Road to Reclamation: Curbing the Income Inequality

In his historic speech of 7th March, Bangabandhu Sheikh Mujibur Rahman (1920-1975) mentioned the word 'freedom' twice because he knew that achieving economic emancipation is equally important to free the country from the Pakistani occupation.

Bangabandhu started working with this goal after independence. His struggle was for achieving economic emancipation for the deprived section of society. ( HT Imam, Bangladesh Sarker, 1971-75, August 2013) . Bangladesh has beaten the initial pessimism about viability and prospect of the country with its resource limitations to feed a large population and the lack of energy and natural resources for developing industries. Amidst all achievements, an important area of concern for Bangladesh economy is the rigorous rise in inequality in the distribution of income. After all, the dream of economic emancipation through the alleviation of economic inequality was one of the driving forces of our independence. Fifty years back, it was a war-ravaged economy facing the dire challenges of rehabilitation and reconstruction. Notwithstanding all hurdles, Bangladesh had surged forward and in the recent decades, the country's average economic growth rates reached 7 per cent per year, and growth has been inclusive (GED, Planning Commission, 2015). Bangladesh was raised to the status of a lower middle-income country with GNI per capita of US$1080 in FY14(World Bank, 2016), and the per capita GNI in 2019 was US$1940. The country attained remarkable success in many of the socio-economic indicators but it is evident through several studies that the sustainability of the success will be critically confronted by the growing socio-economic inequalities. However, with this backdrop, Bangladesh now needs to focus on addressing the growing socio-economic inequalities and the structural and institutional reforms as a major agenda in the next fifty years. 

Conceptually income inequality is an extreme concentration of wealth or income in the hands of a small percentage of a population. It is often described as the gap between the richest and the rest. Effects of income inequality, researchers have found, include higher rates of health and social problems, lower rates of social goods, lower population-wide satisfaction and happiness and an even lower level of economic growth when human capital is neglected for high-end consumption. There are wide varieties of economic inequality, most notably measured using the distribution of income (the sum of money people are paid) and the distribution of wealth (the sum of wealth people own). Besides economic inequality between countries or states, there are important types of economic inequality between different groups of people. Current economic literature largely points to three explanatory causes of falling wages and rising income inequality: technology, trade, and institutions.

The Urban Institute of the United States, in an analysis of 53 years (1963-2016) of economic data, reflected that the poorest have gotten poorer while the richest have gotten much richer. According to the report,  the poorest 10% of Americans went from having zero assets to being $1,000 in debt, the families in the middle more than doubled their prior average wealth, families in the top 10% had more than five times the prior wealth and families in the top 1% had more than seven times their prior wealth. According to a 2017 Federal Reserve report, the richest 1% of the U.S. population possessed 38.6% of the nation's wealth in 2016, 

Bangladesh has remained a country with substantial income inequality with all its manifestations even five decades after independence. A small section of the society enjoys most of the country's wealth depriving the larger section. Income share held by the highest 10% increased from 21% in 1984 to 27% in 2010. Income share held by the lowest 10% decreased from 4.13% to 3.99%. 

Equity is a core principle of the Universal Declaration of Human Rights, successive UN conventions and the constitutions of many nations and states, including that of Bangladesh. Social justice, and with it the promise of economic, social and cultural rights is the embodiment of development with equity.  These commitments aim to promote peaceful and prosperous coexistence within and among nations, based on human dignity and non-discrimination.

Although these rights — to shelter, food, education, health, decent work and livelihoods — have been controversial in the past, their place is now well-established in international law. To be clear, these are cast in terms of access to opportunities and capabilities, based on the principle of fair provision of public services and exercise of law between people and groups.  It is recognised also that resource constraints may limit the achievement of these rights, yet it is, nevertheless incumbent on governments to take all necessary action to secure them.  For the United Nations, the pursuit of social justice is at the centre of its global mission, and the world body seeks in all that they do, to support governments in meeting these obligations. While monitoring and reporting have their place, advocacy and support are still more significant, especially in this very challenging area. For Bangladesh, these types of commitment also have a strong grounding — notably in Article 15 of the Constitution which states:

"It shall be a fundamental responsibility of the State to attain… a steady improvement in the material and cultural standard of living of the people, with a view to securing to its citizens… the basic necessities of life, including food, clothing, shelter, education and medical care; the right to work, that is the right to guaranteed employment at a reasonable wage having regard to the quantity and quality of work; the right to reasonable rest, recreation and leisure; and the right to social security, that is to say to public assistance in cases of undeserved want arising from unemployment, illness or disablement, or suffered by widows or orphans or in old age, or in other such cases."

Bangladesh has long recognised the importance of social protection, and the potential contribution it makes to equitable development. Moreover, these programmes have a special resonance for this country, given the level of vulnerability accruing from exposure to environmental and climatic risks. Today the government is spending around 15% of its revenue budget equivalent to around 2% of national GDP on social transfers and allowances.  This is a major resource commitment. Additionally, Bangladesh has pioneered many innovations in this field — including the educational stipend allowances targeted on school attendance, a focus on poverty graduation and the building of resilience and a system to respond to environmental and climatic shocks.

However, the system has many weaknesses. The number of programmes has proliferated and there is some degree of administrative fragmentation, with over 80 schemes being delivered by more than 20 ministries. Both coverage and targeting have been weak, and too large a portion of the benefits do not reach the intended, most needy recipients. Most significantly, the system is not well-attuned to the rapidly changing nature of Bangladesh –i.e. major forces in play such as industrialisation, urbanisation and mass migration. These pose enormous consequences for social and economic change in the coming years. The pattern of spending is rather too dominated by relief-type programmes focused on disaster response. While there were and remain, very good reasons for this focus, the system needs to evolve to meet new needs and build-in resilience to shocks as well as offer direct responses.

