Reducing income inequality: An agenda in search of actions
"Inequality is widening, posing major moral, social and political challenges to which policymakers must react," wrote Prof Olivier Blanchard of MIT and Prof Dani Rodrik of Harvard University, in a widely quoted article in 2020. They argued that a combination of forces such as globalisation, new technologies, and institutional changes has generated "strong centrifugal forces," which have made existing divisions more acute and also created new ones. The authors were writing about trends in advanced economies in the recent past decades. However, inequality has emerged as a growing concern in many developing countries as well, in spite of notable economic growth and reduction in poverty levels. Policymakers in developing countries must also react to this and focus on reducing income inequality.
Take, for example, Bangladesh. The country's progress in terms of socioeconomic indicators has been, by any measure, undeniable and highly impressive. The proportion of people living below the national poverty line has seen secular decline over the past years—from 56.7 percent in 1991-92, to 48.9 percent in 2000, to 31.5 percent in 2010, to 24.3 percent in 2016, to 18.6 percent in 2022, according to various Household Income and Expenditure Surveys (HIESs) conducted by the Bangladesh Bureau of Statistics (BBS). The share of the population living below the national extreme poverty line has also declined in tandem, to reach 5.6 percent, according to HIES 2022, from 41.1 percent in 1991-92, 17.6 percent in 2010, and 12.9 percent in 2016. In terms of a number of key social indicators, too, Bangladesh's progress has no doubt been remarkable. This achievement has been well-recognised and well-appreciated by development observers worldwide. At the same time, one does not fail to note that over the same timelines, income inequality in Bangladesh has been on the rise and has reached a point where the emergent trends demand urgent and priority attention from the country's policymakers.
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The HIESs show a trend of rising income inequality in Bangladesh over the past years. The Gini coefficient of income inequality, which measures the degree of income concentration, has increased from 0.39 in 1990-91, to 0.46 in 2010, to 0.50 in 2022. Urban Gini coefficient has risen from 0.40 to 0.45 and to 0.54 over the corresponding points in time, while the rural Gini coefficient has risen from 0.36 to 0.43 to 0.45, over the same period. The share of the bottom 10 percent of the population has come down from 2.58 percent of national income in 1990-91 to 2.0 percent in 2010 and 1.31 percent in 2022, while that of the richest 10 percent has gone up from 29.23 percent and 35.85 percent to 40.92 percent over the corresponding period. This would indicate that income of the richest 10 percent of the population compared to the lowest 10 percent has gone up from 11.3 times in 1991-92 and 17.9 times in 2010, to 31 times in 2022. To also note, income of the top five percent of the population was 80 times higher than the bottom five percent in 2022, which was 18 times in 1991-92 and 31 times in 2010, according to the BBS data.
Between 2016 and 2022, some positive changes in terms of income shares are discerned. However, the levels of Gini coefficient and the significantly large difference in the shares of top and bottom 10 percent remain quite disquieting, and testify to the growing gap between the rich and the low-income segments of the population. To note, rising income inequality also results in rising asset inequality, as has been the case in Bangladesh.
There is, of course, a moral argument to be made against what Prof Rehman Sobhan has called the "injustice of poverty and inequality" in his seminal publication Challenging the Injustice of Poverty (2010). According to Prof Sobhan, it all boils down to democratising opportunities. He draws attention to the embedded structural injustices—unequal access to assets, unequal participation in markets, unequal access to education and human development, and unjust governance. He emphasises the need for correcting injustice by recognising the urgency for change, and by pursuing an inclusive policy agenda.
There are strong economic arguments to be made in view of this. As analysis carried out by Prof Dani Rodrik and others have shown, economies that start with relatively lower levels of inequalities tend to grow at a faster pace than those that start with higher levels of inequality, indicating that rising inequality could arrest the prospects of realising future growth potentials, and could be a drag on economic development in future. Research also shows that growing inequality has adverse implications on aggregate demand in an economy, working as a disincentive for supply-side response and, by implication, for investment. A vicious cycle is thus created which perpetuates inequality.
In most economies, there is an attempt at reducing income inequality in the first round through taxation, fiscal-budgetary policies, and public expenditure. Progressive taxation ensures that those who are rich pay taxes at relatively higher rates, and government expenditures, particularly in social sectors such as health, education and social security, would benefit the relatively low-income groups more. Thus, fiscal-budgetary policies are expected to reduce the initial inequality in the second round, through redistribution and the consequent impacts on income level and well-being of the general masses.
The structure of domestic resources mobilised in Bangladesh through taxation explains, to some extent, why inequality is on the rise. At less than nine percent equivalent of the country's annual GDP, Bangladesh's domestic resources mobilisation is one of the lowest in the world. Consequently, with a fiscal deficit of about four to five percent of GDP, public expenditure remains very low, at about 13-14 percent of the GDP.
The structure of domestic resources mobilised in Bangladesh through taxation explains, to some extent, why inequality is on the rise. At less than nine percent equivalent of the country's annual GDP, Bangladesh's domestic resources mobilisation is one of the lowest in the world. Consequently, with a fiscal deficit of about four to five percent of GDP, public expenditure remains very low, at about 13-14 percent of the GDP. This share is also one of the lowest in the developing world and does not leave much leeway to policymakers to go for the required allocations to social sectors.
Composition of revenue earnings shows that the share of direct tax is also much lower in Bangladesh, accounting for only about one-third of the total revenue earnings. This has two important implications. First, The current taxation system is failing to make tangible progress in reducing income inequality, and the burden of indirect tax, the major component of revenue earnings, is falling disproportionately more on the lower-income group. Second, the government's capacity to invest in people's welfare becomes constrained due to lack of adequate resources for public expenditure.
Factors such as widespread tax-dodging, high debt default, and a significant amount of capital flight are accentuating the problems further, because income generation and employment creation through domestic investment are hindered when resources do not get mobilised and invested, and when these are taken out of the domestic economic system.
Property tax, inheritance tax, universal minimum wage, and moving from social safety nets to universal social security should be seen as necessary elements that could drive the reversal of the current inequitable distribution. But these entail hard political choices. Transparency, accountability and good governance in economic management must inform both policymaking and policy implementation.
Arresting the rising income inequality by taking concrete steps towards a more equitable and inclusive society and economy is morally fair, economically justified, and also best serves the enlightened self-interest of the political class.
Bangladesh has committed to attaining the SDGs by 2030. A key idea underpinning the SDGs is to leave no one behind. And SDG 10 specifically aims to attain the goal of Reduced Inequalities. Fair share in economic growth and national income is also embedded in the four fundamental principles of Bangladesh's state policy, reflected in the pillar Socialism. The Bangladesh Vision 2041, the plan adopted by the present government, aspires for an economically developed, socially inclusive, and environmentally sustainable country. The 2024 election manifesto of the governing party also pledges to work towards a more equitable society. Time to walk the talk.
Dr Mustafizur Rahman is a distinguished fellow at the Centre for Policy Dialogue (CPD).
Views expressed in this article are the author's own.
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