Interesting, I heard of that book by Picketty at a recent conference. Reference was also made to a 2009 book 'The Spirit Level: Why More Equal Societies Almost Always Do Better', by Richard Wilkinson and Kate Pickett (similar name to Picketty!). I have yet to read this, but understand it claims that, for many health and social problems, outcomes are significantly worse in more unequal societies. Nordic societies seem to have found way to reduce income inequality by means of a flatter hierarchy in society. But it would be interesting to discover how such approaches (from a wealthier society) could apply to India and the developing world. 

I would also refer to Piketty. In any case, there is no direct link between GDP growth and inequality. It depends how the growth is distributed/redistributed. Good theoretical and empirical data can be found in Held and Kaya's Global Inequality. 

There is a huge literature on growth and inequality.  I would not start with Piketty.  In fact, I think it is only laterally related to the subject.  Take a look at this recent IMF Working Paper for recent results and lit review.

http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf

Hi,

I suggest to read this: Chapter 2 The impact of inequality on economic growth. in: OECD 2015. 'In it together. Why less inequality benefits all".  Paris:OECD

http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htm

Hot off the press, published last week..

I agree with Lucio when he says in this respect it is not Piketty to start with. (Thanks for the hint to the IMF paper, I did not know it.) However, Piketty is not irrelevant either. His argument is that capital income grows faster than labour income. This creates larger role for rents from inheritence. So: in Piketty, there are at least some attempts to explain causality (from growth to inequality). My judgement is that he fails in many respects (when ignores the role of human capital and also mobility on the top, hence overestimates the role of inheritance), but his book provides and attempt to "explain"  while many others stop at descriptions only (in many times, correlations of unrelated things..). Wilkinson and Pickett, for example, say much less on  causality chains and nothing really on economic growth.. 

When growth is non-inclusive.

I am not sure the issue is to start with Piketty or not. The issue is how to relate economic growth and inequality (or greater equality). It is a very theoretical (and empirical) problem, but that cannot be solved, because the answer is not straight forward, Piketty suggest that empirically, economic growth increases inequality -- depending on the gap between the interest rate and the economic growth and the state of inequality at the beginning of the period under study. He then comes to criticize the approach of Kuznets (inequality starts to raise at the beginning of economic growth and then decreases) because not only the period analyzed by Kuznets is too short but because the period when inequality decreases is historically "special" -- eg marked by a strong inflation. Whether this is applicable to India (the original question) is another problem... but I would relate it more to the China case -- that experienced a very high increase in inequalities, even though the level of poverty sharply decreased at the same time. China is an interesting case, because its growth prompted the World inequality to decrease, while inequality in China increased at the same time. Clearly, there is still a lot we don't know on the evolution of inequality...

Sounds interesting. However, think of China, Brasil and India in the last two decades. Do their experience support your theories?

The question assumes that there are determinate meanings to terms such as economic growth and inequality. If there were, it is likely that economics would be a predictive science, but it is not, it is an empirically-founded metaphorical science. Lack of robust and stable relationships between economic growth and almost any explanatory variable across global datasets was found two decades ago by Levine and Zervos, This suggests that these terms are not referring to the same things in different contexts - there is no ontological stability. This is turn suggests much. 

Adam's point is a fair one, and recalls the indeterminacy of many such general terms and Morgenstern's reflections on the weaknesses of economic indicators. There are nevertheless clear signs that the size of the Indian economy is expanding and the means of production are in fact being developed; I think it is hard to deny that.

But Vedamani's question is about how growth and inequality co-exist when some versions of classical economics predict that this should not happen because of 'trickle-down' effects from the top to the bottom of society.  There are some obvious explanations.  The first is financialisation of the world economy, present in India as elsewhere (the growth-inequality issue is also widespread), since financial assets allow the accumulation of wealth at a faster rate than investment in productive resources and much faster than in human capital (Piketty, 2014).  The second is the weakness of labour; in India as in much of the 'developing' world, most labour is 'informal' i.e. not within an employment relationship but within a Williamson-style primitive market one.  The third is that those in employment have been decreasingly able to assert their collective interests through collective vehicles such as trade unions.  The final brick in this wall is of course neo-liberal ideology, which has been thought to have been 'proven' correct by the collapse of Communism; its victory was too complete and also decimated social democracy.  In India, this is all too apparent!  

Is it a problem?  it is for everyone sine the evidence is that even the 'winners' are less happy in societies with high Gini coefficients; for the majority, it most certainly is a problem and one that will not go away any time soon.

