An IMF Working Paper 2016 titled ‘Sharing the Growth Dividend: Analysis of Inequality in Asia’ generated some public discussion recently on income inequality in Fiji.
The IMF research paper focuses more broadly on Asia but a graph illustrates that inequality has declined in Fiji between 1990 and 2013.
It is pleasing to note that there is now an emerging conversation on income inequality in Fiji. Income inequality must be a concern for all of us especially if it is on the rise. This article therefore aims to offer a better understanding about income inequality amongst members of the general public.
Measuring income
inequality
Income inequality is about looking at how unevenly income is distributed in a country. Economists use ‘Gini coefficient’ to measure income inequality. The measure is named after Italian statistician Corrado Gini who published a paper on inequality in 1912. Although there are other ways to measure income inequality, this remains the most commonly utilised measure.
Gini coefficient varies between 0 (complete equal distribution) and 1 (complete inequality). Inequality can be measured by looking at either consumption or income. However, consumption is commonly used as economists consider it to be a much better measure of welfare than income. So, when economists talk about income inequality, it is generally a consumption-based inequality.
A consumption-based inequality is based on household or individual consumption rather than income. However, it should be noted that there is evidence to suggest that inequalities are much more noticeable when levels of income rather than consumption are used for calculating inequality.
Income inequality in Fiji
The data to calculate a measure of income inequality in Fiji comes from Household Income and Expenditure Survey (HIES). Professor Wadan Narsey has provided a summary of income distribution in Fiji from 1997 to 2003 in his book titled The Quantitative Analysis of Poverty in Fiji.
Using HIES data, it can be observed that income inequality (overall distribution of income) in Fiji remained mostly stagnant between 1977 and 1991 at a Gini coefficient of around 0.43. From the 2002 HIES, Gini coefficient was estimated to have decreased to 0.41. The 2008 HIES shows Gini coefficient rise to 0.43. That is, income distribution worsened between 2002 and 2008. However, the 2013 HIES shows that Gini coefficient has declined to 0.38.
What does 0.38 mean? It tells us income inequality across the whole population. As the number decreases, more and more people share all of the income earned. It is clearly possible to have a Gini coefficient of 0.38 with the top 20 per cent of households receive 46 per cent of all the income earned in the country, the next 40 per cent receive 35 per cent and the bottom 40 per cent get 19 per cent.
An emphasis on Gini coefficient itself is not a complete analysis of inequality. Additional ways to focus on income inequality include comparing household incomes in the top 20 per cent and the bottom 20 per cent of the population.
Alternatively, one can look at household incomes of the top 10 per cent and the bottom 10 per cent. Further, there is the ratio of the income share of the top 10 per cent to that of the bottom 40 per cent.
Comparing 2002 and 2008 HIES data, the ratio of the income earned by the top 20 per cent of the population to that earned by the bottom 20 per cent of the population worsened from 8.2 to 9.3. This means that in 2008, the average income of a household in the top 20 per cent is around 9.3 times the average income of a household in the bottom 20 per cent. Similarly, the average income of a household in the middle 20 per cent was around 2.6 times the average income of a household in the bottom 20 per cent in 2008. This figure was 2.5 in 2002.
Further, share of household income for the bottom 20 per cent decreased from 5.8 per cent in 2002 to 5.4 per cent in 2008. At the other end, share of household income for the top 20 per cent increased from 48 per cent in 2002 to 50 per cent in 2008.
Comparing the statistics between 1990 and 2002, there has been a trend of declining inequality. However, the period between 2002 and 2008 has seen a reversal of the decreasing trend. This actually means that between 2002 and 2008 the rich got richer and poor became poorer.
From the 2013 HIES, inequality decreased to 0.38. This is partly reflected in an improvement in household shares of income for the bottom 20 per cent of households from 5.4 per cent in 2008 to 7.8 per cent in 2013.
In 2013/2014, the poorest 10th of the households had, between them, share 3.2 per cent of the country’s total income; up from 2.3 per cent in 2002/2003. The proportion of total income going to the richest 10th is slightly lower than a decade ago: 31 per cent in 2013/13 compared with 32.5 per cent in 2002/03.
Why inequality is
considered harmful?
High levels of inequality are bad for an economy as it reduces people’s ability to participate in social and economic opportunities, and thereby impacting economic growth. Although income inequality is an economic concept, there are several reasons why inequality might be harmful for a society as a whole.
Research in economics and other social sciences show there exists negative association between inequality and indicators such as health, education, child welfare, social mobility, and trust and community cohesion.
There is further evidence to show a positive relationship between inequality and drug abuse, imprisonment, obesity, violence, and teenage pregnancies.
What can drive income inequality?
There are many reasons for the gap between rich and everyone else in countries like Fiji. Combinations of effects from individual ability, culture, tradition, religion, ethnicity, nature of work, regional growth disparities, formal rules/regulations, norms and attitudes can lead to differences in incomes as well as wealth over time.
Below are four key aspects applicable to Fiji:
First, some inequality can arise from individual differences in ability or skill. There is a diversity of individual ability/skills and unequal outcomes are a natural consequence of equal opportunity.
Second, inequality can arise based on the nature and type of work in the economy and returns for labour. The major driving forces generating income inequality based on work include regional disparities in economic growth over time, type and nature of economic activity, returns to education, government policies (in addition to tax and transfer systems), and ability of workers to organise and defend their rights.
For the majority of the households in Fiji wages and salaries are a primary source of household incomes. So the nature of jobs, working hours, and wage rates make a huge difference to inequality in wages and salaries thus acting as a driver of overall income inequality.
Third, better security rights and access to productive resources such as land empower individuals and households to exploit gains from investment in labour and finance. However, poorly defined ownership and use rights to resources will make it difficult to collateralise these and thus dampen individual initiative for work and investment.
Fourth, the importance of race, gender and class towards inequality cannot be ignored. Rules/laws, ideologies and culture can play a role in impacting inter-generational wealth distribution and thereby impacting ability to generate incomes. For instance, the transmission and control of property leading to economic control within the household can create long lasting inequality favouring men.
My research shows that women in Fiji earn, on average, 8-10 per cent less than men. This is after controlling for variables such as age, education and experience.
This unexplained gap can be attributed to factors such as prejudice and discrimination in the labour market.
Other class related inequalities such as health and nutritional status, food security, etc. can be a cause on income inequalities as much as they are a consequence of income inequality. Ethnic inequality has been raised by many commentators such as Professor Wadan Narsey in the past.
Additional remarks
Short term changes in Gini coefficient do not portray a comprehensive picture about the dynamics of income inequality. In the long term, however, the indicator better reflects how the distribution of income has changed within a country over a period of time.
It should also be noted that creation of wealth is also an important component of changes in consumption and welfare. Thus high levels of wealth inequality can also impact income inequality overall. In this regard, it would be a good idea to utilise tax details (data from Fiji Revenue and Customs Authority) to study and understand the distribution of income and wealth over time. So, how do we address income inequality? Since drivers as well as roots of inequality lie in economic, social, and political spheres, a multifaceted approach is required to deal with income and wealth inequality.
A fundamental step would be to prioritise and implement policies to improve the economic and social opportunities of the poorest and most vulnerable. These include earning opportunities (employment status and nature of the employment) and number of people working for money. Although poverty and income inequality are two different aspects, there is a connection between the two. Only an inclusive growth strategy can lead to an overall reduction in income inequality. This means growth that targets all sections of the society; poor, middle as well as higher income households.
* These are the views of Dr Neelesh Gounder, and not of The Fiji Times or of USP where he teaches. He tweets at @GounderNeelesh
