A Monologue on Poverty and Inequality

Percentage population living on less than $2 per day. Image source de.wikipedia.org

by Adrij Chakraborty      May 15, 2018

In the United States of America, every Presidential election campaign rests on the pillar of an Economic ideology whereby the candidates would try to woo the electorate en-masse with articulate expressions of their vision to take the American Economy to a newer height than ever before. We saw that in Barack Obama’s emphasis on economic democracy and economic justice at almost every speech during his campaign and we saw an encore during the 2012 Presidential elections with a very emotional speech about Democracy, the marginal voter and the will to fix this economy for that marginal voter, taxpayer, father, mother, child and so on. We saw a similar phenomenon recently in India, with the recently concluded general elections where the debate on “Secular Development vs. Secularism” dominated the mainstream media and captured the minds of the average Indian voter. What is common between the three strands of events that I just mentioned is the bleeding economy that one could see at the backdrop, reeking with inequality and thirsty for growth.

The growth narratives that are being drawn by a lot of developing and emerging market economies today are pervasive in principle of predominant financialization of the economy where the stock markets are more important to the policymakers than the real economy outside. The recent reactions of the global economy to chaos in the Chinese Stock Markets with Sensex leading the charge, dropping from almost 29,000 points to 25,000 points within such a short period of time have put policymakers on such alarm that the Prime Minister had to convene an ad hoc summit of “India Inc.” to restore economic confidence in the business class and among investors in the fact that although all may not be well in the country’s economy, the “ached in” are surely on their way. Paradoxically this reminds of a prominent work among leftist-economic circles by Paul Sweezy (which was a result of one of his debates on Economic Policy with Keynes) on how Capital was redistributing the contours of growth among economies which were on the path. I used the word paradoxically because Sweezy very eloquently and lucidly opposes the lion’s share of the indicators of Economic Growth in most capitalist economies such as the stock-market as a yardstick of the growth story, rebutting the fundamentals on which they rest.

What Sweezy does in his treatise is to point out the Marxist ideology of the base and superstructures and give it an economic twist by exploiting the dichotomy of the real and the financial sector of the economy. He points to the real (industrial, manufacturing, etc.) sector as the base and the financial sector as the superstructure of the economy, and in doing so points out that most growth stories which occur in the world rest on a tiny base and an ever-expanding super-structure, which makes this growth increasingly shaky and unstable as it goes on with time. Why I refer to Sweezy is because the Indian economic story of growth has come into a dangerous similarity with this brand of growth with financialization at the helm, seeming to pull the economy forward. The dichotomy takes a starkly ugly form here when we incorporate the spectrum of poverty within this framework of growth that India is indulging itself in.

India, as an economy has never quite been able to come to terms with the rampant spread of poverty within its polity and no amount of plans, have been able to impede this snowballing increase in poverty throughout the country. The dichotomy of the real and the financial sector have almost translated themselves into a debate on whether there are two versions of India that seem to now co-exist within a common territorial unit, which for an objective observer is nothing but shocking. The quintessence of growth and poverty lies in the observation of a city in India housing a structure more than twenty stories for just a family of four, while the same city also houses the largest and most densely populated slum in the world. This may seem rhetoric, but these are just facts to put to the forefront where the base and the superstructures of this economy have been divergent in the growth experience of this country. For such a shockingly disparate scene to exist at the heart of the financial system of our country, Mumbai shows where the rampant financialization has been taking our growth dream in sync with the policymakers at Lutyens. The problem with the current perspective of growth in India is reflected somewhat in the words of Nobel Laureate, Ronald Coase when he observed: “The entities whose decisions economists are engaged in analyzing have not been made the subject of study and in consequence lack any substance. The consumer is not a human being but a set of preferences – Exchange takes place without any specification of its institutional setting. We have consumers without humanity, firms without organizations, and even exchange without markets”. These words essentially sum up the anatomy of the Indian story of growth, and to any objective analyst of such a story, the scenes would not only be sordid, but the reviews would also be shocking.

What this scene of disparity does is to remind me of a very interesting track by Thorstein Veblen where he departs from the conventional text-bookish economics taught to us, to examine the processes of capital utilization and accumulation in the economy from a rather refreshing angle. What Veblen said almost a hundred and ten years back was that Capital, rather than being a produced means of production is rather a social phenomenon; a phenomenon where possessing capital implied possessing power over the means of production in an economy. This is a classic departure from the neo-classical school of economics that we are taught in Economics 101 lessons of treating capital as a means of production, a variable which can be quantified and treated with a set of assumptions in a multitude of numerical problems that we solve in the classroom. I do not want to sound heretical here but these again, are just plain observations that I am making to develop the grounds of my reasoning in this nuanced debate growth and prosperity in the Indian Context.

