Financial Times

World Bank advocates pro-equity policies to reduce poverty
Equity, defined primarily as equality of opportunities among people, should be an integral part of a successful poverty reduction strategy anywhere in the developing world, says the World Bank’s annual 2006 World Development Report released last week.

“Equity is complementary to the pursuit of long-term prosperity,” said François Bourguignon, the Bank’s Chief Economist and Senior Vice President for Development Economics, who guided the team that produced the report. “Greater equity is doubly good for poverty reduction. It tends to favor sustained overall development, and it delivers increased opportunities to the poorest groups in a society.”

Equity and Development, produced by an eight-member team of authors led by economists Francisco Ferreira and Michael Walton, makes the case for equity, not just as an end in itself, but because it often stimulates greater and more productive investment, which leads to faster growth. The report shows how wide gulfs of inequality in wealth and opportunity, both within and among nations, contribute to the persistence of extreme deprivation, often for a large proportion of the population. This wastes human potential and, in many cases, can slow the pace of sustained economic growth.

Pro-equity policies can bridge these gulfs, the authors conclude. The objective is not equality of incomes, but rather to expand access by the poor to health care, education, jobs, capital, and secure land rights. Crucially, equity requires greater equality of access to political freedoms and political power. It also means breaking down stereotyping and discrimination, and improving access to justice systems and infrastructure.

“Public action should seek to expand the set of opportunities of those who have the least voice and fewest resources and capabilities,” World Bank President Paul Wolfowitz says in the foreword to the report. “It should do so in a manner that respects and enhances individual freedoms, as well as the role of markets in allocating resources.”

To increase equity within developing countries, the report calls specifically for policies that correct for persistent inequalities in opportunity, by leveling the economic and political playing fields. Many such policies will also increase economic efficiency and correct market failures. These policies include:

• Investing in people, by expanding access to quality health and education services, and providing safety nets for vulnerable groups;

• Expanding access to justice, land, and economic infrastructure such as roads, power, water, sanitation and telecommunications;

• Promoting fairness in financial, labor, and product markets, so that poor people have easier access to credit and jobs, and are not discriminated against in any market.

Pro-equity policy changes
Examples of pro-equity policy changes include land reform. In the Indian state of West Bengal, for example, a land tenancy reform increased security of tenure for sharecroppers, while also guaranteeing them at least 75 percent of output.

Land productiviy rose by 62 percent as a result. Increasing poor people’s access to credit and insurance has proven to be another effective way of leveling opportunities to increase prosperity. Studies in India, Kenya and Zimbabwe, among other developing countries, show that the poor must pay much higher interest rates than the rich. “We would thus expect the poor to under-invest, certainly relative to the rich, but also relative to what would happen if markets functioned properly,” the report concludes.

In addition to domestic reforms, the report also calls on nations to promote greater equity in the global arena, notably in the international markets for labor, goods, ideas and capital. To achieve this, it urges rich countries to allow greater migration for unskilled workers from developing countries, to press ahead with trade liberalization under the Doha Round at the WTO, to allow poor countries to use generic drugs, and to develop financial standards appropriate to developing countries. It also reiterates the importance of increased and more effective development aid.

A mix of these policies, applied with close attention to specific conditions in different countries, can help give poor people more equal opportunities, at once increasing their economic contribution to their societies, and reducing their own poverty.While pointing out the negative consequences of extreme inequality, the WDR draws a clear distinction between equality and equity. Equity, the authors say, is not the same as equality in incomes, or health status, or any other specific outcome. Rather, it is the quest for a situation in which opportunities are equal, that is, where personal effort, preferences and initiative—and not family background, caste, race, or gender—account for the differences between people’s economic achievements.

The report makes the case that equity and prosperity are complementary, citing examples in which high levels of economic and political inequality lead to economic institutions and social arrangements that systematically favor the interests of those with more influence. Such institutions, it argues, undermine a country's potential for growth and poverty reduction.

“Inequitable institutions impose economic costs,” said Francisco Ferreira, a lead author of the report. “They tend to protect the interests of politically influential and wealthy people, often to the detriment of the majority. This makes society as a whole more inefficient. If the middle and poorer groups are not able to exploit their talent, society loses opportunities for innovation and investment.”

Inequitable institutions
One example of inequitable institutions emerges from a study of women farmers in Ghana, who do not have secure rights to their land. Because their access to it is uncertain, the women cultivate their land every growing season, failing to leave it fallow during some seasons, as they should in order to maintain its fertility. They do this because of fear that the land would be taken from them by higher-status individuals, usually men, on the pretext that the women are not putting the land to use. The productivity of their land declines as a result, creating a vicious circle of low productivity and widening inequality.

Inequality traps emerge when inequalities between individuals and groups are perpetuated over time, within and across generations. These traps are marked by high child mortality rates and low school completion rates, unemployment and low incomes repeated over generations. Opportunities, large or small, are passed on from father to son, mother to daughter. This persistence reduces the incentives for individual investment and innovation, and weakens the development process. They are perpetuated, the report says, by interlocking economic, political and socio-cultural mechanisms, such as discriminatory attitudes and practices relating to race, ethnicity, gender and social class.

To help societies escape these inequality traps, the World Bank report stresses the importance of strengthening the “agency” of poor and excluded groups, that is, their ability to press for stronger mechanisms of voice and political accountability. By insisting on more checks and balances on the abuse of economic and political power by elites, the poor and excluded—often including women as a group—can build alliances with middle classes in support of strategies for equitable change. Such strategies would serve to undermine oligarchic dominance and level the playing field in the political arena, without resorting to the kind of unsustainable populist policies that have failed in the past.

Achieve empowerment
Equity and Development’s prescriptions complement the conclusions of the Bank’s World Development Reports for 2004 and 2005, which focused on enhancing access to services for the poor and improving the investment climate.

“We argue that an approach to development that is deeply informed by equity is consistent with the frameworks in the last two World Development Reports,” said Michael Walton, another lead author of the report. “Indeed, equity is a fundamental part of the package needed to achieve empowerment and a better investment climate. It is also essential to achieving the Millennium Development Goals.”

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