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Transcript of 1 Francois Bourguignon, Chief Economist and Senior Vice-President, The World Bank Palma, ECINEQ,...
1
Francois Bourguignon,Chief Economist and Senior Vice-President,
The World Bank
Palma, ECINEQ, July 21, 2005
EQUITY AND DEVELOPMENT:EQUITY AND DEVELOPMENT:
The 2006 World Development ReportThe 2006 World Development Report
2
(Uni-dimensional) poverty depends on mean level of welfare and inequality of welfare distribution in the population
The old debate between growth and distribution in development
Development strategy often seen as a choice between distribution and growth…
But what is the relationship between then?
Poverty, growth and distribution
3
Inefficient (non lump-sum) redistribution of income in a perfectly competitive economy : the efficiency-equality tradeoff (tax models : Mirrlees, Romer).
Efficient (lump-sum) redistribution (of income, assets and other endowments) within imperfectly competitive context (imperfect credit-market argument – Bardhan, Bowles and Gintis)
Extension to the growth-inequality issue : (Kaldor), Bertola, Persson-Tabellini, Alesina-Rodrik, Galor-Zeira, Banerjee-Newman, Aghion-Bolton, …
Ambiguous conclusion, unconvincing (cross-country) and vague evidence that “inequality harms growth”.
Contributions of, and paradoxes in the economic literature on distribution and development
4
“Equity” and development in WDR06
“Equity” and growth are complementary in the long-run.
Promoting equity at the lowest (short-run) economic cost as a key element of development strategies
5
Outline
1. Defining and observing ‘equity'
2. Why equity matters for development
3. Policy instruments and the cost of promoting equity
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1. Defining and observing “equity”
Equity is a normative concept of which component principles include:
• Equality of opportunities (equality of endowments, process fairness, merit-based rewards, …)
• Aversion to consumption deprivation
Almost never the same as equality in one of the outcome dimensions, but may involve changes in distribution in a number of them.
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Endowments: Wealth, land, culture, social background,… Outcomes
: income, consumption, health, environment,… Individual traits :
taste for efforts, risk, entrepreneurship…
Process : labor market, investment, schooling, voice
Opportunities
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Relationship between concepts and measures of inequality and inequity
Inequality usually refers to outcomes (welfare, education, health,..) rather than opportunities
A society with some (possibly) significant inequality may be “equitable”. However, a very (income) unequal society is likely to be inequitable. ( Income “Gini” as a “marker”)
Equity leads to consider both the top and the bottom (poor) of the distribution of opportunities
The difficulty of measuring inequity
10
Example (2) Opportunities in health are important especially at an early stage in life
El Salvador study on Early Childhood Development
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Example (3): Enrollment Rates in India by income quintile of parents
India Education: Children Currently Enrolled
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Income Quintile
Percen
t o
f q
uin
tile p
op
ula
tio
n
Girls 1992 35.0 46.9 63.0 81.6 94.0
Girls 1998 58.1 72.2 84.1 91.6 97.5
Boys 1992 57.1 66.0 78.0 87.2 95.4
Boys 1998 70.7 82.5 89.2 94.1 97.6
1 2 3 4 5
12
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0 (0-4] (4-6] (6-8] (8-11] >11
years of schooling of parents
Pro
b. o
f bei
ng in
form
al s
ecto
r
* Source: Bourguignon, Ferreira and Menendez (2005)
Example (4): how access to formal jobs depends on parental education in Brazil
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7.6%
32.3%
42.4%
51.9 %
63.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Micro Small Medium Large Very Large
Example (5): Access to Credit Large firms are more likely to have bank loans
% with Bank Loans
Source: World Bank ICS data
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Inequity Across Countries: Nationality is a key determinant of opportunities.
0.0
5
0.0
5
0.0
5
0.0
5
0.0
520 40 60 80 20 40 60 80 20 40 60 80
20 40 60 80 20 40 60 80
1960 1970 1980
1990 2000
estim
ate
d d
en
sity
life expectancy at birthGraphs by year
The distribution of life expectancy across the world, and over time.
