Monday, Sep 22, 2014

Reading Piketty in India

Piketty makes much of the similarities between the current period in the US and the period of high inequality prior to about 1930. ( Source: Reuters ) Piketty makes much of the similarities between the current period in the US and the period of high inequality prior to about 1930. ( Source: Reuters )
Written by Martin Ravallion | Posted: May 15, 2014 12:03 am | Updated: May 15, 2014 8:04 am

THOMAS PIKETTY’s Capital in the Twenty-First Century has attracted a great deal of attention, especially (it seems) where I live, in Washington DC. Some people have said the city has caught a severe case of “Piketty fever”. Everyone seems to be talking about the book — clearly many more people than have read its 700 pages. Yet I venture to guess that not too many in Washington had even heard of Piketty — a distinguished academic economist at the Paris School of Economics — before the book appeared.

Piketty’s book is mainly about inequality in the rich world — its historical magnitudes (based on an impressive data effort) and the factors influencing it (based on economic analysis). The book is a major contribution to ongoing debates and it deserves attention. I hope it helps advance the policy debate in the US. But how relevant are its messages for India?

Let me be clear from the outset that I share Piketty’s concerns about the potential damage of high inequality. This is something India should be concerned about, especially given the signs of rising inequality that we have seen. (There are uncertainties about the inequality measures from standard sources for India; if anything, we are probably underestimating the rise in inequality.)

But “inequality” is a big word. Policy has to focus on the most important sources of inequality in the context at hand. Piketty’s book is mainly about what can be termed “high-end inequality” —  notably the top 1 per cent in the rich world. And the book is mostly about a specific source of that inequality: the rising concentration of non-human wealth — Piketty’s “capital” in his title, comprises physical capital, financial capital and real property. This is returning the US to levels of inequality not seen since the first few decades of the 20th century.

In assessing the relevance of Piketty’s book for India, three points come to mind: first, Piketty’s analysis of rising inequality in the rich world rests on believing that the rate of return to capital appreciably exceeds the rate of growth in national income. Piketty demonstrates that this has been the case over the last few decades in the US, and that it was so prior to World War I. Then we can expect to see capital’s share of total income rising.

Since capital ownership tends to be very unequally distributed, inequality will tend to rise over time. (Diminishing returns will set in, but not enough, in Piketty’s view, to stall rising inequality.) However, given that we don’t expect India to return to its old low-growth path any time soon, this dynamic will be more muted or continued…

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