FRANGOIS BOURGUIGNON AND SHANTAYANAN DEVARAJAN

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.