15
2. Why equity matters for development
General principle 1. Unequal access to processes that facilitate certain outcomes implies an inefficient allocation of resources :
Archetypical example = credit market :
i.e. some profitable investments are not undertaken whereas average or mediocre projects are implemented
Note that unequal access to markets like credit or insurance result from a combination of market imperfection (asymmetric information) and inequality in endowments.
16
2. Why equity matters for development (cont’d)
General principle 2. Unequal protection of property rights and unequal political rights are disincentives to investment and enterprise, and the source of bad governance
General principle 3. Excessive inequity and weak institutions may be motive for crime, violence, political instability and conflicts.
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Empirical support
Problem of the measure of equity and unpromising cross-country analysis
Limits of “aggregate evidence” anyway (e.g. cross country analysis of inequality and growth)
The “Microeconomic” approach
18
Example (1): Inefficiency of capital distribution in Mexico
Differential Returns on Own Capital
Source: McKenzie and Woodruff, 2004
19
Example (2): Exclusion and Internalized Inefficiency in India
Differential Performance when Caste is Made Salient
Source: Hoff and Pandey, 2004
Average number of mazes solved, by caste, in five experimental treatments
0
1
2
3
4
5
6
7
8
Piece Rate, Caste Not Announced
Piece Rate, Caste
Announced
Tournament, Caste Not Announced
Tournament, Caste
Announced
Tournament,Caste Announced
and Segregated
high caste
low caste
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Example (3) : Good economic institutions are associated with prosperity
Association between economic prosperity and protection against risk of expropriation.
.
Lo
g G
DP
pe
r ca
pita
, P
PP, in
19
95
Avg. Protection Against Risk of Expropriation, 1985-954 6 8 10
6
8
10
AGO
ARE
ARG
AUSAUTBEL
BFA BGD
BGR
BHR
BHS
BOL
BRABWA
CANCHE
CHL
CHN
CIVCMRCOG
COLCRI
CZE
DNK
DOM DZAECU
EGY
ESP
ETH
FINFRA
GAB
GBR
GHAGIN
GMB
GRC
GTM
GUY
HKG
HND
HTI
HUN
IDN
IND
IRL
IRN
ISLISR
ITA
JAMJOR
JPN
KEN
KOR
KWT
LKA
LUX
MAR
MDG
MEX
MLI
MLT
MNG
MOZ MWI
MYS
NERNGA
NIC
NLDNOR
NZL
OMN
PAK
PAN
PER
PHL
POL
PRT
PRY
QAT
ROM RUS
SAU
SDNSEN
SGP
SLE
SLVSUR
SWE
SYR
TGO
THATTO
TUNTUR
TZA
UGA
URY
USA
VEN
VNM
YEM
ZAF
ZAR ZMB
ZWE
21
Example (4) : Crime and Inequality [as a proxy for inequity]Example (4) : Crime and Inequality [as a proxy for inequity]
Income Distribution & Robbery Rates 1970-1994 (5-year-averages)
Source: Fajnzylber, Lederman, and Loayza (2002).
22
2. Why equity matters for development (end)
Equity and efficiency or growth are complementary in some fundamental dimensions of development.
But short term trade-offs between equity and efficiency may be necessary to promote more equity in the long-run
Also, excessive inequality of results may lead to future major obstacles to development and must be corrected
23
3. Implications for Policy: Leveling the Economic and Political Playing Fields
An equity lens adds three new perspectives to development policy:
1. Good policies for poverty reduction may involve redistribution - of influence or government expenditures - away from dominant groups. (Political economy)
2. Equity-efficiency trade-offs in such redistributions need to be assessed in light of the full long-term benefits of equity.
3. The perception of a dichotomy or pure tradeoff between growth policies and policies for equity is misguided.
(Country-specific context is key in policy choice.)
24
3. Implications for Policy (ct’d)
Equitable accumulation: access to education, health, land, infrastructure, …
Market fairness: labor market, credit, goods
Full political participation
Reduce absolute poverty (safety nets) Reduce excessive inequality (taxes, public
management, macro-economics)
25
Promoting fairness in markets and the macro-economy
Financial Markets: Broader access through more competition and less capture.
Labor Markets: Protection with flexibility, focusing on the least engaged.