Richard

There are a host of possible explanations. The problem caused by the empirically-founded metaphorical approach is that there is no way within the methodology to choose between them. As a producer of such explanations I can do this as well as any, and it has produced for me research product with many citations. But it is not a wise guide to action if action is conceived in cause-effect terms, and that is the point of the question - what to do, not what is a decent understanding. 

what to do?  not what we were asked, but global experience shows that workers' bargaining power must be increased.   

Back to the 1970s, secular decline in profits, then look for the Thatcher/Reagan reaction? How to stop that? 

In depends on the speed in which each social class accumulates this growth. It is like two (or more...) cars in a race: both are going ahead, however, if one goes faster, it increases its accumulation of speed in relation to the other car. Inequality.

Depending on the income-share claims made by employees, businessmen, rentiers, State, and so forth, one may gain more than the other, though they are all earning. Inequality.

In most cases economic growth positions some participants at a vantage position in terms of resources control more than the others, this often brings about income inequality. This is more rampant in capitalist economy which encourages the rich to get richer at the detriment of the poor. The well to do are the ones controlling the means of production. The income inequality in such economy is more conspicuous when the basic infrastructures are inadequate as it is common in most developing countries.

I think there is no any uniform theoretical base for this issue, and you should look at particular cases. E.g. I often notice regional factor here (in Russia as well as in many other countries). If we regard social inequality determined by interregional disparities (like north-south disparities in some economies; and in Russia regions specialised in mining and quarrying are richer than others), then we will see that rich regions becoming even richer make their impact to the GDP growth and simultaneously to growth of interregional inequality.

Growth is essential but not sufficient to reduce inequality which is associated with growth as resource endowments are different among households. Hence, appropriate policies should always be implemented to shape of the income distribution without leaving to determine its own shape by the market forces. Being unable to make the growth distributional with suitable policies, it will automatically generate distributional-neutral growth, which will always accompany inequality. 

During the 1950’s and 1960’s, economic growth was considered as the main element affecting development strategies. The increase in gross national product was supposed to ensure the achievement of other objectives such as reducing unemployment and poverty.

However, since the late 1960s, the importance attributed to the rapid economic growth effect on social development came under increasing criticism and considered insufficient. Authors such as Seers (1970), Myrdal (1968, 1971), Adelman and Morris (1973), Paukert (1973), Ahluwalia (1976a, 1976b) find that a rapid economic development is not sufficient to increase the volume of employment. Contrary, such a development leaves out a part of the population and emphasizes the inequalities among citizens.

It is from the 1990s that the debate about the relationship between economic growth, poverty and inequality has increased in the context of the analysis of the economic growth that benefits the poor, called pro-poor growth.       

I add that two possible definitions of pro-poor growth are discussed in the literature. The first, called absolute, considers growth as pro-poor if and only if poor people benefit from growth in absolute terms .i.e. the poor benefit from overall growth (Ravallion and Chen, 2003; Fiestas and Cord, 2004). The second is called relative, when the poor benefit from growth proportionally more than the non-poor i.e. which focuses both on reducing poverty and inequality (McCulloch and Baulch, 2000; Kakwani and Pernia, 2000; Son, 2004; Kakwani and Son, 2008).

In this context, different methods have been proposed for measuring pro-poor growth. For example, the Datt-Ravallion decomposition (Datt and Ravallion, 1992), the Growth Incidence Curve (Ravallion and Chen, 2003),  the Rate of Pro-Poor Growth (Ravallion and Chen, 2003), the Growth-Elasticity of Poverty (Fiestas and Cord, 2004), the Poverty Bias of Growth (McCulloch and Baulch, 2000) and the Poverty Growth Curve (Son, 2004).

An important factor that is often overlooked in the analysis the increasing  income inequality resulting from growth is the sources of growth. When growth in the sectors of the economy where the poor do not fully participate the inequality gap is bound to  increase greatly. Where the source  of growth is in the say the petroleum/gas sector where the poor are not fully active then the situation is bound to be worse. On the other hand if growth occurs in say agriculture and perhaps in the informal sector, the poor is bound to benefit greatly and at the same time minimize the extent of the inequality. In short, in order to address the inequality problem, we need to always ask where is the source(s) of that growth.

A second source of increasing inequality in the extent of the rate of growth of the various sectors. In situations where all sectors benefit from an overall economic growth, but disproportionately so in certain sectors, income inequality is bound to be exaggerated.

