Inequality in Rural Bangladesh in the 2000s: Trends and Causes

This paper investigates the patterns of inequality that have emerged in rural Bangladesh in the decade of the 2000s. Two findings stand out clearly –distribution of income has become more unequal over the decade, but, somewhat surprisingly, distribution of consumption has remained more or less unchanged despite widening income inequality. The main analytical task of the paper was to search for the underlying causes responsible for these two apparently contradictory trends. The root of widening income inequality was found to lie in the unequalising effects of foreign remittance, and to a lesser extent, that of income from self-employment in non-agricultural activities. These two sources of income were also the driving force behind rapid growth of the rural economy. This poses a trade-off between growth and equity, which the policymakers need to resolve – for example, by making foreign migration more affordable to people of small means. Our explanation of how consumption inequality remained stable in the face of widening income inequality turns on the consumption smoothing effect of microcredit. The hypothesis is that consumption inequality did not rise because people at the lower end of the income scale were able to enjoy higher levels of consumption at given levels of income thanks to the relaxation of liquidity constraint made possible by the rapid expansion of microcredit. The hypothesis was validated by examining the nature of consumption functions at the two ends of the decade.