Commentary

Don’t Worry about Inequality

If people are totally free, the most talented (and lucky) will get far richer than the dullest and unluckiest. So, freedom will create inequality. Communist countries aimed for equality of outcome through totalitarian controls, but this was hypocrisy: there was no equality of power between those laying down the rules and those forced to obey.

To ease the tension between liberty and equality, countries typically aim for equality of opportunity, not outcome. Yet, inequality is almost everywhere measured by economists in terms of outcome, not of opportunity. This leads to paradoxical data and flawed analysis.

The accompanying table lists the six most equal and unequal major states in terms of consumption, measured by the Gini coefficient, the standard statistical measure of equality ranging from 0 to 1. A high Gini of 1 means complete inequality, and a low of Gini of zero means complete equality.

Dramatically, areas with the most consumption equality (i.e., with the lowest rural Ginis) are the poorest. Bihar and Assam are the most equal, with Ginis of just 0.17. But do they represent islands of great fairness and well-being? Not at all. They have suffered for decades from some of the worst poverty, misgovernance and slow growth. This inequality of governance — and hence of opportunity — is not captured by the data.

Recently, Bihar has enjoyed record growth and improved governance under Nitish Kumar. When the 2009-10 data is released, it will surely show that inequality of consumption has increased in Bihar. Analysts may condemn this as sign rising unfairness, but that will be nonsense. Incumbent chief ministers in poor states that suddenly grow fast (Bihar, Orissa, Chhattisgarh) typically get re-elected with large majorities despite worsening Ginis. In such states, opportunities of improvement have improved, and that matters more than the equality of outcome.

The most unequal states in rural Gini are the richer ones. Haryana leads with 0.31, followed by Kerala (0.29), Maharashtra (0.27) Tamil Nadu (0.26) Punjab (0.26) and Gujarat (0.25). Consumption equality in the poor states is almost invariably below (and in rich states almost invariably above) the all-India average of 0.25. Such equality is a sign of distress more than fairness or satisfaction.

People have long migrated from relatively equal but poor states to relatively unequal but richer states. People also migrate from villages (which are relatively equal) to towns (which are relatively unequal in terms of consumption). The greater the gap between the rich and poor areas, the greater are the gains from migration. So, what some analysts condemn as growing inequality between states translates to rising returns to migration, creating more opportunities for poor migrants.

For most people the biggest surprise in the table will be Kerala. It has long prided itself on its welfarist, socialist pattern of society, but has the second highest rural consumption inequality (0.29). By this measure, it is far worse off than Bihar or Uttar Pradesh!

Kerala is substantially a remittance economy (a quarter of state GDP comes from remittances), and clearly those getting remittances gain over those without. Kerala has the best social indicators in India, which should mean the most equality of opportunity. But that does not translate to equality of outcome, and there is no reason why it should. Apparently unequal Kerala is a much better place to live in than apparently egalitarian Bihar and UP, because Kerala provides more opportunity for developing skills that fetch returns in the marketplace, and that is what really matters.

Haryana has the highest rural consumption inequality. Its proximity to Delhi has driven up land prices to crores per acre, making plutocrats of all large farmers. But the same process has also converted some one-acre farmers into crorepatis, something Ginis fail to measure. These “unequal” one-acre farmers are, ironically, wealthier than many urban folk who earn one lakh a month but own no real estate.

As the table shows, Ginis in urban areas are not very different in rich and poor states. The big difference is in rural Ginis. Most migration in India takes place within states, not between states. Poor villagers migrate to nearby towns to escape the tyranny and monopoly power of landed elites who have the local police station and revenue officials in their pocket and do not want villagers to rise.

Migration is often but wrongly seen as a sign of distress. In fact, it’s a sign of newfound opportunity. In the last Bihar state election, Rahul Gandhi told election rallies that Bihar was badly off under Nitish Kumar since so many Biharis migrated. Voters rejected that thesis utterly by reducing the Congress to just four seats.

There are indeed countries (mainly in Africa) where consumption inequality can be a sign of terrible distress and injustice. But in India, both the best economic opportunities (in Maharashtra, Gujarat) and best social indicators (in Kerala) lead to unequal income outcomes.

It is easy to say that, other things equal, more income equality is better than less. But other things are not equal, since rising equality of opportunity leads to rising inequality of outcome. We need to abandon the Gini coefficient as a measure of fairness, and create another measure that captures equality of opportunity and the freedom to get richer than your neighbour on merit. Just as GDP is a very incomplete measure of well-being, so is income equality a very incomplete measure of fairness.

Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute’s Center for Global Liberty and Prosperity.