Equity and Development

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Equity and Development
Michael Walton Centre for Policy Research, Delhi
Harvard Kennedy School June 1 2008 Brown
International Advanced Research Institute
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Two long-term controversies

• Diagnostic orientation economics or broader
  social science
• Substantive position on the nexus of
• Markets
• High modernism
• Power
• Prism of World Bank thinking as way into
  discussion

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A rapid tour of phases

• McNamara high modernism meets rural poverty
• 1980s structural adjustment, from distortions to
  markets
• 1990 WDR liberalization for the poor plus the
  return of high modernism in social provisioning
• 2000 WDR admixture of empowering from the
  bottom, controversy over growth, security
• 2005 WDR equity, power and institutions to
  center

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Structure at a Glance

• Introduction
• Part I Inequity Within and Across Countries
• Part II Why Does Equity Matter?
• Part III Leveling the Economic and Political
  Playing Fields

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Introduction What is equity?

• A normative concept, related to fairness in
  distribution.
• Two basic principles
• Equality of opportunity
• Outcomes should be driven by individual
  preferences, efforts and talents, and not by
  their predetermined circumstances, such as
  gender, race, social group or family background.
• Avoidance of outcome deprivation
• Almost never the same as equality in a particular
  outcome dimension, but may require changes in
  distribution in a number of them.

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From opportunities to outcomes
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Inequality Traps
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Inequity within countriesIllustrating an
Inequality Trapinfant mortality and maternal
education
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Opportunities are curtailed very early
on.Cognitive Test Performance by Children in
Ecuador
Source Paxson and Schady, 2004.
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African and Latin American countries have the
highest measured economic inequalities(Gini
coefficients of income or expenditure)
African countries
Latin American countries
Namibia
Mauritius
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Gender InequalityAsias Disappearing Women
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Global inequalities three concepts
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Between and within-country differences
Lines are from 10th to 90th percentile boxes are
from mean to median
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I. Inequity Across Countries Where you are
born matters a lotConvergence in some HD
indicators (international/weighted)
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Inter-country inequality rose, but international
(population-weighted) fell
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Across people there was long-run rising
inequality in the distribution of incomes, driven
by between-country differences
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Large impact of China and India on global
(inter-person) inequality
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II. Why does Equity Matter?Intrinsic reasons

• Philosophical traditions
• Moral and religious traditions (but often
  inequitable in practice)
• Evidence from surveys and experiments that people
  care about fairness

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Why does Equity Matter?Instrumental reasons

• Inequalities in wealth and power combined with
  imperfect markets (credit, insurance, land, human
  capital) creates large inefficiencies. Examples
• Marginal products of capital do not equalize.
• Credit constraints and intra-household issues
  imply that investment in human capital is often
  sub-optimal.
• Missing insurance markets imply farmers choose
  crops with lower expected returns, because they
  are less risky.
• Discrimination lowers returns to investment, and
  thus lowers investment itself.

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Prima-facie evidence of inefficiency in resource
allocation across small firms
Two non-parametric estimates of returns to firms
own capital stock among Mexican
micro-enterprises.
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Social inequity influences performanceDifferentia
l Performance when Caste is Made Salient
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Unequal power and influence can lead to capture
of institutions

• Unequal Control over Resources
• Bad Political Institutions
• Bad Economic Institutions
• Impaired Development

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that can create causal forces relevant to the
association between good economic institutions
and prosperity
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Categories of evidence for causal links between
economic and political inequality and growth
processes

• Suggestive econometric results in Acemoglu,
  Johnson, Robinson tradition
• Historical and contemporary narratives e.g.
• Latin America v. Northern America
• Mauritius v. Guyana
• Explaining East Asia
• examples of two kinds of channel
• Constraints on predation by economic and
  political elites
• Pressures for governments to respond to middle
  and lower groups

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Inequality weakens the power of growth to reduce
poverty.
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III. Policy implications three themes

• Two typical policy pathologies
• elite capture/exclusion
• ill-designed policies in name of equity
• The real policy prizefor global and national
  equityis of equitable policies that are good for
  economic dynamism
• Policy approach a more level economic playing
  field underpinned by a more level political
  playing field, in local and global arenas

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An equity prism on familiar policy domains
Domestic

• Expanding Access
• Human development
• ECD, Education, Health, Safety Nets
• Taxation
• Justice Systems
• Land and Infrastructure
• Promoting Fairness in Markets
• Financial, labor, product
• Macro-management
• Rules and influence in all areas

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Example 1 Early childhood development
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Example 2 Finance

• Should we care about concentration of wealth and
  influence at the top?
• Hereditary billionaire wealth and concentrations
  of family control associated with slower growth
• Micro studies showing connected lending
  associated with narrower, less efficient banking
  systems

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Finance contd.
Poland

• Apparent paradoxliberalization is required but
  can also be captured
• Financial broadening requires more open access
  with accountability
• Czech Republic voucher privatization w/weak
  protection tunneling
• Poland legal protection and strong
  regulatormarket deepening
• Inequity in financial crises in patterns of
  flight and bailout

Czech Republic
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An equity prism on familiar policy domains Global

• Markets
• Migration
• Trade
• Ideas
• Capital
• Aid
• Setting the rules

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Example 1 Migration

• Greatest barriers and so greatest potential
  gains.
• Politically v. difficult, but major scope for
  increased managed, bilateral international flows
• Need to increase benefits from migration (e.g.
  cost of remittances)
• Domestic (rich-country) action to support
  unskilled natives necessary but hard

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Example 2 Innovation (in drugs)

• Problem A cost of global drugs
• TRIPs a product of influence
• Countervailing action HIV/AIDS drugs in South
  Africa
• Generalized solution patent free zone
• Problem B research incentives for poor country
  drugs
• Unprofitable for companies
• Solution global fund for successful drugs

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Setting the rules

• Different forms of inequality of voice
• WTO equal vote, unequal capacity
• WB/IMF unequal votes
• Finance/Basle II lack of presence of poor
  countries in rule-setting
• NGO-international civil society networks an
  offset to unequal voice, but a highly imperfect
  one

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Main Messages

• Opportunities are distributed very unequally
  within and across countries
• 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 economic
  and political playing fields - both domestically
  and internationally.
• Tackling inequality traps central
• Efficiency-equity tradeoffs often exist in policy
  choices policy needs to focus on specific
  inequalities
• A more level playing field is about reducing
  influence of elites as much as empowerment of the
  poor

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Critiques

• From right
• a new excuse for Fabian socialism and
  intervention
• its growth, stupid
• From left
• bold start on ideas same old stuff on policy
• incomplete working through on breaking through
  the political and socio-cultural aspects of
  inequality traps
• want a mea culpa on structural adjustment
• timid on international