Dhaka Courier

The monster in the room

The 'elephant chart', as illustrated by Vox.

Inequality has always been a feature of Bangladesh society, right from pre-independence days. In 1968, Dr Mahbub ul Haq, the then Chief Economist of the Planning Commission of Pakistan , identified 22 Pakistani families who controlled 66 percent of the industrial assets and 87 percent of the banking. Dr Haq, who is famed for having pioneered the concept of human development, argued that these 22 families, who were all West Pakistani, had become both the Planning Commission and the Finance Ministry for the private sector.

These ‘22 families’ became a byword for the disparity that adversely affected the vast majority of the population in both wings of Pakistan, although undoubtedly things were worse in the east. In East Pakistan, a  number of its own economists had for years propounded the theory of ‘2 economies’ entirely, a play on the pre-Partition slogan of ‘2 nations’, although none as effectively as Rehman Sobhan, who wrote about it in newspapers, that resulted in bringing it to the attention of political leaders like Bangabandhu Sheikh Mujibur Rahman, and Rashed Khan Menon, who has said the issue of economic disparity as put forward by the economists had contributed to the shaping of the six-point demand in 1966.

According to the economist Mustafa K. Mujeri, currently executive director of the Institute for Inclusive Finance and Development and formerly director general of the Bangladesh Institute for Development Studies, since independence, overall economic inequality in Bangladesh has become pervasive. “The rising inequality has emerged not only because of differences in what people inherited and received, but more fundamentally, due to big inequalities in accessing opportunities and sharing outcomes,” he says.

Earlier this month, at the national seminar of the Bangladesh Economics Association, the theme chosen was “Income and Wealth Inequality in Bangladesh”. Former Bangladesh Bank Governor Dr Mohammed Farashuddin, attending the conference as the chief guest, noted how Bangladesh has indeed performed well in all indicators of human development, yet income inequality “is increasing gradually in the country.”

He was talking in reference to Bangladesh having moved three steps up in the Global Human Development Index (HDI) 2018 to rank 136th among 189 countries, according to the latest Human Development Report (that draws on the work of Mahbub ul Haq). The per capita income of the country stood at $1,909 in the last fiscal year, which was $1,751 in 2017-18. And according to provisional data of Bangladesh Bureau of Statistic (BBS), Bangladesh’s Gross Domestic Product (GDP) grew by 8.13% in 2018-19—the highest ever in the country’s economic history, which was 7.86% in the FY18.

“Economic development should not be measured only with the per capita income. The government has to ensure that marginalised sections of society get their fair portion from the economic growth already attained,” said the economist. Others including the BEA’s current president Dr Abul Barakat and Dr Mainul Islam addrd their voice to the same overall objective.

Is income inequality rising in Bangladesh? The Gini coefficient of income distribution stands at 0.483 nationally in 2016; which is 0.498 in rural areas and 0.454 in urban areas. The trend of income inequality since 1963 shows that national Gini has risen from 0.36 to 0.483-an increase by more than 34 per cent-while rural Gini increased by nearly 38 per cent and urban Gini by 21 per cent over the same period. These figures suggest that Bangladesh has experienced increase in the Gini coefficient over the period of last half century, but the rate has accelerated especially since the 1990s. Further, inequality increased rather sharply in the rural areas while urban areas experienced a somewhat moderate rise in income inequality.

Another good indicator for looking at the worst form of income inequality is the Palma ratio, which focuses on extremes of inequality- the ratio of incomes at the very top to those at the bottom. Specifically, it is the ratio of the richest 10% of the population's share of gross national income (GNI) divided by the poorest 40%'s share. In Bangladesh, it is the changes in these extremes that are most noticeable, according to Dr Mujeri, while the share of income in the middle is relatively stable.

The Palma ratio at the national level has consistently increased from 1.68 in 1964 to 2.93 in 2016; in urban areas, it rose from 2.00 to 2.96 while, in rural areas, it grew from 1.38 to 2.51 over the same period. Over the period, the share of the middle 50 percent has remained relatively stable; while the poorest 40 percent have generally lost in terms of income share, the richest 10 percent have gained. The policy implication is that Bangladesh should focus on its 'extreme' inequalities, that is, inequalities that do most harm to inclusive and sustainable economic growth and undermine social and political stability. It is also therefore one of the aims of the UN’s Sustainable Development Goals (SDG) that Bangladesh is signed up to.

One of the targets of SDG10 is to progressively achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average by 2030. The national data since the 1980s show that the average per capita household income (at 2010 prices) during 1986-2016 grew at 1.43 per cent while the same for the bottom 40 percent grew by only 0.28 per cent. The situation is worse in the rural areas where, while the average per capita income grew by a healthy 4.41 per cent, the income of the bottom 40 percent actually declined by 0.24 percent. The per capita income of the bottom 40 percent (both nationally and in the rural areas) started showing positive growth only since 2005.

“In some ways, the developments represent the famous 'elephant chart’ which captures the percentage growth in the incomes of those in the middle (back of the elephant) and those at the top (trunk),” Dr Mujeri says.

The elephant in our world

The elephant chart is one of the most famous charts in economics of the past decade, one that aims to summarize the state of the world economy in the post-Cold War era. Using World Bank data from researchers Christoph Lakner and Branko Milanovic (who is mostly credited for coming up with the concept), the chart shows how each part of the world’s income distribution fared from 1988 to 2008. There are two big winners: the global middle class, in particular people in East Asia (especially China) and South Asia (especially India), and some parts of sub-Saharan Africa who’ve escaped extreme poverty in recent decades; and the ultrarich, who are overwhelmingly concentrated in rich countries in Europe or North America.

