Inequality and poverty

The presentation of the 2013 Budget in Parliament ended on a poignant note. A prophetic reference was made to the potential for many a ‘tsunami’ on the path to development, including the eradication of inequality and poverty. “There will be more political, economic and natural tsunamis. They will remain unpredictable.”

Within hours, news of the slaughter at Welikada hit the airwaves; 27 killed, 59 injured. A veritable unexpected tsunami as predicted in the Budget speech, brought about by the financial deprivation of the Department of Prisons, an unsustainable custodial sentencing policy, incompetence, corruption and a serial break down of law and order.

This incident reinforces one fundamental principle – economic growth must be equitable. Every citizen must have the equal opportunity of accessing the economic benefits of an expanding economic cake.

People are not born equal. They are born in different strata of society, to families who have differing levels of wealth and income. Further, the level of nutrition, the level of access to education, may differ from region to region. Such unequal opportunities, in terms of economic capacity, result in poverty, wealth, or even a path of crime, for some.

Poverty, and the resultant inequality, is an economic malady which affects selected groups within the population, but it does not affect all groups with equal frequency. Poverty can be correlated to caste, tribe, or race. Within a nation the majority race may have a less proportion of the poor than the minorities. This can be due to the fact that voting power controls the allocation of resources in democracies.

In dictatorships, the dominant race, caste or tribe may allocate more resources to themselves or regions which they populate, depriving the minorities. This deprivation may relate to lack of nutritious food, no irrigation and bad road infrastructure, poor extension services, poor healthcare, lack of education, no access to energy, etc.

Poverty also can be correlated to age. Children and the elderly are generally subject to more marginalisation and deprivation than people of working age. Poverty can also be correlated to family composition. Female-headed households are estimated to be around five times as likely to be living in poverty as compared to a family headed by a husband and wife.

Levelling the playing field

Governments raise taxes in order to take funds from the economically capable and redistribute capacity to the poor and the marginalised. These tax funds are used to create an equality of opportunity – to level the playing field – so that, although there may be inequalities at the time of a person’s birth, tax money can be used, to provide an equal opportunity for everyone.

Such redistribution can take various forms. In Sri Lanka, for example, it may mean, free tuition in Government schools, free treatment in Government hospitals (both paid for by taxes), in kind transfers, in which those who are classified as poor and deprived are provided with food at subsidised prices at Government run sales outlets, etc.

Where such a subsidy has to be targeted to a special category of persons, classified and defined as deprived, huge problems of selection occur. Generally such systems, if they are not self-selecting, end up in the hands of rent-seeking officials, who have the power to decide the eligibility for such benefits. Programs which at the inception are blanket subsidies to which all are eligible may in time end up being ones which are liable for self-selection.

For example, health services, which may be available to all devoid of any eligibility criteria, except that of needing healthcare, will over time, as a society gets more affluent and has access to a higher disposable income, end up being self-selecting, due to those who can and wish to pay for what they consider to be better quality healthcare deciding to purchase those services at privately-run healthcare facilities, while the poor, who cannot afford to pay, are compelled to self-select the free service.

When high deficit budgeting and lack of resources deprive a healthcare system of basic funding to provide services, such as adequate numbers of medical professionals or adequate quantities of drugs, even those who cannot really afford paid for healthcare may be compelled to access a fee-charging healthcare service, in preference to a deficient, inefficient, low quality, non fee levying one.

The same possibility is true in education. Where due to perceived deficiencies in non fee levying, free education provided in government schools, parents choose to send their children to fee levying private schools or access private tuition. Though the possibility of exercising this choice is a positive factor, it increases the inequality.

The quality of education, health, transport or whatever service available for purchase by payment, is generally perceived to be of higher quality and utility than the option which is available free of charge. Such an inequality in the services available to the poor and marginalised as against the quality available to the more affluent is one major cause of poverty.

There is no equality of opportunity when the playing field is not level. The better educated, those who are healthier, have a head start. The rest are playing catch up for the rest of their lives, through generations.

The Occupy Movement

One way in which poor people try to improve their financial status is by borrowing money. But a plethora of competitive lenders result in over-borrowing, the poor get indebted beyond their capacity to meet their financial obligations.

In Andhra Pradesh in India, a mix of money lenders, micro finance institutions, state and commercial banks, government disbursement programs, resulted in uncontrolled lending to poor subsistence farmers.

Due to a crop failure the farmers were unable to meet their multiple financial obligations, hundreds of farmer suicides followed, which resulted in the Reserve Bank of India imposing strict rules on financial service providers supplying micro finance loans to farmers. The crisis in Andhra Pradesh affected the whole micro finance industry negatively.

Even in the United States, the housing debt crisis was caused by banks lending funds to families to purchase housing stock, which was beyond their economic capacity. When the economic slowdown hit, families were unable to keep up their mortgage payments which led to a rash of foreclosures and bankruptcies. This led to a revolt against the banking industry.

