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Income Distribution
International BusinessProf. J. K. NayakDepartment of Management StudiesIndian Institute of Technology, RoorkeeLecture – 23Income Distribution, Poverty, ProductivityWelcome friends. So, welcome again to the course International Business. I think youmust be doing pretty well at the moment and you are following the course well. So, let usstart from where we had left in the last lecture. So, in the last lecture we had discussed atyou know we were continuing with the economic factors and how economic factors whatare the components in the economic factors that affects you know the economy at largeand the international business firms.So, what are they basically? So, there we discussed about few like inflation being one ofthem debt you know and the role of debt in any country and then we talked aboutemployment and our unemployment right. So, when we talked about inflation, we realizethat inflation is not to be always treated badly. Sometimes inflation is very dangerous;obviously.So, if there is a case of hyperinflation like it happened in Argentina or Venezuela orZimbabwe you know it the economy completely crashed. So, that is a very difficult timefor any country, but some inflation is also moderate inflation or slight inflation is goodright. On the other hand if there is a you know negative inflation that is not a very idealsituation also for a country right.So, neither it should be a hyperinflation nor a deflation situation none of them is good,but rather a small amount of inflation is desirable to some time right because what isinflation it is basically the rise of goods, the price of the rise in prices of the basic goodsright which we are using.So that means, there is a this is basically an equilibrium between the demand and thesupply. If demand is growing too much and supply is less automatically inflation willgrow. So, there has to be some balance between the two, right. And then we talked abouthow unemployment is a we talked about the misery index right which talks about howinflation plus unemployment taken together besides the economic health of a country.So, that is another factor we discussed. And the third we talked about what is debt andhow debt is also to be seen. Again debt sometimes people take it as a very negative in ageneral terms, but if you talk to a finance guy or somebody well learned abouteconomics he would not see debt only as a negative in the negative way rather debt hassome positive impact.And we saw how some of the top countries in the world they accounted for about 65percent of the world’s total debt and we saw that all these countries were developedcountries right.On the other hand we saw some you know another situation where we compared. Forexample, Japan versus you know Greece and we found Japan has a you know debt toGDP ratio of 240 percent, but still Japan is doing well, but on the contrary Greece hadonly 160 percent, but Greece was doing very badly.So, what is the reason? Because Japan is developed 90 percent of its debt is internal debt.So, which is that is why it is not a very dangerous situation with Japan. And they areutilizing this debt in a very you know positive sense and they are using for the bettermentof the economy.So, all these factors are very important and today we will continue from there right.Now, another important point that is connected with the economy and you know whereinternational firms need to understand is a income distribution.(Refer Slide Time: 03:55)Now, when we talk about income distribution, what it says is it estimates the proportionof the population that earns various levels of income. Now income distribution like,knowledge distribution is a very key variable. Similarly, income distribution is a verykey variable. Now if the income distribution is not in a proper way it cannot be equal, butthat should not be too much of a difference right.If the difference is too large in any economy; that means, some people are extremelypoor and are in a poverty situation; some are extremely rich and they are having a veryyou know lavish lifestyle. Now, this kind of situation is not a very desirable situationbecause it might lead to conflicts in the society right. It might lead to increase in crime. Itmight lead to increase in attacks on the richer people.So, as somebody had said rightly in such a situation it will be the responsibility for therich to take care of the poor. Otherwise they would not be in a very safe zone. So, tounderstand income distribution there is something called the Gini coefficient right. Somepronounced Gini some pronounce Gini.So, the Gini ratio is a measure of statistical dispersion. What it is saying is a measure ofthe statistical dispersion how much it is dispersing right intended to represent the incomeor wealth distribution of a nations residents and is the most commonly used measure ofinequality.So, the Gini ratio is used to measure inequality and it helps to represent the income orwealth of the nations people, right. Now, it summarizes the relative distribution of wagesin the population with lower values closer to 0 indicating lower values of inequality andhigher values closer to 100 indicating higher levels of wage inequality; that means, morethe value more it is closer to 100 the dangerous it is right.That means there is a high inequality in the nation, but if it is close to 0 it is a good signright. Or the coefficients range from 0 to 1 right; with 0 representing perfect equality and1 representing perfect inequality which is an ideal situation. It does not happen. Youknow it is a kind of a is only a situation which you can think 0 and 1 does not happen,absolute 0 and 1 does not happen.Now, when we talk about income distribution, we will talk about the urban versus therural income distribution. Now, this is very important for you know for a country likeIndia. For example, let us say now the urban rural income is in a different you knowlevel and the rural income distribution is in a different level. So, if companies do notunderstand this distribution of urban and rural income well then what would happen ismost of the products would be made for only maybe the