Poverty and inequality

Poverty and inequality

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As per the new World Bank report entitled: Addressing Inequality in South Asia (published in January 2015), if standard monetary indicators are to be taken at face value, South Asia has modest levels of inequality. Gini coefficients for consumption per capita range between 0.28 and 0.40 depending on the country, much lower than in China, Mexico, or South Africa. The share of the poorest 40 percent of households in total consumption also suggests that inequality in South Asian countries is moderate by international standards. This, however, happens because the comparison is tainted by the nature of the monetary indicators considered in different countries. In advanced economies as well as in many Latin American countries, inequality is measured on the basis of income per capita. In South Asian countries, in contrast, most surveys convey information about consumption per capita. Within the same country, income inequality is generally higher than consumption inequality. Nonmonetary indicators provide an even starker picture.

Inequality measurement based on income or consumption also may fail to capture the full extent of disparity. This is because household surveys may not capture well the income or the consumption of the richest members of society. The survey questionnaires usually focus on the relatively basic basket of goods and services purchased by those who live around the poverty line. In so doing, they fail to capture the more diverse and sophisticated ways in which the better-off spend their money—and to remind respondents about them. Richer households also tend to shun surveys of this sort. One indication of underreporting is the size of the discrepancies between levels and growth rates of consumption, as measured by household surveys and by national accounts.

Based on Banerjee and Piketty (2005), the World Bank report suggests that individual tax returns can be used to examine the extent of undercounting of the rich in household surveys. According to this data source, the income share of India’s top 0.01 percent was in the 1.5 percent to 2 percent range, whereas the share of the top 0.1 percent was in the 3 percent to 4.5 percent range. Assuming that the top 1 percent is not captured by household surveys is not enough to account for the full gap but explains 20 percent to 40 percent of it. This indicates that traditional income- or consumption-based monetary indicators are biased downward, probably by a substantial margin.

The key findings of the report entitled: Addressing Inequality in South Asia by Martín Rama, Tara Béteille, Yue Li, Pradeep K. Mitra, and John Lincoln Newman (January 2015), World Bank (please click here to access), are as follows:

• In India, at the household level, the Gini coefficient is 0.668 for asset holdings and 0.680 for net worth. As in other countries, the wealth distribution is more concentrated than the distribution of income and especially more concentrated than that of expenditures.

• For a typical Indian household among the top 10 percent, the net worth could support consumption for more than 23 years. For a typical Indian household in the bottom 10 percent, however, the net worth was sufficient to support consumption for less than three months.

• The concentration of billionaire wealth appears to be unusually large in India. According to Forbes magazine (2014), total billionaire wealth amounts to 12 percent of gross domestic product (GDP) in 2012. As such, India is an outlier in the ratio of billionaire wealth to GDP among economies at a similar development level.

• There is no doubt that India has world-class entrepreneurs, commanding admiration for their innovation and management capacity, and many of them operate successfully in highly competitive global markets. At the same time, over a quarter of India’s billionaire wealth is estimated to be inherited, 40 percent is based on inheritance, and 60 percent originates from “rent-thick sectors,” such as real estate, infrastructure, construction, mining, telecommunications, cement, and media. This does not imply that wealth was acquired through the exercise of influence, but highlights that the potential for rent extraction exists (Gandhi and Walton 2012).

• In India, although some households fell into poverty between 2004–05 and 2009–10, more of them, about 15 percent of the total population or 40 percent of the poor, moved above the poverty line. Meanwhile, a sizable proportion of the poor and the vulnerable—over 9 percent of the total population or about 11 percent of the poor and vulnerable—moved into the middle class. Households from Scheduled Castes and Scheduled Tribes experienced upward mobility comparable to that of the rest of the population.

• Nonmonetary indicators of well-being provide a more striking picture than monetary indicators. The share of children under five who are stunted among the poorest quintile is above 50 percent in Bangladesh and Nepal and reaches 60 percent in India.

• India and Pakistan also have some of the highest infant mortality rates and under-five child mortality rates among the poor across all comparators. Of 1,000 children born in India’s poorest population quintile, 82 will die within 12 months and 117 within five years. The figures for Pakistan are 94 and 120, respectively.

• Gaps in neonatal mortality (death within the first 28 days of life) and in under-five child mortality (death within the first five years of life) between the top and the bottom quintiles are large, especially in India and Pakistan.

• In a controlled experiment in India, boys from high and low caste displayed the same ability to solve mazes under monetary incentives, but low-caste boys performed worse if the name and caste of the boys were announced at the beginning of the session. Making caste salient may have evoked in the children memories that changed how they think about themselves and their relationship with others. (Hoff and Pandey 2006, 2012).

• Some connections exist between inequality and conflict. Across irrigation communities in south India and in Nepal, inequality is found to make resolving disputes in water allocation more difficult (Bardhan 2005; Lam 1998). In the case of India, the probability of a district being affected by Naxalites (Maoist rebels) can be linked to the characteristics of the district. With the exception of Jharkhand, poverty incidence of rural areas is higher in districts where Naxalites are better implanted.

• For India, the inequality in learning outcomes can be seen by comparing test scores of children whose households have both a radio and a TV to those who have neither. The mean test scores for students in the first group are higher across the entire distribution than for those from the second group (Dundar and others 2014).

