On different floors of the same hotel

Joseph Schumpeter, the Czech-born Austrian-American economist, is said to have once said that income distribution in a society is just like a hotel with three floors where the rooms at the top are luxurious, those in the middle are ordinary, and those on the ground floor or basement are totally shabby. At a given point of time, guests of the hotel experience very unequal accommodations but at some later time, if one examines as to who has moved where, one would find that some guests have moved to higher floors, some have moved to the lower floor and some have stayed where they initially were.

The difference in the quality of hotel rooms gives a snapshot of inequality and the movement of hotel guests among rooms of different quality is mobility. If the movement of hotel guests among rooms of different quality is more frequent, there is greater likelihood of long-term equality in the accommodations of the hotel. Moreover, it also means that the rooms at the bottom give at least some minimum level of services so that the guests of middle and upper accommodations can also stay there if they are unable to find space in the luxurious portions of the hotel. From the perspective of inequality in a society, this example offers some useful insights.

For example, the structures of society should be such that they allow opportunities to people and do not impede the mobility of those who are born at the lower stratum of society due to sheer circumstance of birth Moreover, the state should provide some minimum standards of public services and socio-economic environment which help compensate for the adverse circumstances.

Does South Asia provide such an environment to its citizens? The World Bank’s recently released report ‘Addressing inequality in South Asia’ says that it does not. If standard monetary indicators are taken at face value, inequality in the South Asian region is modest compared to other regions and countries but such statistics, says the report, can hardly be relied on in case of South Asian countries.

South Asia is a land of extremes. On the one end are the affluent and on the other extreme are those who stand deprived of even basic necessities and public services. The gap between the rich and the poor may be far higher as indicated by by statistics. According to Forbes Magazine 2014, the total billionaire wealth in India amounts to 12 percent of GDP.

But South Asia has some of the worst human development indicators in the world. For example, the share of stunted children in the poorest quintile of population is above 50 percent in case of Bangladesh and Nepal; in case of India it is about 60 percent. Out of 1000 children born in the poorest quintile, 82 die within twelve months and 117 die within five years while in the case of Pakistan this figure is 94 and 120 respectively.

According to the report, “A substantive equality of opportunity remains an elusive goal in South Asia. In terms of access to basic services, many children are still suffering from discrimination because of their socioeconomic background. For example, in Afghanistan, Bhutan, India, Nepal, and Pakistan, girls have fewer chances than boys to study because of cultural and social reasons. Girls 12 to 18 years of age have both lower secondary school attendance rates and lower completion rates than boys of the same age group. In Afghanistan and Pakistan, the difference in attendance rates between boys and girls is as high as 25 percentage points and 14 percentage points, respectively.”

The detrimental effects of extreme inequality on growth and social development are now widely known. In one of its recent papers, OECD has officially declared that inequality reduces long-term economic growth. A paper by the IMF found that redistribution is not bad for growth. Oxfam is doing a wonderful job in making the negative impacts of growth known to the people. Some leading economists like Joseph Stiglitz have tried to show that inequality is an economic problem and should be approached from an economic perspective; and that tackling inequality is desirable from both moral and ethical perspectives. Extreme inequalities are bad for economic growth and social development. The World Bank is talking of shared prosperity; a comprehensive report has recently come out on inequality in South Asia.

The point the report has attempted to emphasise is that inequality needs to be approached from multiple angles by expanding opportunities at each stage of life. People’s circumstances at birth shape the options available to them, especially as far as accumulation of human capital is concerned. Circumstances at birth can be compensated for through committing more funds for quality provision of public services. Discrimination based on gender, caste, and location must be done away with while providing public services like health and education. Oxfam has also suggested in its reports that public services can mitigate the impact of skewed income distribution by distributing resources to the poorest of the poor.

But in case of highly unequal societies, opting out of public services is an option for the rich and powerful in the society. Resultantly, much of the funds and efforts may not go for public service not utilised by them. The report says: “In case of Pakistan, land inequality is unambiguously associated with greater access to services in the cases of electricity, drainage, and access to public transport.

In contrast, the teaching quality in public primary schools is far poorer in the most unequal villages. Notably, this negative impact of land concentration on teaching quality does not extend to private schools. These results imply that service quality and access tend to decline at very high levels of inequality but mainly for services for which the wealthy can move to private providers – such as schools.”

Much of the inequality, especially in the developing countries, rests on rent-seeking. Inequality in the developing countries does not necessarily arise out of technological changes; in most of the cases it is a result of rent-seeking. The inequality arising out of rent-seeking has a negative effect on economic growth and social development. In a rent-seeking society, people spend their efforts on securing favouritism and protection. Pakistan is a pertinent example of that. Most of the wealth in our country originates from rent-thick sectors like real estate, construction, telecommunications, cement, and media etc.

The report emphasises that mobility during the adult life can be enhanced through economic growth and rapid urbanisation. Pakistan is passing through a haphazard transition in this regard. It is caught up in low economic growth equilibrium for the last many years. Structural transformation is estimated be the lowest in Pakistan in the South Asian region. The industrial sector, which is generally located in the urban areas, is unable to absorb the teeming millions of unemployed youth. But due to urban biased policies in the past, the urbanisation rate in Pakistan is the highest in the region.

At an estimated urbanisation rate of 3.06 percent per annum, our social, political and economic landscape is likely to change altogether by 2050. The increase in urbanisation will increase demand for public services as well as the level of anger in case of non-provision of such services in the coming years. If economic growth and provision of quality public services do not become the government’s top priority, the transformations our society is now passing through can unleash the forces of long-term political and economic instability. The message thus is that opportunities need to be expanded by ensuring quality public services, managing haphazard urbanisation, and transferring resources to the people to offset disadvantages. The occupants of the shabby portion of the hotel should not think that they will remain stuck there forever.

The writer is a graduate of Columbia University.  Email: jamilnasir1969@gmail.com Twitter: @Jamilnasir1