Inequality - governance deficit main culprit

Dhaka,  Sun,  20 August 2017
Published : 04 Aug 2017, 20:55:09
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Inequality - governance deficit main culprit

Inequality - governance deficit main culprit
Abdul Bayes
Bangladesh has done well in terms of some socio-economic indicators, especially compared to its neighbouring countries. But the country continues to grapple with rising income inequality. The growth of slums beside the skyscrapers reveals the harsh reality. Attempts have long been made to address the issue of inequality but to no avail. 

Empirics show that a redistributive land reform in Bangladesh cannot be an answer to the question of inequality in rural areas. The success of oft-quoted experiences of Japan and Korea is an exception. Over time, the share of large land-owning households in Bangladesh has been declining while about two-thirds of households are considered to be landless. "The government is the biggest land-holder and some redistribution has been attempted from time to time with limited success owing to governance problems due to land grabbers", says the Seventh Five Year Plan document. 

But that does not mean that land reforms have outlived its utility. There is an important need to shift attention from drastic reforms to soft ones. This could possibly be achieved by strengthening the land administration regime and related land market through an array of institutional, regulatory and fiscal reforms, such as proper land ownership surveys, digitisation of land records, simplification of land transactions and land records, etc. Imposition of proper capital gains tax on land transaction would add up to revenue, reduce windfall capital gains and help stabilise land prices by reducing speculations. Again, reforms in tenancy market could help sharecroppers who are growingly dominating agricultural production. By and large, the soft approach in terms of reforms in land administration and transaction might achieve limited success in reducing inequality, led by land ownership.

The Seventh Plan rightly finds a major way to help income distribution through human capital formation of the poor. It argues that "it will equip the poor to get better and higher-paying employment. An educated and healthy labour force can also help increase the rate of growth of Gross Domestic Product (GDP) while improving income distribution". The increased enrolment in primary and secondary schools from the poor segment of the society is paying dividend.  Empirical evidences tend to show that school-goers earn better wage than non-school goers. Thus the Plan aims to raise the share of public spending on education and health from 2.2 per cent and 0.8 per cent in FY 2015 to at least 3 per cent and 1.2 per cent respectively in 2020. Admittedly, the allocation has to be supported by 'major improvement in the delivery of public education and health services through education policies, governance and institutional reforms.' 

One would like to hope that at the end of the Seventh Five Year Plan period, Bangladesh would witness a reduction in inequality over the next five years as more of children from the poor group would attend schools and access health services. But in a regime where the rich get quality education and health services of which the poor are deprived, inequality may not be reduced but it might actually widen. Thus a girl from a kindergarten in urban areas could end up in software services while a girl from a rural school would give hard labour in a garment factory. To end educational inequality, the society needs to have same type of schools across the board with the same curriculum. This is a tall-order task hardly to be accomplished by policy-makers and politicians whose children are generally educationally privileged to study in kindergartens, private universities or abroad. Again, within rural areas, solvent parents can pay for tutors while poor ones lack the capacity thus resulting in inequality in the access to education. In this context, one would suggest that the government takes a lesson from the experiment of the Bangladesh Rural Advancement Committee (BRAC) with pre-primary and primary schools where access to education for the poorest could be ensured with a sharp eye on the quality of education.

However, the Plan should make public spending on rural infrastructure such as rural roads, irrigation and flood control. Availability of rural credit could be another important way to address inequality but the Plan document remains silent on the modus operandi excepting a line of appreciation for micro-credit revolution that has helped the poor with consumption and asset accumulation. The role of public sector in providing rural credit has remained peripheral.

The third important area is related to spending on social protection which is to go up from 2.0 per cent of GDP in 2015 to 2.3 per cent in 2020. One can hardly disagree that spending on social protection is a must for addressing inequality but 'there are also important concerns about quality and targeting of this spending that need urgent reviews and reforms'. By and large, higher spending on education, health, rural infrastructure and social protection would cost additional 2.5 per cent of GDP, 'a seemingly tall order in the present environment of public resource constraint…a strategy to mobilise this additional funding is certainly within the reach of public policy'.

First, the government spends roughly 3.0 per cent of GDP on subsidies, of which 2.0 per cent is on energy. It is our conjecture that subsidies in Bangladesh have not been as equaliser as expected in higher education or in agriculture. The energy subsidy is no exception where a miniscule of the poor has access to subsidised energy. The Plan documents assume that about half of the energy subsidy could be saved through price increases and better targeting for use in social service. Second, increase in personal income tax, value-added tax and local government revenues would be needed to mobilise additional resources for reducing inequality.

While the fiscal policy package could help with additional resources, the on-going 'political policy package' under the umbrella of governance remains to be no less important. We should not be oblivious of the fact that major sources of inequality are loan defaults, land grabbing and tax evasion. In this case, income distribution can be improved through better governance. The additional generation of 2.5 per cent of GDP required for social spending would only be effective in a regime of less corruption, better targeting, and quality improvement in public service delivery system. The governance deficit that Bangladesh is faced with may raise the Gini ratio of inequality rather than reduce it.

The writer is a former Professor of Economics at Jahangirnagar University. 

abdul.bayes@brac.net

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