Evaluate reasons for economic disparity amongst different regions of Pakistan and the problems caused by it.
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Understanding economic imbalance
Political EconomyA SyedNovember 24,2019
If not addressed properly and in a timely manner, the social, political and economic repercussions of income inequalities may be disastrous
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One percent of the richest people control more wealth than the balance 99 percent – Photo by Rahat Dar
Economic inequality is a topical issue, demanding attention from Sub Saharan Africa to the establishment in the developed world. This goes well beyond the inequitable distribution of opportunities amongst various strata of the economy. It is a leading indicator for lack of opportunities. This then continues from generation to generation in an endless vicious cycle. It leaves a vast swathe of the population bereft of the ability to maintain a reasonable lifestyle and without access to necessities such as healthcare and education.
There are two ways to look at inequality within an economy: inequality of income distribution and inequality of wealth distribution.
Of the two, income inequality is the more popular, better understood and more easily researched. An income can come from two sources: labour and capital (i.e. returns from capital). In the latter, inequality of wealth comes into play, impacting the total income generation capacity of an individual.
The most popular measure of income inequality is the Gini coefficient (named after Corradi Gini, an Italian economist). Gini index ranges between 0 (perfectly equal distribution of income across the economy) and 100 (most imperfect distribution of income, i.e. one person has all the income in an economy).
This index has been tracked for decades and has been a useful guide to identifying interesting patterns. Countries with common geopolitical backgrounds tend to be in the same range.
Based on the World Bank’s estimates, former Soviet states have the lowest Gini coefficients (in the high teens). This is followed closely by the Scandinavians who are recognised for their egalitarian economic models (in low 20s). On the other hand, African nations such as South Africa, Namibia and Botswana are on the highest end of the scale (high 40s).
In terms of Gini, Pakistan performs reasonably well compared to its regional peers — 30.7 vs India (35.1), Sri Lanka (39.8), Nepal (32.8) and Bangladesh (32.4). Gini data is useful as it allows us to group nations together to understand what common factors drive the income distribution trends.
As an extension to Gini, the analysis of income share of top earners in a country reveals a similar pattern, as an additional validation.
Income inequality varies vastly between regions — Europe being most egalitarian (where top 10 percent earners took 37 percent of the economic income) vs the Middle East the least (10 percent have access to 61 percent of the regions’ income generation). These numbers are also impacted by regional geopolitics. We see a spurt in income inequality in Russia (as oligarchy came to prominence in the 1990s), China (following the economic boom from 2004) and India, where rising inequality is at a level where the top 10 percent earn more than 50 percent of the entire economy.
This phenomenon is not limited to the Third World only. Research by Mckinsey Global Institute (MGI) (published in 2016) identified patterns which have led to income disparity in the developed world. Analysing data for world’s top 25 countries post World War II, the study revealed that during the post-recession recovery (1993-2005), 98 percent of the households saw some increase in their incomes. However, during the post-recession recovery period of 2005-2014, 65-70 percent of the households in these economies saw their income either fall or stay flat. Clearly, the fruits of any economic growth were captured by a few.
There is a price to pay for this. In the USA, only 20-30 percent of children end up going to college if their parents are bottom 10 percent earners. Top 10 percent earners, however, see 90 percent of the children going to college.
The impact of this economic imbalance is not going unnoticed. In the same study MGI found a sense of hopelessness and frustration leading to a hardening of attitudes on race, immigration and free trade.
The other and more esoteric measure for economic inequality is wealth inequality. Recent research, Thomas Piketty being a notable example, seems to suggest that this measure is a starker indicator of economic disparity.