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Monday, 18 December 2017 04:06
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Traditional definitions of inequality, whether by Piketty or Credit Suisse ignore the impact of education, hugely


Even among free-market types, most feel embarrassed by the seemingly massive hike in inequality that liberalisation has spawned. Hardly surprising then, at the popular level, most instinctively accept French economist Thomas Piketty’s analysis as the gospel truth. And why not since, for several years now, Credit Suisse regularly puts out data on the world’s wealth and points out that, for instance, more than half the world’s wealth is owned by the top 1%. Hence Occupy Wall Street, and other such movements. Given the massive decline in global poverty, essentially in China and India over the past few decades, however, this narrative hasn’t quite sounded right. If billions can be brought out of poverty, can the accompanying increase in inequality necessarily be a bad thing? As this column pointed out (goo.gl/nHkmgn), in 1980-2014, incomes of the top 1% in India grew 750%, 1,534% in China, 198% in the US and 88% in France—that’s the bad part, going by Piketty—but incomes for the bottom half rose 89%, 312%, 4% and 25% respectively; it would appear, at least for developing countries, inequality is a by-product of growing fast in the initial stages. Picketty’s database, too, was riddled with inconsistencies.

In even the caste system, traditionally seen as the source of India’s greatest inequality, data from all-India income surveys by NCAER and PRICE clearly showed education, more than even caste, was the greatest explanator for income differences across various groups (goo.gl/vHkGDj) over a period of time.  This is where Surjit Bhalla’s latest, The New Wealth of Nations, does an amazing job of explaining economic growth across nations, changing levels of inequality and even the great fall in inflation using education as the explanatory variable. While Credit Suisse tracks financial wealth, Bhalla discounts incomes of the educated to arrive at education wealth since it this education that is the source of future wealth. He finds the world’s education wealth is far greater than financial wealth and, not surprisingly, education inequality is a small fraction of financial wealth inequality (see graphic). Even way back in 1870, Bhalla notes, with the US and Europe accounting for 70% of the world’s educated, it is not surprising they accounted for 64% of the world’s income.

Bhalla has a lovely graphic on the increase in the size of the global middle class and the proportion of college-educated. He even links, from 1850 onwards, the relative stagnation of US/Europe and China/India’s ascent to the growth of graduates in these countries. Each 1% rise in college graduates, his analysis shows, leads to an additional 4.2% of the population joining the middle-class. In his inimitable style, Bhalla uses this data to explain the anti-globalisation backlash in the US/Europe. Curiously, the biggest beneficiaries of this – countries like India – have seen their elites also joining the anti-globalisation lot! Between 1992 and 2000, while the number of US college graduates rose 12.4%, those in the ‘rest’ grew by 68.8% and college-educated wages in the US rose 12.5%. Between 2000 and 2016, while US college graduates rose by 32.2%, those in the ‘rest’ rose 93.2%, so US college wages rose by a mere 8.5%—any time a US employer wanted to hire a graduate, he simply hired one in China or India, keeping US wages near constant.

That, of course, is why US president Donald Trump can build as many walls as he wants, he isn’t going to be able to get US wages to rise in a big way—unless he completely stops US firms from setting up bases overseas or from off-shoring and bans trade. Indeed, given the centrality of wages in explaining inflation, Bhalla posits this as a possible explanation for the global collapse in inflation. If the sharp rise in the number of graduates in countries like China and India are keeping a check on US wages, this also explains why, despite US unemployment levels being at all-time lows, inflation simply refuses to rise to the desired 2% level.
While arguing that the greater number of women getting college degrees will be responsible for today’s gender discrimination falling, Bhalla normalises women’s wages using their relatively lower levels of education—rapidly changing though—and finds this considerably lowers the discrimination in the form of lower wages; normalise this further by the number of years in the work force (women take off for child bearing/rearing) and this falls even more.


An interesting nugget, in this context, is the perceived discrimination in India where just 12.4% of company board seats are held by women. For starters, this isn’t too bad compared to 14.2% in the US and 20.3% in the UK. But once you normalise this, as you should, to account for the number of women in school/college and in the work force, you find India is actually one of the best in the world! It is such analysis, more than a decade ago, that led Bhalla to conclude, that what was perceived as discrimination against SC/ST/OBCs in India was mostly the result of lower levels of education and while this was interpreted as a need for reservation in colleges, the real issue was large dropout levels in school. You can agree or disagree with Bhalla but, as always, his analysis of the data makes you want to re-examine old positions.

Last Updated ( Friday, 15 June 2018 07:48 )

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