Income inequality

The World Bank’s report “Mauritius – Inclusiveness of growth and shared prosperity” opens with these words: “On inequality, Mauritius also fared well compared to its peer middle-income countries, with a Gini coefficient 0.39 in 2012. On the negative side, Mauritius’ growth has not been equally shared”. Income inequality and unequal sharing of growth: are we talking about the same thing? What is sure is that it is not with this report that one can put into question the free market and unbridled capitalism. In any case, they do not characterise the Mauritian economy. The report does not contain a single reference to progressive income tax, but “suggests a need for further reform of labor regulations and wage determination”, something which free-marketeers support. This is not a damning report as some want it to be. If “between 2007 and 2012, the overall size of the middle class declined slightly”, the most important point is that “the relative sizes of the rich and poor groups remained roughly the same, with a slight reduction in poverty.” The good news is that 2.9 per cent of the population have joined the upper middle class, which now encompasses more than half the population (52.3 per cent). The bad news is that 2.5 per cent of the population, from the lower middle class, became vulnerable. The report thus noted “people from the lower middle income group moving in equal numbers into the upper middle income and vulnerable groups.” A rise in income inequality, as reflected by the rising Gini coefficient, obviously leads to an increase in relative poverty (from 8.5 per cent in 2007 to 9.8 per cent in 2012). But a much more telling indicator of development progress is the fall in absolute poverty (from 8.5 per cent to 6.9 per cent), which “suggests improvement in the well-being of the population,” says the report. It does not come as a surprise that absolute poverty parts company with relative poverty. For there is only one route to pursue reduction of absolute poverty: it is through economic growth, and this cannot be spread evenly over the population. In other words, income inequality is an essential feature of the process of wealth creation. If one wants to do away with income inequality, one must abandon market economy, which brings prosperity, and replace it with policies that favour high, confiscatory tax rates for the rich. It is theoretically possible for the state to make all incomes equal: Lenin tried to do that in Russia from 1917 to 1921, and the experiment resulted in famine. The fact is that men are born unequal in regard to physical and mental capacities, so some surpass the others in entrepreneurship or management. Marx himself admitted that when he spoke of “the inequality of individual endowment and therefore productive capacity” as “natural privileges”. Prosperity is generated by those who serve the consumers in the most efficient way and thus make profits. It is thanks to the accumulation of wealth by the successful conduct of business that people’s standard of living improves. One gets wealthier in a market economy by making others better off, not poorer. There is voluntary exchange when the buyer values more highly the product than what it costs the seller – a win-win situation. If there must be a redistributive policy that targets the rich, who are they? The rich sometimes mean high-income earners (who may own few assets) and other times those who have considerable financial wealth. But other sources of wealth are excluded from the financial measures: they are pension fund assets, social security benefits and consumer durable goods such as cars. Official measures of inequality may be misleading. First, in-kind state aid and welfare programmes (free education, free health care, free public transport) are not counted in the official data. Second, non-salary benefits to workers are omitted. Third, our ageing population has raised the proportion of pensioners, increasing apparent income inequality. Fourth, Mauritian households have become smaller than in the past, which leads to underestimating the growth in household income (family size is positively correlated with income). Fifth, just as they ignore underreporting by lower-income households, surveys overestimate the condition of those at the high end of the income distribution. And sixth, the Gini coefficient measures pre-tax income rather than after-tax consumption, thereby overstating the degree of real income inequality. Once taxes and transfer payments are taken into account, the distribution of actual consumption is less unequal compared to the distribution of income. It is best to analyse inequality with respect to the goods and services that the middle class and the elite are able to consume. The differences between the types of goods available to everybody differ today only in degree (in terms of physical characteristics) whereas they differed in kind in the past. The goods accessible to the middle class can now be substituted for those intended for the rich. The middle-income earner can afford to buy a smartphone and enjoy almost the same facilities as the iPhone user. The Nissan March of a modest family can travel to anywhere on the island, just like a Mercedes. The menu for the bourgeois of the 1970s resembles today’s average buffet enjoyed by the common man in a restaurant. Mauritius’ per capita income, according to World Bank figures, has increased nearly tenfold from USD 1,091 in 1982 to USD 10,017 in 2014. Far from disappearing, the present middle class lives much better than previous generations. If sociologists use an apocalyptic language to make an issue out of inequality, the problem is not growing economic polarisation but envy.