Product Markets: prevent monopolies and other imperfect
competitions situations Mind incidence of trade reform Innovate to reduce informational asymmetries in
markets where the poor trade. Macroeconomic Policy: Prudent and as much
countercyclical as possible, to prevent the twin regressive evils of inflation and financial crisis.
26
Leveling the international playing field can help reduce global inequities
Trade: less distortion by rich countries
Migration: greater scope for labor mobility
Intellectual Property Rights: innovative solutions
Aid: greater volume and effectiveness, fewer ties.
Global Commons.
27
Unifying the two pillars of the World Bank strategy for poverty reduction : "Investment climate" and "Empowerment" are complementary
Conclusion
29
Investing in the Human Capacities of the opportunity-poor:
Policy should start early and can make a difference
110
105
100
95
90baseline 6 mo 12 mo 18 mo 24 mo
Mental Development of Undersized Children (Low Height for Age) : The Jamaican Study
developmentquotient
stimulation
supplement
control
stimulation &supplement
children ofnormal height
30
Ensuring an Adequate Investment Environment
A focus on justice systems, land and infrastructure
3%
89%
77%
9%
20%
3%
Average price
0
10
20
30
40
50
60
70
80
90
100
1 2 3 4 5
Wealth Quintile
Pe
rce
nt o
f qu
intil
e u
sin
g s
ou
rce
0
100
200
300
400
500
600
700
Ave
rag
e p
rice
(F
CF
A)
/ m3
Piped water
Fountain orVendors
Neigbors,Wells, orRiverAverageprice
Water sources and water price by wealth quintile in Niger
31
Example (5) : Example (5) : “Natural resource curse” and conflict trap in Sub-Saharan Africa
Natural Resources and the risk of civil war for low-income countries
5.7%10.5%
16.8%
23.6%
29.5%
0%
10%
20%
30%
40%
5% 10% 15% 20% 25%
Primary commodity exports as a share of GDP
Ris
k o
f ci
vil
war
(p
erce
nt)
32
Opportunities are unequally distributed and processes are far from fair within most countries, as well as across them.
In the long-run, equity and efficiency are complements. Fair societies, where opportunities are widespread, are more successful in achieving long-term prosperity.
Public action should aim to level the playing field, by expanding access to opportunity to those who are most constrained. Efficiency – Equity trade offs exist, but may be less
pronounced in a long-run view that takes the institutional benefits of fairness into account.
Individual incentives matter, and policy design should always take this into account.
World Development report 2006Main Messages
33
"A pie shrinks when more equally divided."
A pie may shrink in the short run when more equally divided, but may expand in the long run.
True False
34
Dimensions of pro-equity policy
Direct promotion of equity - - policies that help build equitable assets
(education, health, land, infrastructure) - policies that deliver procedural equity - policies that help vulnerable populations better manage
risks
Processes that guarantee equity in the functioning of markets
- financial market policies - labor market policies - trade policies - managing macroeconomic instability
35
Dimensions of pro-equity policy (continued)
Equalizing opportunities in basic education Societal commitment Adequate resources, effectively used Minding incentives and accountability Reaching excluded groups
[Conditional cash transfer programs] Enabling children to realize their potential
[Early childhood development programs]
36
Dimensions of pro-equity policy (continued)
Equitable health care provision
Interventions that affect child health (Prenatal care, nutrition, ECD)
Interventions that enhance poor people’s demand for higher quality services (Nutritional and health education; Early diagnostics)
Interventions that empower low-income beneficiaries: transparency, accountability (Civil Rights Act in 1964 and Medicare in 1965)
37
Dimensions of pro-equity policy (continued)
Access to land Improving security of tenure Improving functioning of land markets Exploiting options for cost-effective land
redistribution
Access to infrastructure Policies for equitable infrastructure
provision (private provision, competition and user choice)
38
Dimensions of pro-equity policy (continued)
Equity in the functioning of financial markets Unequal access to finance is associated with unequal
productive opportunities Broadening of the financial sector is fundamental for
equity and growth Effective financial reform requires greater accountability
and judicious design of sequencing.
Equity in the functioning of labor markets Reforming labor market policies requires achieving a
balance between social protection and flexibility Design comprehensive policy package; tackle vested
interests; broaden accountability and voice of poorer groups; compensate losers.