Thursday, February 04, 2010

Inequality and Income distribution of G20

Recently I have read an extremely informative article in G20 website about the growth in personal income among the population of different G20 countries and there was a similar NBER working paper. The article is a little long, but it gives deep insight about poverty, inequality and income distribution. The research tracks the income growth since 1970. One interesting observation is that the G20 income distribution exactly traces the entire world's income distribution. Since G20 represents more than 60% of world's population, it may make sense. But what makes then a part of this club is not their population, but their economic growth. If that is the case, shouldn't G20 income be significantly or at least notably larger than the world average? The fact that it is not simply implies that even in a fast growing economies, poverty is a continuous problem. The US, Europe and Japan occupy the highest income distribution segment among the G20, as expected.

Another observation is that the income range in 1980 is more or less the same as it was in 1970. Seventies has been the decade of small, recurring depressions all over the western world, just like the current decade, although there was nothing as worse as the current depression since 1930s. Seventies also saw the peak of cold war. In seventies, more than one-fourth of India and China was earning lesser than $1 per day. China's socialist market economy has not kick started at that time and India was still confused and there were not stable economic and trade policy to talk about. In fact, it was more tilted towards USSR.

In 1980, China has started its internal liberalizations. India was still confused and the government was holding most of the industries. The industries lacked in technological growth, innovation, and productivity. The society was split in different terms and keep on innovating ways to not stick together.

Then started the roaring nineties and its globalization. India made some right choices and jumped on the globalization bandwagon. Or rather it can be argued that India had no other choice. One thing that still bothers me even now was the marked absence of internal liberalization in India. Except in certain sectors like banking, when the Indian market opened for private investments, it immediately invited global players. So the number of pure Indian players who compete with these global giants was less. At the end of the roaring nineties, Asia hit a currency crisis with Thailand as its epicenter. The different countries which were the proud foster children of IMF fell down first almost pulling down everybody around along with them. What did India and China do differently? The more suitable question is what did they not do. They did not drink the capital market liberalization potion. And thus they survived.

The best observation that we can make out of these curves is that throughout this period, the shape of the income distribution curve remained the same. This means when India's economy started developing through globalization, it created positive effect of everybody across the histogram. On the other hand, China's curve became flatter and flatter - which means the inequality between the rich and the poor increased constantly and dramatically. But in India, although it did not achieve the income shift as China did, it managed to maintain its income distribution ratio.

Now whatever short term political stupidity might have happened in India over the past two decades, this could arguably be its greatest achievement since independence. Kudos to India's policymakers!

Note: All images courtesy:,

1 comment:

  1. Excellent. Import substitution and self-sufficiency were the two mantras that Jawarharlal Nehru followed at that time. So even if the import is cheap, it was prohibited. Instead Indian markets were flooded with goods manufactured in India (costly ones using
    technological obsolecense.) But only when Mr. Narasima Rao was the PM and Dr. Manmohan Singh was the FM, liberalisation process was started.
    But as you stated, the liberalisation helped only overseas companies to open shops in India. No company from the private sector was
    benefited from the liberalisation thanks to the absence of internal liberalisation.