Inclusiveness and income inequality

Introspective

Inclusiveness and income inequality

By Raul V. Fabella

Inclusiveness and income inequality are two related salient themes in the current development discourse. Inclusion is one of the twin ideas (the other is order) highlighted by the current doyen of macro narratives Why Nations Fail by Acemoglu and Robinson discussed by my colleague Calixto Chikiamko in his last BW column.

Income inequality -- the tome explains -- results from extractive institutions: those that take from the many to render to the few. Income inequality is also the pet idea of two April 2011 IMF reports: "Asia and Pacific: Managing the Next Phase of Reform" and "Inequality and Unsustainable Growth" by Berg and Ostry. The first suggests that while the Asian region has learned the secret of wealth creation, it still has to learn to share its bounty. Especially highlighted is the rapidly increasing income inequality in the rampaging People’s Republic of China (PRC). The second claims that with past experience as guide rising income inequality puts growth sustainability at risk. The still ongoing turmoil labeled the "Arab Spring" seems a confirming evidence for this view.

Acemoglu and Robinson raised the ante further by predicting -- based on their admittedly very impressive reading of macro history -- that the People’s Republic of China, despite its jaw-dropping strides in reducing poverty incidence, is actually headed for a fall without further institutional reform, i.e., more inclusive western style politics. Nice, but wicked problems await those who want to apply them: (1) At what stage in the growth trajectory has efficiency and inclusion become complementary rather than substitutes? (2) What does inclusion mean at the micro level of policy making? (3) Are there policy packages that exhibit efficient inclusion, serving both growth and equity? (4) How do inclusive institutions, if we know them, get engendered? These are critical questions for which macro narratives offer few answers. This piece will dwell only on the first two and leave the next two for later.

Marx and Lenin’s "scientific socialism" argued that income equality should be served ab initio, which meant the abolition of the source of inequity, private property and, in practice, of the incorrigible property-owning classes. Mao Zedong took scientific socialism seriously and unleashed upon China the "Great Leap Forward" which killed upwards of 40 million thick-headed and capitalism-tending peasants. Pol Pot -- in slavish concordance -- created the "killing fields" which sent Khampuchea into the bowels of darkness for decades. Myanmar, formerly Burma, went into a half-century eclipse after a 1962 coup d’etat ushered in the "Burmese Way to Socialism." Burma, as some will remember, was one of the countries (the Philippines was another!) predicted by Nobel Memorial prize co-winner Gunnar Myrdal, author of the ambitious three-volume opus The Asian Drama, to inherit the mantle of rapid growth in the Asian region. South Korea, in contrast, failed to make Myrdal’s list. Overall, he was pessimistic about the Asian prospect. These strong social predictions unmade Myrdal’s claim to lasting glory just as similar braggadocio did in Das Kapital’s.

Deng Xiaoping labeled the Maoist interpretation of socialism "leftist revisionism" which spawned the redistribution of poverty. Deng’s own "revisionist" policies-based on the belief that equity can wait until there is actual bounty to redistribute-by contrast, pushed 500-million people out of poverty. The price was a historically unprecedented spike in income inequality about which the IMF now crows. If you ask the 500-million Chinese graduates of poverty, this is a singularly fair exchange! Is it time for PRC to change tack as western observers counsel (translation: let the yuan go and embrace western style political inclusiveness)? China argues that this means turning its back on the upwards of 100 million still under the poverty line. Deng’s achievement suggests that there such thing as efficient inclusion. I agree.

Indeed, a widely discredited framework called "the trickle down" says that income equity will eventually be served by rapid economic growth regardless of state incomes policy. Rapid economic growth creates a strong demand for labor services, the only asset that poor households have in abundance. When in the mid-1970s, after a decade of rapid growth in the Asian tiger economies, labor scarcity sets in, real wages started to traject upwards and income inequality trajected downwards. That was when income growth and income equality stopped being substitutes for each other. The 39% rise in wages since 2010 in the Chinese equipment maker Foxconn follows this trajectory (China consciously follows a low wage policy and independent labor unions are outlawed).

The inclusion principle is unhelpful at the micro level on the question of wages. Every May in the Philippines, the question of how much to raise the minimum wage hogs the airwaves. One side argues that inclusion demands that the minimum wage be raised substantially. The other side argues that it will make the Philippines less competitive and, thus, more unemployed. At this stage in our economic growth, is efficient inclusion served by favoring the employed with formal sector jobs or the unemployed whose prospects dim with higher wages? Macro narratives don’t provide easy guidance.