urban people and the ruralwould be left behind.But, actually the rural income distribution if you look at the rural incomes they also havea capacity to buy. The rural people also have a capacity to buy although yes its very less,but still they have and because of the volume of the rural people the you know the massof people in the rural areas in India for example, gives an opportunity for the companiesto try out new products for them. And this is what Gary Hammer you know C. K.Prahalad Dr. C. K. Prahalad has said in his bottom of the pyramid concept right.So, how this urban and rural income distribution is there in a nation it is very important.So, it should not be very high. Now, you see if there is a high difference in the urban andrural income distribution what will happen? The resultant is that people will migratefrom the rural to the urban right which will lead to development of slums, you know kindof colonies which are not very desirable and again there will be lot of crime, theft and allthese things.So, this would make the for a tourist purpose also that the cities would look very odd likewhich has happened in you know India. For example, if you see Bombay which isMumbai today or even Calcutta, if you see all these places because of the incomedistribution a lot of people have stopped their work in the rural areas and they havemigrated towards the urban in search of job and wages.Managers must realize that income inequality is not just bad for social justice, it is alsobad for the economy as we said and it can provoke, crime, corruption and risk that limitgrowth and erode the stability in an economy ok.(Refer Slide Time: 08:32)So, let us continue with that. Groupings of different countries. Now, this is the globalwage report of ILO right for 2018-19 among the high income countries. The Ginicoefficient ranges from a low of 19.5 for Sweden to a high of 38.7 for Chile right.So, as we said the lower it is closer to 0, it is better right. Among low income countriesthis is for high income right. For low income countries the united republic of Tanzaniahas a Gini coefficient of 53.6 while South Africa which is classified as the upper middleincome scores 63.9 right.According to these estimates South Africa, Namibia, the United Republic of Tanzaniaand Malawi are the countries with the highest levels of wage inequality among the 64countries they have considered right. As per the report wages in the developing countriesare increasingly increasing more quickly than that of in the higher income countries thatis very interesting and very nice. What it says that in the developing countries the wagesare increasing more quickly than that of in the higher income countries.India for example, led the average real wage growth in 2008 to 17 from this period of 10years at 5.5 against a regional median of 3.7 that is too good for India right. So thatmeans, a lot of people have moved from a low wage and low income to a higher sideright. So, since the median was 3.7 and this is 5.5 ok.(Refer Slide Time: 10:13)Let us see this diagram. South Asia in you know India led the average real wage growthrate from this period at 5.5 against this right. Following India was Nepal which is at 4.7,Sri Lanka 4, Bangladesh 3.3, Pakistan 1.8 only and Iran 0.4 right. So, you can look atthis and this is the median right, median value 3.7 right.So, this shows that Indian government has been acting very good and working very nicebecause of some of our policies. For example, the MGNREGA policy and all thesewhich I have been for the you know to increase the wage or the purchasing power or theincome of the poor, the government did. They have acted positively right, we can we canclaim that.(Refer Slide Time: 11:00)Let us look at what has happened overall the global wage growth declined to 1.8 percentin 2017 from 2.4 percent in 2016. The findings are based on data from 136 countries. Inthe last 20 years average real wages have almost tripled in emerging and the developingG20 countries.Now, that is look at this diagram. If you see labours love lost, what it says woman’shourly wage lower than men’s by what percent? India men have a 34.5 percent higherhourly wage than woman. Pakistan 34. So, almost 34 and 35 is as close as possible. SriLanka the difference is less; that means, men and women earn little closer Indonesia 7.8,this is a good sign I would say this is a good healthy sign for any economy lower thedifference better.On the contrary you see Bangladesh has got a negative; that means, women earn morethan men in Bangladesh right. So, this is what it says right and if you look at this theglobal wage growth since financial crisis that had happened right in the 2008. If you see2008 from there it started growing right and there has been changes spikes and in 2017now, when we are here it is 1.8 percent of the growth rate right what we have said here.Women are paid the most unequally in India now that is the clay that is a statistics whichis not very desirable for the Indian government to be you know and they should take itvery seriously compared to men. When it comes to hourly wages for labour on averagewomen are 34 percent less than men this is what ILO has found.(Refer Slide Time: 12:43)Now, what a labour cost; another component that affects the economy. For many goodsand services, the cost of labour is a key element for many goods and services the cost oflabour is an integral component right it is a major part. Consequently companies scan theworld looking for markets that offer lower cost labour. You see the whole world after thetrade has really opened up.Companies are looking at the factors of production in which labour is one of the factorsof production very important one. So, they would like to see where labour is cheaper andthey would try to start their factories or their operations in those places where rawmaterial is available and, but labour is also cheaper right.So, for example, you see labour costs are an important tool for understanding therelationship between work and the economy and can give an indication of the relativecost of doing business. This is a very important term right, the cost of doing business invarious locations.So, let us look at