Growing inequality in rural incomes

In a repeat survey, sample households were ranked on the scale of per capita income and income-shares of successive decile groups were estimated to assess the nature of distribution of income. The income distribution was fairly unequal. In 2008, the bottom 40 per cent of households received only 16 per cent of the income, while the top 10 per cent earned 35 per cent. The Gini concentration ratio of per capita income was 0.44. The concentration ratio has increased from 0.41 for 1988, indicating that income inequality has grown over time.  What are the sources of growing inequality in the distribution of rural income? A Gini decomposition analysis was conducted and the results were compared for the two periods to assess the sources of growing income inequality.
  The economic position of a household depends more on its per capita income than on income from an individual component. So, the concentration coefficient of income from different components was measured by maintaining the same rank of the households on the scale of per capita income. The concentration coefficient thus measured is known as the 'pseudo Gini ratio'. A negative value for this ratio would mean that the income from this source is distributed in favour of the poor. This is often the case with income from selling agricultural labour, as well-off households rarely sell labour in an agricultural labour market. When the income-share of the component is multiplied by its pseudo Gini coefficient, the product gives the contribution of the component to the overall inequality in household income.
As expected, income from rice farming is highly unequally distributed because of the skewed distribution of landownership. But the income from trade and services is distributed even more unequally. The concentration ratio for income from rice and that for service-sector activities have declined over the period, while inequality in the distribution of income has remained unchanged for trade and business and has increased for non-rice crops and non-crop agricultural activities (fisheries and livestock). The findings do not support the popular view that the spread of modern agricultural technology is responsible for growing inequality in rural incomes. Rather the new income earning opportunities in non-agriculture and in non-rice agricultural activities (crop diversification) have been availed of by the higher income groups, causing growing inequality in rural incomes.
As mentioned earlier, the remittance received from migrant workers has become a significant source of rural incomes. The remittance income accrued mostly to high income groups in 1988, as indicated by the concentration coefficient of 0.8 for the income from this source. In 2008, the concentration coefficient was reduced to 0.56, indicating that the income from this source is also availed of by some low-income households.  The reduction in the concentration ratio for income from services also suggests that with increased access to education, some lower-income households have benefited from the expansion of service sector employment and incomes.
Panel data were generated on income for households that were common in consecutive surveys to explain the income dynamics. Among the 1,239 households studied in 1988, 217 (18 per cent) households split into 584 households by forming separate households, 148 (12 per cent) migrated outside the village, and 874 (70 per cent) remained intact. We used the panel data for the households that remained intact to analyse the effects of different factors to changes in household incomes from 1988 to 2000, and 2000 to 2008.
The income and the two major asset endowments - land-owned and level of education of workers - in the base period were included in the model to assess whether economically better-off households and those with better endowment of land and education have fared well over the period compared to those who lacked the assets.  Other variables included are changes in different asset endowments -- land, labour and non-land physical capital. The impact of technology on growth in income was assessed on inclusion of a variable measuring the change in area under modern rice varieties. It is well-known that development of infrastructure contributes to an increase in the productivity of assets. The effect of this factor was estimated by including two village level dummy variables: a) with value 'one' for villages that had access to electricity in the base period, and b) with value 'one' for villages that got electricity connection during the intervening period. Access to roads in the model  was not included because of strong multi-collinearity between access to roads and access to electricity.
The findings show that land is still a significant determinant of income, so the decline in land endowment over 1988-2008 period had contributed to a reduction in income for the average rural households. Increased access to land from the tenancy market for the land-poor households has increased their income in recent years, as indicated by the significantly positive coefficient of this variable in the equation for the period 2000 to 2008. The coefficient was not, however, significant in the equation for 1988-2000. The diffusion of modern rice technology contributed to an increase in income in the earlier period, but not so in the recent years. The technological progress benefited the early adopters of the technology.
The effect of education should be captured by the variable representing non-agricultural labour, the coefficient of which is statistically highly significant for both periods. The positive effect of education is also reflected in the significance of the coefficient for the base period education of household worker and further accumulation of human capital over time. The estimated model also shows positive contribution of rural electrification to growth in rural incomes in both periods.  The most important drivers of change in rural incomes are accumulation of non-agricultural assets and the mobility of labour from farm to non-farm occupations.
The writer is a Professor of Economics at Jahangirnagar University.  address:[email protected]