Monday, 27 June 2011

A different perspective on economic disparity

A few days ago, I was in conversation with a gentleman from the Netherlands. I daresay he was in his late fifties, very possibly in his sixties. As is frequently the case when I meet Europeans, the conversation settled upon India's rapid economic growth.

Proud as I am about the extraordinary progress India has made in my relatively short lifetime, I am nevertheless too much a realist to close my eyes to reality. The appalling poverty in India (a lot of it in urban India itself) is a topic this writer has broached more than once on this very blog. When I tried to highlight the obverse aspect of situation, the Dutchman presented a very different perspective on the topic which I thought was worth sharing.

Historically, societies undergoing a socio-economic transformation have always been deeply unequal societies. However, the combination of high (at times extreme) inequality and a rapidly developing economy can be potent one, as there is crushing poverty on the one hand and opportunities to improve one's economic lot on the other, which spurs people to work harder and earn more.

A second effect of the disparity in distribution of income is that it gives businesses the luxury of low cost of labour, which in turn enables them to keep the cost of their products and services at reasonable levels.

On the other hand developed countries, where the vast majority of the population is economically well off, face the dual problem of high cost of labour and low productivity and consequently, high price levels. This is on account of the fact that on one hand with far lesser disparity in distribution of wealth and a reasonably comfortable standard of living, the vast majority of the population has little incentive to work hard and earn that little extra, quite apart from high labour costs.

It is an interesting perspective and admittedly, one which never quite occurred to me. Having given it a serious thought, I realised that the facts support the assertion.

Consider this: legislation restricts working hours in western european countries to 48 hours a week. In most developed EU countries (France notably), the actual working hours are much lesser. Contrast that with countries like India, where fifty hours a week is pretty much the average and in most cases, the working hours are much longer. There are extreme cases where the working hours are well over sixty hours a week- the kind of thing that can provoke a strike in France.

Also look at the price levels and you get the complete picture. Just to give an example: I had recently been to France, where I had to take a cab from the airport to the venue of the event I was participating in. The taxi ride- which was around 25 kilometres- cost me 47 euros, which would work out to about 3,000 rupees in India at the prevailing foreign exchange rates. In most Indian cities, one could get an apartment on rent for a whole month with that amount. In short, there's simply no comparison between the prevailing price levels in emerging countries and developed ones.

The point becomes even more pertinent when you take into account that fact that European countries as well as the USA benefited immensely from low labour costs a century or more ago, when they rose to become economic powerhouses. Its also no coincidence that the most highly developed countries experienced very slow growth in recent years. Most of them are currently in the midst of perhaps the biggest financial crisis in living memory (three years and counting, with no end in sight).

And so much as one would love to wish away poverty, the sad but inescapable reality is that the presence of a significant number of people at lower income levels is an indispensable pre-requisite for economic growth.

1 comment:

MS said...

Your observations are very apt. Thank you for sharing your conversation with the Dutch national.