Veblen’s political, economic treatment of capital opens up a whole new angle in this analysis if we are to look at how in the current scenarios, the Indian state is trying to engineer its growth to a globally competitive level. It is no secret that the policies of the yesteryears in the country post liberalization and 1991 have been to promote growth and an export-oriented approach to the same, through the promotion of private enterprises in the economy where the business environment in the country was created to cater to needs of the individuals and organisations who could take the mantle of the changing economy and create a new path towards sustained economic growth. The Bombay Stock Exchange and the National Stock Exchange became the beacons of privatization in the economy with new private corporations getting their shares traded for capitalization almost on a regular basis. Hence the power over these major production processes in the economy created a nexus of the private entrepreneurs and the governmental officials which came together in sync to add up to the numbers and carry the growth story forward for this new emerging India. However what was left out of this nexus was the percolation of this power over productive resources in the economy to the people who were relatively not well off. The growth story of our country began to rest more on the financial superstructure than on the bases on which this economy was built. This structural change became visible in the redistribution of the GDP from agriculture and more toward manufacture and even more towards the service sector of the economy.

The anatomy of this growth, though the need for India to increase the rapidity of its growth is something which was required, I would cast my serious doubts over the question of whether it was desired. If we look back at Sweezy’s analysis of economies we see that “monopoly capital” thrives in two ways – capital deepening and capital broadening. The former is when the core capital (or the people who possess the principal power over the productive resources of the economy) thrive to extend their grip over the resources possessed by others, and capital broadening is when capital as a whole expands to take newer resources into its ambit. If we look at the context of the Indian economy and the growth it has undergone, we will see that this has given rise to a new group of super-rich who are being looked at to help carve out a niche for India on the global map. The second aspect is something rather similar to Baumol’s analysis of entrepreneurial capitalism in the Philip that is now being given by the government and by the big corporations to the smaller corporations and startups to contribute to the growth story of India.

In this case, when the growth of the nation is so heavily concentrated on this amalgam of capital in the hands of a minority when we consider these people in the spectrum of the total demographics of the country, we are increasingly led to the question of whether growth indeed is a zero-sum game in the Indian context. In the Indian context of resource distribution, the answer would be a shocking affirmative. Let us not mistake that the GDP pie has not been growing. It has been, but the share of the limited number of people who matter in the economy over the pie has been growing at a much faster rate than the norms of trickle-down economics would imagine it to be.

In such a case of zero-sum growth, we can look at the case of poverty from two different spectrums. One view is that the poor are just like the non-poor regarding their potential (that includes ability, preferences), and they simply operate in a more adverse environment, regarding individual characteristics (e.g., factor endowments) or economy-wide characteristics (e.g., prices, infrastructure, various government policies). The best-known statement of this view is Schultz’s phrase “poor but rational.” Modern development economics has extended this view to what Esther Duflo calls “poor but neoclassical” by studying various frictions that impede the smooth functioning of markets as well as technological non-convexities that make it disadvantageous to be poor or operating at very low scales. If we look at both these cases from an Indian perspective, we see much social light being shed on both these strands of poverty to analyze a largely common afflicted mass. The premise of this view is that poverty is a consequence of individuals operating at very low scales. The implicit premise of this view is that poverty is a consequence of individuals operating with an unfavorable external environment. To the extent this can be fixed by placing a poor individual in a more favorable external environment, it will be a transient phenomenon, but otherwise the poor may be trapped in poverty. In a sense, in this view the phenomenon of poverty, other than being inequitable, is also inefficient: a combination of individual rationality and market forces should work to utilize any potential gains (e.g., lost income from insufficient investment in human capital).

The first strand of analysis ties in well with the earlier ideas of this essay on the rampant spread of monopoly capital throughout the Indian economy with little emphasis being given to the poor concerning giving them an opportunity to move up the social ladder. Infrastructurally in most parts of the country, these sections of the population have been impoverished and left with not much to bank upon. The fact that the political jibe of Narendra Modi in the Lok Sabha about the poor still requiring the MGNREGA to dig up holes in almost 70 years of independence depicts a shocking reality about the state of affairs prevailing in this nation currently. Casual employment opportunities, lack of proper safety nets and misguided welfare schemes have been the norm of the day and the poor in our country are the ones to have paid the price. A major chunk of the growth in this country has taken place without their inclusion, and the trend of the future growth process seems to be nothing less. Schemes such as “Make in India” may exist and flourish but will they be able to lift these poor people who form a major chunk of our economy, out of the entrapments of poverty? That remains the big policy debate on a lot of schemes introduced by a lot of governments – whether this increasing GDP will ever have a wider base.

What we must realize as a body polity is our priorities between a sole growth perspective and one which incorporates Growth with distributive justice. Our nation seems to be in a mania of surpassing China regarding the growth figures. However what we have ignored over the past is the distributive justice of the fruits of this growth that we must ensure. Even though people may say that the relative percentages of poverty have dropped over the years, India still houses a large share of the world’s poor, and it only seems that things are in no mood for improvement. What needs to understand is that the plank on which this modus operandi of our growth is standing is nothing but temporary and we must find ourselves an opportunity as a nation to get out of this looming prospect of stagnation and chart a new way forward for ourselves.