If Bangladesh is to secure middle-income status based on social equity and inclusion, then a modern social protection system is a prerequisite. Learning from other low middle-income countries, this would involve the adoption of a series of technical and practical innovations, and a move to a life-cycle approach based on a mixed system of entitlements and targeted benefits through a phased transition.

 Regrettably, in Bangladesh, there has been an increase in the degree of inequality in income distribution from the mid-1980s. As per the latest Household Income and Expenditure Survey (HIES) of Bangladesh Bureau of Statistics (BBS), the country's Gini coefficient, which is the economic measure of equality, stood at 0.482 in 2016, up from 0.458 in 2010, in a worrying development. Historically Gini stood at 33.12 in 2010 from 33.22 in 2005. The Gini coefficient was 25.88 in 1984 and went up to 33.46 in 1996.

At the time of independence, over 90% of Bangladeshis were villagers, a share that has now come down to nearly 70%. Historical experience suggests that if our economy grows faster, more and more people will flock to the cities. Dhaka in particular has gone from being home to 2% of Bangladeshis to 10% in the past four decades. Lack of decentralisation is causing a growing spatial inequality in income-earning, where residents of Dhaka and Chittagong are earning way more than the residents living elsewhere. Bangladesh had a plan to halve the rich-poor gap by 2015 as part of the Millennium Development Goals. This was going to involve lots of plans and bureaucrats and official foreign aid. And that global free-market capitalism just went and did it without permission -- it's the one of the MDGs that was overachieved and before time. 

Macroeconomic and social indicators show that Bangladesh has been better off as an independent nation though it is far behind in achieving its primary goal of alleviating economic and political inequality. Macroeconomic growth contributed to higher national income, but growing income inequality needs to be addressed. Geographically centralised industrialisation has contributed to a higher flow of domestic migration and export of goods and services helped the national economy gain its self-sufficiency, but it is essential to safeguard the rights of the workers. 

Within the rich countries, it's that economic growth that made them rich, alongside the poor as well. And then the same happened internationally. These past few decades have been called the age of neoliberalism -- that globalized free-market capitalism. The trend then raises questions and concerns about the quality of Bangladesh's much-lauded GDP growth. According to South Asian Network on Economic Modelling (SANEM),   "The economic growth in recent years has been far from inclusive".The official statistics show that the country experienced an accelerated GDP growth rate since 2013; the GDP growth in recent years has been the highest in the country's history. "However, inequality rose significantly during this period -- this is a big concern," SANEM observed. One reason is the disconnect between economic growth, wage growth and job creation. Though figures show that  GDP growth has accelerated in recent years, job growth has slowed and real wage growth has been sluggish at best. The high GDP growth over the past few years has been unable to lead to large scale job creation -- the country is witnessing a phase of jobless growth as the poor people are not getting enough scope for productive income-generating employment activities.

This has resulted in slow progress in poverty reduction and rising inequality. The public expenditure on education and health as a share of GDP is very low and has declined in recent years. Such a low expenditure does not help improve the productivity of workers and is not consistent with the effort to reduce poverty and inequality. There is an increasing inequality of opportunities particularly in access to health care, education, financial services and social protection. Health and education outcomes remain much worse for disadvantaged groups. A stronger focus on faster inequality reduction, especially in a country like Bangladesh, with still a very large number of poor people, may further enhance the power of economic growth to translate into poverty reduction and better opportunities for all.  Nor are the poor in a position to access privileges that the government gives to particular businesses and interest groups in the form of bailouts, loan rescheduling, tax exemptions, subsidies, licences and so on. Social protection programmes are too inadequate to reduce poverty and regional disparity. There is a need for a substantial rise in the allocation for and leakage-free disbursement of the social protection fund. Regressive fiscal policies, particularly taxation policies, end up benefitting the better off than the poor on the growing inequality. The expenditure programmes that are targeted for the poor suffer from serious leakages appropriated by the wealthier classes. Corruption is the ultimate reason for creating inequality. Using public office for private gains is something the poor are never in a position to engage in and benefit from. 

Inequality is not an inevitable consequence of economic growth. Long-term growth and social stability are two important reasons to focus on equity. Bangladesh needs to work on strengthening income and asset-based tax collection, enhancing private investment for economic diversification and growth of labour productivity based on upgraded technology. Following are the five activity clusters to consider for  curbing inequality by making the country's recent success more sustainable and inclusive:

1. The quality of growth should be enhanced by supporting policies, such as land tenure reform, changes in marginal and average tax rates, increases in pro-poor social spending, etc. and necessary structural and governance reforms would be required to empower the poor for the purpose;

2. Trade policy in Bangladesh needs to be streamlined by making more reforms in tariff structure with a predictable approach for solving the problem of an unpredictable set of tariff and para-tariff structure and policy reforms should aim to create an enabling environment and level-playing field conducive to private sector investment and broad-based economic growth;

3. Reform in tax administration and tax structure for fiscal sustainability in a situation when Bangladesh has the lowest tax-GDP ratio among the South Asian neighbours and Bangladesh needs to streamline the mismatch between GDP and tax income, improving tax governance, increase tax net and coverage, analyze tax incidence, and enhance capabilities of the NBR;

4. Ensure a sustainable improvement in living standards in the long run especially through a vibrant manufacturing sector with a particular focus on micro, small and medium enterprises; and

5. Create conducive regulatory and business environment, maintain consistency and continuity of fiscal measures, ensure domestic private sector investment, attract FDIs, improve human capital through skills development, ensure serviced land through SEZs and competitive and efficient financial sector etc.

Dr Muhammad Abdul Mazid, former Secretary to the Government and former Chairman, NBR