Inequality, Growth and Poverty in the Era of Liberalization and Globalization Policy Brief No. 4, UN WIDER, 2001 By Giovanni Andrea Cornia and Julius Court Presentation by Dan Prud’homme

Outline 1) Thesis, methods, why important? 1) Thesis, methods, why important? 2) Traditional causes of rising inequality 2) Traditional causes of rising inequality 3) New causes of rising inequality 3) New causes of rising inequality 4) Implications for growth and poverty 4) Implications for growth and poverty 5) Recommendations to reduce inequality 5) Recommendations to reduce inequality

Thesis Intra-country inequality has RISEN since the early/mid 1980sIntra-country inequality has RISEN since the early/mid 1980s Traditional causes of inequality DO NOT adequately explain recent trendsTraditional causes of inequality DO NOT adequately explain recent trends Higher the level of inequality= less impact growth has in reducing povertyHigher the level of inequality= less impact growth has in reducing poverty High levels of inequality depress the rate of growthHigh levels of inequality depress the rate of growth Rising inequality is not inevitable amidst globalizationRising inequality is not inevitable amidst globalization

Methods Measures national income inequality—distribution of income among people within a country— using UN World Income Inequality Database (WIID) Measures national income inequality—distribution of income among people within a country— using UN World Income Inequality Database (WIID)

Why important? Policymakers accept growth as anti- poverty strategy but largely ignore inequality Policymakers accept growth as anti- poverty strategy but largely ignore inequality MDG #1- cut income poverty from 30-15% by 2015 MDG #1- cut income poverty from 30-15% by 2015

Traditional vs. New causes of inequality TRADITIONAL Explain most of the variation in cross- country inequality But, with the exception of education in Africa and L. Am., don’t explain recent surge in intra-country inequalityBut, with the exception of education in Africa and L. Am., don’t explain recent surge in intra-country inequalityNEW Best at explaining recent trends in increasing intra-country inequalityBest at explaining recent trends in increasing intra-country inequality

…traditional causes 1) Land concentration (*) 1) Land concentration (*) 2) Increasing influence of mineral sector on GDP 2) Increasing influence of mineral sector on GDP

…traditional causes 3) Rising inequality due to changes in access to education* 3) Rising inequality due to changes in access to education* Need at least 6.5 yearsNeed at least 6.5 years

…traditional causes 4) Increasing urban bias 4) Increasing urban bias Some evidence points to persistent urban bias, but no overall trend for within-country rural-urban inequality since 1980s in developing and transitional countriesSome evidence points to persistent urban bias, but no overall trend for within-country rural-urban inequality since 1980s in developing and transitional countries

New causes of inequality 1) New technology 1) New technology Favors high-skilled workers; replaces labor; only explains part of inequalityFavors high-skilled workers; replaces labor; only explains part of inequality 2) Trade liberalization (*) 2) Trade liberalization (*) Mixed results; only explains part of inequalityMixed results; only explains part of inequality Doesn’t explain rise in inequality where manufactured X and M hardly changedDoesn’t explain rise in inequality where manufactured X and M hardly changed

…new causes 3) Stabilization and adjustment programs in developing countries 3) Stabilization and adjustment programs in developing countries Force single-digit inflationForce single-digit inflation Deficit reduction is too fastDeficit reduction is too fast At times, reduce fiscal deficit via cuts in pro-poor expendituresAt times, reduce fiscal deficit via cuts in pro-poor expenditures Interest rate hikes inappropriateInterest rate hikes inappropriate

…new causes 4) Financial liberalization- THE MAIN FACTOR 4) Financial liberalization- THE MAIN FACTOR Increase in interest ratesIncrease in interest rates Combined with weak financial markets= big problemsCombined with weak financial markets= big problems 5) Privatization and distribution of industrial assets 5) Privatization and distribution of industrial assets Privatization often = clientelismPrivatization often = clientelism

…new causes 6) Changes in labor market institutions (*) 6) Changes in labor market institutions (*) 7) State tax and transfer system 7) State tax and transfer system Trend toward lower progressivity in both developing and developed countriesTrend toward lower progressivity in both developing and developed countries

Implications for growth and poverty 1) Negative effects if inequality is too low 1) Negative effects if inequality is too low 2) Negative effects if inequality is too high 2) Negative effects if inequality is too high 3) High inequality= social tensions 3) High inequality= social tensions 4) Growth alone doesn’t reduce poverty 4) Growth alone doesn’t reduce poverty 5) Higher level of inequality= lower rates of poverty reduction at any given rate of growth 5) Higher level of inequality= lower rates of poverty reduction at any given rate of growth

Recommendations to address inequality 1) Acknowledge it isn’t an inevitable by-product of growth (Note: China, Taiwan) 1) Acknowledge it isn’t an inevitable by-product of growth (Note: China, Taiwan) 2) Address both traditional and new causes 2) Address both traditional and new causes Land reform where applicable- distribute costs wiselyLand reform where applicable- distribute costs wisely Project evaluation unit to ensure efficient public investment from mineral resourcesProject evaluation unit to ensure efficient public investment from mineral resources Improve educationImprove education Develop int’l mechanism to dampen volatility of commodity prices and short term k flowsDevelop int’l mechanism to dampen volatility of commodity prices and short term k flows Regulate privatization to make sure equitableRegulate privatization to make sure equitable More progressive tax policies- if will spend revenue on pro-poor plansMore progressive tax policies- if will spend revenue on pro-poor plans

SOME ways for improving IMF and WB policy packages (iii) achieve the deficit reduction through increasing progressive taxation rather than through cuts of pro-poor public expenditures (vi) whenever possible, rely more on devaluation and other export promotion measures rather than on fiscal and monetary expansion. (iii) include distributional concerns in the design and regulation of privatization and domestic financial liberalization, and include them in tool-kits for World Bank teams using PRSPs; (iv) support policies (including capital controls) to reduce the output volatility caused by financial shocks; (v) set up new, permanent mechanisms that would support the poor during periods of structural reform; social funds have not been satisfactory in this regard

Re-cap Intra-country inequality has RISEN since the early/mid 1980sIntra-country inequality has RISEN since the early/mid 1980s Traditional causes of inequality DO NOT adequately explain recent trendsTraditional causes of inequality DO NOT adequately explain recent trends Higher the level of inequality= less impact growth has in reducing povertyHigher the level of inequality= less impact growth has in reducing poverty High levels of inequality depress the rate of growthHigh levels of inequality depress the rate of growth Rising inequality is not inevitable amidst globalizationRising inequality is not inevitable amidst globalization