the Indian IT sector for example. Why do many companies want tocome to India? It is not only the market, but Indian labour is cheaper much cheaper to thewestern in compared to the western ones and more than that they also know speakEnglish and they are very flexible to the you know different time zones that is prevalentin the world.So, looking at all this labour costs are considered to be much cheaper in India andtherefore, many companies have set up their show offshore you know units out in Indiaright.You see and even the it services in for companies like Infosys, TCS, Wipro and all theyprovide lot of labour and they you know send them to the other countries where thesepeople go and work at a better salary what they would have earned in India and, but it isfor the foreign firms, it is a quite a lesser amount in comparison to what they would haveto paid to the local workers.So, now when the some of the political leaders talk about stopping outsourcing which isthis example right. At that time it becomes a headache for the business firms to realizewhether this would be economically viable or not. A factory worker in the United Statestypically cost between 15 to 30 dollars per hour right looking at a skill. Factory wages inMexico which is close to US is about 11 percent of the US level.In China it is 3 percent only right. So, you can understand that how effective it would befor somebody to start an operation in China no wonder China has become themanufacturing you know hub of the world right.(Refer Slide Time: 15:25)Another important you know component is poverty. Now, poverty is a condition inwhich a person or the community is deprived of or lack of essential for a minimumstandard of well being right and life.So, there are two definitions; extreme poverty and moderate poverty. Poverty is below acertain standard. So, below you know extreme poverty says when people are earningeven less than 1.25 dollar per day. So, if I make a simple calculation somewhere it willbe around let us say around you know 90 rupees.So, I am not exactly in Indian currency if I say if I take it 70 rupees per dollar, so, 1.25into 70 will be almost 90 rupees; so, 90 rupees per day right. So, that is around 2700rupees per month right and moderate poverty says less than 2 dollars. So, 2 dollars meansaround 140 right. So, if take it 70 again for a easier calculation. So, that is around 4200.So, anybody who lives below this level would be considered moderate or a extremepoverty case right. Now, what is the relation between poverty and the economicenvironment? See if most people are there in poverty as I have been saying right, so,there would not be very you know happy situation right and peoples buying power is alsopoor.So, all these will not lead to a you know the circulation of money which is a very verykey you know component. If money does not circulate it is a very dangerous thing. So,people will tend to hoard money they would not invest money they would be scared oftheir future. So, all these things will lead to a very bad situation right, but interestinglythe potential of poor.For example, this example we have brought that Indian mobile phone subscribers usedwhen they understood the lot of people in India are in the poverty line below the povertyline so, they use this as an opportunity and companies are still earning profits. So, theywhat they made was they made the cost of a call so low by using the latest technologyand all that even the person who was who comes under the poverty also was able to usethe services of these telecom companies, right.Now, that is an opportunity they could use, but then it does not mean that is the peopleshould live in the poverty lane right. And the India has done a excellent job in a countrywhere it has transferred lot of people from the poverty to a better condition right.(Refer Slide Time: 18:04)Now, this is the global multi dimensional poverty index of 2019 if you can see fromhere. The dimensions of poverty have been taken as to be health, education and livingstandards right.So, when it comes to health, its nutrition you know level of nutrition, the child mortalityand when it comes to education it is years of schooling, school attendance. So, forexample, if you see in India there are lot of mid-days meal schemes which are prevalentto encourage students to come to the school to attend school because they are given freemeals right.So, these experiments have been done in India from the past have been the governmenthas been doing and because of this India’s education system has been strengthening,India’s economic condition has been strengthening below the you know the peoplebelow the poverty line this number has been decreasing ok. Standard of living when youtalk about for example, you know some others parameters are cooking fuel, sanitation,drinking water, electricity, housing and assets.Now, if you look if I am not praising any government, but to my knowledge the presentgovernment has started working on let us say the cooking fuel where they have startedgiving the LPG right.So, they are now working on the water condition. So, what they are doing is now, thegovernment every government does it right this is no special for any government, it istheir job to do, but the government to improve Indian government what whoever theywere whichever government was there at the time yes the present government has beenlittle better than that in terms of these issues.So, what they have tried to do is they have tried to improve upon the standard of livingeducation and health of people by having you know like for example, insurance for youknow for health related insurances and all so that people can afford they do not worryabout their health. So, all these things has led to a better situation for Indians at least.Now, what it says is this MPI compares acute multi dimensional poverty for more than100 countries and 5.7 billion and monitors the changes over time. Across 101 countries1.3 billion people 23.1 percent are multidimensionally poor.India lifted now this is this is something I am very happy. India lifted 271 million that is27 crores out of poverty between this 2006 and 16 right, recording the fastest reductionsin the