Rethinking Development and
Inequality: Insights from the Asian
Experience
(Presentation for AGW, 2013)
Vamsi Vakulabharanam
University of Hyderabad, India
Why rethink Development and Inequality?
 Long-term changes in within-country inequality
(especially) inadequately understood so far. Focus here
on time-series, not cross-sectional analyses.
 A continued search for simple (linear or non-linear),
secular patterns of change may not be the appropriate
way forward.
 My contribution – a coherent and novel framework
through which this relation can be recast. Different from
the mainstream, also synthesizes the Asian story.
Pre-Occupation with Kuznets Curve
 Kuznets - Non-mechanistic, thoughtful and tentative
(Also emphasized social and political factors).
 Later thinkers made it mechanistic. The inverted U
hypothesis became a law. Cross-sectional results
used to interpret dynamic changes (e.g. Ahluwalia
1976).
 Need to go beyond Kuznets curve as there is
overwhelming anomalous evidence - e.g. East Asia
(post-1950), Developed World (post-1970).
 Attempts to see Kuznets patterns despite this (e.g.
Kanbur 2011). Lot of incoherence.
UK Inequality: 1823 - 1974
0.65
0.6
0.55
0.5
Gini
0.45
0.4
0.35
0.3
1823
1830
1871
1891
1901
1911
1915
1938
1949
1954
1959
1964
1965
1966
1971
1974
UK Inequality Since 1961
0.4
0.38
0.36
0.34
0.32
0.3
0.28
0.26
0.24
0.22
0.2
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2008
United States Inequality 1947-2009
0.440
0.420
0.400
0.380
0.360
0.340
0.320
0.300
Japanese Inequality 1890-2005
0.65
0.6
0.55
0.5
0.45
0.4
0.35
0.3
0.25
1890 1900 1910 1920 1930 1940 1961 1967 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
Mainstream Analyses of Inequality
(In response to these anomalies)
 Focus shifts from macro-analyses to micro-studies or
short-period analyses of inequality or more
sophisticated attempts to establish a Kuznets pattern?
(e.g. Banerjee and Duflo 2003; see Weil (2004); Ray
(1999), ch. 7 for a textbook survey on Kuznets curve).
 Physical Capital/Wealth differences across
people/groups /regions.
 Human Capital differences across individuals/groups
and technological change.
 Spatial/Sectoral Differences, (e.g. City vs.
Countryside; Manufacturing vs. Services)
Possibilities for New Thinking?
 Focus of my reflections today:
 To understand changes in inequality within countries, more
than the levels of inequality, from a macro-framework.
 Within-Country inequality dynamics as opposed to
Between-Country dynamics.
 Analyze East, Southeast and South Asian experiences –
which have an interesting recent history of development
and inequality.
 Generalize from the Asian Experience after 1950s to a
more durable and macro understanding of the relation
between development and inequality. What is the Asian
experience?
Japanese Inequality Since 1960
0.55
0.5
0.45
Gini
0.4
0.35
0.3
1961
1967
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Korean Inequality Since 1960s
0.39
0.37
0.35
0.33
Gini (EPB)
Gini
0.31
0.29
0.27
0.25
1965
1970
1976
1980
1985
1988
1993
1995
2000
2005
Malaysian Inequality Since 1958
0.55
0.53
0.51
0.49
0.47
Urban
0.45
Rural
0.43
All
0.41
0.39
0.37
0.35
1958
1970
1976
1984
1990
1995
2002
2004
Chinese Inequality Since 1978
0.5
0.45
0.4
0.35
0.3
Rural
Urban
0.25
0.2
0.15
0.1
All
Indian Inequality Since 1960
0.41
0.39
0.37
0.35
0.33
Urban
Rural
0.31
All
0.29
0.27
0.25
1961-62
1967-68
1968-69
1977-78
1983-84
1993-94
2004-05
2009-10
What is the Asian Experience Since 1950s?
 Not entirely homogenous, but there are strong similarities.
 Japan, South Korea, Malaysia, China and India witnessed
a U shaped evolution of inequality since 1950s. (Like the
US, UK and other developed countries!)
 How to make sense of this?
 Local Political Economy.
 Global Political Economy.
Local Political Economy 1:
The Japanese Case
 Decline in inequality post WWII:





