Freddie? Hey hey hey...Mr Ronan is who he talkin bout?
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Understanding income and wealth distribution: getting the basics right
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The state of wealth and income distribution in a society is very important for social consensus and cohesion. Various traditions of economics have established models and theories of how distribution determines not only the business cycle (the short term), but also long-term economic growth. It was in this context, I launched a series of columns on the ethnic security dilemmas (ESDs) and their implication for economic outcomes today. Distribution of income and wealth is at the core of the ESDs.
My primary argument has been that the ESDs are based on economic insecurity which impels people to take political actions and resort to stereotyping. When we look at the ESDs in this framework, we observe that the actions of each group takes into account the actions of the other – hence, we have here problems of low inter-group trust and high strategic uncertainty. There is no guilty ethnic group, just aggregate economic losers as each group does what it perceives is best for itself – thus, the classic definition of a social dilemma.
I maintain that culture does not explain differences in income and wealth distribution today. Culture is determined by the structure of production, which itself is determined by external constraints and geography. If people are given a fair opportunity, their culture will evolve as the structure of production changes. So-called ‘good’ culture tends to evolve in places where the production structure is more complex. Complexity of production means several things, but at its most basic level it implies the society can produce and export goods and services which have high income elasticity of demand. The latter implies, to give one example, if an industry produces sugar, bauxite or gold bars, then over a long period of time every 1% increase in world income might result in at most 0.2% increase in income of the masses of people working in those sectors. And if the good is an inferior good (as I suspect is bulk sugar, but I have to consult some academic journals on this), then the same 1% increase in world income could engender a 0.2% decrease in the incomes of people working there. However, the outcome changes if the same industries could produce slightly more complex things like heritage tourism, power generation, biodiesel and palm/coconut oils, red wine from antidesma, or jewellery.
The discussion on the ESDs, however, has been somewhat derailed recently. It seems that to be considered non-racist, I have to say categorically that Indians own 95% of the income and wealth in Guyana. There is no room for nuances. Being familiar with the methodologies used by economists to calculate these things, I cannot make such a clear-cut call until we have better data. Apparently because the economist Piketty produced the state of income distribution in United States and Europe in a book, which took him several years to write, we can just produce same overnight for Guyana. The chest-beating nationalist did not estimate them in a 26-year academic career.
We do not have access to the quality tax data that Piketty had. The name Piketty was just thrown out there to feign understanding of the issue, confuse and derail. If we use the data from the Guyana Revenue Authority (assuming we can even get access to it), we will not have an accurate measure of the distribution of income, let alone by ethnicity. It should also be noted that Piketty’s study of inequality says absolutely nothing about distribution by ethnicity, which I believe is necessary in Guyana for addressing the problem of distrust. Piketty studied and reported on overall personal-income and functional-income distributions, which mean different things. The primary reasons why Guyana Revenue Authority data cannot be used is because of the underreporting of incomes and an estimate that puts the underground economy around 40% of official Gross Domestic Product (GDP).
Therefore, we will need an indirect methodology, taking into account historical events, such as the PNC’s party paramountcy, the Economic Recovery Programme and the privatisations, elected oligarchy under PPP/C, and recent Grangerian patronage systems.
The public sector has always been a major source of wage income (civil service) and profit/surplus income (state-owned firms), as well as the foreign sector which earns profit income via Foreign Direct Investments (FDIs). Indians do earn a fair share of profit income as do African businesses. However, I would say with a fair degree of confidence that Indians do earn a higher share of profit income compared with Africans. Then, of course, there are proprietary/partnership profit incomes plus owners’ salary. Professionals who have their own firms earn profit incomes plus salary. There is also mining incomes from those who own dredges. Just a few Indians tend to earn a large share of the profit incomes from rice farming. There are also a few large publicly traded firms and banks. How do we determine who owns the shares in the publicly traded companies? This would be a hard one to decompose in terms of ethnicity. Then, we have to figure out rental incomes and so on.
There is also another major conceptual problem: asset or wealth distribution. Income is a flow over time while wealth is a stock at a given time. We should at least demonstrate knowledge of stocks versus flows before making categorical statements about distribution. These are two different issues and will require two different studies to fully address them. We will have to use the GDP and Gross National Product (GNP) to indirectly determine the flow of incomes each year going to various groups depending on historical work and investment specialisation. The GNP is crucial because we have to account for all the foreign profit incomes that leave after FDIs have been made. Anyone who goes to the data on the Bureau of Statistics website and accounts for the percentage of foreign-owned and state-owned business in the economy will see how absurd it is to make aggressive statements about this problem. This is even more important given the ExxonMobil investments. As I have written in these columns examining the resource curse, the government assumes greater power over economic allocation next year. The structure of the economy, and therefore ownership, will fundamentally shift next year. Hence, we are driving head-on into the resource curse once the constitution, election systems and civil service stay the same.
However, the GDP, GNP and Gross National Income do not tell us anything about the distribution of wealth or assets. They speak to the distribution of incomes. We will probably have to rely on a survey and institutional knowledge. Doing surveys in Guyana is always problematic because people are reluctant to disclose ownership and income. Assumptions have to be made when estimating both income and wealth inequality; therefore, all estimates will have a margin of error.
So, what are my tentative hypotheses?
Indians earn a higher share of profit income relative to Afro-Guyanese after accounting for foreign profit.
The share of wage incomes is relatively better distributed across ethnicity, except for Amerindians.
Proprietor/partnership profits might be slightly skewed in favour of Indians.
Combining all incomes, there is a higher degree of intra-Indian inequality relative to Intra-African inequality.
The latter is very important because inequality can be positively correlated with limited social mobility and poverty. However, social mobility and poverty will require different studies. Only recently economists have been making progress in understanding social mobility using micro-level data in the United States.
I am less certain about wealth distribution in Guyana. Let me give one example as it relates to the sensitive asset known as land. The rice sector that is dominated by Indians uses approximately 0.87% of the entire landmass of Guyana. Not all rice farmers own the land on which they farm. Only 2% of all lands in Guyana is freehold, meaning the owner truly owns it and can dispose as he or she sees fit. In other words, a lot of distrust among Indians and Africans is over less than 2% of the entire land mass. I will do an entire column on land distribution next week to show how data can shed some light on these issues.
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Ayoo bad mind PNC /Jagdoe rass...hey hey hey.