By contrast, people from the 80th-90th percentiles of the distribution experienced sluggish growth, if any, and the absolute poorest people didn’t see incomes grow as fast as their slightly richer neighbors.  There’s been some debate about whom, exactly, the dip at the 80th-90th percentiles represents — Lakner and Milanovic argue it includes many lower- and middle-class people in rich countries like the US and Germany, while others argue it’s mostly showing a stagnant Japan and struggling post-Soviet economies — but the broad implication, that the bulk of humanity and the top 1 percent both gained while a somewhat richer cluster fell behind, is clear and powerful.

The data for the chart published by Lakner and Milanovic stops at 2008. But a team of economists — led by Facundo Alvaredo, Lucas Chancel, and famous inequality research trio Thomas Piketty, Emmanuel Saez, and Gabriel Zucman — recently unveiled the 2018 World Inequality Report, which extends the data to 2016. They replicated the elephant chart. But as observed by another economist, Justin Sandefur of the Centre for Global Development, the chart doesn’t look like an elephant anymore; it looks “more like the Loch Ness monster”.

In the new version, the trunk reaches much higher and the elephant’s head is much smaller. The rich see much higher income growth, which comparatively swamps that of residents in poor countries. Poor residents in developing countries still gain, but their growth looks dismal compared to that of the global top 1, 0.1, 0.01, and even 0.001 percent. Indeed, they find that the global top 1 percent captured twice as much growth as the bottom 50 percent from 1980 to 2016.

Part of the difference can be accounted for by the fact that the original elephant chart included the years 1988 to 2008, encompassing only 20 years, while the new one encompasses 36, from 1980 to 2016. As such, it includes the Great Recession and subsequent recovery, as well as the bulk of the 1980s, when China’s economic rise began in earnest. Also, the original Lakner-Milanovic elephant chart is based exclusively on World Bank survey data.The new World Inequality Report chart relies much more heavily on administrative data, in particular income tax records. The researchers argue that those records offer a more accurate picture of the income distribution in many countries, particularly among the richest citizens.

The original elephant chart relied on surveys asking about either income or consumption, which were used interchangeably. The World Inequality Report, by contrast, uses an approach called “distributive national accounts,” in which every dollar of a country’s national income is accounted for and attributed to an adult in the country.

The new elephant chart is an extremely powerful illustration of just how sharply the incomes of the world’s richest people have grown in recent decades, and how much faster they’ve grown than everyone else’s. That’s been a major theme in the work of Piketty and Saez for a decade and a half now, and this work by them and their collaborators is no exception. It’s vulnerable to the same critiques about faulty distributional assumptions that have been levied against their own work on distributing national income (see this piece for more on that), but the data is solid and backed by voluminous tax records, and it represents one of the most complete and exhaustive documentations of the global income distribution yet completed.

Slaying the monster

Inequality can be assessed in many different ways and sometimes the conclusions depend on the measure used, according to Dr Zahid Hussain, who until recently served as the lead economist at the World Bank’s Dhaka office.“In the case of Bangladesh however, no matter what indicator you use, the conclusion that inequality has increased in recent years is inescapable,” is his damning conclusion.

As speakers at the BEA’s seminar pointed out, much of the economic inequality in Bangladesh is associated with 'rent-seeking', that undermines economic efficiency. As Dr Mujeri has written: “Inequality is not inevitable, it is a policy choice. Our leaders should not make the wrong choice. There is mounting evidence that the current levels of inequality are the result of windfall income from 'rent-seeking' activities.”

Bangladesh has made impressive progress in reducing poverty.  Measured against the international extreme poverty line, poverty fell from 18.5% in 2010 to 13.8% in 2016. Progress on reducing poverty measured by the national upper poverty line has been equally strong. In 2010, almost one third of the country’s population lived in poverty; by 2016 this had fallen to less than one-fourth. Since 2010, 8 million Bangladeshis moved out of poverty. Despite accelerating growth, the pace of poverty reduction has slowed. The pace of economic growth increased since 2010 with GDP growing at a rate of 6.5 percent on average per year between 2010 and 2016. In contrast, the pace of poverty reduction slowed. The national poverty rate fell by 1.2 percentage points annually from 2010 to 2016 compared to 1.7 from 2005 to 2010. As the country tries to reach these bottom percentiles, more creative ways of redistributing national income could be the order of the day.

Reducing inequality has both economic and social benefits. It strengthens people's perceptions about a fair society, improves social cohesion and mobility, and boosts employment and education with beneficial effects on human capital and development. Inequality may partly be the result of economic forces, but it can be addressed by effective public policy choices in areas such as taxation, level of minimum wage, and investments in social sectors. But we are still mired in the morass of regressive fiscal policies, particularly taxation policies, that end up benefiting the rich, rather than redistributing income and wealth in a manner that can lead to a better and fairer society. Or as the researchers behind the 2018 World Income Report might say, more aggressive redistribution could hasten the end of extreme poverty, and make the elephant chart a little more elephant-like again.

  • The monster in the room
  • Vol 36
  • Issue 11
  • DhakaCourier

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