Inequality needs tackling on multiple fronts, says Nobel economist

Bangkok Post
February 12, 2017

Asian countries have not done enough to reduce income inequality, and governments have to step up efforts to train their unskilled workers while providing better education to their least advantaged citizens to improve income generation, says a Nobel Prize-winning economist.

Conditional cash handouts to poor people and tax incentives to motivate companies to train their unskilled workers have been proved to narrow the income inequality gap in some developing countries and they could be applied more in Asia, Eric Maskin said recently in Bangkok.

"If you take the world as a whole, income inequality has been declining because the gap between rich and poor countries has indeed been falling, but within countries, inequality has been going up and Asia is included in that," he told Asia Focus.

The 2007 Nobel laureate and Harvard professor is best known for mechanism design theory, a specialised form of game theory which attempts to maximise gains for all parties within markets, and which examines whether trading mechanisms are the best way to allocate resources.

Prof Maskin said globalisation has been one of the causes for the widening income inequality gap within countries. He was in Bangkok last month as a keynote speaker at the sixth Bridges dialogue sponsored by the International Peace Foundation.

"The fact is that globalisation has not only globalised consumer markets but it has also led to the globalisation of the production process itself," he said.

"The internationalisation of the production process is certainly not bad for prosperity, on average, but when companies go to look for people to hire in China, they look for people who have some skills to offer.

"People with education, people with job training, those are the ones who get the jobs and the people without skills and without education are left behind, and that has been the primary contributor to growth in inequality in developing countries."

Consequently, governments have to lead the effort to help unskilled workers. "The point to remember is that disadvantaged people's situation is not going to improve automatically," said Prof Maskin

Employers, he pointed out, lack sufficient incentive to provide such training and they are also afraid that once trained, skilled workers will leave and their investment will effectively be lost.

"What governments have to say to potential employers is, 'Look, if you train these guys you will get a tax break', and that will give them the incentive to train the least advantaged and that is an important role for government in tackling inequality," he said.

Prof Maskin singles out Brazil -- before its recent economic and political crisis -- for its programme to improve education through conditional cash transfers. Poor families were given the equivalent of US$12 per month in exchange for sending their children to school.

Bolsa Familia, the biggest and best-known cash transfer scheme in the developing world, was started in 2003. By 2010, around 12 million families had joined.

"This is an investment for the future and it is not just a way of helping people out at the moment but it is a way to help the next generation and in fact, thanks to this programme, we began to see a decline in inequality in Brazil," said Prof Maskin. "Unfortunately, things have become politically much more complicated now and it is hard to know whether this programme will survive but it certainly was a success."

According to the latest World Bank data, Brazil's Gini coefficient fell from 56.88 in 2004 to 51.48 in 2014. A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.

In the first five years of the programme, the level of inequality declined 17%, one of best achievements in welfare ever recorded. The poverty rate also fell from 42.7% in 2003 to 28.8% in 2008.

The payments, made via the banking system and debit cards, were dependent on a family's children staying in school until age 17 with attendance of at least 85% up to age 14. All the names of the recipients are available on a website where individual claims can be checked.

From this system, independent evaluations found that around 80% of the money actually reached the poor. That is good for a country that has been plagued by corruption, noted Prof Maskin.

The Brazilian programme has been imitated successfully in other developing countries so the concept is easy enough to replicate wherever it is needed, he added.


Turning to more recent events, Prof Maskin said he was "cautiously optimistic" that the election of Donald Trump as US president will not be as catastrophic as some people fear, because the roots of globalisation are too deep.

"Even within the Republican party there are many people who are alarmed by the prospect of an anti-trade policy, and the American political setup is one in which it is difficult for a president to act unilaterally," he said.

If the Trump administration wants to impose punitive tariffs, it will need Congressional approval and Congress does not seem inclined to do so, he added.

It is probably safe to assume that the US will not be participating in multilateral trade deals in the near future, but Prof Maskin maintains that in any case, the benefits of the now-moribund Trans-Pacific Partnership (TPP) were "exaggerated".

"When you come right down to it, the deal was not all that important and a lot of the same things that the TPP would have done could be done without a formal trade agreement," he said.

Prof Maskin also warned against the use of populist policy such as imposing import tariffs in the name of "protecting jobs", saying it could contribute to widening income inequality in the US and elsewhere.

"Trade tariffs are not going to be good for income inequality," he said. "Trump also talked about enormous tax cuts, mainly for the rich, because they are the ones that pay most of the taxes and that is not going to be good for inequality.

"On the other hand, he talked about infrastructure programmes which could be good for [reducing] inequality because they will provide jobs for people who need them, so I think it is too soon to tell what the implications of his policies are when comes to income inequality.

"The problem with populist policies, in general, is that they often sound good and they may even be well-intentioned but they haven't always been well thought out.

"It might sound good to give everybody free education but that is ignoring the fact that it is enormously expensive to pay for that programme ... and the common danger with populists is that they tell you about the benefits of the programme without saying or thinking through about what the costs are."

Meanwhile, cash handouts or subsidies for farmers have proven to be "a pretty bad policy" in the US and elsewhere. If governments are going to give cash handouts, they have to do so as an investment so that countries and their citizens can get something back in the long run.

"Paying farmers to subsidise their income is not giving you anything in the long run," Prof Maskin said.

Tax policies to encourage the private sector to help lower income inequality and to redistribute by taxing the rich to subsidies the poor could help in the short run, but in the long run the solution to income inequality is not to "drag the rich down" but to "bring the poor up" by investing in their skills and education, he said.

Efficient capital gains tax and progressive VAT collection are examples of reasonable approaches.

"We should move to a system where consumption is taxed more by raising the value-added tax and then correct it by giving poor people a discount to make the VAT more progressive," he said.