Módulos TLP434/RLP434

Issues

The rise of income inequality is a global phenomena (Cornia and Court 2001; Akita 2002). Certainly income distribution inequality has been on the increase in Thailand since the 1960s (Ahuja et al. 1997; Krongkaew 1985, 1993; Ikemoto 1991; Clarke 2001a, 2001b). Between 1981 and 1997, inequality between the richest 10% and the poorest 10% of the Thai population, increased from a multiple of 17 to a multiple of 38 (Watkins 1998). Therefore, despite the increases in economic growth, the poorest members of the Thai economy have not equally benefited from this economic growth (Kakwani 1997b). This is exacerbated by the spatial divide between rural and urban populations (Cornia and Court 2001). Interestingly though, poverty (measured by poverty line analysis) has fallen during the same period (Dixon 1999; Muller 1996; Warr 2001). However, whilst a fall in poverty levels is important in terms of social welfare, such a fall does not exclude concern over the increasing levels of income distribution. Unequal distribution of income has implications for social welfare (Altman 2000; D. Johnson 1996; Sen 1984; Taylor and Jodice 1983; Ravallion 2001).

In terms of social welfare, income inequality is undesirable for a number of reasons. Inequality hampers: 1) future growth (Ahuja et al. 1997; Rowan 1996; Birdsall et al. 1995; Watkins 1998; Alesina and Perooti 1996; World Bank 1991); 2) poverty reduction (Cornia and Court 2001; Ahuja et al. 1997); and 3) political instability (Cornia and Court 2001). In the long run, inequality threatens the stability of development (Chotikapanich 1994). Such an unevenness of development exacts a high social cost that can lead to economic dislocation, social tension and political unrest (Dixon 1999) as ‘individuals in a society may place intrinsic value on equality and a sense of social cohesion arising from it’ (Ahuja et al. 1997, p. 29). It is also difficult to compare real income differences if income distribution is not taken into account (Sen 1976).

Increasing income inequality has been explained as a natural outcome of economic growth (Mizoguchi 1985; Akita 2002). A Kuznets’ inverted-U curve is used to illustrate the self-correcting nature of income inequality (Kuznets 1955). Income distribution

worsens during the early stages of economic growth as the income rises accrue mainly to the urban industrial classes. At a certain point however, income distribution begins to improve as the economy and agricultural classes modernise and take advantage of modern methods of farming (Mizochui 1985). However, this view is disputed both in theory (Krongkaew 1985; Adelman and Morris 1973; Muller 1996; Ahulwalia 1975) and practice (Muller 1996).

In achieving economic growth, governments have two major policy objectives; increasing income and decreasing inequality. ‘When average income is below the poverty line… then the reduction of poverty and of inequality necessarily become competing objectives’ (D. Johnson 1996, p. 104). When these two objectives conflict the ‘disadvantages of economic growth, due to poorly distributed benefits of growth, outweigh the advantages’ (Mizoguchi 1985, p. 307). ‘Indeed it is often argued that the mechanisms which promote economic growth also promote economic concentration, and a worsening of the relative and perhaps absolute position of the lower income groups’ (Ahluwalia 1975, p. 3). Chotikapanich (1994) argues that whilst average income levels have increased in Thailand, the benefits of this economic growth have not been equally enjoyed by the whole population due to the unequal distribution of this growth.

Social Choice Perspective

Market outcomes on income are not equity based, but rather efficiency based. And yet these two issues should not be separated (Maler 1985; also see Altman 2000 for discussion on an alternative to Pareto Optimality). The divergence between optimal market outcomes and optimal social outcomes begins within the issue of equity. Equity is important in increasing social welfare (Sen 1973). When considering society’s choices, preferences and value judgements on income inequality, the State has an essential prerogative to redistribute income (Musgrave 1959; Stoleru 1975). Within this social welfare function the social choice perspective on equity is imbedded in this analysis. Distributing the benefits of economic growth and national income more equally is a stated goal of the present Thai government (Ministry of Finance 2001; NESDB 1996, 2000).

How income is distributed within a society impacts on social welfare. It must be taken into account in the construction of a welfare index (Adelman and Morris 1973; Sen 1979b). This is particularly the case if intergenerational equity is accepted (see Chapter Three, Section 3.3.3) because ‘if a society is to accept responsibility for intergenerational equity, it must also have some regard to domestic and international equity and distribution of resources (Clayton and Radcliffe 1996, p. 173). Income distribution is therefore one of the most vexing issues when discussing social welfare (Sen 1982).

Methodology

To consider social welfare issues of income distribution an ethical, relative inequality index is required (Chakravarty 1990). Atkinson has developed a method which provides an ‘equally distributed equivalent level of income’ (Atkinson 1970, p. 250). Atkinson’s work is perhaps the answer to a call to calculate ‘the proportion of total income that is absorbed in compensating for the loss of aggregate income due to inequality’ (Champernowne 1952 cited in McKenzies 1983, p. 155). This index therefore has ‘a ready interpretation as the proportion of income wasted from the viewpoint of maximising social welfare, as a result of the inequality’ (Blundell et al. 1994, p. 34). Similar work has been undertaken by others (Sen 1973a; Ebert 1987; Jorgenson 1997 – where one-third of income was considered lost due to inequality).

