World Development Report 2006: Equity and Development

François Bourguignon

Chief Economist & Senior Vice President of the World Bank

Lecture at Cairo University

Cairo, Egypt

December 19th, 2004

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Structure at a Glance

Overview: Introduction and Summary

! Part I: How Unequal is the World?

! Part II: Do these Inequalities Matter?

! Part III: Institutions and Policies for Greater Equity and Lower Poverty

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Introduction: A Normative Framework

1. Inequality of what?• Fundamental space: opportunities to live

fulfilling lives. • Related to Sen’s capabilities.

• Constituent dimensions:• Consumption (or income)• Health and education outcomes• Access to public services• Agency and recognition.

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Introduction: A Normative Framework

2. What is equity?• Equity is a normative concept, related to fairness

in distribution. Its component principles include:• Equality of opportunities

• Equality of endowments • Process fairness and merit-based rewards.

• Aversion to outcome deprivation

• It is almost never the same as equality.

• The exact combination of those competing values, as well as a choice along any equity –efficiency trade-off, is a normative matter for social accord in each polity.

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Introduction: A Normative Framework

3. So this report:" Summarizes information on the extent of

inequality along the fundamental dimension of opportunities, as well as various constituent dimensions;

" Discusses reasons why high inequality is detrimental to the achievement of some other goals;

" Considers policy and institutional options for greater equity.

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Introduction: A Positive Framework

Distribution of Assetsand Opportunities

Distribution of outcomes

Distribution ofvoice / agency

Institutions of governance

Economic Institutions

and mechanisms

Political &Socio-CulturalInstitutions

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Part I: How unequal is the world1. Inequalities within Countries

! How are inequalities distributed in the world?# Opportunities # Income, consumption, health, education, agency.

! How do they change over time?# Inequality dynamics for selected countries.

! What is the profile of inequality across countries?# Group-based decompositions:

$ E.g. by gender, race, area or educational background.

! Where are these inequalities coming from?# The roles of asset distributions, labor markets, household

formation and the State.

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Figure 1: Gini coefficients from the SIMA database.

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

Legend: Solid bars - by incomeStripes - by consumption

Regions:High IncomeMENASSAECALACEAPSA

Note: Latest data for each country for the 1995-2002 period. Source: SIMA

Egypt

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Figure 2: Two Decades of Inequality in China

Two Decades of Income Inequality in China

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1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Year

Nat

ion

al G

ini

ind

ex w

ith

ad

just

men

t fo

r C

OL

dif

fere

nce

Source: Ravallion and Chen, “China’s (Uneven) Progress Against Poverty”

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Figure 3: Example of an inequality profile: by education group.

Source: Elbers et.al. work in progress.

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Figure 4: Example of an inequality profile: by gender of the household head.

Between Group Inequality Decompositions: Gender of the Household Head Comparison of Conventional and Alternative (Rb-Bar) Between-Group Share

0

0.01

0.02

0.03

0.04

0.05

0.06

KYRGYZTAN C

VIETNAM C

JAMAIC

A Y

PHILLIPIN

ES C

CAMEROON C

SENEGAL C

GHANA C

JORDAN C

KENYA C

BOLIVIA

Y

ALBANIA C

TURKEY C

THAILAND C

EAST TIM

OR C

CHILE Y

YEMEN C

DOMINIC

ANA Y

PAKISTAN C

COSTA RIC

A Y

BURKINA C

ETHIOPIA

C

INDONESIA

C

BULGARIA

C

GUATEMALA Y*N

OTE

BANGLADESH C

MOLDOVA C

EL SALVADOR Y

COTE D'IV

OIRE C

CAMBODIA C

LAOS C

NICARAGUA Y

BRAZIL Y

ARGENTINA Y

COLOMBIA Y

ECUADOR Y

HONDURAS Y

MADAGASCAR C

MEXICO Y

ROMANIA C

Country

% Contribution

Co nvent io nal

Alternative

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Part I: How unequal is the world2. Global inequalities

! International and world income distributions.$ The distribution of country means: absolute divergence?$ The population-weighted distribution of means: the role of

Chinese and Indian growth.$ The world distribution of income: within vs. between.

! International distributions of LEB and years of schooling.

$ Convergence big-time?$ The AIDS tragedy in Africa.

! Do these conflicting trends have anything to tell us about globalization?

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Figure 5: A Pen Parade of Countries

Note: GDP per capita, PPP values in current international $ in 2002. Source: SIMA.

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5000

10000

15000

20000

25000

30000

35000

40000

Egypt

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Figure 6: Vanishing Twin Peaks in Life Expectancy

we

ight

ed

kern

el d

ens

ity, 1

96

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Life expectancy25 35 45 55 65 75 85

0

.01

.02

.03

.04

.05

wei

gh

ted

kern

el d

ensi

ty,

199

0

Life expectancy25 35 45 55 65 75 85

0

.01

.02

.03

.04

.05

Source: Araujo, Ferreira and Schady, work in progress.

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Part II: Does Inequality Matter?3. Inequality, Well-Being and Development

! Some inequalities matter to welfare intrinsically…# Opportunities

# Fair processes

# Outcomes $ with aversion largely to absolute deprivation

! But inequality also matters instrumentally:$ The growth elasticity of poverty reduction falls with inequality.

