Thursday, September 13, 2012

Spend more to revive economy and reduce inequality, advises UNCTAD report to Govts.

The UNCTAD 2012 report entitled Policies for Inclusive and Balanced Growth, released on 12 September, 2012, has warned developed countries who are in a hurry to shift towards the policy of government budget cuts from the policy of economic stimulus measures. Insufficient State spending as a part of austerity measures adopted in the developed countries has slackened their domestic demand. Global growth has reduced from 4.1 per cent in 2010 to 2.7 per cent in 2011. As a result, export prospects of developing countries have been affected. Restraining demand in the midst of recession is a misdiagnosis of the causes of crisis, which the new report has cautioned.

The UNCTAD 2012 report has found that countries like India and Turkey have suffered due to weaker demand from developed countries and because of the policy of monetary tightening they pursued in 2011 for curtailing increase in inflation and asset prices. In the absence of external demand, economic growth in India [which used to be 7.5 percent in 2008, 7.0 percent in 2009, 9.0 percent in 2010, 7.0 percent in 2011 and 6.0 percent (forecast) in 2012] could be maintained because of continuous expansion of household incomes and consumption that boosted domestic demand. However, aggressive monetary tightening has affected private domestic investment, which has slowed down the Indian economy in the recent times.  

For India, annual growth in volume of exports declined to -6.6 percent in 2009 from 16.8 percent in 2008 but jumped to 5.9 percent in 2010 and further to 13.7 percent in 2011. Annual growth in volume of imports plummeted to -0.8 percent in 2009 from 29.7 percent in 2008 but jumped to 13.8 percent in 2010.      

It is important to note that although developed countries accounted for 75 percent of global growth in the 1980s and 1990s, they only contributed 22 percent of global growth between 2006 and 2012. Developing countries accounted for 74 percent of world growth between 2006 and 2012.

India's Gini coefficient* for consumption has risen from 0.31 in 1993-94 to 0.36 in 2009-10. A rising trend in inequality could be attributed to gains from growth being concentrated among surplus-takers (which include profits, rents and financial incomes). The UNCTAD 2012 report has observed that the manufacturing sector in India could not generate sufficient employment opportunities and most of the labour force is still employed in the low remuneration informal sector and low productivity agriculture. Wage shares in total national income in the organized sector have been falling since the early 1990s.
The top 1 percent held a much larger share of the total wealth of the economy than the bottom 50 percent. For example, 15.7 percent compared with 8.1 percent in India in 2002-03 and their share of wealth is significantly higher than their share of income (9.0 percent share in total income by top 1 percent in India in 2002-03)-see the table above. The UNCTAD report has argued that high inequality deprives people of access to education and credit and prevents the expansion of domestic markets.

Apart from India, Eastern and South East Asian countries have witnessed a rise in personal income inequality between 1980 and 1995. Economic growth in China has come at the cost of rising income inequality since 1980s and the trend has still continued.

The UNCTAD report has advocated for government backed fiscal and labour market policies, which can reduce income inequality. It has given example of Latin America and other developing countries where progressive taxation and increased public investment have contributed to inclusive growth. [For example, in Latin America public expenditure on education rose from 4.1 percent to 5.2 percent of GDP between 2000 and 2010]. The UNCTAD 2012 report has informed that in the 1980s and 1990s, fiscal policies tended to reduce the share of direct income taxes in government revenues while increasing the share of indirect taxes such as value added tax. While criticizing the neoliberal policy of reducing the "size of the State", the report has stated that lower taxation of high-income groups and public spending restraint did not generally result in greater investment, either public or private.

The UNCTAD 2012 report has commended the Indian Government for adopting a $5 billion plan to provide free medical care to the poorest 50 percent of the population in 2012. If generic drugs were to be used in the programme then the policy of the Government would improve access to health care and strengthen the domestic pharmaceutical industry, anticipated the report. 

* A Gini of zero denotes absolute equality, while a value of 1 (or 100 on the percentile scale) means absolute inequality.

Key findings of the UNCTAD 2012 report:

  • Macroeconomic, financial and labour market policies have caused unemployment to rise and remain high, and wages to lag behind productivity growth, and they have channelled rentier incomes towards the top 1 per cent of the income ladder.

  • Income inequality fell markedly in most developed countries between 1929 and 1950, and continued its decline in some of them until approximately 1980. Between the 1980s and 2000s, Gini coefficients increased in most countries of this group.

  • Inequality declined significantly during left-of-centre governments in Argentina (around 1950), Brazil (1950), Chile (1970) and Peru (1985).

  • While looking at historical figures, the report has found that between 1920 and 1930, top 1 percent accounted for between 15 and 20 percent of national income in India and also in developed countries such as Canada, Finland, France, Germany, the United Kingdom, the United States, Sweden etc. India witnessed a decrease in inequality during the 1970s, which reversed the increase in the previous decades.

  • Top 1 percent income group increased its share in the national income from 6 percent in 1979 to 16 percent in 2007 in the United Kingdom and from 8 percent to 18 percent in the United States during the same period.

  • Despite a very modest improvement of GDP growth in the United States and a more significant one in Japan, developed economies as a whole are likely to grow by only slightly more than 1 per cent in 2012 owing to the recession currently gripping the European Union (EU).

  • Growth of global gross domestic product (GDP), which had already decelerated in 2011, is expected to experience a further slowdown in 2012, to around 2.5 per cent.

  • Many developing countries have adopted expansionary demand-side policies. For example, China was able to absorb a dramatic fall in its current-account surplus with only a small reduction of its overall growth expectation and without restraining real wage growth.

  • After a long period of relatively stable distribution of income between profits and wages, the share of wages in total income has fallen since around 1980 in most developed and many developing countries.

  • Fiscal austerity, combined with wage restraint and further flexibilization of labour markets, not only causes an economy to contract, but also creates greater inequality in the distribution of income.

  • By offshoring their production to low-wage countries and/or by keeping wages down through the mere threat of going offshore, firms of developed countries created profits which were used for dividend payments and share buybacks to maximize shareholder value. Due to this, income shares among the top income groups, including rentiers and the “working rich” in top management positions, rose.

  • In many developed and developing countries liberal tax reforms (lower taxation of corporate profits and high-income groups) reduced the tax-to-GDP ratio, lowered marginal tax rates and contributed to strengthening those elements of the public revenue system that had regressive effects on income distribution (i.e. a tax burden that falls disproportionately on lower income groups).

Trade and Development Report, 2012, United Nations Conference on Trade and Development,

Overview of Trade and Development Report, 2012,

Economies will perform better with more even income distribution–UN report,

Austerity did not lead to growth; supportive government policies are still needed, UNCTAD report says

Rising inequality is not inevitable, report says – and economies will perform better with more even income distribution

Report says reducing inequality through fiscal and incomes policies is key for growth and development,