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Rebel without a cause!

Tuesday, January 16, 2007

Income Inequality : Indian Context

Dr. Charles Wheelan has written a thought-provoking article on Why Income Inequality Matters and it seems to be a must read for anyone interested in contemporary economics. He reitarates a very interesting observation in economics.

"In other words, we care less about how much money we have than we do about how much money we have relative to everyone else. In a fascinating survey, Cornell economist Robert Frank found that a majority of Americans would prefer to earn $100,000 while everyone else earns $85,000, rather than earning $110,000 while everyone else earns $200,000.

Think about it: People would prefer to have less stuff, as long as they have more stuff than the neighbors.

The point -- and this is still a nascent field -- is that a nation may be collectively better off (using some abstract measure of well-being) with a smaller, more evenly divided pie than with a larger pie that's sliced less equitably. Reasonable people can and should argue about that."

That's a very interesting observation which is very true both for the individual as well as nations. One of the reason for India's strong economic growth seems to be the "tournament effect" as seen by the way we (as seen in the media) are always comparing ourselves economically with the west and china.

But there is another point of relevance for India. India's Gini coefficient in that article is said to be 0.33 which means that we are a relatively equal society. But more than that, this also would be a point to rebut the views of certain section which believes that Nehruvian economics was responsible for all the ills of Indian economy upto the 90s and Manmohan Singh magically waved a wand of liberalization and all was light.

This criticism come mostly from the upper middle class which had the most to suffer in this era. For the rich, could go abroad and live that life, while the poor were just thankful to survive. The upper middle class believes that if the liberalization had started earlier, then they would have been able to enjoy the luxuries that they have now earlier.

But IMHO this is a false belief. Nehru's controlled economy probably led to the smaller but more equitable pie than the way Brazil developed. But of course, even my view is pure speculation but that is all that should be kept in mind by people who accuse Nehruvian policy of being the architect of India's economic misery.


nevermind said...

I don't think this is quite speculation- what you have described is exactly what's been happening in Scandinavia over the decades, especially Denmark.

As for the vocal minority whingeing about Nehru, V.N Balasubramanyam delivers an excellent and even handed critique of this minority in this book, which read in the context of Khilnani's The Idea of India, makes for startling reading. Nehru's policies had the blessings of the cream of Indian economists at the time, including the often misquoted Jagdish Bhagwati, not to mention a veritable who's who of economists from the West, including I.M.D. Little.

Sreekumar said...

Thanks for the links to those books. Had heard of Khilnani but not the other one.
I am ofcourse not defending all of Nehru's policies but then many of those very policies are responsible for the industrial and service sector growth of today.
I believe that true economic reform in India means to try to increase efficiency and productivity of the industry and the working class by building proper infrastructure.
India cannot and should not aim for the kind of per capita prosperity that the average American can afford because of the tremendous drain on our natural resource that it would entail.