Bangladesh duly boasts of a growth rate averaging little more than 6.0 per cent per annum for a decade. Again, on the heels of lowering population growth rate, per capita income has been rising, on average, by around 5.0 per cent. The country has already reached lower middle-income status with an average per capita income of $1,300 per annum. Note that all these are 'averages', not reflecting the distribution pattern within group(s). Half of your body is in the oven and half in the fridge - you are not that bad on an average!
That there is a dark side of the higher growth trajectory since the early 1990s - nay development - was clearly foreseen by Professor S.R. Osmani of the Ulster University. He reckons that increasing growth was accompanied by rising inequality over the period under consideration. "In particular, the gap between the richest ten per cent and the poorest forty per cent of the population has steadily widened while the middle half of the population has retained control over about half of national income - a common pattern in most countries where income distribution is getting worse."
The bright side of the bleak scenario is that the incidence of poverty has in the meantime been reduced substantially despite growing inequality. Why then bother about inequality? Prof Osmani reckons that the worsening of income distribution is still a matter of concern for at least two reasons. The intrinsic reason is the inherently unfair and unjust outcome that fruits of development are being forfeited by a few at the cost of many. There is also an instrumental reason behind the concern for inequality and it is that higher inequality has the potential to dampen the pace of poverty reduction in the future by depressing the future growth. Inequality cuts both ways: it reduces the rate of growth and lowers the growth elasticity of poverty reduction, i.e., the pace of poverty reduction for any given level of growth.
It is not by coincidence that growth and inequality are running like a railway line; the two are causally intertwined also. The process of growth has been the villain of the piece called equitable distribution of the cake. Prof. Osmani digs out two aspects of this causal connection. First, the rapid growth since the early 1990s was followed by a slow growth in real wage - in fact, far below the growth of labour productivity - which was a bane for the labour class but a boon for the economy. It induced cost advantage for Bangladesh to access global markets with its rapidly growing export industries that are deemed to be the engine of growth for the economy as a whole.
On the other hand, slower growth of real wage relative to labour productivity has moved the functional distribution of income against labour and in favour of the owners of non-labour factors of production such as land and capital. Since labour input is supplied mostly by the poor people and non-labour inputs mostly by the rich, this anti-labour change in the functional distribution of income has also resulted in the widening of personal income distribution.
The second element of the causal connection between growth and inequality is adduced to the role of remittance. As the inflow of remittance has emerged as an important driver of growth in rural areas, beneath the surface, it has contributed to widening of inequality with relatively solvent households able to bear the cost of migration abroad.
Thus, as Prof. Osmani opines, higher growth path and worsening of income distribution are two sides of the same coin - the coin being the very process of growth itself. Does it mean that we should reverse or abandon the ongoing growth process with a view to achieving higher equity? The Professor answers in the negative: "In fact, export-oriented growth process must be allowed not just to continue but to prosper, and greater earning of foreign remittance must be encouraged, not discouraged if we are to maintain the growth momentum." He adds, "Equitable growth must be achieved by ensuring that the fruits of this growth process are enjoyed more equitably by a broad spectrum of the population".
Professor SR Osmani also shows a way out of the impasse, i.e., ensuring equity in a regime of higher growth. He suggests a two-pronged strategy. First, an effective social protection system must be in place for the bypassed and impoverished ones in the growth process. Second, conditions must be created for the disadvantaged so that they can seize the opportunities opened by the growth process - just as much, if not more than the privileged ones. An environment of equal opportunity can only come from equality in the distribution of human capital. "The first prong of this strategy would help mitigate the current inequities that are emerging as a consequence of the growth process, while the second prong would improve future equity by enabling the children of the disadvantaged segments of the population to participate more fully in the growth process".
Disconcertingly, on an empirical plane, neither of these two prongs is working in Bangladesh. The social protection system is too small and the allocation too perverse to make a dent into current inequities. On the other hand, the inequality in human capital - as reflected by differences in health and educational outcomes between poor and rich households - has remain unchanged (even increased at times) over the decades. Particularly, disparity in the formation of human capital has another dimension to be duly recognised. It is that this failure would sow the seeds of perpetuation of income inequality.
The important question is about rising inequality and suppressed real wage. Osmani feels that real wage would be hiked some day or other in the wake of surplus labour getting exhausted and the skill base of labour force upgraded (in fact, the signs are already on the horizon). This would raise real wage and reduce the gap. There is a danger, however, that despite rising real wages inequality in personal income distribution may continue to grow because one source of inequality may replace another. For example, currently we are worried about the widening gap between labour and non-labour income but in future with rising real wages we may have to strike head over rewards between skilled and unskilled labour a concern looming large in many middle-income countries. At the end of the day, development of human capital with more equity is the answer to linking growth and equity in Bangladesh. That is what is needed for overcoming the dark side of development.
The writer is a Professor of Economics at Jahangirnagar University.
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