Extensive bombing of cities like Tokyo and Osaka.
Tax reforms: Taxes on the rich, and estate taxes.
Zaibatsu dissolution and reduction of top incomes.
Rural land reforms and agricultural price management.
Interventionist and progressive state.
 Rise in inequality post-1980:




Two-tier labor market deepens. Contract employment rises.
Capital becomes footloose.
Financialization; Asset booms and crash in the early ‘90s.
Privatization and Deregulation.
Local Political Economy 2:
The Korean Case
 Overall trend of declining inequality between 1960s and early
1990s.




Land Reforms and equalization in rural areas.
Massive increase in urban employment through growth in
manufacturing. In the 1980s, progressive labor movement.
Rural-Urban gap kept low.
Interventionist state.
 Rising inequality since 1990s.




Strengthening of Chaebols in the preceding period.
Significant deregulation, two tier structure of the labor market. Skillbiased technical change.
Polarization and Flexibilization; Low Union Density.
Formation of a class enclave in Seoul (Gangnam ?) and other cities.
Local Political Economy 3:
The Malaysian Case
 Rising inequality (1958-70)
 Laissez Faire Policies continued from British Colonial times.
 Severe inequality among ethnic communities. Malay
community at the bottom but had political power.
 Declining inequality (1975-1990)
 New Economic Policy 1970 (post-1969 race riots)
 Reduces inter-ethnic inequality through affirmative action.
 Rising inequality (1990-2005)
 Neoliberal economic policies introduced.
 Flexibilization in the labor market and financialization.
 Rural Urban gap shoots up. Intra-ethnic inequality increases.
 A Malay rich class consolidates. Inequality is of a class form.
Local Political Economy 4:
The Chinese Case
 Declining inequality: 1952-1980s
 Waves of land reforms in the 1950s, and again in 1978.
 Wage income equalization in urban areas.
 Early reforms after 1978 reduced the rural-urban income gap
and reduced inequality.
 The decade of 1980s was high growth with equality.
 Rising Inequality: Late 1980s-2012
 Previous period consolidated a powerful political class that also
began to venture into business after reforms.
 Post-1990s, processes of primitive accumulation, massive low
wage migration, deregulated business structure, entry of foreign
and private capital. Capital–labor balance shifts towards former.
 Rural-urban gap shot up to a historical high.
Local Political Economy 5:
The Indian Case
 Overall declining trend between 1950s and 1990
 Overall, progressive regime, although land reforms failed.
 In the 1970s, inequality rose due to Green Revolution and
industrial stagnation (slower employment generation).
 1980s saw broad-based growth with incomes of all classes
rising rapidly.
 Rising trend since 1990s



Consolidation of a class enclave, especially from 1980s
onwards (capital–professional classes-bureaucracy-politician)
combine.
Agriculture left behind (agrarian distress – thousands of farmer
suicides).
Growth in employment mainly in the informal sector – the gap
widens.
Global Factors 1: Regimes of
Capitalism and Inequality
 Changes in inequality may be governed by changes in
the deeper underlying dynamics of capitalism - the
idea of ‘regimes’ and their crises.
 For instance, two regimes of capitalism –
 A Keynesian Welfarist/Interventionist regime
between 1940s and 1970/80s.
 A Neo-liberal market-oriented economic regime
between 1970/80s and 2000s.

