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Why inequality is rising

That inequality is rising in India is not surprising, considering that the centre offers Rs 4.6 lakh crore in tax exemptions and incentives to industrialists, compared to Rs 1.54 lakh crore in subsidies to the poor and farmers. But the solutions a new OECD report offers will increase, not reduce, inequality, says Sharmila Joshi

inequality in emerging economies

A recent report by the OECD recognises that income inequality is growing in India. While the economy was “expanding strongly”, the report says, “the distribution of income became increasingly concentrated…[and the] highest increases in real household income were systematically observed in the top quintile.” 

In a ‘special focus’ section the report discusses inequality patterns in India, Argentina, Brazil, Indonesia, China, the Russian federation and South Africa. These countries, the OECD says, form the group of the world’s largest emerging economies or ‘EEs’, and they constitute around one-fifth of global GDP and nearly half the world’s population.

The report, titled Divided We Stand: Why Inequality Keeps Rising (December 2011), says that in India about 42% of the population lives on less than USD 1.25 per day. This is the “highest headcount poverty rate” of the seven EEs.

The OECD’s observation, that income inequality is growing, has been made before by others. In 2004, for example, economist Jayati Ghosh wrote: “The period since the neo-liberal economic reforms were introduced in India has been one of dramatically increased income inequality… while a minority of the population (around 20%) has indeed benefited greatly from the economic policies and processes of the last decade, for the majority of the rural population and a significant part of the urban population, things have got worse.”i

The dollar a day ($1.25 since 2008) demarcation used by the OECD is a World Bank definition for poverty. Such arbitrary lines don’t take into account numerous factors -- access to housing, healthcare, food security—to determine poverty levels. The OECD estimate is also lower than other figures: for example, the 2007 report of the National Commission for Enterprises in the Unorganised Sector said 77% of Indians are poor. ii

But to the extent that the OECD acknowledges that close to 500 million people in India are poor and not touched by the “economic growth” that the report repeatedly refers to, it is a useful figure. Particularly since it comes from the OECD, whose ideological cohorts are the institutions that have unleashed the global mechanics of neoliberal economic ‘reforms’ over the last few decades. These reforms have produced growth defined in the circumscribed terms of GDP, but along with intensified inequality.

The OECD began as the Organisation for European Economic Cooperation (OEEC) in 1947. By the end of World War II, in 1944, the UN Monetary and Financial Conference in Bretton Woods, USA, had inaugurated the pillars of the global neoliberal system: the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade (now the WTO). The OEEC was established to run the US-mandated Marshall Plan for reconstruction of war-ravaged Europe, and to further the operation of free market principles. The mutated Organisation for Economic Co-operation and Development (OECD) was officially born in September 1961. It remains an ideological driver and influential think-tank of the free market triumvirate institutions. The OECD now consists of 34 wealthy nations pursuing “common goals”.

The OECD’s website says: “China, India and Brazil have emerged as new economic giants. Most of the countries that formed part of the former Soviet bloc have either joined the OECD or adopted its standards and principles to achieve our common goals. Russia is negotiating to become a member of the OECD, and we now have close relations with Brazil, China, India, Indonesia and South Africa through our ‘enhanced engagement’ programme. Together with them, the OECD brings around its table 40 countries that account for 80% of world trade and investment, giving it a pivotal role in addressing the challenges facing the world economy.”

This global dominance—influencing 80% of world trade and investment—has come after strenuous work. The paving blocks included pushing economically struggling nations into loans conditional on adopting harsh neoliberal economic and social reforms through liberalisation, privatisation and structural adjustment programmes. The SAPs include cutbacks in social spending, a withdrawal of the state from critical welfare functions, promoting the private sector, and opening up of national markets to international investment

It is in this context that the OECD’s analysis of India’s high level of poverty and the reasons for growing income inequality must be viewed, along with its prescriptive “policy challenges” to reduce the income gap. The report’s reassertion of economic success legitimises the policies the OECD and its institutional allies push for. “Their [the EEs] growing integration into the world economy, supported by domestic policy reforms, has been a key determinant in helping the move towards stronger and more sustainable growth,” the report states. The report does not clarify how increasing income inequality is compatible with “sustainable growth”, or what the contested term means.

