Why equality is the best policy

Why equality is the best policy

Heather Stewart

The authors of a new World Bank report hope to change attitudes with claims that inequality is the biggest obstacle to economic success.

WHEN CHRISTOPHER Columbus stumbled across America in 1492, he opened the way to a centuries-long struggle between the European powers to control and dominate the New World, from the frozen north of Canada to the fertile plains of Argentina. But for the authors of a sweeping new report from the World Bank, the triumphant arrival of Columbus also inaugurated a real-life economic experiment, whose lessons are still relevant today.

The authors of the World Development Report use a wealth of examples from across the globe and through the centuries, to prove that in general, fairer economies are more successful. Inequality is not only unfair — it also wastes resources and stifles economic progress.

The Spaniards who colonised South America, with its gold and silver deposits and a large indigenous population, were able to impose punitive taxes, slave labour, and political institutions that kept power in the hands of a wealthy few. Though enormously lucrative in the short term, this approach squandered resources, fostered political instability, and handicapped the region’s economies.

In North America, meanwhile, where there was a sparse native population that refused to submit to slavery and no lucrative gold reserves to exploit, resources had to be divided more equally in order to keep the European settlers alive and happy. “As in Latin America, there was a synergy between economic and political institutions, but this time it was virtuous, not vicious.”

Research suggests that “good” institutions — those that divide resources relatively equally, and guarantee property rights — are more important in explaining the economic success or failure of a country than its geographical position, or whether it is ridden with diseases. Francisco Ferreira, the report’s lead author, says this lesson has immediate relevance for today’s developing countries. An increase in the gap between rich and poor is sometimes excused as an inevitable by-product of economic development, the price developing countries have to pay to climb out of poverty. But Mr. Ferreira says that is simply wrong: leaders who sit and wait for the mythical “trickle-down effect” to pour wealth through the economy will fail.

“We hope this report will change the perception that people often have that the poor are almost charity cases, and the rest of the country generates growth,” he said. “You shouldn’t see those people as an ocean of unskilled labour. You should see them as a pool of potentially skilled individuals. Think how many brilliant inventors there could be in sub-Saharan Africa or in the slums of Latin America.”

“Some people tend to think of an alternative, between policies to redistribute, and policies to grow, and there’s no such thing. There’s a whole set of policies that can help growth by redistributing.”

China’s extraordinary emergence as an economic powerhouse — GDP per capital has quadrupled over the past 25 years — is also held up as an illustration of the importance of equity in supporting growth. Under Deng Xiaoping’s leadership, in the 1980s, economic decision-making was decentralised to local governments and individual businesses and farmers, as the failures of post-war central planning became clear. Although the political stranglehold of the Communist Party over China has not relaxed, Mr. Ferreira says opening markets and spreading wealth more widely has been crucial. “We actually see China, particularly in the early 1980s, as an example of what we argue for here: a combination of equity and markets.”

In many parts of the world, that combination is a long way off — and, as a result, sustained economic development. Those who are excluded, because markets do not work properly can fall into “inequality traps,” held back by their ethnic group, income level or sex, and unable to improve their own prospects or contribute to their country’s expansion. “With imperfect markets, inequalities in power and wealth translate into unequal opportunities, leading to wasted productive potential and to an inefficient allocation of resources.”

Poor rural villagers in India pay rates of interest four times as high as their richer neighbours, for example. Mr. Ferreira and his colleagues say part of the difference reflects the higher risk of lending to people with fewer assets; but much of it results from the fact that the credit market doesn’t work properly.

The report is littered with shocking examples of the inequalities in income, opportunities, and life chances faced by people within individual countries, and between one part of the world and another — and the resources that are wasted as a result.

Mr. Ferreira and his colleagues are not suggesting this rag-bag of wrongs can be righted overnight, but they do argue that sharing wealth and opportunity more equally is a good first step to achieving long-term economic progress. They want developing-country governments, rich donor countries, and their own colleagues at the World Bank, to try looking at the world through an “equity lens.” It is a peaceful, patient and pro-market revolution. It is a long-haul,” Mr. Ferreira says.

– Guardian Newspapers Limited 2005

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