What is a regime?
Inequality and Regimes (contd…)
 What are the deeper imperatives that are driving inequality in these
different regimes of capitalism?
 Circuits of capital:
 Individual Capitalist Circuit: M-C1-C2-M1;
 Two stages:
 1. Profit Creation (M-C2);
 2. Profit Realization (C2-M1);
 At a systemic level too, Profits are created in stage 1; They are
realized by the capitalist class in stage 2;
 Interruptions/slowdowns in either of these two stages can cause
global and national crises.
Inequality and Regimes (contd…)
 Stage 1 changes may cause profitability crises; Stage
2 interruptions are aggregate demand crises.
 History of the last 150 years appears to be an
oscillation between regimes produced by stage 1 and
stage 2 crises. Solution to a crisis seems to produce
the other regime and a macro theory that is suitable.
 Long Depression (1873-1896) – Profitability crisis.
 Great Depression of 1930s (Aggregate Demand Crisis)

Stagflation of 1970s (Profitability Crisis)

Great Recession of 2008 - (Aggregate Demand Crisis)
Medium Term Crises Since 1850s
Inequality and Regimes (contd…)
 Post-Great Depression (1945-1973)
Institutional changes to sustain increases in aggregate
demand.
Welfare state and trade unions ensured that workers’ fallback improved. Interventionist states in developing Asia.
Demand management policies.
Footloose capital was reined in. Executive compensation
under check.
Inequality showed a decline in most countries.
Wage increases continued despite slowdown in productivity
growth after late 1960s. With oil price increases, Profits were
increasingly squeezed.
Inequality and Regimes (contd…)
 Post-Profitability Crisis (1976-2008)
Attacks on welfare state and trade unions. Intensified search
for destinations with low wages. Fallback declines.
Capital becomes footloose. ‘Financialization’, more dominant.
Executive compensation grows unrestrained. Accumulation by
dispossession (transfers from public or commons to private)
and through speculation. Rich get much richer, working poor
see little improvement. Inequality rises.
Inadequate Aggregate Demand: Temporary solutions found in
asset bubbles, credit provision. Not sustainable.
 Post-Great Recession?
Inequality and Regimes... Conclusion 1
 The idea that I am working with is that predominantly it is the
deeper, systemic logic of a particular regime of capitalism that
determines inequality dynamics:
 There cannot be a singular (even non-linear) long-term trend of
inequality. It is important to look at the dynamics of capitalist regimes.
 Oscillations of the previous 130 years may or may not continue.
Outcomes are determined as much by class struggle and other political
dynamics as the deeper systemic/economic imperative.
 On regimes of capitalism, there is a lot of literature already from the
French regulation school (e.g. Aglietta 2000), and Social Structures of
Accumulation school (McDonough, Reich, Kotz. 2009).
Global Factors 2: World Systemic Changes
(Marx-Braudel-Arrighi Hypothesis)
 There are other cycles that are longer than the
‘regimes.’
 Sustained long periods of capitalist expansion (IberianGenoese, Dutch-centered, British-centered and UScentered) during the era of European Dominance.
 The circuit that characterizes each of these cycles is
also M-C-M;
Global Factors 2
 Different Interpretation: In the initial phase of a long-term cycle,
capital is in money form. In the next phase, it constantly takes on
the productive or commodity form (trade and production). The last
phase sees capital “financializing” itself, returning to the money
form.
 Implication 1: Increased instability in the last phase;
 Implication 2: Increased inequality - Industrial workers may lose
jobs and may not be able to retrain. Certain classes of workers
privileged. Financial/speculative classes gain.
 Implication 3: Eventual change of hegemon;
Conclusion
 What does the Asian Experience teach us?
 Global and local political economy both important to understand
the relation between inequality and development.
 Strong Interventionist states gave way to states that facilitate the
interests of capital. Rising urban Inequality and rising rural-urban
gap - keys to understanding the rising inequality phases.
 Global Regimes of capitalism come with specific regimes of
inequality. There is evidence for oscillation between two kinds.
 World System Changes and the rise of Finance Capital has
significant implications for inequality.
 Age of Uncertainty?