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

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(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

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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

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“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

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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

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Example (1): Infant Mortality Rate and Mother’s Education

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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.

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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.

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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

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Example (1): Inefficiency of capital distribution in Mexico

Differential Returns on Own Capital

Source: McKenzie and Woodruff, 2004

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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

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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).

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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

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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.)

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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)

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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.

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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.

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Unifying the two pillars of the World Bank strategy for poverty reduction : "Investment climate" and "Empowerment"  are complementary

Conclusion

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END

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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

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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

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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)

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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

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"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

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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

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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]

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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)

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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)

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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.