Income inequality and Seventh FYP

While Bangladesh has done remarkably well in terms of some socio-economic indicators, it continues to grapple with rising gini ratio of income inequality. All the celebrations of success conceal the cruel reality that poverty-stricken Kuril slum lies in the heart of posh Gulshan area. Attempts have long been made in addressing the question of inequality but to no avail. Empirics show that a redistributive land reform in Bangladesh cannot be an answer to the question of inequality. The success of oft-quoted experiences of Japan and Korea are exceptions. Over time, the share of large land-owning households in Bangladesh has been declining while about two-thirds of households are considered to be landless households. "The government is the biggest land-holder and some redistribution has been attempted from time to time with limited success owing to governance problems due to land grabbers" - says the Seventh Five Year Plan document.
But that does not mean that land reforms have outlived utility. There is an important need to shift attention from drastic to soft reforms. This could possibly be achieved by strengthening the land administration regime and related land market through an array of institutional, regulatory and fiscal reforms such as proper land ownership surveys, digitisation of land records, simplification of land transactions and land records etc. Imposition of proper capital gains tax on land transaction would add to revenue, reduce windfall capital gains and help stabilise land prices by reducing speculations. Again, reforms in tenancy market could help sharecroppers who are growingly dominating agricultural production. By and large, the soft approach in terms of reforms in land administration and transaction might impart limited success in reducing inequality led by land ownership.
Perhaps the Plan rightly finds a major way to help income distribution through human capital formation of the poor. Arguably this "will equip the poor to get better and higher paying employment. An educated and healthy labour force can also help increase the rate of growth of GDP while improving income distribution". The increased enrolment in primary and secondary schools from the poor segment of society are paying dividend. Thus the Plan aims to raise the share of public spending on education and health from 2.2 and 0.8 percent in FY 2015 to at least 3.0 and 1.2 percent respectively in 2020. Admittedly, the allocation has to be supported by "major improvement in the delivery of public education and health services through education policies, governance and institutional reforms."
There is no doubt that at the end of the Plan period, Bangladesh would witness a reduction in inequality over the next five years as more of the children from poor group would attend schools and access health services. But in a regime where the rich gets quality education and health services than the poor, the inequality may not wane but widen. Thus a girl from kindergarten in urban areas could end up in software services while a girl from rural school would groan in a garment factory. To nip educational inequality in the bud, society needs to have the same type of schools across the board with same curriculum. This is a tall order hardly to be achieved. Again, within rural areas, solvent parents can pay for tutors while poor parents lack the capacity thus resulting in inequality in the access to education. In this context, one would suggest that the government takes a lesson from BRAC's experiment with pre-primary and primary schools where access to education for the poorest could be ensured with a sharp eye on the quality of education.
However, the Plan also has to go for public spending on rural infrastructure such as rural roads, irrigation and flood control. Availability of rural credit could be another important way to address inequality but the Plan document remains silent on the modus operandi excepting a line of appreciation for microcredit revolution that helped the poor with consumption and asset accumulation. The role of public sector in providing rural credit has remained peripheral.
The third important area relates to spending social protection to go up from 2.0 per cent of GDP in 2015 to 2.3 percent in 2020. One can hardly disagree that spending on social protection is a must for addressing inequality but "there are also important concerns about the quality and targeting of this spending that needs urgent reviews and reforms". By and large, higher spending on education, health, rural infrastructure and social protection would cost an additional 2.5 per cent of GDP - "a seemingly tall order in the present environment of public resource constraint…a strategy to mobilize this additional funding is certainly within the reach of public policy".
First, the government spends roughly 3.0 per cent of GDP on subsidies, of which 2 per cent of GDP is on energy. It is presumed that subsidies in Bangladesh have not been as equalizer as expected,say, in higher education or in agriculture. The energy subsidy is no exception where a small number of the poor have access to subsidised energy. The Plan documents assumed that about half of the energy subsidy could be saved through price increases and better targeting for use in social service. Second, increase in personal income tax, value-added tax and local government revenues would be needed to mobilise additional resources for reducing inequality.
While the fiscal policy package could help with additional resources, the on-going 'political policy package' under the umbrella of governance remains to be no less important. One should not be oblivious of the fact that major sources of inequality are loan defaults, land grabbing and tax evasion. In this case, income distribution can be improved through better governance. The additional generation of 2.5 per cent of GDP required for social spending would only be effective in a regime of less corruption, better targeting, and quality improvement in public service delivery system. The grievous governance that Bangladesh is faced with may raise the gini ratio of inequality rather than reduce it. This is a fait accompli - the planners propose, the politicians disposes - instilled in inequality question throughout all plan periods. Hope this time, it is a bit different.

Abdul Bayes is a Professor of Economics at
Jahangirnagar University. [email protected]