• Both education gaps and the rural-urban divide account for a growing share of consumption inequality. The share is smaller in the case of ethnicity, but caste remains relevant in northern and eastern Indian states.

• In India, caste explains more than religion in access to primary education. In the case of secondary education, gender plays a significant role in explaining secondary school attendance and completion across countries in the region. Location turns out to be a critical circumstance for access to infrastructure services.

• In India, urban households whose members are selfemployed or who work as casual labor experience stronger upward mobility and smaller downward mobility than rural households.

• India spends less than 1 percent of GDP on social protection. In India, the MGNREG Act represents a significant milestone in the design and execution of public works, supported by massive government resources. The Rashtriya Swasthya Bima Yojana health insurance program for the poor is also pathbreaking in its design though still in an early stage of development.

• India spends a substantial amount on the Public Distribution System. It covers about 20 percent of the population, much more than any other social protection program. It was found to have strong poverty reduction impacts, accounting for a significant fraction of the poverty decline between 2004–05 and 2009–10. Several states have made substantial improvements in infrastructure and delivery systems to plug leakage. However, the coverage rates were around 53 percent in rural areas and 33 percent in urban areas in 2011–12. Take-up rates were progressive across quintiles, but coverage rates of the richest 20 percent in rural areas remained high. Because of the price difference between subsidized grain and grain sold through regular marketing channels, powerful incentives exist to arbitrage and make illegal profits. In fiscal year 2004/05, the level of leakage of Public Distribution System grains countrywide was estimated to reach above 50 percent. The situation improved later: the illegal diversion and leakages declined to about 44 percent by the end of 2007/08 and to around 35 percent in 2011/12 (Himanshu 2013; Jha and Ramaswami 2010; Khera 2011).

• The bias toward food and price subsidies is especially marked in India and Pakistan. In India, the Public Distribution System is responsible for the provision of subsidized food. In fi scal year 2003/04, it absorbed about 3 percent of GDP, almost triple the average spending on food security in advanced economies. Since then the share has declined, but in fiscal year 2008/09 it still absorbed about 1 percent of GDP. This is the largest share of resources among all social protection programs: 43 billion Indian rupees, compared to around 30 billion Indian rupees devoted to MGNREG funding (Union Budget of India 2013–14, http://indiabudget.nic.in/budget2013-2014/budget.asp).

• A study covering 533 blocks in Bihar— India’s poorest state—found that one-third of them did not have any block development officers. As a result, 20 percent of the funds allocated to the state had not been spent (World Bank 2005).

• At the level of villages, increasing mobility is largely associated with occupational change. The timing and the pace have varied across countries, but the shift has consistently involved an expansion of nonfarm employment. While the new jobs are mainly casual, they have supported considerable mobility. Wages of casual nonfarm workers were 30 percent to 50 percent higher than agricultural wages in rural India, Nepal, and Pakistan in the 2000s; they were 10 percent higher in rural Bangladesh during the first half of the 2000s (World Bank 2011). Although regular jobs tend to pay better, the earnings gap between regular and casual nonfarm jobs has narrowed over time in rural India, whereas the earnings gap between casual nonfarm jobs and agricultural jobs has increased (Himanshu and others 2013).

• Contrary to expectations, the extent of mobility in South Asia turns out to be substantial. The occupations held by sons are increasingly independent from those their parents used to have, and the movement is in the direction of leaving unskilled jobs and farming. In India, mobility across generations is greater for households belonging to the Scheduled Castes and Scheduled Tribes and to Other Backward Castes than it is for higher-caste Hindus.

• Special microsurveys focusing on female migrant workers in 20 Indian states found that a significant proportion of unemployed or housebound women enter into paid employment through migration (Mazumdar, Neetha, and Agnihotri 2011).

• In India, some villages have reserved the position of chief councillor (pradhan) for women. After about seven years of exposure to a female pradhan, the gender gap in aspirations was sharply reduced for teenagers in these villages. Girls were less likely to want to be a housewife, less likely to want their in-laws to determine their occupation, and more likely to want a job that requires more education. The gender gap in educational outcomes was erased in these villages. Because little else changed in terms of actual policy or career opportunities, seeing a woman achieve the position of local head likely provided a role model and affected aspirations, efforts, and educational choices (Beaman and others 2012; Duflo 2012).

• In India, a meager 2.8 percent of the population pays personal income tax. Stepped-up efforts to increase tax collection by the ministry of finance include a unique online system for monitoring suspicious transactions through real-time coordination among revenue intelligence agencies. Yet these efforts concern a few thousand cases and less than 0.2 percent of GDP in lost tax revenue, showing that there is still some way to go (World Bank 2012).

• In India, seasonal migrants are characterized by lower economic and educational attainment than the neighbors; they also tend to come from households with smaller landholdings (Keshri and Bhagat 2012).

• Energy subsidies disproportionately benefit the better-off. In the case of the subsidies for liquefied petroleum gas (LPG) in India, the average household in the poorest quintile has less than a 20 percent probability of using LPG; in contrast, the average probability for an urban household in the richest quintile is almost 100 percent (Goutam, Lahoti, and Suchitra 2012).

• The overall system of intergovernmental transfers in India is generally progressive and leads to a more equitable distribution of fiscal resources across constituencies (Ghani, Iyer, and Misra 2013).

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