Atkinson (1970) assumes a view of welfare, whereby welfare increases with higher levels of income as long as the income increases are equally distributed (Kakwani 1997b). This is in line with Dalton (1920) and Lerner (1944).

Thus, given the diminishing marginal utility of income (and assuming the equal capacity for enjoyment), welfare is maximised when income is equally distributed. Therefore an equally distributed equivalent income (Yede) which calculates the equivalent welfare level

based on an equally distributed income is the first adjustment to national income. It is not a utilitarian approach to welfare as it measures the amount of wasted income, with regards to maximising social welfare, as a result of unequal income distribution (Blundell et al. 1994).

The formula for this equally distributed equivalent income is:

n

I = 1 - ∑ (yi / µ)1/1-∈ if ∈≠ 1 [4.3]

i = 1

where: i = level of inequality

yi = income of individuals in the ith income range

f(yi) = proportion of the population with incomes in the ith range

µ = mean income

∈ = society’s perspective on equality

Table 4.2 Selected Income Distribution and Atkinson’s Measure of Inequality for Thailand

1975 1981 1986 1990 1992 1994 1996 1998 1999 Quintile 1 6 5.4 4.6 4.2 3.9 4.0 4.2 4.2 3.8 Quintile 2 9.3 9.1 739 7.4 7.0 7.3 7.5 7.6 7.1 Quintile 3 13.3 13.4 12.1 11.5 11.1 11.6 11.8 11.9 11.3 Quintile 4 21.4 20.6 19.9 19.2 19.0 19.6 19.9 19.8 19.3 Quintile 5 50.1 51.5 55.6 57.7 59.0 57.5 56.7 56.5 58.5 µ 12143 16184 18417 26481 29943 34470 38227 31952 32828 .3319 .3574 .4198 .4521 .4757 .4600 .4453 .4428 .4757 Source: Clarke (2001b).

If I falls, then the distribution has become more equal. If I equals 0 there is complete equality. If I equals 1 there is completely inequality. Society’s perspective on the importance of equality ranges from zero to infinity. If ∈ = 0 then society is indifferent to inequality. If ∈ = ∞ then society is concerned with the position of the lowest individual or income group. Based on previous empirical studies (Kakwani 1997a, 1997b), the

decision to estimate ∈ = 1.5 is considered an appropriate reflection of the level of inequality acceptable within Thailand (Ministry of Thailand 2001; NESDB 1996, 2000). The Atkinson Index has previously been applied to Thailand (Krongkaew 1993) and to a number of developed and developing countries (see Chakravarty 1990).

It must be noted though, that such a redistribution which Atkinson‘s Yede proposes would

not be cost-free (Johannesson 1996) and so conceptually involves practical difficulties experienced by the Kaldor-Hicks compensation test.

Table 4.3 National Income per capita adjusted for Income Inequality for Thailand, 1975 –

1999 (1988 prices – millions of baht) Year Aggregate National Income Atkinson’s Measure of Inequality (I) Net Benefits of Economic Growth on Economic Sub-system for Thailand Net Benefits of Economic Growth on Economic Sub-system

for Thailand per capita (in baht)

1975 514777 0.3319 343934 8113 1976 563800 0.33615 374279 8661 1977 614143 0.3404 405089 9150 1978 675676 0.34465 442804 9792 1979 700213 0.3489 455909 9887 1980 736822 0.35315 476613 10149 1981 774824 0.3574 497902 10400 1982 822023 0.36988 517973 10604 1983 861383 0.38236 532025 10745 1984 896725 0.39484 542662 10728 1985 937965 0.40732 555913 10733 1986 975516 0.4198 565994 10685 1987 1071338 0.4151 626626 11631 1988 1198771 0.4104 706795 12860 1989 1357294 0.43125 771961 13813 1990 1490961 0.4521 816898 14509 1991 1609476 0.4639 862840 15148

1992 1730397 0.4757 907247 15699 1993 1868278 0.46785 994204 17043 1994 2037046 0.46 1100005 18614 1995 2213825 0.45265 1211737 20379 1996 2298050 0.4453 1274728 21204 1997 2230072 0.44405 1239809 20386 1998 1963940 0.4428 1094307 17803 1999 2024239 0.4757 1061309 17212

Source: Author’s own calculations.

Results

The first adjustment within the ANI social welfare function dramatically reduces the money-metric level of social welfare in Thailand due to the increasing inequality of income distribution within Thailand. This reduction reflects social choices on inequality expressed within stated government policies (Ministry of Finance 2001; NESDB 1996, 2000). The increase in social welfare that does occur is markedly flatter. Not only is the overall level of social welfare reduced, but the difference between unadjusted aggregate national income and income inequality adjusted aggregate national income has increased over the period under review. This suggests that income inequality has a dampening affect on social welfare increases. Flowing from this is the conclusion that policy makers can increase social welfare through reducing income inequality.

