UN and World Bank Agree that Inequality Reduces Economic Growth

" Never has the world been so prosperous, however, inequalities have also never been so great!"

Jospin de Villepin, Prime Minister of France at the United Nations in October 2005

There is increasing recognition that inequality both within and between countries is a serious impediment to economic growth and that one of the key objectives of all governments should be to try and reduce or at least mitigate this inequality. One of the main components of the Millennium Development Goals is having the number of people living in extreme poverty by 2015. The World Bank’s World Development Report for 2006 had as its theme equity and development and concludes that “greater equity can, over the long term, underpin faster growth”. These views are supported by the United Nation’s Human Development Report 2005 on aid, trade and security in an unequal world. Thus there is an increasing recognition that governments have to do more than merely ensuring an environment in which private enterprise can thrive. Governments also have responsibility for maintaining equity and avoiding the extremes of poverty and wealth.

The World Bank defines equity as meaning “individuals should have equal opportunities to pursue a life of their choosing and be spared from extreme deprivation in outcomes”. It now recognises that the complementarities between equity and prosperity arise for two broad sets of reasons. First there are many market failures, at least in developing countries, notably in the markets for credit, insurance, land, and human capital. Thus governments have a responsibility to act to correct such failures and ensure widespread access to such essential services as education and health. As the World Bank notes “public action has a legitimate role in seeking to broaden the opportunities of those who face the most limited choices”. The World Bank has long said it was working for a world free of poverty. But now it has gone further and called for "more equitable access by the poor to health care, education, jobs, capital, and secure land rights, among others".

“The second set of reasons why equity and long-term prosperity can be complementary arises from the fact that high levels of economic and political inequality tend to lead to economic institutions and social arrangements that systematically favour the interests of those with more influence”. Thus governments have a responsibility for “levelling the playing field—both politically and economically and in the domestic and the global arenas” to “broaden the opportunities of those who face the most limited choices”.

As a result, the World Bank report argues, societies which are more equitable are likely to have faster economic growth as “greater equity implies more efficient economic functioning, reduced conflict, greater trust, and better institutions, with dynamic benefits for investment and growth”. In contrast, global inequality “contributes to economic inefficiency, political conflict, and institutional frailty”.

The UN report is more explicit in detailing the effects of global inequality. It hails the world’s response to the December 2004 tsunami noting that “within days of the tsunami, one of the worst natural disasters in recent history had given rise to the world’s greatest international relief effort, showing what can be achieved through global solidarity when the international community commits itself to a great endeavour”. The report, however, immediately notes that 1,200 children die each hour which is:

Equivalent to three tsunamis a month, every month, hitting the world’s most vulnerable citizens—its children. The causes of death will vary, but the overwhelming majority can be traced to a single pathology: poverty.

The UN goes on to note that:

One-fifth of humanity live in countries where many people think nothing of spending $2 a day on a cappuccino. Another fifth of humanity survive on less than $1 a day.

The World Bank now recognises that “global inequities are massive” and doubled in the 175 years to 1992. It is only because of significant growth rates in China and India that the long-term trend towards greater global inequality has begun to reverse in recent years. However, “if China and India are excluded, global inequalities have continued to rise”. As a result, as the UN notes “Income inequality is increasing in countries that account for more than 80% of the world’s population”.

A long-run diverging trend in income inequality:

Source: Authors’ manipulation of data from Bourguignon and Morrisson (2002).

This situation is made worse by the widespread observation of intergenerational immobility. The UN notes that “health outcomes in the United States, the world’s richest country, reflect deep inequalities based on wealth and race”. But also, someone born into a poor family has a small chance of escaping from this situation, the World Bank notes that “new evidence from the United States (where the myth of equal opportunity is strong) finds high levels of persistence of socioeconomic status across generations”.

Thus the World Bank would probably agree with the UN that:

Human development gaps within countries are as stark as the gaps between countries. These gaps reflect unequal opportunity—people held back because of their gender, group identity, wealth or location. Such inequalities are unjust. They are also economically wasteful and socially destabilizing. Overcoming the structural forces that create and perpetuate extreme inequality is one of the most efficient routes for overcoming extreme poverty, enhancing the welfare of society and accelerating progress towards the Millennium Development Goals.

Whilst the World Bank recognises that action to alleviate inequality and the adverse effects of poverty have to be adapted to the specific conditions in each country, it also recognises four main areas in which action is needed:

• human capacities, including early childhood development, schooling, health and taxes for equity
• ensuring equity in terms of access to justice, land and infrastructure
• markets and the macro-economy
• the global arena.

The World Bank has recognised for several years that the introduction of primary school fees denied the opportunities of education to children from the poorest families. It now accepts that governments should go further as there is “a considerable body of evidence showing that scholarships conditional on attendance have significant impacts” especially in encouraging the attendance of girls from poor families.

The Bank also recognises the significant externalities involved with health-care especially with immunization programmes and the provision of safe water and sanitation. As a result it notes that “public provisioning makes sense in these areas”. Others have gone further noting that the global risk of diseases such as HIV/AIDS, SARS and avian flu provide convincing arguments for designating basic health services as global public goods. As a result, the funding of such services should be a global responsibility and not be subject to the vagaries of budgetary constraints within individual countries.

The World Bank also appears to have moved some way from its broad support for privatisation as this report notes “poorly designed privatizations may be captured, transferring public assets, at excessively low prices, into private hands”.

In the global arena the World Bank report recognises that “global markets are far from equitable, and the rules governing their functioning have a disproportionately negative effect on developing countries. These rules are the outcome of complex negotiating processes in which developing countries have less voice. Moreover, even if markets worked equitably, unequal endowments would limit the ability of poor countries to benefit from global opportunities”. Thus the Bank concludes the rules are in need of reform to make them equitable to the poor.

