EQUITY AND DEVELOPMENT:

BASIC THEORY

1
 Poverty, growth and distribution

 (Uni-dimensional) poverty depends on mean level

of welfare and inequality of welfare distribution in
the population

 The old debate between growth and distribution

in development

 Development strategy often seen as a choice

between distribution and growth…

But what is the relationship between then? 2

Contributions of, and paradoxes in the economic
literature on distribution and development

 Inefficient redistribution of income in a perfectly

competitive economy : the efficiency-equality tradeoff (tax
models : Mirrlees, Romer).
 Efficient redistribution (of income, assets and other
endowments) within imperfectly competitive context
(imperfect credit-market argument – Bardhan, Bowles and
Gintis)
 Ambiguous conclusion, unconvincing (cross-country) and
vague evidence that “inequality harms growth”.

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 “Equity” and Development

 “Equity” and growth are complementary in

the long-run.

 Promoting equity at the lowest (short-run)

economic cost as a key element of
development strategies

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 Outline

1. Defining and observing ‘equity'

2. Why equity matters for development

3. Policy instruments and the cost of promoting

equity

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 1. Defining and observing “equity”

Equity is a normative concept of which component

principles include:
 Equality of opportunities (equality of
endowments, process fairness, merit-based
rewards, …)
 Aversion to consumption deprivation

Almost never the same as equality in one of the

outcome dimensions, but may involve changes in
distribution in a number of them.
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 Opportunities

Endowments:
Wealth, land,
culture, social Process :
background,… labor
Outcomes :
market,
income,
investment,
consumption,
schooling,
health,
voice
environment,
Individual traits : …
taste for efforts, risk,
entrepreneurship…
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 Relationship between concepts and measures
of inequality and inequity

 Inequality usually refers to outcomes (welfare,

education, health,..) rather than opportunities

 A society with some (possibly) significant inequality

may be “equitable”. However, a very (income)
unequal society is likely to be inequitable. ( Income
“Gini” as a “marker”)

 Equity leads to consider both the top and the bottom

(poor) of the distribution of opportunities

 The difficulty of measuring inequity

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Example (1): Infant Mortality Rate and
Mother’s Education

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 Example (2) Opportunities in health are
important especially at an early stage in life
El Salvador study on Early Childhood Development

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Example (3): Enrollment Rates in India
by income quintile of parents
P e rc e n t o f q u in t ile p o p u la t io n
India Educa tion: Childre n Curre ntly Enrolled

100.0

90.0

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0
1 2 3 4 5

Girls 1992 35.0 46.9 63.0 81.6 94.0

Girls 1998 58.1 72.2 84.1 91.6 97.5
Boys 1992 57.1 66.0 78.0 87.2 95.4
Boys 1998 70.7 82.5 89.2 94.1 97.6 11
Incom e Quintile
 Example (4): how access to formal jobs
depends on parental education in Brazil

0.7
Prob. of being in formal sector

0.6
0.5
0.4
0.3
0.2
0.1
0
0 (0-4] (4-6] (6-8] (8-11] >11
years of schooling of parents

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* Source: Bourguignon, Ferreira and Menendez (2005)
 Example (5): Access to Credit
Large firms are more likely to have bank loans

100% % with Bank Loans

90%
80%
70% 63.5%
60%
51.9 %
50%
42.4%
40% 32.3%

30%
20%
7.6%
10%
0%
Micro Small Medium Large Very Large
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Source: World Bank ICS data
Inequity Across Countries:
Nationality is a key determinant of opportunities.
The distribution of life expectancy across the world, and over time.
1960 1970 1980
.05

.05

.05
e stim at ed density
0

0
20 40 60 80 20 40 60 80 20 40 60 80

1990 2000
.05

.05
0

20 40 60 80 20 40 60 80
life expectancy at birth
Graphs by year
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 2. Why equity matters for development


General principle 1. Unequal access to processes that
facilitate certain outcomes implies an inefficient allocation
of resources :

 Archetypical example = credit market :

i.e. some profitable investments are not undertaken
whereas average or mediocre projects are implemented
 Note that unequal access to markets like credit or
insurance result from a combination of market
imperfection (asymmetric information) and inequality
in endowments.
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 2. Why equity matters for development
(cont’d)

 General principle 2. Unequal protection of

property rights and unequal political rights are
disincentives to investment and enterprise, and
the source of bad governance

 General principle 3. Excessive inequity and

weak institutions may be motive for crime,
violence, political instability and conflicts.

