LDCs
Less inequality, more growth?

The unequal distribution of assets such as land can help explain the incidence of unemployment and malnutrition in LDCs, argued Programme Director Partha Dasgupta at a lunchtime meeting on April 21. This analysis led Dasgupta to conclude that there was no necessary conflict between reduced inequality and faster growth in LDCs: measures to reduce inequality could increase output.

Partha Dasgupta is Professor of Economics at the University of Cambridge and Director of CEPR's research programme in Applied Economic Theory and Econometrics. His analysis was based on joint research with Professor Debraj Ray (Stanford University and Indian Statistical Institute), reported in CEPR Discussion Paper No. 50.

Dasgupta began his talk by drawing attention to a number of 'stylized facts'. Per capita food production is growing in non- African LDCs, yet more than 300 million people are estimated to be severely malnourished. Available evidence suggests that in developing countries unemployment and malnutrition are concentrated among the landless and near-landless, who have little or no non-wage income. But why have the undernourished failed to obtain jobs that would provide them with a wage and adequate nutrition? In particular, why have they failed to obtain employment while many who were similarly situated did not so fail? Dasgupta argued that involuntary unemployment and malnutrition in less developed countries can be traced, in part, to the unequal distribution of assets such as land.

In order to focus attention on the problem of malnutrition, Dasgupta considered the case of an economy which is moderately endowed with physical assets, and is productive enough in principle to feed everyone adequately. The theoretical model of this economy used by Dasgupta closely resembles those of conventional general equilibrium theory. In particular all markets are competitive, information is complete and there is no aggregate demand deficiency. Dasgupta argued that, despite these assumptions, all markets do not clear in the model; involuntary unemployment can exist, because of wage rigidity. The wage rigidity is explained within the model, however, and is not the result of 'ad hoc' assumptions.

Conventional theory suggests that all markets should clear in such a model, and that involuntary unemployment could not exist. Yet this is not the case, Dasgupta argued, in LDCs where the distribution of income and wealth is subject to severe inequalities. Conventional equilibrium theory, Dasgupta noted, assumes that the ability of individuals to perform certain tasks is given. Studies of malnutrition emphasize, however, that at low consumption levels labour power (the general ability to perform work) will increase with daily consumption, at an increasing rate. It is these 'increasing returns to nutrition' which produce the unconventional results in Dasgupta and Ray's analysis.

Dasgupta discussed a simple example, which illustrated this process in its most dramatic form. He assumed that the crucial nutrition level was 2000 calories per day: a worker receiving less than this was unable to do any work, while nutrition levels in excess of 2000 calories added nothing to labour power. A profit-maximizing enterprise is interested in making the minimum payment to workers per unit of labour power supplied. Enterprises will seek to hire first those with non-wage income, and the landless will take second place because they cannot supply as much labour power relative to the cost of their hire. As soon as workers without non-wage income are employed, competition in the labour market will establish a wage level equivalent to 2000 calories per day. The wage will not rise above this level, for there are landless unemployed willing to work for 2000 calories. Yet these unemployed landless cannot 'price themselves into jobs': they cannot offer to work for less than the going wage of 2000 calories because they would be malnourished and could not provide enough labour power.

Dasgupta demonstrated that the resulting equilibrium is one in which a fraction of the landless find employment, but the remaining landless are unable to obtain jobs. The landless are hungry and therefore too expensive for the labour power they can provide, and those who cannot get jobs are worse off than those who can. Those with a modest amount of land are able to find employment, while those with large holdings of land and non-wage income choose to enjoy leisure instead of working. With a large landless population, Dasgupta argued, competitive markets are simply unable to provide sufficient employment for all the landless, so that malnutrition and rigidities persist and can even increase. But the fault lies not with the production capacity of the economy, which is assumed to be sufficient to feed all, but with the distribution of land and with the competitive market mechanism.

Competitive markets, according to Dasgupta, may widen income disparities when there is a very unequal distribution of assets. Although in equilibrium the wage per unit of labour power must be the same for all those who are employed, those with non-wage income are a better bargain for firms. In addition, the strong relationship between income and labour power at these levels means that the wage rates per unit of labour time of those with non-wage income can be bid up to exceed that of the landless. Those with land therefore enjoy not only extra sources of income outside work, but also higher wage rates.

Dasgupta noted that one possible solution lay in a path of economic growth involving improvements in land productivity, which would eradicate unemployment and malnutrition over time, through a 'trickle down' effect. But he argued that there are circumstances in which redistributive policies can more speedily reduce undernourishment and unemployment and may be the only feasible policies in the short and medium term. Dasgupta emphasized that such asset redistributions, aimed at reducing and possibly eliminating undernourishment and unemployment, could also increase the level of aggregate output. The tasks of reducing inequality and promoting faster growth can proceed hand- in-hand in certain LDCs, he concluded.