Inclusive Development: Relevance of Socio-Political Factors

Rising inequalities in wealth and income lead to unequal access to power, status and influence. Democracies may be less prone to such state capture than dictatorships but even democracies have proved to be vulnerable to pressures from the powerful private interests, particularly when the prevailing social structure is inequitable, as in India.

Policy-analyses, worldwide, highlight rising income inequalities as the foremost concern today. Recent OECD evidence based on a sample of 15 countries over the period 2002-12 showed a negative correlation between income inequality within a region and the region’s growth, basically on account of underinvestment in human capital by the lower income groups, suggesting that policies should avoid the “grow first, distribute later” assumption that has characterised the economic paradigm until recently, and instead consider from the outset the way in which the benefits of growth will be distributed to different income groups. (OECD, 2017 Update Report)

Further, there is a general consensus among these studies on the major factors driving inequalities and on the agenda for action to reduce inequalities, prominent among such agenda being public provision of education, health care and necessary skills. But these studies do not ask why countries in general failed to implement such agenda effectively, even though these measures have been articulated for over two decades—a period during which inequalities have in fact reached unacceptable proportions. There is thus a major gap in understanding with respect to the relevance of socio-political factors beyond the oft-repeated economic policy agenda.

In general, democracy has been regarded as a major political instrument for achieving inclusive development. But inequalities have been rising even in mature democracies which had experienced democratic revolutions long ago and have undergone radical social transformation, as in Europe. In China, feudalism was abolished in the late 1940s. However, its authoritarian political system with enormous powers for political mobilisation and will for action, while successful in bringing about high growth, resulted in highly uneven sharing of gains from growth. India, on the other had, succeeded in sustaining democracy so far in a society that is ancient, slow-moving and ridden with various kinds of inequities with respect to classes, castes, gender etc. But instead of democracy bringing about radical social change, the long-entrenched and powerful social groups are able to influence even the popularly elected governments for appropriating disproportionately large benefits from growth.

There seem to be two sources for the failure of democracies in this respect. In the first place, democracies were expected to give rise to a large middle class that would espouse the cause of liberty and equality, but experience has shown that the upper sections of the middle class are more interested in reaching the top 10 per cent or one per cent of the income ladder than joining the forces working for wider sharing of benefits from growth. Another major source for distortion of the democratic framework is ‘money power’. (Stiglitz, 2012) It ranges from the very wealthy employing the highly paid consultants and lawyers for ‘tax planning’ to financing interest lobbies to win over the law-makers, as often observed in the United States and even in other democracies in Europe.

It is now widely recognised in social science research that much of the variation in poverty and inequality across rich democracies is due to politics and institutions. For example, there is convincing evidence of a strong relationship between unionisation and higher earnings, and lower inequality and poverty, the indirect effect of unionisation through liberal welfare policies of states becoming more prominent. The proportional representation system of democracy, where multiparty competition becomes effective at different stages, explains why countries in Europe with the system of proportional representation have much less poverty and inequality than the countries with a majoritarian system like the United States. (The Oxford Handbook of the Social Science of Poverty, 2017) There is evidence that congressional shifts to the Republican Party, diminishing Union membership, lower tax rates, and financial asset bubbles played a strong role in the rise of the super-rich in the United States. (Volscho and Kelly, 2012) Political actors, who favour free markets, do not simply ‘let markets do their job’ and actively influence how markets work through their institutional choices of whom to tax and what to regulate. One of the emerging concerns with the dramatically rising inequality in countries like US is that this results in an unbalanced distribution of political power which reinforces inequalities and may by itself have a corrosive effect on democracy. (Brady and Leicht, 2007)

A major casualty of rising income inequality and the increasing role of money power in policy-making is that those adversely affected start losing interest in the prevailing democratic system. This is confirmed by a study which, based on the individual survey data from twenty-four democratic countries, demonstrates that increasing income inequality strongly depresses political engagement by people who feel left out. (Frederick Solt, 2004) The decline in voter participation and apathy is explained by the decline in the government expenditure on social development and welfare measures as a proportion of GDP since the late eighties, which had steadily increased earlier in such economies for over two decades on account of unionisation and political pressures. (Brady and Lee, 2014)

All this shows that formulating a good policy agenda for achieving inclusive growth is not enough. There is need for a debate on the efficacy of the existing framework of democracy and necessary modifications so as to enable it to more adequately represent the long-term societal aspirations for justice and fair play. It is also necessary to explore the possibilities of strengthening civil society activism by combating the prevailing apathy. This is a formidable challenge at the political level. But intellectuals can contribute to this effort through their investigations and thinking. This requires individual as well as joint effort from different scholars such as political scientists, sociologists, historians, economists and others.

(Inaugural Address at the International Seminar on “Inclusive Developmat: Issues and Challenges” in honour of Prof R. Radhkrishna, held at the Centre for Economic and Social Studies, Hyderabad on October 8-9, 2018)

References

David Brady, K.T.Leicht, ‘Party to inequality: Right party power and income inequality in affluent Western democracies’, Research in Social Stratification and Mobility, 26 (2008).

David Brady and Hang Young Lee, ‘The rise and fall of government spending in affluent democracies, 1971-2008’, Journal of European Social Policy. 24(1), 2014.

Frederick Solt, ‘Economic Inequality and Democratic Political Engagement’, Paper presented at the Annual Meeting of the Midwest Political Science Association, Chicago, April 15-18, 2004.

OECD, Bridging the Gap: Inclusive Growth 2017 Update Report.

Stiglitz, Joseph E. (2012), The Price of Inequality, Penguin Books India Pvt. Ltd., New Delhi.

The Oxford Handbook of the Social Science of Poverty, 2017.

Thomas W. Volscho and Nathan J.Kelly, ‘The Rise of the Super-Rich: Power Resources, Taxes, Financial Markets, and the Dynamics of the Top 1 Percent,1949 to 2008’, American Sociologcal Review, 77(5), 2012.

The author, an eminent economist, is an Honorary Professor, Centre for Economic and Social Studies, Hyderabad.