Poverty and inequality, again

The real problem is not that of treating poverty and inequality as the same thing, but the failure to appreciate that though they are different, they are closely related.

ANDRE BETEILLE'S recent piece on poverty and inequality (The Hindu, November 2, 2002) raises some issues that need to be pursued further. There can be little doubt that in view of its extent and intensity poverty in our country is a more palpable and morally indefensible problem than inequality. Prof. Beteille is quite right also in pointing out that "poverty and inequality are two different things and that in India there is understandable public concern over both of them". But he is at best vague when he says that there is a common presumption about the equivalence of the two and that "this presumption is reinforced by the writings of many economists who are inclined to treat poverty and inequality as the same thing, or more or less the same thing".

The real problem is not that of treating poverty and inequality as the same thing, but the failure to appreciate that though they are different, they are closely related. First, on the difference between poverty and inequality, especially economic inequality. Economic inequality, usually of income or of expenditure over a period of time such as a year or month, refers to the manner in which that item is distributed among members of a group, frequently a country. Inequality in wealth, at a given point in time, also refers to its distribution. Since distribution, in this sense, is a share, it is a matter of comparison. A standard procedure that economists use is to compare the (percentage) share of the top 10 per cent and the bottom 10 per cent households. These shares can also be expressed as a ratio. Inequality, then, is relative.

The measurement of poverty is quite different. To measure it, it is necessary to agree upon a norm. The norm could be physical — requirement of certain calories a day per person, as was done in the early 1960s in our country — or it could be a monetary figure, such as earnings or expenditure (a day, a month etc). Physical norms, of course, can be converted into monetary equivalents provided appropriate goods yielding the physical quantity can be located and their prices too can be agreed upon. Poverty line is such a figure commonly accepted (rupees a month, for instance) with those below it considered poor.

In other words, inequality is expressed as a ratio and the poverty line as an absolute sum. Any economist who knows this distinction cannot possibly treat poverty and inequality "as the same thing, or more or less the same thing". Since Prof. Beteille claims that many economists by their writings reinforce this false presumption, he could have given a few examples, unless it is his understanding of what the economists' position is. In passing, it may be pointed out that neither the measurement of inequality, nor that of poverty can be foolproof. On poverty, for instance, what is the sanctity of a 2,400 calories a day requirement per person? Shouldn't inter-personal and even intra-personal differences be taken into account? And what basket of goods is to be accepted to ensure the calorie requirement? More pertinently, are there uniform prices for these goods? How are the inter-temporal variations in prices to be taken note of? It is, therefore, not surprising that there can be, and there are, differences of opinion among economists on the identification of the poverty line and on the changes in poverty over time.

Even if poverty and inequality are not the same thing, there is nothing wrong in saying that under certain conditions the two can be closely related. Growth of income over time can affect both poverty and inequality, although the precise manner of this impact cannot be determined a priori. Growth can reduce poverty and inequality; growth can reduce poverty and increase inequality; growth can increase both inequality and poverty. These diverse patterns are possible because growth is not a uniform numerical addition. It is a process of change that affects not only the volume of output, but the composition of that output, the manner of production, the relative values of particular goods, the participation of different sections of the population in productive activities, the purchasing power of different sections and so on. How these impact on inequality and poverty will have to be empirically examined. But certain quick inferences are possible too. For instance, if there is an increase in the foodgrain production achieved by labour displacing methods of production, and if the increased output is largely exported, it can lead to an increase both in poverty and in inequality. On the other hand, if the increase in output leads to a fall in grain prices, a reduction in poverty is possible.

Since the matter is essentially empirical, two concrete cases may be helpful. Both are taken from the United States only because such detailed records are more readily available for that country. The first dealing with the relationship between inequality and poverty is taken from the economist Robert B. Reich's influential book "The Work of Nations". According to Mr. Reich, "Between 1977 and 1990 the average income of the poorest fifth of Americans declined by 5 per cent, while the richest fifth became about 9 per cent wealthier... That left the poorest fifth of Americans by 1990 with 3.7 per cent of the nation's total income, down from 5.5 per cent 20 years before — the lowest portion they have received since 1954. And it left the richest fifth with a bit over half of the national income — the highest position ever recorded by the top 20 per cent. The top 5 per cent commanded 26 per cent of the nation's total income, another record." What is significant is that according to Mr. Reich, these changes in inequality had a similar effect on the livelihood of many ordinary Americans. "By the 1990s, many jobs failed to provide a living wage... The number of impoverished working Americans climbed by nearly 2 million, or 23 per cent, between 1978 and 1987... Among full-time, year-round workers, the number who were poor climbed even more sharply — by 43 per cent." Such findings provide enough reason to be concerned about the relationship between inequality and poverty.

The second case is reported by Thomas L. Friedman, columnist of The New York Times. In his widely read book on globalisation, "The Lexus and the Olive Tree", Mr. Friedman tells the real life "story" of the payment system of the National Basketball Association and some of its social implications. The NBA's star player, of course, is Michael Jordan whose total earnings in 1997 were estimated to be around $80 million (equal to the annual salary of some 2,700 teachers at $30,000 a year). Mr. Friedman points out that other players in the team, even those who are professionally almost equal to Jordan, got only the NBA's minimum of $272,250. What accounted for the almost 300 times earning differentials? Because Jordan is able to supplement his professional earnings though commercial activities such as endorsements, sale of autographs and many other ways, and use this also to get the NBA to pay him much more than the minimum that his less fortunate team mates receive.

Mr. Friedman brings out a couple of wider economic and social consequences of the phenomenon. As the fortunes of the NBA went up, the sports association was bought by new owners, not sports lovers but profit lovers. This led to a social gap between players and owners which, in turn, got reflected in a gap in the stands. "Ticket prices are being put out of reach of all but the rich; the stadiums are segmented by classes," said Mr. Friedman, adding that they are no longer the kind of shared public space that brings together people from different walks of life.

Whether one should get indignant about such instances can be debated. But there can be little doubt that inequality even within a segment of the economy will have larger consequences that deserve the attention of economists, of, perhaps more so, sociologists.

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