Oh by the way, permit me to indluge you with a discussion about my latest paper. I forgot to announce last March that my paper with Rana Hasan, Rhoda Magsombol and Ajay Tandon were already published in the journal World Development. Entitled "Accounting for Inequality in India: Evidence from Household Expenditures," we utilize household-level consumption expenditure data from India to examine the evolution of inequality during the period of 1983 to 2004.
Like what is already a trend in most countries today, inequality in India increased, specially in the decade between 1993 to 2004. (As a sidenote, an also similar current trend is the fact that even with rising inequality among countries, poverty levels have gone down--even if more people have begun to eat the pie, some eat way more than others). Now the thing is this phenomenon of increasing inequality is more prevalent in the urban sector, and more interesting is that we find this to be accounted more for by increases in returns to education.
What does this mean, you say? Well, the economic liberalization that happened in India during the 1990s have resulted in the rise of education-intenstive service industries where the highest level of job compensation can be expected. But of course, not anyone can immediately be hired for such occupations. It requires heavy investment in education on the part of the individual. And so, of course, such situations are accessible to only a few--either the rich or the more intelligent or talented that has a better chance of getting a scholarship from the government or from some charitable organization.
But this is always the case, isn't it? Any economy in their history underwent the same situation. Their economic growth first witness a few benefiting and then eventually, the benefits would gradually spread to the rest of the population. That is why we also raised this question in the paper: if it is a natural progression of a growing economy, then we should leave it to the "market" and let it evolve naturally. Or should we? Should governments take a hand in minimizing this negative effect (growing inequality) of increasing GDP?
The fact is, there is also what we call inequality in abilities (i.e., the intelligent and the talented), and since the higher-paying jobs are more accessible to them, this does give rise to inequality in opportunities. This is one area that a government may need to intervene. Furthermore, leaving economic development to the "market" may lead to development of only one sector, i.e. the service sector, leaving the other sectors underdeveloped, i.e. industry and especially the agricultural sector, where the majority of the population is. Then it becomes a vicious cycle--being underdeveloped means income is low in these sectors (as is naturally), leaving workers in these sectors with little or no income needed to help put their children to good schools. Not having the right education needed to enter the high-paying service sector, these children will grow up and remain working for these underdeveloped sectors. In this case, the solution is for the government to come in and help develop these sectors.