The UN is also more explicit in the need for redistribution of resources in favour of the poor arguing that:

Reducing inequality in the distribution of human development opportunities is a public policy priority in its own right: it matters for intrinsic reasons. It would also be instrumental in accelerating progress towards the MDGs. Closing the gap in child mortality between the richest and poorest 20% would cut child deaths by almost two-thirds, saving more than 6 million lives a year—and putting the world back on track for achieving the MDG target of a two thirds reduction in child death rates.

And thus the UN proposes that “Far more weight should be attached to improving the availability, accessibility and affordability of public services and to increasing poor people’s share of the growth”.

Turning to international development assistance the UN report argues that:

Aid is sometimes thought of in rich countries as a one-way act of charity. That view is misplaced. In a world of interconnected threats and opportunities aid is an investment as well as a moral imperative—an investment in shared prosperity, collective security and a common future. Failure to invest on a sufficient scale today will generate costs tomorrow.

The UN report welcomes the adoption of the Millennium Development Goals (MDGs), but notes that “there remains a large aid shortfall for financing the MDGs. That shortfall will increase from $46 billion in 2006 to $52 billion in 2010”. The UN goes on to argue that the resources are now available to achieve these goals, but that they need to be redirected:

Since 1990 increased prosperity in rich countries has done little to enhance generosity: per capita income has increased by $6,070, while per capita aid has fallen by $1. Such figures suggest that the winners from globalization have not prioritized help for the losers, even though they would gain from doing so.

The UN report also points out that:

For every $1 that rich countries spend on aid they allocate another $10 to military budgets. Just the increase in military spending since 2000, if devoted to aid instead, would be sufficient to reach the long-standing UN target of spending 0.7% of GNI on aid.

Indeed with the budget for 2006 the US will have spent $420 billion on the invasion of Iraq and the eminent economist, Joseph Stiglitz, has estimated that the eventual total costs are likely to be in excess of $2,000 billion.

Put another way, the UN notes that:

The $7 billion needed annually over the next decade to provide 2.6 billion people with access to clean water is less than Europeans spend on perfume and less than Americans spend on elective corrective surgery. This is for an investment that would save an estimated 4,000 lives each day.

Or again, the rich countries:

Now spend just over $1 billion a year on aid for agriculture in poor countries, and just under $1 billion a day subsidizing agricultural overproduction at home

The UN concludes by saying that:

The international community has an unprecedented opportunity to put in place the policies and resources that could make the next decade a genuine decade for development. Having set the bar in the Millennium Declaration, the world’s governments could set a course that will reshape globalization, give renewed hope to millions of the world’s poorest and most vulnerable people and create the conditions for shared prosperity and security. The business as usual alternative will lead towards a world tarnished by mass poverty, divided by deep inequalities and threatened by shared insecurities. In rich and poor countries alike future generations will pay a heavy price for failures of political leadership at this crossroads moment at the start of the twenty-first century.

The UN and World Bank clearly recognise that governments across the world have a major responsibility for reducing current levels of inequality both within and between countries. Can we ensure that our governments face up to the challenge of global inequity and poverty? If we do then the benefits are likely to be greater economic development for us all and a safer world for us and our children.

Links:

World Bank World Development Report 2006: Equity and Development

http://tinyurl.com/awwdr2006

United Nation’s Human Development Report 2005

http://hdr.undp.org/en/reports/global/hdr2005/

Latest issue of IJGFM now available

The latest issue of the International Journal of Governmental Financial Management was recently published and is now available for free download from: www.icgfm.org/journal.htm

In the first paper of this issue, David Hall provides the second half of his study on public finance. David notes that taxation tends to increase as a proportion of GDP as countries develop, but also that the burden of taxation has become less fair, because countries have moved towards regressive taxes such as value added tax (VAT), which hit lower incomes harder. He also argues that rather than reducing public sector spending as many European countries, for example, are now being encouraged to do, the better alternative is to develop stronger and fairer taxation systems and to continue to grow public spending to meet the challenges of the future, including climate change.

In our second paper, Michael Parry reviews and compares the financial reporting (IPSAS) and statistical standards for financial information about public sector institutions – particularly sovereign governments. He concludes that there appears to be a general acceptance that statistical reports and financial statements have different objectives and will never be fully harmonised.

In the next paper, Robert Quaye and Hugh Coombs investigate Ghana’s organised economic crime legislation strategy and the extent to which it has met international requirements in respect of anti money laundering measures. The research objective was to acquire a bottom up and comprehensive picture of Ghana’s experience of such legislation and associated regulation. The paper discovered there was general agreement amongst practitioners that, while Ghana had passed relevant legislation relatively quickly, there was concern over how the legislation worked in practice and the cultural acceptance of corrupt behaviour.

In our fourth paper, Sidhakam Bhattacharyya and Gautam Bandyopadhyay consider the background to urban local bodies in India. In particular they consider imbalances between their constitutional responsibilities, their financial resources and the impact of certain financial controls on the performance of these bodies as measured by their annual level of recurrent surplus of deficit.

In our final paper, Mohamed Moindze reviews the modernisation of internal control of public expenditure in francophone African countries. He concludes that it would be unrealistic to establish an internal control system that aims to eliminate any risk of loss. But the costs of any internal control system should be balanced with the benefits of reduced errors, fraud and corruption (this paper is in French).

We again end this issue with a section reviewing recent public financial management publications and other resources which we hope will be of interest to readers of the Journal.

Finally we have included a short questionnaire with this issue. The aim is to consider how well the Journal is meeting the needs of its readers and contributors and what further improvements may be made. We would greatly value feed-back from our readers – we look forward to hearing from you!