BERKELEY – Inequality is on the public’s mind almost everywhere nowadays. Indeed, in the world’s two largest democracies, India and the United States, widespread popular movements against rising inequality and elite greed are becoming highly salient issues in looming national elections.

Yet, in both countries, some social inequalities have been on the decline over the last few decades. In India, certain historically disadvantaged groups (particularly among the lower castes) are now politically assertive. The most egregious vestiges of caste discrimination are gradually disappearing. Similarly, in the US, discrimination against women, African-Americans, Latinos, and homosexuals is declining.

These developments reflect a democratic advance in both countries. At the same time, however, the fabric of democracy is being torn apart by a staggering rise in economic inequality.

Generally, economic inequality is easier to justify than racism and other forms of invidious discrimination. A fundamental tenet of American society is that everyone has an equal chance – a belief that appears more plausible with the decline of social bias. In India, this myth is less powerful, but there is a general feeling, shared even by some of the poor, that the rich deserve their wealth because of their merit, education, and skills.

There are two problems with this argument. First, education and skills are not inborn talents. The rich have access to better schools, health care, nutrition, and social support than the poor, which plays a decisive part in later academic and social success. Pre-school children in rich families have better nutrition, health care, and mentoring; there is evidence that much of the brain damage due to malnourishment for poor children may have already, irreversibly, happened by age three.  

When students from poor families start to fail in school, they have little or no access to remedial classes, whereas the rich receive expensive coaching from private tutors throughout their education. As a result, India has the world’s largest number of school dropouts.

Sociologists in the US have also documented adverse "neighborhood effects” for poor children in inner cities. In Indian villages, where residential patterns are often even more segmented, such effects are acute.

The other problem in both countries is the rising importance of ‘unearned incomes’.  In India, as in other fast-growing economies, scarce public resources, such as land, minerals, oil and gas, and telecommunication spectrum, have shot up in market value recently, generating extremely high unearned income for the politically well-connected.

In the US, the deregulation of the financial sector over the last few decades, and the accompanying rise of dubious financial instruments, destabilized the real economy while doing little to improve productivity. The result, as everyone knows, was exorbitant financial gain for a select few, followed by large losses that were paid for by the many.

The US and Indian examples suggest that, in democratic societies, groups that promote social discrimination grow politically weaker over time. Economic inequality, on the other hand, is perpetuated through the politically powerful and well-funded lobbies of the rich. The trend is reinforced as elections become more expensive in both countries, leaving politicians increasingly dependent on contributions from wealthy donors who demand policies that are favorable to their interests.

This implies that anti-discrimination and egalitarian movements need to broaden their focus to include electoral reform, better financial regulation, transparent privatization, and, above all, an overhaul of the education system to ensure high-quality schools for the poor and pre-school nutrition and health care. In addition, massive investment in both countries’ creaking physical infrastructure would create jobs for some workers and improve the productivity of others.

The advantages of improving education, creating more jobs, and increasing productivity seem clear. The question, then, remains why India and the US neglect both education for the poor and infrastructure. The answer lies partly in the fact that the rich in both countries are ceasing to use many public services. They send their children to elite private schools, are treated in expensive private hospitals, and live in gated communities where security and other services are provided privately.

Moreover, big companies nowadays have their own power plants, private roads, and many internal services as well. As the rich secede from the public infrastructure upon which the rest of society depends, it has become increasingly challenging to tax them in order to pay for services that they do not want or need. Meanwhile the pre-existing countervailing institutions (like labor unions) for the workers get eroded by new technology and globalization.

In India, greater social equality has meant that small numbers of hitherto subordinate social groups have begun to enter the political and economic elite. Once there, however, rather than trying to change conditions for the poor, they adopt the values of the elite while manipulating the symbols of identity politics – a tactic that still attracts votes. (Democratic South Africa shows how difficult it is to make a dent in economic apartheid).

Both India and the US have responded to unrest over rising economic inequality with a kind of reactive populism. In India, this takes the form of loan waivers for distressed farmers (which weaken the banks); price controls for water, electricity, and public transportation (which wreck government budgets and undermine the prospect of long-term investment in those areas); and more subsidized food in the corrupt and inefficient public distribution system. Meanwhile, in the US, populist right-wing movements prefer tax cuts to long-term investment in infrastructure. At the other end of the political spectrum, anti-state anarchists cannot help in building institutions that will sustain pro-poor investments.

The world’s two largest democracies face a grave economic challenge. They must find a way to channel the rising anger caused by economic inequality into productive investments that make the rich feel that they have a stake in ameliorating conditions for the poor. If India and the US move towards overcoming the most pervasive inequality of all, they will reinvigorate their democracies – and their economies.

Pranab Bardhan is Professor of Economics, University of California at Berkeley and the author, most recently, of Awakening Giants, Feet of Clay: Assessing the Rise of China and India.

Copyright: Project Syndicate, 2011.