Income Inequalities In the last class we analyzed a particular type of inequality in the context of a two-sector model In particular, we used the H-T model of rural – urban migration which generates income inequalities within a particular country In today’s lecture we shall address the following questions: 1) Why does equity matter for economic development and poverty reduction within countries? 2) What are the roots of income inequalities from a historical viewpoint across countries? 3) Implications for policy differ from the poverty reduction agenda?

1)Why does equity matter Ethical considerations (fairness and justice) Such considerations aside, there are two main reasons (WDR, 2006) a)The effects of unequal opportunities when markets are imperfect b)The consequences for the quality of institutions a society develops Market imperfections: Credit Land Human Capital →unequal opportunities →wasted productive potential→ inefficient allocation of resources

Quality of institutions inequity leads to the formation of institutions that perpetuate inequalities in power, status, and wealth, in turn bad for → investment → innovation → risk taking → long term growth Typical example: The comparison between North and South America

2) The roots of inequality Dates back to colonization period greater equality led, over time, to: -more democratic political institutions -more investment in public goods and infrastructure -institutions that offered broad access to property rights & opportunities In contrast: extreme inequality led, over time, to: -political institutions were less democratic -investment in public goods and infrastructure were far more limited -institutions that provided highly unbalanced access to property rights & opportunities

3) Implications for policy Equity enhances the policy reduction agenda: a)directly through greater participation in the development process b)via better institutions, more effective conflict management, and better use of potential resources in society-- those of the poor So, an equity lens adds new perspectives to development policy making: Redistributions of influence, advantage, or subsidies away from dominant groups While such redistributions may be efficiency-increasing, possible tradeoffs need to be assessed The dichotomy between policies for growth and policies specifically aimed at equity is false

Public action for greater equality requires: Investing in human capacities Expanding access to justice, land, and infrastructure Promoting fairness in markets And for greater “global” equity in terms of access to markets resource flows governance → Next Class: Land & Tenure Reform, DR, Chap 12