$ Progressive redistribution accelerates poverty reduction.

$ Inequality that is too high likely to slow down growth itself.

$ Inequality may cause other ‘bads’, such as crime and violence.

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Figure 7: Inequality weakens the power of growth to reduce poverty.

Note: See Bourguignon (2004). ε = the elasticity of poverty with respect to income. T-statistics are included in

parentheses in the regression equation.

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Figure 8A: Income Distribution and Intentional Homicide Rates

1965-1994 (5-year-averages)

Source: Fajnzylber, Lederman, and Loayza (2002).

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Figure 8B: Income Distribution and Robbery Rates

1970-1994 (5-year-averages)

Source: Fajnzylber, Lederman, and Loayza (2002).

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Part II: Does Inequality Matter?

4. Inequality and investment! If the poor are liquidity constrained – due to

rationing on credit markets – their investment rates are lower and potential returns higher than in the rest of the economy.

! If access to insurance markets is limited, production choices of the poor are inefficiently constrained to low risk and low return activities.

! Aggregate vs. microeconomic evidence.% Economic efficiency losses could be a result of the coexistence of poverty and capital market failure;

% Institutions and policies may mitigate problems of under-investment.

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Part II: Does Inequality Matter?5. Inequality and conflict

! High inequality can exacerbate several kinds of conflict:# Political conflicts of interest leading to political

instability and inefficient economic choices.

# Distortionary redistribution as a consequence of inequality in a democratic society

# Open civil conflict: the ultimate failure of institutions to mediate conflicts of interest and the poverty trap

# Intra-household conflicts, again with intrinsic and instrumental costs.

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Part IIIEquity and Policy Objectives

Equity Principles Broad Policy Goals

Equality of endowments “Level the playing field” Correction of Asset Imbalances

Fairness in Processes Non-discrimination

Aversion to outcome deprivation

Pro-poor growth Risk Management

Safety Nets and Safety Ropes

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Part III6. Towards More Equitable Markets and

Macroeconomic Policies! Product Markets and Trade

# Distortions are usually inequitable# But reform processes must be managed with explicit regard to

distributional aspects.! Financial Markets

# Shallow markets are also often narrow and captured (examples from pre-crisis East Asia)

# Wider access: liberalization w/ regulation can be win-win.! Labor Markets

# Process fairness & core labor standards.# LM Policies often involve a trade-off between protection and flexibility

! Macroeconomic Management# Stability is a public good, but of particular importance to the poor.# Must move towards a fiscal contract which allows for truly

countercyclical fiscal and monetary policies.# Legitimate and inclusive institutions provide for better crisis resolutions.

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Part III7. Towards More Equitable States

! Equalizing Endowments: Building Assets for Equity# Health and education policies

# Land markets and land reform

# Access to infrastructure services

! Ensuring Fair Process: Governance for Equity# Legal services and justice systems

# Redressing discrimination

! Providing a Minimum Guarantee: Social Protection for Equity# Social assistance

# (Old age security?)

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Part III8. Institutions and Policies for Global

Equity.! Towards more equitable endowments

# Doha and trade arrangements in agriculture and textiles.

# International capital flows (and debt resolution mechanisms)

# International migration (incl. cross-border trafficking of women)

! Ensuring Fair Process# Intellectual property rights in pharmaceuticals (and others)

# International dimensions of agency and recognition: governance of multilateral systems?

# Role of civil movements – fair trade, corporate social responsibility as examples

! Providing a Minimum Guarantee# Aid: levels, allocation and effectiveness

# Crisis management

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Part IIISome Thoughts on Egypt:

Investment Climate

% The inefficiencies and constraints to the well functioning of the main markets impede investment and limit growth;

% Excessive regulations on business affect growth largely by increasing the costs of starting and running a business and thereby deterring new entry, business expansion and trade.

• Starting a business requires 13 separate procedures and takes 43 days on average in Egypt compared to 10 procedures and 39 days respectively in MENA;

• Typical Egyptian employer pays 162 weeks of salary to be able to legally dismiss a worker;

• It takes an average of 4.2 years to resolve a bankruptcy case in Egypt compared to 1.9 years in Morocco and 1.3 in Tunisia.

% Small business in informal sectors suffers disproportionately.

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Part IIISome Thoughts on Egypt:

Education

Education: Ensuring better incomes & opportunities for the future

% Continue to expand universal primary education, especially in rural areas and to girls;

% Lower child labor (and thus school drop-outs) through direct interventions. For example, school lunch programs in poor areas;

% Provide high-quality and market-relevant secondary education to the youth.

Equalizing endowments in Egypt:

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Part IIISome Thoughts on Egypt:

Safety-Net

Safety Net: Protecting the most vulnerable in the society

% Improve the size of the existing government transfers and adjust the level for the increase in the cost of living;

% Improve the eligibility criteria and better target the poor;

% Target transfers regionally, with higher allocations to poorer governorates;

% Introduce a broader public works program.

Providing minimum guarantee in Egypt:

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Main Messages

%Opportunities are distributed very unequally within most countries, as well as across them.

% Inequality reduction can (if adequately pursued) greatly enhance the power of economic growth to reduce poverty, and growth itself.

%Equitable institutions can be an important building block for sustainable long-term social and economic development.