Friday, September 30, 2005

Can equity & development coexist?

The Economic Times
Friday, September 30, 2005

Compromising on efficiency can hurt growth
Arup Mitra
Professor, Institute of Economic Growth
It is seemingly legitimate and logical to say, as does the World Development Report 2006: Equity and Development (World Bank), that greater equity can reduce poverty, enhance economic growth and advance development. But the trade-offs between equity and efficiency can sometimes be high. Also, compromising on efficiency can hurt growth not just in the short run, but over the long run too. So the central contention that neither growth nor equity is attainable without efficiency, holds despite WDR 2006’s contention that the inequality of opportunities underutilises human potential, leads to extreme deprivation and weakens growth prospects. The divergence of growth rates seem to have started in the ’90s, leading rich states to grow faster than relatively poorer ones. They grow faster as they have better infrastructure and meet other prerequisites; they can thus also attract FDI, gain from economic reforms and energise overall growth.
But growth would be immediately dampened if equity got precedence and distorted natural market responses. The losses arising from that would not be compensated even over the long term by a more equitable distribution of resources.
The principle of ‘agglomeration economies’ also suggests that firms in large cities are more efficient than their small town counterparts. Hence it may be counterproductive to push policies that curb locational concentration in favour of a spatially ‘equitable’ industrial spread. Firms, instead, would gain by reaping the advantages of agglomeration in an increasingly more competitive world. Concentration will hike efficiency and competitiveness — as scale economies slash costs, motivate price cuts and competitive trading. Finally, equity-targeted outgoes on health, education or poverty reduction can be sustained only after growth attains high levels. Forcing through efficiency losses before that can leave the economy in a stagflationary state, and militate against poverty removal. That is because deficit financed transfers will nullify the potential of development programmes aiming at equity. In short, efficiency must get priority even if it initially exacerbates inequality.
Markets fail the efficiency test in real life
P Chaudhury
Professor CESP, JNU
It is often argued in economic theory that it is impossible to simultaneously achieve efficiency and equity in the development process. But, looking closer at the World Development Report 2006: Equity and Development, equity can mean different things to different people. Economists now define equity as ‘non-envy’ — or, an allocation under which no individual envies another. Economic theory also shows there is no way of achieving an equitable and desirable (or Pareto-efficient) allocation in an economy wherein some are more productive than others. (A resource allocation is said to be Pareto-efficient if it meets given constraints and also if no one can be made better off by altering the state of affairs while satisfying the same constraints.) Economic theory also shows that none of the equilibria that exist need be Pareto-efficient if the economic environment is characterised by increasing returns to scale, externalities in production and consumption, non-convexities in consumption, and indivisibilities.
The efficiency of the economic system is, thus, not guaranteed in any realistic situation — except in an idealised market-driven model of a competitive economy. Hence, no theory can support the overlooking of equity on efficiency grounds. It is, moreover, thus because markets, in real life, fail to achieve efficiency while governments do not pursue equity.
Yet, equity is even more relevant today than ever before. The pursuit of market-led, ‘efficient’, growth over the past two centuries has so degraded the environment that it threatens the very existence of life on earth. Ever-increasing inequalities have led to greater social discontent and hiked the incidence of crime. So the case for equity is based on common sense: a society that prioritises poverty eradication and employment creation, targets health, promotes literacy and allocates resources for the provision of food, clothing, shelter, health and education for all will achieve a higher level of happiness and harmony than another which attaches priority to the production of luxuries and newer methods of mass destruction.

