The Great Gatsby Curve and the Future of the Indian Economy

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COVID 19 has had a negative impact on the Indian economy. However, economic growth has not been a straight curve but has seen many ups and downs. This slow growth trend has been observed since demonetization. Another aspect that would be learned is the great Gatsby curve. It would also be useful to know whether the Indian economy would resemble East Asia or Latin America.

The Great Gatsby Curve: About

The great Gatsby curve signifies the relationship between income inequality and intergenerational income mobility. The concept was introduced by Alan Krueger during a speech at the Center for American Progress in 2012.

The curve follows the intersection of two measurements. The first being inequality and the other intergenerational mobility (this indicates the likelihood that the next generation will be able to rise up to economic norms ranging from a low income group to a middle income group).

Study:

  1. the the Nordic countries do your best on the curve.
  2. East Asian countries are not doing well, but the big one Latin American economies are the worst in this regard.
  3. If India combines high inequality with low intergenerational mobility, it might not become like East Asia with its rapid growth rates, but rather like Latin America with lower performance.

Great Gatsby Curve: Explained

In the graph, we can see the X axis defined by the Gini coefficient and the Y axis representing intergenerational mobility which can also be called intergenerational income elasticity. Take a look at the graphic below to understand:

The Gini coefficient represents the inequality in the nation. To know the Gini coefficient, it is necessary to know the Lorenz curve. It signifies equality in a society and is the curve between the percentage of the population and the percentage of income. A perfect Lorenz curve means a perfectly egalitarian society.

According to the World Bank, the The Gini value of 0 signifies an equal distribution of wealth and the coefficient of 1 signifies an unequal distribution.

The countries located at the lower end of the Gatsby curve are therefore more equal than the countries located at the upper end of the graph. So in a way it also shows how difficult it would be for children to exceed their parents’ income level.

Other information on the Great Gatsby Curve

We can also know how many generations it takes for a low income family to reach the middle income group across the curve.

1. It is observed from the relationship between inequalities and mobility across the number of generations over time. Countries with better upward mobility would see a smaller generational gap in reaching the higher parts of the socio-economic scales.

Income inequality curve: Source World Bank / Business Insider

2. Information on educational mobility can also be obtained through this curve. Upward academic mobility would be higher in countries with low income inequalities. According to the information on the curve, children in low-income countries have a better chance of pursuing higher education than their parents.

Source: World Bank and OECD - Business Insider

Great Gatsby curve and Indian economy:

  1. Previously, many economists said that the Indian economy will return to its former glory in 2 years. But can we expect it? Let us know:
  2. The system is known to be slowing down before the COVID 19 lockdown hit the country. Growth had halved from 8% to 4% in 2019-2020.
  3. Many economists also believe that growth has been supported in recent years by public consumption. Public consumption increased by up to 30 percent compared to 21 percent of private consumption.
  4. It can be agreed that during the recession the government is the main resource as the public debt has reached up to 2/3 of the GDP now at 90% and the position is therefore at risk.
  5. It is also difficult for private consumption to recover when employment declines and inequalities increase. During the lockdown, millions of jobs in the service and industrial sectors declined.
  6. So it would take almost 3 years to get to where we are if consumption increases slowly and capacity utilization remains at levels as low as it is today.

What to do: the way forward

No one wants to be part of the Latin American countries in this regard. Such policies need to be developed which can help exporters bring money and opportunities. The domestic market also needs growth. India is reaching extreme inequality in the socio-economic scale and is on the verge of becoming like Latin America.

Tax policies must be improved and school education must be something that is invested in.

Labor-intensive but value-added jobs must be adopted to save India from economic collapse.

One can only pray that the condition of Latin America which had populist and authoritarian democracies does not arise in India. This is why it is important that quality jobs are maintained and that inequalities are controlled.

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