Vamsi VakulabharanamUniversity of Hyderabad, India

Rethinking Development and Inequality: Insights from the Asian Experience

(Presentation for AGW, 2013)

Why rethink Development and Inequality?

Long-term changes in within-country inequality (especially) inadequately understood so far. Focus here on time-series, not cross-sectional analyses.

A continued search for simple (linear or non-linear), secular patterns of change may not be the appropriate way forward.

My contribution – a coherent and novel framework through which this relation can be recast. Different from the mainstream, also synthesizes the Asian story.

Pre-Occupation with Kuznets Curve

Kuznets - Non-mechanistic, thoughtful and tentative (Also emphasized social and political factors).

Later thinkers made it mechanistic. The inverted U hypothesis became a law. Cross-sectional results used to interpret dynamic changes (e.g. Ahluwalia 1976).

Need to go beyond Kuznets curve as there is overwhelming anomalous evidence - e.g. East Asia (post-1950), Developed World (post-1970).

Attempts to see Kuznets patterns despite this (e.g. Kanbur 2011). Lot of incoherence.

UK Inequality: 1823 - 1974

1823 1830 1871 1891 1901 1911 1915 1938 1949 1954 1959 1964 1965 1966 1971 19740.3

0.35

0.4

0.45

0.5

0.55

0.6

0.65

Gini

UK Inequality Since 1961

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 20080.2

0.22

0.24

0.26

0.28

0.3

0.32

0.34

0.36

0.38

0.4

United States Inequality 1947-2009

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

0.300

0.320

0.340

0.360

0.380

0.400

0.420

0.440

Japanese Inequality 1890-2005

1890 1900 1910 1920 1930 1940 1961 1967 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 20050.25

0.3

0.35

0.4

0.45

0.5

0.55

0.6

0.65

Mainstream Analyses of Inequality (In response to these anomalies)

Focus shifts from macro-analyses to micro-studies or short-period analyses of inequality or more sophisticated attempts to establish a Kuznets pattern? (e.g. Banerjee and Duflo 2003; see Weil (2004); Ray (1999), ch. 7 for a textbook survey on Kuznets curve).

Physical Capital/Wealth differences across people/groups /regions.

Human Capital differences across individuals/groups and technological change.

Spatial/Sectoral Differences, (e.g. City vs. Countryside; Manufacturing vs. Services)

Possibilities for New Thinking?

Focus of my reflections today: To understand changes in inequality within countries, more

than the levels of inequality, from a macro-framework. Within-Country inequality dynamics as opposed to

Between-Country dynamics. Analyze East, Southeast and South Asian experiences –

which have an interesting recent history of development and inequality.

Generalize from the Asian Experience after 1950s to a more durable and macro understanding of the relation between development and inequality. What is the Asian experience?

Japanese Inequality Since 1960

1961 1967 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 20050.3

0.35

0.4

0.45

0.5

0.55

Gini

Korean Inequality Since 1960s

1965 1970 1976 1980 1985 1988 1993 1995 2000 20050.25

0.27

0.29

0.31

0.33

0.35

0.37

0.39

Gini (EPB)

Gini

Malaysian Inequality Since 1958

1958 1970 1976 1984 1990 1995 2002 20040.35

0.37

0.39

0.41

0.43

0.45

0.47

0.49

0.51

0.53

0.55

Urban

Rural

All

Chinese Inequality Since 1978

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

Rural

Urban

All

Indian Inequality Since 1960

1961-62 1967-68 1968-69 1977-78 1983-84 1993-94 2004-05 2009-100.25

0.27

0.29

0.31

0.33

0.35

0.37

0.39

0.41

Urban

Rural

All

What is the Asian Experience Since 1950s?

Not entirely homogenous, but there are strong similarities.

Japan, South Korea, Malaysia, China and India witnessed a U shaped evolution of inequality since 1950s. (Like the US, UK and other developed countries!)

How to make sense of this? Local Political Economy. Global Political Economy.

Local Political Economy 1: The Japanese Case

Decline in inequality post WWII: Extensive bombing of cities like Tokyo and Osaka. Tax reforms: Taxes on the rich, and estate taxes. Zaibatsu dissolution and reduction of top incomes. Rural land reforms and agricultural price management. Interventionist and progressive state.

Rise in inequality post-1980: Two-tier labor market deepens. Contract employment rises. Capital becomes footloose. Financialization; Asset booms and crash in the early ‘90s. Privatization and Deregulation.

Local Political Economy 2: The Korean Case

Overall trend of declining inequality between 1960s and early 1990s. Land Reforms and equalization in rural areas. Massive increase in urban employment through growth in

manufacturing. In the 1980s, progressive labor movement. Rural-Urban gap kept low. Interventionist state.

Rising inequality since 1990s. Strengthening of Chaebols in the preceding period. Significant deregulation, two tier structure of the labor market. Skill-

biased technical change. Polarization and Flexibilization; Low Union Density. Formation of a class enclave in Seoul (Gangnam ?) and other cities.

Local Political Economy 3: The Malaysian Case

Rising inequality (1958-70) Laissez Faire Policies continued from British Colonial times. Severe inequality among ethnic communities. Malay

community at the bottom but had political power. Declining inequality (1975-1990)

New Economic Policy 1970 (post-1969 race riots) Reduces inter-ethnic inequality through affirmative action.

Rising inequality (1990-2005) Neoliberal economic policies introduced. Flexibilization in the labor market and financialization. Rural Urban gap shoots up. Intra-ethnic inequality increases. A Malay rich class consolidates. Inequality is of a class form.