As a result recently we have seen in the developed and developing world a spate of protests by the 99% of the population (the Occupy Movement) who allege that a 1% rich people dominate the world economy. The protesters occupied Wall Street, New York, the City of London, the European Central Bank in Frankfort and other prime financial sites in the world financial capitals to protest this domination of the world economy by the rich few and the perennial marginalisation of the poor.

At the end of October, a top Bank of England official, Andrew Haldane, the Bank’s Executive Director for Financial Stability, claimed affinity with the 99% protesters. Haldane, whose salary and profile places him comfortably within the 1%, the protesters were complaining about, spoke to an audience consisting of top level financiers and protesters at the lecture hall of London’s Friends House, to listen to Haldane criticise the inadequacies of the world economy prior to the crisis.

He said: “The occupy movement has made some good points, we need to have good answers. Regulators of the financial system have a duty to explain what we’ve done and why.” Haldane made the point that the Occupy movement had not only been right morally, but also right in its analysis of the role in which the deep and rising inequality played in bringing about the financial crisis.

“Levels of debt, in particular among households, rose pretty much exactly with the levels of inequality. Occupy has touched a moral nerve in pointing to the growing inequities in the allocation of wealth and incomes globally.”

More senior bankers, belonging to the much-maligned 1%, have expressed sympathy for the Occupy Movement. They include Ben Bernanke of the US Federal Reserve Bank, and Mark Carney Governor of the Bank of Canada. Some were sceptical of the effect of the reforms made following the financial crisis.

Richard Barwell, an economist at the Royal Bank of Scotland said at the Friends House meeting: “The Bank of England used to talk about building a constituency for low inflation. Now that the Bank has becoming directly responsible for financial stability, it will have to build a constituency for that too. The Occupy Movement are a part of that constituency.”

The five Cs

In response, Haldane said he was confident that five Cs that characterised the regulatory response to the financial crisis would work. The five Cs are:

Culture – ring fencing banks’ deposits so that they could no longer fund high risk financial interventions, this would stop the culture of investment banking infringing into banker’s retail lending arms.

Capital – requiring banks to hold more capital against their assets, as stipulated under the global Basel III financial reforms; this would protect tax payers by reducing the chances of them having to foot the bill for a future financial crisis.

Compensation – Bankers pay structures should focus more on longer term targets, not merely short term profits. Focusing on the longer term would help prevent the highly unhealthy levels of risk taking seen in the build up to the financial crisis.

Credit – destabilising credit booms and busts should be prevented by stringent policy interventions, the issues was ‘key public policy responsibility’.

Competition – removing barriers to entry into the banking system and thereby promoting more competition would ensure a fairer and more efficient service for the customers of financial services from the lenders.

Haldane reiterated that there was the “quiet but unmistakable sound of a wheel being turned. I’ve heard directly from Bank Chief Executives’ mouths that they want to change the way they do business. It’s too early for that to be visible to customers; it’s still working its way through the system.”

Others were not so optimistic. Richard Paton of the Occupy Movement, who was among the panellists at the event, observed: “There is gap between what senior regulators believe is necessary and what political leaders are ready to accept.”

Another panellist, Mick McAteer of the Financial Inclusion Centre, a think tank, suggested that the Occupy Movement should provide ‘hard-headed ideas’ to reform the financial system and a better idea of what sort of banking they regarded as socially useful. “The Occupy Movement has made some very powerful points. But some are asking for too much, they want revolution, not evolution. They have to be more pragmatic.”

Massive inequalities

Inequality and poverty begets violence. Witness the Welikada slaughter. Marginalised communities, who for generations see that their regions or communities are not getting a fair share of national investment and resources for development, are often driven to violence, to express their sense of grievance.

Take Sri Lanka’s case; the youth revolts and civil wars of 1971, 1976 to 2009 and 1989 were driven by perceptions of lack of equal treatment, inequality in access to education, government employment and development resources.

We have always had massive inequalities. Historically, the Raja Rata was more developed, later South Western Quarter, after the drift to the South West due to Malaria epidemics, the destruction of the hydraulic civilisation and European colonial intervention, and the Plantation Raj cocoon did relatively well.

Today the South West still dominates due to the hidebound Colombo-centric domination. Other than exceptions like the directed Hambantota interventions, the post-tsunami investments in the east and the post war development in the Vavuniya-Kilinochchi sector and the proposed investments in Trincomalee, the rest of the island still lags behind. The plantation community today has the worst socioeconomic indicators.

Indian divide

In India, the divide is starker. When the original light-skinned Aryan invaders came over the Hindu Kush Mountains from the Central Asian steppes, they found a darker-skinned indigenous population living in the forests.

Over time the descendants of the Aryans assumed dominance and the present Indian caste system developed. The fairer-skinned Aryans evolved into the higher ranks of the caste system into the priests, land owners and warriors, and the indigenous darker people were classified as untouchables and tribals and denigrated to the bottom of the social structure.

