The Growth-Equity Nexus in Bangladesh and Its Implications for Poverty Reduction

S. R. OsmaniUniversity of Ulster, UK

Presentation prepared for the conference on Towards Sustained Eradication of Extreme Poverty in Bangladesh

NEC Conference Room, Planning Commission8-9 April 2015

Basic fact:

Growth acceleration since the 1990s has been accompanied by greater income inequality in Bangladesh.

• The trend of rising inequality is confirmed by a different (and a more intuitively revealing) measure of inequality:

• The Palma ratio:

Defined as the ratio of income shares of the top decile (richest 10%) and the bottom four deciles (poorest 40%).

• Question:

Why has income distribution worsened? In particular, why has the gap between the top 10% and bottom

40% widened?

• Our approach towards searching for an answer:

We need to investigate what has been happening to functional distribution of income – in particular, the distribution of income between labour and non-labour factors of production (land and capital).

The reason is simply that the bottom 40% derive their income mostly from labour, while the top 10% do so from non-labour factors of production.

• Our hypothesis:

Rising inequality is a consequence of the nature of the growth process itself.

The processes that have brought about growth acceleration since the 1990s have also led to rising share of non-labour income in GDP and falling share of labour income.

As a result, the share of the top 10% has increased relatively to the share of the bottom 40% - leading to the increase in Palma ratio.

Thus, growth acceleration and rising inequality are but two sides of the same coin.

• Sources of growth acceleration:

Growth acceleration since the 1990s has stemmed mainly from accelerated growth in labour productivity.

• Sharing in growth acceleration:

The benefit of productivity growth has gone more to the owners of non-labour inputs and less to the owners of labour.

This is evident from the fact that during the period of growth acceleration real wage has grown at a slower rate than labour productivity.

Sharing in growth acceleration (contd):

Classic case of rapid growth based on surplus labour.

Although the demand for labour increased as a result of rapid growth, real wages hardly moved because of the presence of a large pool of surplus labour.

As a result, labourers have received a falling share of the growing output and owners of non-labour inputs have claimed a rising share.

This has tilted the distribution of income in favour of the owners of non-labour inputs – and hence in favour of the top 10% vis-à-vis the bottom 40%.

Two sides of the same coin:

The fact that real wage growth has lagged behind productivity growth underpins not only rising inequality but also high growth performance.

As real wage has grown slower than labour productivity, real cost of production has gone down.

Technically, this amounts to a depreciation of the real exchange rate.

This has made some of the Bangladeshi products more competitive in the world market and thus helped drive export-oriented growth.

Thus, both export-oriented growth and rising inequality are outcomes of the same underlying cause – namely, slower growth of real wage relative to productivity growth.

Two sides of the same coin (contd.):

• Apart from exports, another driver of growth has been sharp increase in the flow of foreign remittance.

But remittance also creates greater inequality because it is the relatively better off households that can afford to send people abroad.

Once again, the process that creates growth also creates inequality.

Two sides of the same coin (contd.):

• Thus, on the whole, rapid growth and rising inequality of the last two decades are but two sides of the same coin.

• This is true for both export-driven growth and remittance-driven growth.

• There does appear to exist a trade-off between growth and equity in Bangladesh.

How to Link Equity with Growth?

• The answer does not lie in reversing the growth process – we need both exports and remittances.

• The answer consists of two parts:

1. Short run: attenuation of inequality through a comprehensive system of social protection.

2. Medium to long run: Creating greater equality of opportunity for seizing the benefits of growth.

How to Link Equity with Growth? (contd.)

• The short run measure is only a palliative – it may mitigate the symptoms to some extent but it cannot strike at the root of inequality.

• The medium to long run measure – creating equality of opportunity – is of fundamental importance.

• The society may accept some inequality today – for the sake of growth – only if there is hope that things will get better in the future.

That is, if there are reasons to believe that the inequality-creating effect of growth will be reversed later.

But will things be better tomorrow?

• To some extent, the reversal will occur automatically, as the surplus labour gets exhausted and real wages begin to rise faster.

There are already signs of that happening: the gap between productivity growth and real wage growth narrowed in the 2000s in comparison with the 1990s.

If this process continues, the inequality between labour and non-labour (and hence between the incomes of the top decile and bottom deciles) may be reduced.

• But will things be better tomorrow? (contd.)

But there is a danger that a new source of inequality will emerge – that between skilled and unskilled labour.

As the country moves towards the middle-income status and beyond, it will be necessary to raise the skill base of the labour force.

The skill premium (the gap between skilled and unskilled wages) will necessarily widen initially.

Whether this skill premium is shared equitably or not will shape the nature of future inequality.

Linking equity and growth will be possible only if we can create equality of opportunity for enjoying the skill premium.

Creating Equality of Opportunity:

• Much will depend on the distribution of human capital – e,g., health and education.

• Only those who have superior human capital will enjoy the skill premium that will inevitably rise in the course of future growth.

• If current inequalities in human capital remain unchanged or get worse, future growth will be no more equitable than it is today.

• Linking equity with growth will, therefore, require improvement in the distribution of human capital.

• But what is actually happening?

Health:

• Inequality in nutritional status between children from poorer and richer backgrounds has not diminished in the period of growth acceleration.

• According to one measure, inequality in stunting increased from 1.8 in 1996/97 to 2.2 in 2004 and remained stubbornly around that ratio in the subsequent years.

• The picture is the same for mortality and morbidity indicators.

• For none of these indicators, there is a clear trend of decline in inequality – inequality has either fluctuated without showing any trend or has increased slightly in recent years.

Underlying causes

• Socio-economic differentials in preventive healthcare has not diminished.

• Inequality in curative healthcare has increased.

Underlying causes (contd.)

• The problem has been compounded by socio-economic inequality in women’s health outcomes and healthcare, since women’s health is a major determinant of children’s health.

• Inequality has increased in both health outcomes and healthcare for women.

In sum,

• Inequality in children’s health has remained stubbornly high over the years and has actually increased in a number of dimensions.

The reason lies in increasing/ persistent inequities in the distribution of healthcare for children and increasing inequity in women’s health outcomes, the two major determinants of children’s health.

Education:

• Positive aspect: Sharp decline in inequality in attendance rates at primary and secondary levels.

• However, most other aspects of educational inequalities give cause for concern.

• Sharp inequality in primary completion rates.

• Consequently, persistent inequality in rates of transition to the secondary level.

• Inequality in educational outcome as measured by competency tests.

• Inequality in educational outcome as measured by pass rates in competence tests at the secondary level.

Education (contd.)

• Thus although disparities in attendance at primary and secondary levels have gone down, large disparities still persist in the educational outcomes.

• And it is the outcomes that count when it comes to seizing opportunities for sharing the skill premium.

Education (contd.)

• Furthermore, there is evidence of increasing disparities in attendance rates at two ends of the educational spectrum – pre-primary and post-secondary.

• Increasing inequality in pre-primary education makes it likely that existing inequalities in educational outcomes will be further aggravated in the future.

• The combined effect of narrowing inequality in attendance at the pre-secondary level and widening inequality at the post-secondary level is that disparity in the number of years of schooling among the 15-19 year-olds has hardly changed in the last two decades.

Final Remarks

• The essential pre-requisite of linking equity and growth is not being met in Bangladesh.

In the spheres of both health and education, there is evidence of not just high but of rising inequality.

If this trend continues, the disadvantaged segments of the society will fail to seize the opportunities for enjoying the skill premium that is likely to emerge from the future growth process.

Growth will become even more inequitable in the future.

In that event, social backlash will make it difficult to sustain the growth momentum itself, making it harder to achieve rapid reduction of poverty.