Francois Bourguignon, Chief Economist and Senior Vice-President, The World Bank

1. EQUITY AND DEVELOPMENT: The 2006 World Development Report Francois Bourguignon, Chief Economist and Senior Vice-President, The World Bank Palma, ECINEQ, July 21, 2005

2. Poverty, growth and distribution • (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?

3. Contributions of, and paradoxes in the economic literature on distribution and development • 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”.

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 • Defining and observing ‘equity' • Why equity matters for development • Policy instruments and the cost of promoting equity

6. 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 equalityin one of the outcome dimensions, but may involve changes in distribution in a number of them.

7. Opportunities Endowments:Wealth, land, culture, social background,… Process : labor market, investment, schooling, voice Outcomes :income, consumption, health, environment,… Individual traits: taste for efforts, risk, entrepreneurship…

8. 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

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

10. Example (2) Opportunities in health are important especially at an early stage in life El Salvador study on Early Childhood Development

11. Example (3): Enrollment Rates in India by income quintile of parents

12. Example (4): how access to formal jobs depends on parental education in Brazil * Source: Bourguignon, Ferreira and Menendez (2005)

13. Example (5): Access to CreditLarge firms are more likely to have bank loans % with Bank Loans 100% 90% 80% 70% 63.5% 60% 51.9 % 50% 42.4% 40% 32.3% 30% 20% 7.6% 10% 0% Micro Small Medium Large Very Large Source: World Bank ICS data

14. Inequity Across Countries: Nationality is a key determinant of opportunities. 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.

17. 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 MexicoDifferential Returns on Own Capital Source: McKenzie and Woodruff, 2004

19. Average number of mazes solved, by caste, in five experimental treatments 8 high caste 7 low caste 6 5 4 3 2 1 0 Piece Rate, Piece Rate, Tournament, Tournament, Tournament, Caste Not Caste Caste Not Caste Caste Announced Announced Announced Announced Announced and Segregated Example (2): Exclusion and Internalized Inefficiency in IndiaDifferential Performance when Caste is Made Salient Source: Hoff and Pandey, 2004

20. Example (3) : Good economic institutions are associated with prosperityAssociation between economic prosperity and protection against risk of expropriation.

21. 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: • Good policies for poverty reduction may involve redistribution - of influence or government expenditures - away from dominant groups. (Political economy) • Equity-efficiency trade-offs in such redistributions need to be assessed in light of the full long-term benefits of equity. • 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. Conclusion • Unifying the two pillars of the World Bank strategy for poverty reduction : "Investment climate" and "Empowerment"  are complementary

28. END

29. Investing in the Human Capacities of the opportunity-poor:Policy should start early and can make a difference

30. Ensuring an Adequate Investment EnvironmentA focus on justice systems, land and infrastructure Water sources and water price by wealth quintile in Niger

31. Example (5) : “Natural resource curse” and conflict trap in Sub-Saharan Africa

32. World Development report 2006 Main Messages • 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.

33. "A pie shrinks when more equally divided." True  False A pie may shrink in the short run when more equally divided, but may expand in the long run.

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.