After centuries of marginalisation, the tribals have resorted to violence to vindicate their rights and achieve liberation. The violence has been promoted by extreme Maoist Communist Party of India. The Maoist rebels have dominated a number of states referred to as the Red Corridor, 38 administrative districts, around 6,000 square kilometres of village and forest land, covering a number of states, it has been given an acronym – BiMaRU – Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh.

Prime Minister Manmohan Singh has described the Maoists as India’s greatest internal security threat. A recent Bollywood film on the Maoists was challenged before the Supreme Court of India by one of the humongous India-based multinational corporates, the Tata Group.

Tata epitomises the 1% the Occupy Movement was complaining of. The Court rejected the argument put forward by counsel for Tata, pleading for the elimination of a song and dance routine in the film ‘Chakravyuh,’ but imposed a condition that an onscreen disclaimer should run along with the song and dance sequence, saying that “a reference to individual companies are purely illustrative”.

The sequence shows Maoist supporters entering a poor village singing a song in which the chorus is as follows: “Be it Birla or Tata, Ambani or Bata, everyone has exploited the nation for their own benefit, their engine runs on our blood.” Birla, Ambani and Bata are other vast business conglomerates like Tata, well known to the Indian public.

The film, directed by Prakash Jha, premiered in India in October; no doubt ticket sales enhanced due to the publicity. Jha stated that the controversy has highlighted the huge gap between rich and poor in India as the economy has grown and modernised.

Over the past two years, scandals over deals between politicians and big business have erupted in mining, telecoms and other sectors, sparking public demonstrations and the formation of single issue anti-corruption parties.

Arjun Kejriwal, former acolyte of Lok Pal anti corruption agency promoter Anna Hazare, has been at the forefront of exposing corruption by politicians including India’s current Foreign Minister, the Chairman of the opposition BJP and the business house Reliance owned by the Ambanis.

Jha, a film director who has often dealt with political and social themes in his films, is as critical of the Maoists as he is of big business. Yet he felt that the legal action taken against is film by the corporates was “quite unnecessary”.

“It’s out there in the public domain what people think of these industrial houses.

The song basically expresses the anguish of the people who feel neglected; the industrialists should have taken it as a wakeup call. India has made progress and been called ‘Shining India’, yet we have a large population that’s completely neglected.”

Measuring inequality

The best known way of measuring inequality is the Gini coefficient – named after an Italian statistician called Corrado Gini. It aggregates the gaps between people’s incomes into a single measure. If everyone in a group has the same income, the Gini coefficient is 0; if all the income goes to one person, it is one. In other words, it measures the extent to which the distribution of income (or consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution.

In 2010, India’s Gini coefficient was 0.3. At the same time India had 48 billionaires! China’s Gini coefficient in 2010 was 0.4, and China had 95 billionaires. By 2011 India the number of billionaires in India had increased to 61 and China to 271, respectively!

The Institute of Policy Studies (IPS) of Sri Lanka’s report, the State of the Economy (SOE) 2012, states that in 2009 /10, Sri Lanka’s Gini coefficient of expenditure was 0.36. The Gini coefficient of income was 0.48. The SOE says: “Sri Lanka has a long way to go in achieving equality compared to other countries such as Indonesia, South Korea and the EU region.”

It should be noted that because of the way the scale is constructed, a modest sounding difference in the Gini ratio implies a big difference in inequality. Research by economists at the IMF suggests that income inequality slows economic growth, causes financial crises and weakens demand.

The ADB has argued that if emerging Asia’s income distribution had not worsened over the past 20 years, the region’s rapid economic growth would have lifted an extra 240 million people out of extreme poverty.

Meeting the challenge

The widening gap between incomes is becoming a critical issue. At the last World Economic Forum meeting in Davos, Switzerland, inequality was mentioned as the most pressing problem of the coming decade. There are three responses that could meet this challenge of growing income inequality.

First, imbalanced government policies are a major driver in creating increased income inequality. Second, inequality reflects market and government failures, simple inefficiency that reduces growth. Third, the reform agenda should be targeted towards fairness, eliminating corruption and cronyism. Not merely higher taxes and more handouts, but meaningful investments in creating capacity among young people to enable them to be economically included in the process of development.

Education and technical skills provide social mobility and empower young people to seek productive jobs. Nations need growth with equity. Economic growth which creates inequality is a recipe for disaster. For the really marginalised – cash transfers would be required, but a means tested and properly targeted transfer scheme on the lines of Brazil’s Bolsa Familia, which differs in many material aspects from cash transfers in other countries, including our Samurdhi program.

Economic growth combined with increasing income inequality is not a reality which should be tolerated; it is an invitation for violent revolution. Research has shown that more revolutions take place when an economy is improving, with intolerable inequalities, than when an economy is in the doldrums, and all are in financial difficulty. The prophetic reference to unpredictable tsunamis in the Budget 2013 speech and the Welikada slaughter being enacted within hours is indeed poignant.



(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)