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August 30, 2007

Markets mechanics and inequality trap

Filed under: economics — odrf @ 6:24 am

An article written by Swaminathan S Anklesaria Aiyar in Economic times……

The slump in global stock markets since July has wiped out an estimated $5 trillion of wealth, five times the GDP of India. So, world inequality has fallen dramatically. Are poor people across the world celebrating the great reduction of global inequalities? Are socialists celebrating increased equality ? No, not at all.

But why not? For years, analysts have worried about rising inequalities in India. Rapid growth has sent the stock markets soaring, and several Indians have entered the Forbes list of top billionaires of the world. Simultaneously, 300 million remain below the poverty line. This stark contrast has evoked much outrage.

Prime Minister Manmohan Singh says that unless the poor participate in fast growth, uprisings could disrupt our nationhood – over 150 out of 600 districts are affected by Maoist violence. The same theme is echoed in a recent study of Asian inequality by the Asian Development Bank. The ADB chief economist has been widely quoted as saying that high levels of inequality disrupt social cohesion, and could lead to civil war.

If this were really true, then the stock market slump should have healed social tensions. An Indian Express story on August 12 estimated that the richest five Indians had lost more than $10 billion in the previous fortnight. The total wealth lost by all shareholders was $52 billion (Rs 210,000 crore), almost equal to the GDP of Bangladesh.

So, inequalities in India have fallen dramatically. Not even the most draconian tax measures could have reduced the wealth of shareholders by $52 billion.

But are the 300 million poor people of India celebrating? Are landless labourers in Bihar delighted that the wealth of the Ambanis has suddenly fallen by billions? Are the tribals of Chattisgarh and Jharkand joyous that the Tatas have become poorer? Are illiterate Dalit women, the most oppressed and powerless section of our population, ecstatic that the stock market slump has improved income distribution?

Of course not. And this has consequences for theories of social tension. Now that the stock market slump has significantly improved India’s Gini coefficient of wealth, will Maoist insurgents in Chatttisgarh give up insurrection? Will ULFA in Assam cease its depredations because of greater equality between the people of Assam and those of Dalal Street? Will the militants in Kashmir become less militant because of an improved income distribution?

To even suggest this would be farcical. Yet that farcical notion is deeply entrenched in much socio-economic analysis. The millionaires of Nepal are deeply invested in Indian stock markets. Does the ADB think that their stock market losses, which have reduced inequalities, will ease tensions in the neglected Himalayan region of Nepal?


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