Thursday, September 29, 2005


The Times of India
Friday, September 23, 2005

Last week's United Nations World Summit focused attention on the plight of poor countries. To reduce poverty, should these countries focus on faster growth or on reducing economic disparities? Is economic growth faster with high or low inequality? The World Bank's 2006 World Development Report, Equity and Development, makes the case that this commonly-asked question is misguided. In the long term, efficiency and equity are complements, not substitutes.
Equity is not the same as equality. By equity we mean equality of opportunities, where opportunities are the factors that make it possible for people to generate a certain income and achieve a certain level of well-being. In an equitable society, all have the same opportunities to pursue a life of their choosing, whether this in terms of acquiring an education, obtaining credit, finding a job or participating in the public debate, regardless of their country of birth, the wealth and social status of their parents, or their gender, race, caste, ethnicity or social class. The distribution of incomes, education levels, wealth and other assets will typically be unequal in an equitable society, because people differ in the effort they make, in their desire to bear risks, or in the way they process information. Such inequality of incomes is not only acceptable, but often desirable for the incentives it provides.
What is not acceptable is inequality that derives from lack of opportunities and discrimination. A lower-caste girl born in the slums of Mumbai faces a grim future, unlike a boy born to university-educated parents in a well-heeled neighbourhood of the same city, or the vast majority of people born in the developed world. Citizens of developed countries live on average about 20 years longer, get at least six more years of schooling and have better health, and choose from a wide range of options to fulfil their potential than their peers in low-income countries. While there is no systematic relation-ship between income inequality and growth, in the WDR 2006 we argue that equity and growth are, in the long run, complementary. Greater equity fosters greater prosperity.

There are two main reasons why equity is good for growth.

  • First, lack of opportunities harms initiative and deprives societies of the talent and efforts of some of its members. A poor woman who would like to set up a small shop will generally have a hard time finding credit and may never start the business. Bright children from disadvantaged castes may never get a chance to go to school. More equal access to credit, education, insurance, and so on would lead to greater growth.
  • Second, equity is good for growth because societies with an equitable distribution of resources tend to have more equitable political arrangements, where a majority of the citizens, and not just an elite, parti-cipate directly or indirectly in public decision-making.
In turn, societies with more equitable political systems have better economic institutions — for example, better protection of personal and property rights, greater rule of law, less corruption — that lead to faster growth. This is illustrated powerfully by the contrasting historical experiences of North and South America.
If equity is such a good thing, then why are many societies deeply inequitable? Societies that start off with an inequitable distribution of resources tend to put in place inequitable economic and political institutions. So inequity is perpetuated across generations, because elites control power and capture the benefits from economic activities. This is not only unjust; it is economically inefficient. Elites that capture power to their own benefit prevent large parts of the population from realising their economic potential. While history is important in deter-mining equity, change is possible. Indeed, history is full of examples of governments effecting change, spontaneously when reforms good for both equity and efficiency are available, or in response to political changes.
Where there is a political base for action, many policies and programmes can extend opportunities to the poor. But expanding equity so as to foster growth can also require actions that limit elite capture: Opening up the financial system, reducing the concentration of market power in certain sectors, controlling the negative consequences of corporatism, ensuring transparency and accountability of government action at the central and local level, and so on. These recommendations apply to poor and rich countries alike, but rich countries have the additional responsibility to support reform of global markets to stop discrimination against poor countries, and reform of global governance to give them greater voice and participation. The debates during last week's UN summit, as well as uncertainties over the Doha "development" round, underline the need for the rich countries to sustain their commitment to a more equitable world.
Bourguignon is chief economist, World Bank. Devarajan is the Bank's chief economist, South Asia Region.

Equity and development

Economic Times

Sixty-one years after its birth, the World Bank has at last paid its due to equality. In the 2006 World Development Report, the Bank finally concedes that reducing inequality is “necessary for greater economic prosperity in the long term.” From “Plan to Market” in 1996 to “Equity and Development” in 2006, the World Development Report (WDR) has come a long way.
  • Does this mean the Bank will impose “conditionalities” such as a more equal distribution of income or equal opportunities for education and employment to the next recipient of its loans?
  • Will countries be asked to provide equal opportunities even if that means a slightly higher fiscal deficit?
  • Will governments be asked to spend a minimum proportion of budget on health and education?
  • Will the Bank change loan “conditionalities” so that poor countries attain UN millennium goals to reduce poverty, bring gender equality, improve mother and child health?
  • For the sake of equality, will Bank president Paul Wolfowitz ask his former boss George Bush to increase America’s aid to poor countries?
With more than a modicum of certainty we can say that none of this will happen. For the WDR 2006 represents the thinking of Bank staff, and not the thinking of the countries that run the Bank.