The inequality index (I) has increased from 0.3319 in 1975 to 0.4757 in 1999. It rose steadily to 1992 and fell until 1998 before rising sharply again in 1999.

By disaggregating the various sub-systems of the ANI SWF it is possible to gain useful insights into the impacts each sub-system has played in affecting the overall measure of social welfare.

As would be expected, the economic sub-system closely resembles the increases in national per capita with three distinct phases; 1) steady impressive growth from 1975 to

1987; 2) accelerated growth from 1988 to 1996; and 3) a period of fluctuation in line with the financial crisis after 1996. During the period under study, the economic growth performance was quite impressive and by reviewing this sub-system alone, the impression could be gained that economic well-being has increased considerably and therefore so will have social welfare. However, the economic sub-system does not exist in isolation and there are a number of other sub-systems that significantly impact on the overall measure of social welfare.

Figure 4.2 Comparison National Income per capita and National Income per capita

Adjusted for Income Inequality in Thailand, 1975-1999 (1988 prices)

Source: Author’s own calculations.

The divergence between market perspective social welfare and social choice perspective social welfare measures is already evident by considering the effects of market inequality in this measure of social welfare.

0 5000 10000 15000 20000 25000 30000 35000 40000 45000 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 National income per capita (1988 prices) Partially adjusted national income (economic sub-system) (1988 prices)

Welfare Economic Analysis

The estimate of the net benefits of economic growth on the economic sub-system is based upon national income being adjusted for inequality using Atkinson (1970). Within the market place, current levels of national income are an accurate reflection of the correct aggregation of economic activity of a society. However, income distribution is considered within a social choice perspective and national income is therefore adjusted to take this into account.

The concept of economic efficiency is a central tenant of welfare economics. Economic efficiency is based on two value judgements (see Chapter Two, Section 2.2.1). The first, known as rationality, is that social orderings should be based on individual preferences in which it is implicitly assumed the individual is the best judge of his/her own preferences. The second underlying assumption of economic efficiency is the Pareto principle. Under this assumption, if state A is ranked higher than state B by one individual and all other individuals are indifferent between state A and state B, then state A should be ranked higher than state B within the social ordering (Boadway and Bruce 1984).

It should not be surprising that each of these assumptions have their own associated problems. Within rationality there are a number of instances in which individual preference may not be utility enhancing either through informational asymmetry or through folly. Secondly, rationality fails to incorporate the treatment of preferences for those not yet born, thus failing intergenerational tests. The major fault with the Pareto optimal assumption is the actual difficulty in finding such examples in reality. In most social states it is possible to find individuals who prefer state A to B and other individuals who prefer state B to A. Such examples are consider Pareto non-comparable. The Pareto compensation principle was developed (Kaldor 1939) to overcome this but is hypothetical basis has been criticised (Sen 1979a, 1979b; Page 1988; Hausman and McPherson 1996; Boadway and Bruce 1984).

The market, under perfect conditions, efficiently allocates scarce resources. There are three main causes for market failure that result is less than efficient resource allocation:

1) monopoly; 2) existence of externalities and public goods; and 3) informational asymmetry. It should also be noted that whilst a perfect market efficiently allocates scarce resource it does so with no consideration of equity – or more correctly does so assuming current distribution levels are Pareto optimal. (It has been argued that even perfect markets fail to efficiency allocate scarce resources (Sen 1982, 1999)).

As a result, economic efficiency is a difficult concept by which to order social states. More information and value judgements allow other considerations, such as equity, to be considered within social welfare functions. ‘The social welfare function is an important conceptual tool in welfare economics since it is the means by which a complete social ordering is obtained’ (Boadway and Bruce 1984, p. 4). Therefore there is a need for a social welfare function, as is being undertaken within this work, to rank these social states.

National income levels do not consider intergeneration issues. It is a reflection of current economic activities only. As mentioned above, a central assumption upon which national income lies is that current income distribution is Pareto optimal – that is, income is being efficiently distributed and no other state of distribution could make one person better off without making someone else worse off. Within a Rawlsian view of justice, this assumption can be challenged. Within the case of Thailand, with an increasingly unequal distribution of income (Clarke 2001, 2001b; Warr 2001), that behind a veil of ignorance, more equal outcomes would be preferred. By using the equally distributed equivalent income (Atkinson 1970), a new level of national income is estimated that may, under this assumption, be considered more just.

In a similar way, the adjustment made within this economic sub-system also reflects the view that poverty levels though falling in absolute terms (Kakwani and Krongkaew 2000), it can be considered to have risen in relative and subjective terms due to the rise in inequality (Clarke 2001a, 2001b). By adjusting national income for inequality, relative and subjective poverty concerns are also considered.