all these years of sustained growth.

The author is Professor of Economics, Eastern Michigan University, USA.