Amartya Sen’s approach towards poverty through the spectrum of capabilities plays a key role in this nuanced evaluation of the state of affairs in our economy. The capability approach focuses on what people can do and be, as opposed to what they have, or how they feel. Sen argues that, in analyzing well-being, we should shift our focus from ‘the means of living,’ such as income, to the ‘actual opportunities a person has,’ namely their functionings and capabilities. ‘Functionings’ refer to the various things a person succeeds in ‘doing or being’, such as participating in the life of society, being healthy, and so forth, while ‘capabilities’ refer to a person’s real or substantive freedom to achieve such functionings; for example, the ability to take part in the life of society. Of crucial importance is the emphasis on real or substantive – as opposed to formal – freedom, since capabilities are opportunities that one could exercise if so desired. The capability approach places particular emphasis on the capabilities a person has, irrespective of whether they choose to exercise these or not. Hence from the spectrum of this capability perspective, if we now once again make a qualitative judgment of poverty, India presents a rather dismal picture which ties in with the earlier strands of poverty that I had spoken of. Most people in the country who are labeled under census qualifications as “poor” do not possess these capabilities, and much of the economic thinking has been away from providing them with these capabilities to move out of this vicious circle of poverty that generations have found themselves in. For instance, much of the insistence on privatization has led to basic welfare facilities in the country being privatized such as education and healthcare with the government in an age of fiscal prudence being unable to support this burgeoning population any further logistically. Unsubsidised healthcare and inferior quality of subsidized health care have become a huge constraining factor on the poor, along with the lack of proper and quality education at subsidized rates. If we are to measure capacity formation in the economy, we must turn our attention to human capital, and when we do turn our attention to human capital, we should ideally be seeing a labour surplus economy such as India on a promising note, but what we do see is a shambolic state of affairs for a potentially rich resource for our country.

The story of growth carries with an accompanying story of convergence which we must address as well. If we do look at the statistics, we see that the top 10% of our country now has almost 40% of the country’s wealth and combined resources according to a Credit-Suisse report which was recently published. Conventional growth theory does state that the farther you are from our steady state, the faster does the growth occur. If we, however, do look at convergence from the angle of the Poor-Non-poor binary in the Indian context, we find that this convergence has somehow not been taking its optimal impact. The Growth has arrived, and the convergence effect has also arrived for a section of the population which seems to be well on its way to achieving its optimum levels of growth. However for the larger section of the population which the latest Indian census recognizes as poor, this convergence seems to have tragically cast itself into a form of divergence where the farther they are from their steady state, the farther they keep progressing, other things remaining or not remaining constant. It is a cruel analogy to a sacrosanct theory of growth, but that is exactly what has dominated the Indian economic contours in an age where Millennium Development Goals seem to be carrying the headlines at a lot of international conferences. What does this lack of convergence seem to reflect? In a paper published at the Jackson Hole Economic Policy Symposium held by the Federal Reserve Bank of Kansas City, Dani Rodrik suggested that the lack of convergence stems from misallocation of resources whereby resources are not allocated to the sections of the economy which would actually utilise or benefit from these resources the most in carrying the vehicle of economic growth forward. Looking at our demographics, our allocation should be geared majorly towards eliminating poverty while ushering in the fruits of growth so that this tale of convergence does take its effect in the Indian system. A structural redistribution and re-evaluation of the economy regarding governance, institutions, and policies is a much-needed prescription for the economy to improve the quality of its growth and to make growth sustainable in the long run.

Reference List:

Boskin, M., Dulberger, E., Gordon R., Griliches Z. and Jorgenson D. (1996) Toward a More Accurate Measure of the Coast of Living: Final Report to the Senate Finance Committee, Washington, DC, U.S. Government Printing Office, for the U.S. Senate Committee on Finance.

Ahmed, S. (2007) India’s Long-term Growth Experience: Lessons and Prospects, Policy Research Institute of Bangladesh, Dhaka, Sage Publications, Los Angeles, CA.

Mathur, O.P. (2008) Is Urban Poverty in India Declining? Chapter 2 in Poverty and Deprivation in Urban India. Edited by Sabir Ali, Bookwell Publishers, New Delhi, India.

Datt, G. and Ravallion, M. (2011) Has India’s Economic Growth Become More Pro-Poor in the Wake of Economic Reforms?, World Bank Economic Review 25(2): 157-189.

Ghosh, J. (2010) Poverty reduction in China and India: Policy implications of recent trends, DESA Working Paper No. 92 ST/ESA/2010/DWP/92.

Banerjee, A. and Piketty T. (2001) Are the Rich Growing Richer: Evidence from Indian Tax Data, http://www.worldbank.org/indiapovertyworkshop.

Deaton, A. (2003). Adjusted Indian poverty estimates for 1999–2000, Economic and Political Weekly, January 25–31.

Deaton, A. (2003). Prices and poverty in India, 1987–2000, Economic and Political Weekly, January 25–31.

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