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 Empirical support

 Problem of the measure of equity and

unpromising cross-country analysis
 Limits of “aggregate evidence” anyway (e.g.
cross country analysis of inequality and
growth)
 The “Microeconomic” approach

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 Example (1):
Inefficiency of capital distribution in Mexico

Differential Returns on Own Capital

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Source: McKenzie and Woodruff, 2004
Example (2): Exclusion and Internalized Inefficiency
in India

Differential Performance when Caste is Made Salient

Average number of mazes solved, by caste,
in five experimental treatments
8
high caste
7 low caste

0
Piece Rate, Piece Rate, Tournament, Tournament, Tournament,
Caste Not Caste Caste Not Caste Caste Announced
Announced Announced Announced Announced and Segregated
19

Source: Hoff and Pandey, 2004

 Example (3) : Good economic institutions are
associated with prosperity
Association between economic prosperity and protection against risk of expropriation.

.
LUX
USA
SGP CHE
HKG JPNNOR
DNK
BEL
CAN
10 AUS
ITA
AUT
FRA
ISL NLD
GBR
SWE FIN
ARE
KWT ISR IRL
NZL
QAT BHR
Log GDP per capita, PPP, in 1995

ESP
PRT
MLT GRC KOR
BHS CHL
OMN SAU CZE
ARG VEN
URY
MEX GAB
PAN ZAF
CRI COL BWAMYS HUN
TTOTHA BRA
IRN TUR POL
TUN
ECU BGR
PER DOM DZA ROM RUS
GTM
JORPRY
JAM
PHL MAR IDN
SUR SLV SYR
8 BOL GUY EGY
CHN
AGO LKA
HND ZWE
NIC CMR
GIN
COG SEN CIV
SDN PAK GHA MNG IND
VNM TGO GMB
HTI
KEN
UGA
ZAR BFA
MDG BGD NGA ZMB
NER
YEM
MLI
MOZ MWI
SLE TZA
ETH
6
4 6 8 10
Avg. Protection Against Risk of Expropriation, 1985-95 20
Example (4) : Crime and Inequality [as a proxy for inequity]

Income Distribution & Robbery Rates 1970-1994 (5-year-averages)

21

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

 2. 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 be necessary to
promote more equity in the long-run
 Also, excessive inequality of results may
lead to future major obstacles to
development and must be corrected
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 3. Implications for Policy: Leveling the
Economic and Political Playing Fields

 An equity lens adds three new perspectives to

development policy:
1. Good policies for poverty reduction may involve
redistribution - of influence or government expenditures -
away from dominant groups. (Political economy)
2. Equity-efficiency trade-offs in such redistributions need to
be assessed in light of the full long-term benefits of
equity.
3. The perception of a dichotomy or pure tradeoff between
growth policies and policies for equity is misguided.
(Country-specific context is key in policy choice.)

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 3. Implications for Policy (ct’d)

 Equitable accumulation: access to education,

health, land, infrastructure, …
 Market fairness: labor market, credit, goods

 Full political participation

 Reduce absolute poverty (safety nets)

 Reduce excessive inequality (taxes, public
management, macro-economics)
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Promoting fairness in markets and the macro-
economy
 Financial Markets: Broader access through more
competition and less capture.
 Labor Markets: Protection with flexibility, focusing on the
least engaged.
 Product Markets:
 prevent monopolies and other imperfect
competitions situations
 Mind incidence of trade reform
 Innovate to reduce informational asymmetries in
markets where the poor trade.
 Macroeconomic Policy: Prudent and as much
countercyclical as possible, to prevent the twin regressive
evils of inflation and financial crisis.

