THE (IN)COMPATIBILITY OF GROWTH AND INCOME EQUALITY : A COMPARATIVE STUDY OF SOME DEVELOPING COUNTRIES

Abstract

Rapid economic growth and greater income equality have always been important development objectives for Third World countries. In this academic exercise, we examine the issue of compatibility of these two goals with reference to selected developing countries. First, we look at various theories and hypotheses that may help to provide insight regarding changes in income distribution during the process of economic growth. Then we examine their relevance and usefulness by studying the actual empirical experiences of several developing countries. In this exercise, we examined various explanations for either an improvement or worsening of the income distribution during economic growth. The neoclassical theory, for example, emphasizes the trickle down process where the benefits from economic growth diffuse throughout the economy. This may occur, for instance, when firms expand their investment, resulting in more employment opportunities for labour and higher wages. Migration may also help to narrow the income gap between the rural and urban population. In the international context, export expansion based on labour-intensive commodities tends to improve income distribution by raising the demand for labour. Other theories, however, give rise to quite different predictions. For instance, if high population pressure results in low wages while high rents are accrued to landlords - a situation which Ricardo seemed to have envisaged - then inequality may perpetuate or even increase. In another case, Marx predicts increasing income inequality and unemployment during economic growth as a result of exploitation of the workers by the capitalists. Similarly, according to both the neo-Marxist and dependency schools, the exploitation of developing countries by the international capitalists would result in a distorted pattern of growth for the developing countries, thereby resulting in greater domestic income inequality. In practice, natural tendencies in the economy towards greater or less income inequality may be either augmented or offset by government policies. Certain policies, such as progressive taxation, land reforms and agricultural price supports, are aimed at redistributing either income or assets directly. There are also other policies, for example, trade policy, labour market policy and human capital investment which are implemented for other goals but nevertheless may have important income distribution effects. To see how market forces and government policies have worked to influence the income distribution, a comparative study of Singapore, South Korea and India is conducted. These three countries were chosen because of their different and unique characteristics. For the city-state of Singapore, the absence of a significant agricultural sector and the relative homogeneity of her economy causes the diffusion of benefits from economic growth to be fairly rapid. The adoption of export-oriented industrialization, since the 1960s, has resulted in full employment of labour and rising wages. Greater income equality was also achieved through the implementation of government policies such as the provision of subsidies on education, health care and housing. Since the l 980s, however, there seemed to be some evidence of a slight increase in income inequality, which may be due to the new emphasis on high technology and capital intensive goods and labour market policies. Korea, unlike Singapore, has a significant agricultural sector. Greater income equality was achieved by the successful implementation of land reforms and agricultural price supports which greatly benefited the rural population. After a brief period of import substitution, Korea turned towards export orientation based on labour-intensive goods in the early 1960s. As in the case of Singapore, Korea did not seem to have suffered from the adverse effects of dependence and was able to achieve rapid growth and greater income equality. However, in the last decade, due to the industrial shift towards heavy and chemical industries and the development of large enterprises, the income distribution seemed to have worsened. India, on the other hand, is a relatively poor country which until only recently has maintained an import substitution strategy. The urban bias caused by the protection of industries and the unequal distribution of assets contribute to the reason why India experiences great income inequality. Being a typical dualistic economy, the diffusion of benefits from India's economic growth is expected to work at a much slower rate. For that reason, the government has had an early emphasis on redistributive policies. However, due to inefficiencies and other difficulties in implementation, the benefits of such policies have not fully materialized. In the last few years, India has turned towards greater export orientation and economic liberalization. The effects of these changes on economic growth and income distribution remain to be seen, though it is possible that these effects may not be as great as in the other two countries, due to India's large size and relative closeness of her economy. In this academic exercise, we have examined both theoretically and empirically, the issue of compatibility between economic growth and income equality. The main conclusion that emerges is that while countries' experiences may differ there is in general no presumption that the two objectives need to be incompatible. In fact, both Singapore and Korea had been able to attain both objectives at least during certain periods of time. Due to the nature of her economy, India has a larger task in achieving economic growth and greater income equality simultaneously.