The Great Gatsby Curve

Economy Jun 15, 2021

In India, since the devastating second wave of covid, economists have been moderating growth forecasts and the big question has been regarding the pace of growth of economic recovery.The Indian economic growth, for the past few years, has been haywire. Since 2019, when the growth rate was around 6%, there has been a consistent downfall. In the financial year (FY) 2020, it further downgraded to 4.78% due this once in a century crisis.Hence,in general, we are witnessing an economic slowdown in India. An important concept policymakers should be looking at now is the Great Gatsby Curve.

Concept of the curve

The Great Gatsby Curve was introduced by the economist Alan Krueger and has been named after the Scott Fitzgerald novel that addressed the inequality and class distinctions in Latin America.

The curve shows the relationship between income inequality and intergenerational income mobility, and tracks the intersection of these two measures.

Intergenerational mobility is the change in social status between different generations of the same family due to higher  income and educational levels.

In a nutshell this curve illustrates the connection between the concentration of wealth in one generation and the ability of the next generation to move up the economic ladder compared to their parents.

In the movie, the Great Gatsby, the protagonist moves from a low income to a high income group within one generation, which obviously doesn’t happen for a country as a whole. Hence, the curve basically gives us the number of generations that are needed to move from low income group to upper income group and also tracks the progress in terms of educational mobility, whether the next generation is able to educate itself better than its previous generation.

Looking at the performance of countries on the Great Gatsby Curve, it is the Nordic nations which perform the best. The East Asian countries do not score well but the Latin American economies are the worst performers.

In the case of India, research evidence shows it takes on an average six generations for a family to move up the economic ladder.

The big question- Is India going the Latin American way on the curve?

There is no clear answer to this question yet but the more important point to be addressed is the threat posed towards India if it moves the Latin American way.There is sharp inequality in Latin America,with the majority of the population still poorly educated and incompetent for high productivity employment, further restricting domestic demand and constraining the growth of the economy.

Now contrasting this with the current situation in India, as per a report published in 2020, income inequality has further widened since the onset of the pandemic.  The top 10% of the population holds 77% of the total national wealth. Also, the national debt of India has been continuously increasing for years now. The public debt in India has already climbed to 90% of the GDP. The estimates by the International Monetary Fund (IMF) show this trend to continue for the coming years too wherein India’s national debt is expected to rise even further.

Looking at both these statistics in the light of the Gatsby curve,we understand that the debt taken by this generation will have to be paid by the next generation or the generation after. Connecting this to the inter-generational parity, it is clear that if this generation takes more and more debt, putting the burden of payment on the next generation, it is going to make it increasingly difficult for the coming generations to attain parity and move up the socio-economic ladder. This explains the concern regarding high income inequality and huge debt levels posing a threat to Indian economy in the coming times.

What needs to be done?

Indian economy can be saved from this poor outcome by managing its fiscal finances better.

Higher expenditure should be coupled up with revenue raising measures, investment in improving school education can help in combating intergenerational educational immobility. By creating value-adding employment and promoting inclusive growth, the economic inequality can be reduced to some extent and India can pave its way towards rapid economic growth.

Hence it remains to be seen what will be the growth trajectory in India post this economic downturn.

This article has been written by Khanak Sharma for the Paradigm

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