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Leveling the international playing field can help
reduce global inequities

 Trade: less distortion by rich countries

 Migration: greater scope for labor mobility
 Intellectual Property Rights: innovative solutions
 Aid: greater volume and effectiveness, fewer ties.
 Global Commons.

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 Conclusion

 Unifying the two pillars of the World Bank

strategy for poverty reduction : "Investment
climate" and "Empowerment" are
complementary

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END

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Investing in the Human Capacities of the
opportunity-poor:
Policy should start early and can make a difference

Mental Development of Undersized Children

(Low Height for Age) : The Jamaican Study

110
children of
normal height stimulation &
105 supplement

develop
stimulation
ment 100
quotient supplement
95
control
90
baseline 6 mo 12 mo 18 mo 24 mo
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Ensuring an Adequate Investment Environment
A focus on justice systems, land and infrastructure

Water sources and water price by wealth quintile in Niger

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 Example (5) : “Natural resource curse” and conflict
trap in Sub-Saharan Africa

Natural Resources and the risk of civil war for low-income

countries

40%
R i sk o f ci vi l w ar (p er cen t)

29.5%
30%
23.6%

20% 16.8%
10.5%
10% 5.7%

0%
5% 10% 15% 20% 25%

Pr im ar y com m o d ity exp or ts as a shar e o f GDP 31

 World Development report 2006
Main Messages
 Opportunities are unequally distributed and processes
are far from fair within most countries, as well as across
them.
 In the long-run, equity and efficiency are complements.
Fair societies, where opportunities are widespread, are
more successful in achieving long-term prosperity.
 Public action should aim to level the playing field, by
expanding access to opportunity to those who are most
constrained.
 Efficiency – Equity trade offs exist, but may be less
pronounced in a long-run view that takes the
institutional benefits of fairness into account.
 Individual incentives matter, and policy design should
always take this into account. 32
"A pie shrinks when more equally
divided."  True  False

A pie may shrink in the short run

when more equally divided, but
may expand in the long run.

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 Dimensions of pro-equity policy

Direct promotion of equity

- - policies that help build equitable assets
(education, health, land, infrastructure)
- policies that deliver procedural equity
- policies that help vulnerable populations better manage
risks

Processes that guarantee equity in the functioning of

markets
- financial market policies
- labor market policies
- trade policies
- managing macroeconomic instability 34
 Dimensions of pro-equity policy (continued)

Equalizing opportunities in basic education

 Societal commitment
 Adequate resources, effectively used
 Minding incentives and accountability
 Reaching excluded groups
[Conditional cash transfer programs]
 Enabling children to realize their potential
[Early childhood development programs]

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Dimensions of pro-equity policy (continued)

Equitable health care provision

 Interventions that affect child health (Prenatal
care, nutrition, ECD)

 Interventions that enhance poor people’s

demand for higher quality services (Nutritional and
health education; Early diagnostics)

 Interventions that empower low-income

beneficiaries: transparency, accountability (Civil
Rights Act in 1964 and Medicare in 1965)
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 Dimensions of pro-equity policy (continued)

Access to land
 Improving security of tenure
 Improving functioning of land markets
 Exploiting options for cost-effective land
redistribution
Access to infrastructure
 Policies for equitable infrastructure
provision (private provision, competition and
user choice)
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Dimensions of pro-equity policy (continued)

Equity in the functioning of financial markets

 Unequal access to finance is associated with unequal
productive opportunities
 Broadening of the financial sector is fundamental for
equity and growth
 Effective financial reform requires greater
accountability and judicious design of sequencing.

Equity in the functioning of labor markets

 Reforming labor market policies requires achieving a
balance between social protection and flexibility
 Design comprehensive policy package; tackle vested
interests; broaden accountability and voice of poorer
groups; compensate losers. 38