Local Political Economy 4: The Chinese Case

Declining inequality: 1952-1980s Waves of land reforms in the 1950s, and again in 1978. Wage income equalization in urban areas. Early reforms after 1978 reduced the rural-urban income gap

and reduced inequality. The decade of 1980s was high growth with equality.

Rising Inequality: Late 1980s-2012 Previous period consolidated a powerful political class that also

began to venture into business after reforms. Post-1990s, processes of primitive accumulation, massive low

wage migration, deregulated business structure, entry of foreign and private capital. Capital–labor balance shifts towards former.

Rural-urban gap shot up to a historical high.

Local Political Economy 5: The Indian Case

Overall declining trend between 1950s and 1990 Overall, progressive regime, although land reforms failed. In the 1970s, inequality rose due to Green Revolution and

industrial stagnation (slower employment generation). 1980s saw broad-based growth with incomes of all classes

rising rapidly.

Rising trend since 1990s Consolidation of a class enclave, especially from 1980s onwards

(capital–professional classes-bureaucracy-politician) combine. Agriculture left behind (agrarian distress – thousands of farmer

suicides). Growth in employment mainly in the informal sector – the gap

widens.

Global Factors 1: Regimes of Capitalism and Inequality

Changes in inequality may be governed by changes in the deeper underlying dynamics of capitalism - the idea of ‘regimes’ and their crises. For instance, two regimes of capitalism –

A Keynesian Welfarist/Interventionist regime between 1940s and 1970/80s.

A Neo-liberal market-oriented economic regime between 1970/80s and 2000s.

What is a regime?

Inequality and Regimes (contd…)

What are the deeper imperatives that are driving inequality in these different regimes of capitalism?

Circuits of capital: Individual Capitalist Circuit: M-C1-C2-M1;

Two stages: 1. Profit Creation (M-C2); 2. Profit Realization (C2-M1);

At a systemic level too, Profits are created in stage 1; They are realized by the capitalist class in stage 2;

Interruptions/slowdowns in either of these two stages can cause global and national crises.

Inequality and Regimes (contd…)

Stage 1 changes may cause profitability crises; Stage 2 interruptions are aggregate demand crises.

History of the last 150 years appears to be an oscillation between regimes produced by stage 1 and stage 2 crises. Solution to a crisis seems to produce the other regime and a macro theory that is suitable. Long Depression (1873-1896) – Profitability crisis. Great Depression of 1930s (Aggregate Demand Crisis) Stagflation of 1970s (Profitability Crisis) Great Recession of 2008 - (Aggregate Demand Crisis)

Medium Term Crises Since 1850s

Inequality and Regimes (contd…)

Post-Great Depression (1945-1973) Institutional changes to sustain increases in aggregate

demand. Welfare state and trade unions ensured that workers’ fall-

back improved. Interventionist states in developing Asia.Demand management policies.Footloose capital was reined in. Executive compensation

under check.Inequality showed a decline in most countries.Wage increases continued despite slowdown in productivity

growth after late 1960s. With oil price increases, Profits were increasingly squeezed.

Inequality and Regimes (contd…)

Post-Profitability Crisis (1976-2008)Attacks on welfare state and trade unions. Intensified search

for destinations with low wages. Fallback declines. Capital becomes footloose. ‘Financialization’, more dominant.

Executive compensation grows unrestrained. Accumulation by dispossession (transfers from public or commons to private) and through speculation. Rich get much richer, working poor see little improvement. Inequality rises.

Inadequate Aggregate Demand: Temporary solutions found in asset bubbles, credit provision. Not sustainable.

Post-Great Recession?

Inequality and Regimes... Conclusion 1

The idea that I am working with is that predominantly it is the deeper, systemic logic of a particular regime of capitalism that determines inequality dynamics:

There cannot be a singular (even non-linear) long-term trend of inequality. It is important to look at the dynamics of capitalist regimes.

Oscillations of the previous 130 years may or may not continue.

Outcomes are determined as much by class struggle and other political dynamics as the deeper systemic/economic imperative.

On regimes of capitalism, there is a lot of literature already from the French regulation school (e.g. Aglietta 2000), and Social Structures of Accumulation school (McDonough, Reich, Kotz. 2009).

Global Factors 2: World Systemic Changes(Marx-Braudel-Arrighi Hypothesis)

There are other cycles that are longer than the ‘regimes.’

Sustained long periods of capitalist expansion (Iberian-Genoese, Dutch-centered, British-centered and US-centered) during the era of European Dominance.

The circuit that characterizes each of these cycles is also M-C-M;

Global Factors 2

Different Interpretation: In the initial phase of a long-term cycle, capital is in money form. In the next phase, it constantly takes on the productive or commodity form (trade and production). The last phase sees capital “financializing” itself, returning to the money form.

Implication 1: Increased instability in the last phase;

Implication 2: Increased inequality - Industrial workers may lose jobs and may not be able to retrain. Certain classes of workers privileged. Financial/speculative classes gain.

Implication 3: Eventual change of hegemon;

Conclusion

What does the Asian Experience teach us?

Global and local political economy both important to understand the relation between inequality and development.

Strong Interventionist states gave way to states that facilitate the interests of capital. Rising urban Inequality and rising rural-urban gap - keys to understanding the rising inequality phases.

Global Regimes of capitalism come with specific regimes of inequality. There is evidence for oscillation between two kinds.

World System Changes and the rise of Finance Capital has significant implications for inequality.

Age of Uncertainty?