Professor Nurul Islam's works and recent concerns about income inequality

Photo: Noor-A-Alam

Professor Nurul Islam's life and works, as well as his prominent role as an eminent economist, have been extensively discussed in various forums, both in the national and international spheres. Leading economists and social scientists in the country have highlighted his legendary role as a visionary, a researcher, a devoted teacher, and an institution builder.

His instrumental role in establishing PIDE as a reputable research organisation in the region, which later transformed into BIDE and eventually became BIDS (Bangladesh Institute of Development Studies), is widely acknowledged. 

Even while leading an international organisation, he remained concerned about the quality of research conducted at BIDS. During his visits to the organisation, he engaged in discussions with younger researchers, including myself, offering encouragement and valuable suggestions on how to incorporate more useful ideas.

Therefore, I have chosen to pay tribute to him by discussing the relevance of his research in the context of some of the contemporary development problems in Bangladesh. In this write-up, I primarily focus on recent concerns regarding the rise of income inequality and its connection to the country's development strategy. To grasp the significance of his works in this context, one must revisit his writings, particularly his early works from the 1960s, which examined interregional inequality in Pakistan at that time.

Before delving into this issue, I wish to emphasise the importance of reviewing his works at various stages of his life, considering the rapidly changing global economic environment. Such a review is necessary to recognise that rigorous research can influence policymaking and even bring about fundamental changes in a country's development philosophy. It may be useful to briefly mention the essence of some of his research findings, even at the risk of oversimplification, as it can encourage today's young researchers to revisit his papers.

Professor Islam's analysis, in collaboration with his contemporaries, of the inequality between the East and West wings of Pakistan during the 1960s shed light on the factors responsible for interregional inequality. The unequal distribution of assets, coupled with unequal access to financial capital and various policy supports from the government, resulted in an economy heavily tilted in favour of a small number of West Pakistani industrialists (commonly referred to as the "22 families" at that time). 

Utilising disaggregated factory-level data from various manufacturing sub-sectors, his research revealed a high level of inefficiency (negative cost advantage) in many sub-sectors and a significant proportion of factories within each sub-sector, even if the average was positive.

Inefficient industries were protected through the transfer of resources from the East Wing. Foreign exchange earned from jute and jute goods exports was reinvested in West Pakistan, and foreign aid allocation strongly favoured West Pakistan, where it was utilised to develop much-needed infrastructure. 

As a result, farmers and wage labourers in the Eastern part of the country experienced impoverishment due to low productivity, low and stagnant real wages, and a lack of trickle-down benefits from industrialization in West Pakistan. Therefore, the inequality between the two wings was deeply rooted in the structure of the economy.

The flight of capital and labour immobility further contributed to this structure, hindering the equitable distribution of industrialization benefits to the poorer population in East Pakistan. These research findings gradually led to the development of the theory of two economies and generated widespread awareness about the exploitation by West Pakistani capitalists, who received unwavering support from the state. This awareness played a critical role in the subsequent turn of events, as is well known.

After five decades of independence, is there a need to reexamine inequality within Bangladesh? At the time of independence, there were aspirations to build an egalitarian society. Have those aspirations been realised? Bangladesh's achievements in terms of accelerated economic growth and progress in social indicators have gained international acclaim. However, rising inequality in terms of income and consumption may cast a shadow over these achievements.

The experiences of inequality in Pakistan during the 1960s and the subsequent emergence of an independent Bangladesh demonstrate that growing inequality ultimately leads to discontent and efforts to reverse the trend. Similar experiences in many other countries confirm that unabated increases in income and opportunity inequality have social repercussions and may even hinder economic growth prospects.

Rising inequality is a significant development concern in Bangladesh. At this point, it is worth mentioning the relevant data from HIES (Household Income and Expenditure Survey), which provides evidence of increasing inequality in the country. 

The commonly used measure of inequality, the Gini index, shows an upward trend between 2010 and 2016. The preliminary findings of the 2022 HIES indicate a further increase in the Gini ratio. In urban areas, the Gini index rose from 0.452 in 2010 to 0.498 in 2016 and 0.539 in 2022. The Palma ratio, calculated from the decile distribution of income, also exhibits a sharp increase between 2010 and 2016. However, the decile distribution of income has not been included in the preliminary report of the 2022 HIES.

The government's policy documents reflect the need to combat rising inequality. The Eighth Five-Year Plan offers general suggestions, such as the necessity of well-designed tax systems and a public expenditure policy prioritising human development sectors, among others. However, these suggestions are often overlooked when it comes to setting actual priorities in the government's budgetary decisions.

It is high time for more specific policies to be adopted in order to reduce inequality. This can only be achieved by identifying the deep-rooted causes underlying the rising trend of inequality through rigorous research. 

This is where Nurul Islam's research becomes relevant, not only in studying inequality but also in understanding the changes in the structure of an economy where commercial and fiscal policies interact with current factor endowments and the distribution of ownership of these factors. It is beyond the scope of this tribute to engage in a detailed discussion of the necessary research and potential remedial policies in the short and medium term. 

One may be tempted to follow Nurul Islam's hypotheses and inquire whether regional inequality prevails in Bangladesh. Indeed, the issue of regional differences came to the forefront in 2005–06 when the HIES of that year revealed higher poverty rates in western and northern districts. 

The World Bank researchers' analysis highlighted the East-West divide as a contributing factor to differences in poverty incidence. However, this thesis did not stand the test of time, as the poverty trends in various administrative divisions reversed in 2010 and reemerged in the 2016 HIES.

We cannot overlook the fact that rising inequality is deeply rooted in the structure of the economy. Therefore, a thorough analysis of the factors and processes that contribute to the creation of an inequality-inducing structure is necessary. Macropolicies, sectoral biases, and governance issues are all interconnected in this process.

Professor Islam emphasised these issues even after retiring from his formal institutional responsibilities. He raised questions for himself and other young researchers about how these forces are diminishing the country's capacity to achieve the goal of an egalitarian society. 

It is now the responsibility of the present generation of young researchers to engage in quality research to find answers to the critical question of how such inequality is being created and sustained and how to reverse the process.

A fitting tribute to Professor Nurul Islam would be to pursue such research and endeavour to enhance the quality and rigour of research. We must read and reread his works, which will inspire us to uncover clues for formulating research questions related to this and other prevailing development problems in Bangladesh. This will enable us to choose appropriate methodologies for analysing these questions.

(Note: This tribute is an extended version of my presentation at the memorial for Professor Nurul Islam, titled "Thoughts on Professor Nurul Islam and Contemporary Bangladesh Economy," organised by CPD.)

Dr Rushidan Islam Rahman, Research Director (former), BIDS and Member (former), Board of Directors, Bangladesh Bank

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.