multi dimensional poverty index right.Values during the period with strong improvements in areas such as assets, cooking fuel,sanitation you know nutrition. So, this is something the government has been workinggiving you know children’s iron tablet us at school free midday meals you know freeschooling for the not so, privileged class of people, now, gas cylinders all these thingsright.The report identifies 10 countries with a combined population of around 2 billion toillustrate the level of poverty reduction and all them have shown statistically significantprogress towards achieving the sustainable development goal 1, namely ending povertyin all its forms everywhere.The 10 countries are Bangladesh, Cambodia, Democratic Republic of Congo, Ethiopia,Haiti, India, Nigeria, Pakistan, Peru and Vietnam right. I am not very happy that at leastmy country is in this list, but so, if we are there, but India has done definitely a good jobin you know lifting 27 crore people or 271 million people out of it, which might be evenlarger than some of the population of even some of this countries right.(Refer Slide Time: 21:43)Now, if you can see this, this is a comparison of Ethiopia, India and Peru, significantlyreduced the depravations in all the 10 indicators. What the 10 indicators? Nutrition, childmortality, up to assets right. In different ways, Ethiopia made improvements in nutrition,school attendance, drinking water and assets. India strongly improved in assets, cookingfuel, sanitation and nutrition and Peru developed clean energy, electricity, housing andassets right.So, this is something which has what it says? If you see it is a it downward looking, so,why it is because it has improved. So, what it has done is it says Ethiopia, India and Perusignificantly reduced the deprivations right. So, they have reduced, so, that is a verypositive think right.(Refer Slide Time: 22:29)So, and lastly another important component that is part of the economy is theproductivity. Now, what it says is productivity measures the efficiency with which goodsand services are produced.In terms of labour, it is a quantity produced per person per hour labour hour. It is theratio of gross domestic product to hours work. Now economists use productivity growthto model, the productivity capacity of economics and determine their capacity utilizationrates right. This in turn is used to forecast the business cycle, predict future levels ofGDP growth.In addition production capacity and utilization are used to assess the demand andinflationary pressures. So, what it is saying is basically? Productivity is used to measurethe efficiency with which the services and goods are produced right. So, it says they theeconomists use this productivity growth to model the productive capacity of economists.So, what could be the you know productive capacity, how much they can produce right?So, and determine their capacity utilization. How? If they have some capacity if so, let ussay the some factories are being built or some you know there are some stores somedistribution how they are being utilized how much they are being utilized. So, is it 100percent utilization, is it 60 percent utilization, what is the level of utilization?So, that talks about our productivity. This in turn is used to forecast the business cycle.So, what would happen if there is this is the condition at the moment then what would bethe future? So, this forecasting becomes easier and this is in addition, the productioncapacity and utilization are used to assess the demand also of the products and you knowinflationary pressures that can come on the economy.So, that helps the companies to understand what they should produce, how much theyshould produce and how they should be going ahead. Here technology makes a verylarge impact. So, the continuous diffusion of management methods and technologyamong the low cost markets will power further productivity gains.So, now, technology has played a very vital role in improving the productivity right. Forexample, you have different methods. For example, just you know human skill toimprove the process through which you are making by using maybe you know machineyou are using different processes, you are reducing the you know time required to makea product.So, all these things and you know the efficiency is increased. So, the productivitytremendously grow by using technology more effectively, ok. So, today we will stophere and we will not go further because let us understand this thing. Today what we haveexplained is to you is so, we talked about the productivity.So, we have now understood how productivity; for example, let us say let me give anexample. If a country is let us say now contrast between these two. Let us say there aretwo countries A and B. A has a labour rate of 10.Let us say I am making unit list. B has a labour rate of 8 ok, the labour rate is this one.The this here the productivity is let us say working a productivity is let us say 80, let ussay 80 percent or 0.8 right and here the productivity let us say is 0.5. Now which is acheaper, which where is the labour actually cheaper if you talk about this is as a humanlabour right, then labour wage and all?.Now, if you see this is 10.8, the overall score is let us say; that means, 8 and when I ammultiplying this it is giving me a score of 4. So that means what? If I take these twocountries then although the cost of production looks from the face of you know fromdirectly it looks cheaper here, but when I am multiplying with the productivity labourproductivity this is 200 percent more efficient than this one right.So, this is something which you know the companies also need to understand and thendecide which countries are actually having low cost labour not in direct way, butthrough an overall means right.We understood also you know the effect of poverty and then we effect understood labourand we understood the effect of you know how income distribution effects. So, all thesethings we discussed today and we have a mix made some understanding about howeconomy is getting affected by these measures right. So, in the next lecture we willcontinue from here. So, this is all for today.Thank you very much.