Dealing with the inequality dimension of development

Transcription

1 Dealing with the inequality dimension of development OECD-WB Conference on Challenges and policies for promoting inclusive growth March 2011, Paris François Bourguignon Paris School of Economics

2 Introduction Inclusive growth, pro-poor growth = how to monitor the inequality/poverty aspect of development The relationship between 'income inequality' and development: Inequality and the 'level' of development (Kuznets curve, 1970s) Inequality and growth rates (1990s) Inequality of opportunities and development (2000s) How to put all this together and what are the implications for development policy? 2

3 Outline 1. Brief review of the theoretical relationship between inequality and development: i. The various dimensions of inequality ii. The various inequality-development channels 2. The nature of available evidence 3. The various dimensions of 'redistribution' policies 4. Implications for development policy 3 3

4 1. i) The various dimensions of inequality a) Ex-post: Outcomes of economic activity Welfare inequality (Real income/consumption per consumption unit) Earnings Poverty vs. inequality Static vs. dynamic (vulnerability) Perception of inequality # objective income inequality "Misperception' or conceptual differences? 4

5 Perception of inequality 100% 90% (Perception of inequality) Today, would you say our society is just? Not at all 80% 70% 60% Rather no 50% 40% 30% 20% Rather yes Source: Ifop 10% 0% Brazil China Netherlands United States 5 Very much so 5

6 Gini coefficient (%) Income inequality in selected countries : Brazil 50 USA China Rural 20 Urban China Finland YEAR 6

7 (Perception of change in inequality) 100 Overall, over the last 10 years, would you say that inequality in our country 90 Increased Remained the same Decreased 0 Brazil China Netherlands United States 7 7

8 Dimensions of inequality (ct'd) b) Ex-ante: Inequality of 'opportunities' Sen's Capabilities (Capacity to reach outcomes) Endowments-assets (wealth, talent, education,..) Unequal access to credit, health care, schools, justice, Discrimination in labor and other markets ('horizontal inequality') Voice: access to decision making on public goods (local, regional, national,..) 8

9 1.ii) The various dimensions of the inequality-development relationship Distribution of opportunities (Ex-ante inequality) Factor accumulation, intergenerational transmission, Market mechanisms Economic system: GDP level and structure GDP growth,.. Distribution of outcomes (Ex-post inequality) 9

10 Major inequality-development channels i. Pace and structure of economic growth ii. Factor rewards by type of factor and geographical location Market structure (competition) Productive factor accumulation Savings: some inequality necessary.. but not too much (2008 crisis) Human capital (education, health, ) Market or other imperfections preventing accumulation (credit, property rights, voice, ) iii. Political economy Endogenous redistribution policy Social tensions (conflicts) arising from inequality 10

11 2. The nature of available evidence Distribution of opportunities (Ex-ante inequality) Micro evidence of inefficient inequality Factor accumulation, intergenerational transmission, Market mechanisms Economic system: GDP level and structure GDP growth,.. Distribution of outcomes (Ex-post inequality) Kuznets curve Ctry analysis Growth regressions 11

12 Nothing surprising in ambiguous aggregate inequality - development relationship! Development Inequality (outcomes) Simultaneous and opposite effects of economic development on inequality: (pace and structure of growth, demography, demand and supply of human capital, technical progress, geographical allocation of activity, migration ) Rôle of countries' policy: redistribution of current income, regulation, industrial policy, 12

13 ambiguous aggregate inequality -development relationship! Inequality (opportunities) Development Standard inequality measures (e.g. Income Gini coefficient) imperfect proxies of inequality of opportunities (credit, health, justice, ethnic or social discrimination,..) Which dimension of opportunities matters is highly country specific: wealth inequality vs. access to justice (property rights) vs. education vs. horizontal inequality 13

14 Micro evidence on development inefficiency of inequality of opportunities Evidence that unequal access to several types of facilities reduces efficiency and accumulation propensity: Access to credit (firms, households,..) Schooling (students not necessarily the most talented kids, unequal quality of schools) Public health care (allocation between sophisticated treatments for an elite and basic services e.g. immunization) Effort incentive weakening of social differenciation and discrimination, 14

15 Two caveats 1. The difficulty to aggregate and compare Evidence: "Credit made accessible to poor neighborhoods at x base interest rate increases entrepreneurship by y %" What would be the aggregate effect on both GDP and inequality of N million $ spent on micro-credit, access to health care,..? Larger than N million $ spent on infrastructure? 2. Equalizing or accumulating? Difficult to redistribute human capital (schooling, knowledge, health) and most often physical capital too. Correcting for unequal access often is more about total spending than redistribution. Better to refer to 'pro-poor accumulation'. More schooling yields both a higher mean and less inequality of years of schooling. 15

16 3. The various dimensions of redistribution policies Distribution of opportunities (Ex-ante inequality) Regulation Factor accumulation, intergenerational transmission,... Market mechanisms Correction distortions Economic system: GDP level and structure GDP growth,.. Efficiency enhancing public spending on education, health care, housing, microfinance.... Distribution of outcomes (Ex-post inequality) Taxes, Transfers, Social protection 16

17 Common view: The complementarity of various types of redistribution instruments - Redistributing current income through taxes and transfers generates distortion costs and efficiency losses - Reducing inequality of opportunities may be efficiency and development enhancing (e.g human capital) Practically, however, those instruments are complements - Current income redistribution may enhance efficient human capital accumulation among the poor (nutrition, health, schooling) - Reducing inequality of opportunities may be efficient and will reduce future income inequality but requires tax financing - Good policies are those where efficiency gains dominate distortion costs (country/context specificity) 17

18 Inequality in Brazil 18

19 Causes for inequality decline in Brazil (Paes de Barros) Employment rates among low income families Family composition (drop in fertility) Education (proportion of educated, differential returns) Labor market discrimination Cash transfer (Bolsa Familia) 19

20 Conclusion Income Gini coefficient should not be the sole inequality indicator: key to take other dimensions into account Efficiency-equity: substitutability or complementarity Equalizing opportunities may be important for future efficiency : best proxy of 'inclusive' (or pro-poor) growth Huge scope for improving and equalizing opportunities: - spending more on poor and middle class' schooling including quality health care, housing, micro-credit, social security, - consistent with macro strategies and may even have positive macro spillovers (China example) 20

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