Increasing income inequality indicates clearly specific areas in the economy that ought to be targeted for specific policies and specific pro-poor growth policies.

Increasing income inequality with growth can also be due to  human capital investments which poor are unable to afford unless there are specific policy intervention. So those who are educated, skilled and trained tend to benefit in the initial stages of growth.

See the fllowing review article on the subject:

J. Hellier and S. Lambrecht (2012), “Inequality, growth and welfare”, in: J. Hellier & N. Chusseau Eds, Growing Income Inequalities, Economic Analyses, Chapter 9, Palgrave, MacMillan, pp. 274-311.

Thank you for replies/further reference

There is growing evidence that income inequality increases with economic   growth if the growth is voiceless, jobless and ruthless etc. Wealth disparity is found to much higher and strongly correlated with economic growth than income inequality. Recently Thomas Piketty research ( see his  book on  Capital in the twenty first century) has refuted Kuznet hypothesis.

You are right. Indeed, it is the concern for those that have often been left out of the growth and development processes that has led to the recent emphasis on "inclusive growth" as the paradigm for reducing income inequality.

Despite rhetoric on inclusive growth, conventional growth and poverty reducing policies have been and continue to be the dominant strategies with little or no attention being paid to inequality reducing policy strategies. This has led to increased inequality thereby by hampering growth and its  limited impact of poverty reduction.

Dear friends, I have been looking at this issue from two angles that started in 1776 when Adam Smith published his piece "the wealth of nations" and which magically work together to increase inequality as economcic growth grows since then:

a) The invisible hand has not been a friend of social wellbeing; nothing is said then about environmental wellbeing;

b) The trickle down effect has not been a friend of social wellbeing

d) poverty, inequality, both social and environmental have been increasing as economic growth has been increasing...:

This means that the relationshinp between economic growth and inequality can not be explored from the framework provided by Adam Smith.... It is the embudo effect that explains the growth of inequality and economic growth takes place....

see ideas about this and why here as food for thoughts

7How Do Agricultural Development Benefits Actually Spread: Is it the Trickle Down Effect or the Embudo Effect?

https://www.researchgate.net/publication/281276242_How_Do_Agricultural_Development_Benefits_Actually_Spread_Is_it_the_Trickle_Down_Effect_or_the_Embudo_Effect

Greetings to all

Article How Do Agricultural Development Benefits Actually Spread: Is...

My apologies to all, it should have said

....

---

a) The invisible hand has not been a friend of social wellbeing; nothing is said then about environmental wellbeing;

b) The trickle down effect has not been a friend of social wellbeing

d) poverty, inequality, both social and environmental have been increasing as economic growth has been increasing...:

..

..

According to "Stiglitz (2012) argues inequality slows economic growth. According to Stiglitz, inequality weakens aggregate demand for individuals at the bottom and thus they spend a bigger portion of their income than those at the top. This makes sense intuitively; the poor often need to spend all their earnings simply to have the necessities to get by. Furthermore, Stiglitz argues the policy responses to fight weak demand can damage the economy". Source: Income Inequality and Economic Growth, Jonkoping University, AUTHOR: Barbara Kandek and Veronika Kajling, page 3

Louis:

Thanks for your recommendation

In India and other south Asian developing economies, most of the investments are resulted from private sectors-from businessmen and major part of benefit from higher economic growth goes to the businessmen rather than employees or workers. Consequently, inequality in income distribution increases as economic growth happens.

According to the Organization for Economic Co‐operation and Development (OECD, 2015), of the member countries, Mexico is in first place after Chile with the highest income inequality with Gini Coefficient (0.459 and 0.454 respectively.

economic growth provides opportunities to distribute a bigger cake. Often not everybody gets a bigger slice.

a) When the economy grows it can happen that the resources of the better off grow more than the resources of the poorer sections. While both resources (e.g. incomes) grow the gap between both in growing as well meaning that inequality become bigger, but all groups improve.

b) for poorer sections it is best when their income grows much more than the incomes of the better off. The it can even happen that the gap between different groups narrows, meaning inequality declines.

c) Worst would be, if incomes of poorer sections decline. meaning that not only the gap becomes bigger (increasing inequality), but the poorer sections have less disposable income, meaning they become absolutely poorer.

it depends on the extent to which growth favors the rural sector. also growth is not effective in reducing poverty in the presence of inequalities.

Of the economic growth, the benefit is for the social sectors that have power and obviously it is a small minority.