By JR Janumpalli
The buzzword everywhere is development and distribution of wealth to the people. It is more strident in developing and poor countries. In India, we hear it day in and day out. But we seldom know if it is national income, income of household, personal income or its distribution among the people which makes the so-called development. There is a need to understand the nuances of these concepts to evaluate the development of nations and societies.
There are several concepts to describe development, national income, gross domestic product, per capita gross domestic product, wealth distribution coefficient, etc. Each of these concepts is used to work out the metrics of the economy of nations. Each has its relevance and limitations. They indicate the levels of economy of each country in different ways. But based on them, it would be difficult to say which nation is the best. Some can be good in GDP, some in GDP per capita, some in wealth distribution and some others in less percentage of poverty. Because, they do not occur together.
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Gross Domestic Product (GDP) is the monetary market value of all final goods and services made within a country during a specific period. Per capita income (PCI) measures the average income earned per person in a given country, in a specified year. It is calculated by dividing the area’s total income by its population. The GINI index measures the degree of inequality in the distribution of family income in a country. The more equal a country’s income distribution, the lower its GINI index. Poverty is defined as not having enough material possessions or income to cover a person’s basic personal needs. The poverty rate is the ratio of the number of people whose income falls below the poverty line in a country.
The GDP is one of the most important statistics in economics. Economists use it to determine whether the economy is growing or experiencing a recession. Investors use it to make investments decisions. However, it has its limitations. The GDP does not directly measure those things that make life worthwhile. The GDP per capita acts as a metric for determining a country’s economic output per person living there. Often, rich nations with smaller populations tend to have a higher per capita GDP. But, once you do the math, the wealth is spread among fewer people, with the majority getting less.
The GINI coefficient is not an absolute measure of a country’s income or wealth. The coefficient only measures the dispersion of income or wealth within a population. Data shows that the coefficient generally ranges from 24% to 63%. The poverty rate indicates the equity of distribution of income in a country. Today, estimates for global poverty are approximately 8.6% of the world population. People who live in extreme poverty live on $1.90 or less per day.
Countries with a better GINI coefficient — Slovenia, Slovakia and Belarus — have less GDP and moderate per capita GDP. The percentage of poverty levels in the US and Luxembourg is surprising. That aptly explains the unassociated relationship among these economic concepts. (See box). But better income distribution and lower poverty rate have some relationship. At present, the median annual household income worldwide is $9,733, and the median per-capita household income is $2,920, according to the new Gallup metrics.
In effect, in the methods of knowing the monetary strength or the wealth of nations, there is a great deal of variability in its metrics. No one method appears to be perfect in deciding the ranks of nations on wealth. But these methods can be general indicators of the comparative strengths of economies of the nations. It is the same in the case of States in India. They also vary greatly in their GDP, GDP per capita and percentage of poverty. The wealth inequality is very much pronounced.
The growing inequality has become a pressing global issue. Adults with less than $10,000 in wealth make up 64% of the world’s population but hold less than 2% of global wealth. Discussions around the post-2015 global agenda include a specific focus on reducing inequalities. The world’s wealthiest, those owning over $100,000 in assets, total less than 10% of the global population but own 84% of global wealth. It is clear that inequality can be a serious threat to social and political stability. There is a growing recognition, however, that it can also threaten sustained growth.
It is felt, inequality is not a matter of fate or chance and can be reversed through policies and reforms. Solutions rest with national and regional policymakers. Collective actions and measures at the international level also have a crucial role to play. Average inequality within developing countries has been slowly rising, though staying fairly flat since 2000.
As a rule, higher rates of growth in average incomes have not put upward pressure on inequality within countries. Growth has generally helped reduce the incidence of absolute poverty, but less so in more unequal countries. High inequality also threatens to stall future progress against poverty by attenuating growth prospects. Perceptions of rising absolute gaps in living standards between the rich and the poor in growing economies are also consistent with the evidence.
The Center for Applied Economic Research and Graduate Education, Czech Republic, conducted a comparative analysis of the EU member States and Ukraine, on identifying the links between different structural indicators of income inequality and the most essential features of social and economic well-being. The study found that income distribution can cause large-scale transformations in human resources structure, essential changes of economic outputs via its impact on life satisfaction.
The correlation analysis of the connection between the GINI coefficient and a number of socioeconomic indicators (Human Development Index, International Property Rights Index, net migration rate, tax burden % of GDP) proves that with moderate inequality in the distribution of incomes, high indexes of economic and social development are achieved and vice-versa. The EU’s experience convincingly proves that the deliberate income distribution policy, which eliminates the excessive inequality in their distribution, is the basis of human development and socioeconomic progress.
Thus based on the global situation, it is imperative that nations and States need to include policy initiatives in their economic development programmes for accelerated promotion of equitable distribution of income and eradication of poverty along with an increase in the GDP and GDP per capita. The GDP growth alone is not the sine qua non of economic development of nations. The economic planners of India and its States need to take more cognisance of it.
(The author is a freelance journalist)