François Bourguignon Chief Economist and Senior Vice-President The World Bank Manila, Philippines

1. THE ROLE OF EQUITY IN DEVELOPMENT François Bourguignon Chief Economist and Senior Vice-President The World Bank Manila, Philippines January 22, 2007

2. Poverty, growth and distribution • Poverty reduction depends on: • growth of mean level of welfare • change in the distribution of welfare in the population • The old debate between growth and distribution in development Going beyond this debate with the concept of ‘equity’…

3. Equity and development (WDR06) • Equity and growth are complementary in the long-run. • Promoting equity at the lowest economic cost as a key element of development strategies

4. Outline • Defining 'equity' • Why equity matters for development • Policy instruments and the cost of promoting equity Note : country vs. global approach

5. 1. Defining and observing “equity” Equity is a normative concept of which component principles include: • Equality of opportunities : equality of endowments (public-private), access to economic facilities, process fairness, access to justice, free entry, … (Rawls, Sen, Dworkin, Roemer, ..) • Aversion to consumption deprivation “Equity/opportunis” vs. “equality/results” (i.e. Gini, etc..)

6. Relationship between concepts and measures of inequality and inequity • A society with some significant inequality may be “equitable”. However, a very unequal society is likely to be inequitable. ( Income “Gini” as a “marker”) • In comparison with poverty, equity leads to explicitly considering both the top and the bottom (poor) of the distribution of opportunities in development strategies

7. Household income inequality in East Asia: 1984-2002 (Gini coefficient)

8. Inequality of opportunities - example 1:Infant mortality rate and mother’s education No or incomplete primary education Cambodia Philippines Vietnam Secondary or Higher Indonesia Source: Demographic and Health Surveys (DHS), latest available data since 2000

9. Inequality of opportunities - example 2: Enrollment rates in Philippines by income quintile of parents (2003) Source: Computed from DHS 2003

10. Inequality of opportunities - example 3: How access to formal jobs depends on parental education in Brazil * Source: Bourguignon, Ferreira and Menendez (2005)

11. Inequality of opportunities - example 4: Access to bank credit in the Philippines Source: Philippines Enterprise Survey data 2003, World Bank

12. Inequality of opportunities - example 5: Geographical inequity in the Philippines

13. 2. Why equity matters for development • Principle 1. Unequal access to investment facilities lead to an inefficient allocation of resources. (Some profitable investments are not undertaken whereas average or mediocre projects are implemented) • Principle 2. Unequal protection of property rights and unequal political rights suppress incentives to investment and to reform of bad governance

14. 2. Why equity matters for development (cont’d) • Principle 3. Excessive inequity and weak institutions may be the motive of crime, violence, political instability and conflicts, all deterrent of economic growth (Barro, Perrotti, …) Caveat.This does not mean that inequality may not sometimes have a positive impact on growth (Kaldor’s hypothesis) or that redistribution of current income is necessarily good (Tax distortions).

15. Example 1: Inefficiency of capital distribution in MexicoDifferential Returns on Own Capital Source: McKenzie and Woodruff, 2004

16. 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: Perceived process inequality & induced inefficiency (India)Differential Performance when Caste is Made Salient Source: Hoff and Pandey, 2004

17. Example 3: Inequitable institutions are detrimental to growth (b) Governance and Growth, 1982-2002 .08 CHN .06 BWA KOR SGP .04 THA IND IDN MLT CYP CHL HKG TUN SDN MYS BGD UGA EGY PAK .02 DOM BHR TUR KWT LKA ECU IRN MLI CRI GHA ISL SLV BRA GMB PNG COL per capita income growth, 1982-2002 (residual) POL DZA GTM SEN MWI ISR MEX 0.00 SYR HND JAM BRN URY GUY KEN PAN BOL JOR CMR ZAF HUN TGO BGR TTO PRY ARG ZWE PHL NER PER COG -.02 VEN HTI ROM ZMB NIC SLE -.04 ZAR -.06 -.08 -20 -10 0 10 20 30 ICRG index (residual) Source: Knack, 2005

18. 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).

19. 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 exist (e.g. tax increase to finance expansion of education) • Excessive inequality of outcomes likely to lead to increasing inequity

20. 3. Implications for policy: Leveling the economic and political playing fields • An equity lens adds three new perspectives to development policy: • Good policies for growth and poverty reduction generally involve redistribution - of influence, government expenditures, current income … - away from dominant groups. • 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 between growth policies and policies for equity is misguided. (Country-specific context is key in policy choice.)

21. 3. Implications for policy (cont’d) • Equal access to education, health, land, infrastructure, … • Market fairness: free entry and competition on markets for labor, credit, goods , .. • Full political participation • Fight corruption and“elite capture” + • Reduce absolute poverty (safety nets) • Reduce excessive inequality knowing this may have a cost in terms of growth (taxes, public management, macro-economics)

22. Dealing with the key issue of ‘elite capture’ • Often the main obstacle to accelerating growth; • Rent-seeking by elites partially controlling political and economic power (monopolies, barriers to entry, corruption, ..). • What can be done when economic elites have political power? • Identifying win-win and trade-off reforms • Dissemination of information on distributional effects of possible reforms. • Promoting transparency at all levels

23. Conclusion Equity as a general perspective on development strategies that encompass two fundamental pillars: • Empowerment • Investment climate

24. END