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Explained: The Great Gatsby Curve and the future of Indian Economy

Tulika Tandon

COVID 19 has had a negative impact on the Indian Economy. However the economic growth has not been a straight curve but hasb seen many ups and downs. This trend of low growth has been observed since demonetization. Another aspect that would be learnt is the Great Gatsby Curve. It would also help to know if Indian economy would be like East Asian or Latin American. 

The Great Gatsby Curve: About

Great Gatsby Curve signifies the relationship between income inequality and intergenerational income mobility.The concept was introduced by Alan Krueger while delivering a speech at Center for American Progress in 2012. 

The Curve tracks the intersection of two measures. First being inequality and the other being intergenerational mobility (this tells about the likelihood that the next generation could move up the economic standards that is from a low income to average income group). 

Study:

  1. The Nordic countries do best on the Curve. 
  2. East Asian countries do not have good scores, but the big Latin American economies are the worst in this regard. 
  3. In case India combines great inequality with poor intergenerational mobility, it may not become like East Asia with its rapid growth rates, rather like Latin America with lower performance.

Great Gatsby Curve: Explained

In the graph one can see the X axis defined by Gini coefficient and the Y axis representing the Intergenerational mobility which can also be called as Intergenerational Earning Elasticity.  Take a look at the graph below to get an understanding:

The Gini Coefficient represents the inequality in the nation. To know about Gini Coefficient one must know about Lorenz Curve. It signifies the equality in a society and is the curve between percentage of population vs the percentage of income. A perfect Lorenz curve signifies a perfectly equal society. 

As per the World bank the Gini value of 0 signifies equal wealth distribution and the coefficient of 1 signifies unequal distribution. 

The countries on the lower end of the Great Gatsby Curve are thus with more equality than the countries on a higher end in the graph. So in a way it also shows how difficult it would be for the children to overcome their parents income level. 

Other Information from Great Gatsby Curve

One can also know how many generations it takes for a low-income family to reach the average income group through the curve. 

1. It can be observed from the relationship between inequality and mobility through the number of generations as time passes. The countries having better upward mobility would see a lesser generation gap to reach the upper parts of socio-economic ladders.

2. One can also get the information on education mobility through this curve. Upward academic mobility would be higher in low income inequality countries. As per the information from the curve, children from countries with low-income inequality have better chances to earn higher education than their parents. 



Great Gatsby Curve and Indian Economy:

  1. Earlier many economists said that the Indian economy would return back to its older glory in 2 years. But can one expect so? Let us know:
  2. It is known that the system was slowing before the COVID 19 lockdown hit the nation. The growth had halved from 8% to 4 % in 2019-20. 
  3. Also many economists are of the view that the growth has been propped in the past years by government consumption. Government consumption has grown upto 30 percent compared to 21 percent of private consumption. 
  4. It can be agreed upon that during recession the Government is the primary resource bur public debt has reached upto 2/3rd of the GDP now to 90% and the position is thus in risk.
  5. It is also hard for private consumption to recover when employment is declining and inequality is on the rise.During the lockdown millions of service sector jobs and industrial jobs had shrunk. 
  6. Thus it would almost take 3 years to reach where we were if the consumption rises slowly and capacity utilization remains to levels as low as now. 

What needs to be done: Way Forward 

No one wants to be one of the Latin American countries in this respect. Such policies need to be developed which may help the exporters to bring in money and opportunity. The domestic market also needs growth. India is reaching extreme inequality in the socioeconomic ladder and is close to becoming like Latin America. 

The fiscal policies should be made better and school education must be something that is provided investment.

Labour intensive but value adding employment must be adopted to save India from economic downfall. 

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 inequality is controlled. 

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FAQ

Who wrote the Great Gatsby?

The book Great Gatsby was written by Francis Scott Fitzgerald

What is inter generational elasticity?

It is a coefficient showing the regression model capturing the statistical connection between parents' income and their children's income in later life.

What does the Gini Coefficient inform?

The Gini Coefficient tells about the inequality in a nation

What does the Great Gatsby Effect show?

The Great Gatsby Curve predicts how hard it is for children to overcome their parents' income level.

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