Not surprisingly, terms such as ‘liberalisation’ and ‘privatisation’ are absent in the OECD report. Nor, of course, if there any critique of the havoc the ‘reforms’ have brought about in countries such as India across various sectors, and most notably in agriculture. The push for FDI (foreign direct investment) in retail in India, which will further destroy millions of livelihoods in a country of small traders and small farmers—most of who are part of the informal sector—is part of this overall process of ‘opening up’ the economy.

The report identifies a “persistent informal sector” as one of the drivers of income inequality. Of India’s workforce of about 457 million, 92% or 395 million work in the unorganised/informal sector, according to the 2007 NCUES report. The OECD’s prescription is “better incentives for more formal employment”—for employers. These incentives, in the OECD world, would mean less security of employment for the worker. “Excessively strict regulations governing the firing and hiring of workers are usually seen as an important factor in increasing the reluctance of firms to employ workers on a formal basis. At the same time, they exacerbate wage disparities,” the report says. “… India’s employment protection legislation (EPL) makes lay-offs essentially impossible… discouraging formalisation of firms and firm expansion. One way for the EEs to address these issues could be to ease EPL where it is too strict, while assigning a more prominent role to the safety net for employment [such as unemployment insurance and severance pay].”

Retrenchment, informality in the garb of formality— these are already outcomes of a dilution of labour laws in India in the last two decades of ‘reform’. In tune, the OECD report advocates shifting the focus from job security to “policies more oriented to supporting job search and improving the employability of workers” and “the expansion of formal employment”. This means that employers should be able to fire at will, and workers should become more ‘employable’ and find formal employment in an economy where new or formal sector jobs are shrinking.

Similarly, the prescription for “targeting social assistance to those in need” to reduce inequality is a hallmark of the liberalisation regime. In India, a targeted PDS and targeting of benefit/welfare schemes through magic-bullets like the UID are already part of the process of fiscal tightening (for the poor), which debar more people from social security. “…[T]he writing is on the wall,” economist John Dreze writes in a recent article,iii“not just for the PDS but also for other social programmes that are being quietly ear-marked for BPL targeting, conversion to cash transfers, and ‘self-liquidation’ as the official poverty estimates go down.”  

The OECD advocates ‘cash transfers’ as a form of targeted social assistance. The report states: “Conditional cash transfers (CCTs) appear to have been particularly effective, both in reducing inequality and in meeting other long-term development objectives, such as raising school enrolment rates and improving educational and health outcomes. The effectiveness of CCTs stems from the fact that they are typically means-tested and contingent upon certain behaviours (eg the use of specific health and education services for children).”

Conditional cash transfers (whereby the poor must behave according to pre-set norms) are against the social justice principle of universal entitlement. “There is a need for informed debate on the future of social support in India,“ Dreze writes. “Do we want a divisive, unreliable and exclusionary system of targeted transfers that self-liquidates over time? Or do we want to build a comprehensive social security system inspired by constitutional principles, fundamental rights, and ideals of solidarity and universalism?”

The OECD report also advocates a tightening of taxation systems: “... the tax system delivers only modest [income] redistribution, reflecting such problems as tax evasion and administrative bottlenecks to collect taxes on personal income. The background is one of high levels of self-employment and sizeable informal sectors, which together limit the capacity of the tax authorities to verify taxpayers’ declared income.”

Once again, the informal sector is being blamed. The report barely glances at the massive tax evasions by, and subsidies for, the rich. A recent newspaper report,iv quoting the finance minister, tells us that last year the Centre relinquished potential revenue of Rs 4.6 lakh crore due to various tax exemptions and incentives to industrialists, compared to the Rs 1.54 lakh crore on subsidy to the poor and farmers. Direct tax incentives and exemptions to the corporate sector in the form of profit and investment-linked deductions, besides other freebies, together accounted for Rs 88,000 crore. No wonder one privileged section of the economy in India is ‘growing’.

This at a time when the Global Hunger Index (2011) ranks India at an abysmal 67 in 81 dismal nations. And the OECD wants less job security, more targeting, restrictions on informality, and a host of similar measures that will increase, not reduce, inequality. These are the guiding lights of the present Indian economic regime.

i‘Income Inequality In India’, People's Democracy, February 17, 2004
ii Report on Conditions of Work and Promotion of Livelihoods in the Unorganised Sector, August, 2007. At: www.nceuis.nic.in 
iii ‘The Poverty Trap’, Hindustan Times, September 22, 2011)
iv‘Tax exemptions for rich costs govt Rs 4.6L cr ‘: http://timesofindia.indiatimes.com/india/for-rich-costs-go

Infochange News & Features, December 2011