1. Inequality: Where are we? Oslo May, 2011 Jaime Saavedra Poverty Reduction and Equity THE WORLD BANK

2.  Measuring and analyzing inequality of outcomes and opportunities.  What is the equity impact of policies, or…how to make policies more equity enhancing? The PSIA agenda.  What is the role of fiscal policy? Are taxes and transfers working in reducing inequality? Is the social contract effective?

3.  Persistent and high across regions. Small reduction in some regions, some countries  Reductions in inequality of opportunities in some regions  Strong case for public policy to address inequalities Where are we on inequality?

4. Inequality high and persistent in Latin America Scatter plot log per capita GDP (PPP) and Gini coefficient. Most recent since 2002.

5. Europe and Central Asia countries are more equal on average.

6. Also high in Africa

7. Small reduction in most Latin America countries Changes in Inequality (Early 2000’s-Late 2000’s) have varied across countries Mixed pattern in Eastern Europe and Central Asia And also in East Asia and the pacific

8. Diverging patterns in Brazil and China

9.   Manmohan Singh, : “Large scale poverty is the foremost challenge facing our country.. We have to be acutely conscious of regional disparities and imbalances within the country, and address the inequalities that exist.” (The Hindu, March 27, 2011)   Dilma Rouseff, "The most determined struggle will be to eradicate extreme poverty … we can be a more developed and fairer country... I will not rest while there are Brazilians without food on their table, homeless in the streets, and poor children abandoned to their luck." (Inauguration address, January 2011)   Jacob Zuma, "While many South Africans celebrate the delivery of houses, electricity or water, there are yet many others who are still waiting... " (2011 State of the Nation Address)   Min Zhu, IMF “The increase in inequality is the most serious challenge for the world... I don’t think the world is paying enough attention.” (Davos, May 2011)  Premier Wen “…many had not seen the benefits of China’s dynamic growth”...[we need to ]... “combat rising inequality and corruption” (Washington Post, 3/12/11)  Thai Democrat Party campaign statement "Need to address income inequality which (is) causing social problems in Thai society” (BKK Post, 2/28/20)

10. Improvement in non monetary poverty indicators India, Indonesia and Peru (but not Nigeria) reduced child mortality over last two decades……… Source: DHS, STATcompiler

11. But inequalities across and within countries are large Large differences across quintiles (although convergence in India, Indonesia and Peru) Source: DHS, STATcompiler

12. But no convergence between urban and rural areas for 2 of the 4 countries … gaps also across areas … gaps also across areas Source: DHS, STATcompiler

13. Another poverty indicator: malnutrition Reduction in % of children underweight in India, Nigeria and Peru Source: DHS, STATcompiler

14. But little or no convergence between the richest and poorest – in fact widening of rich-poor gap for India and Nigeria And again large and persistent gaps across income levels Source: DHS, STATcompiler

15. Boy with 4 siblings in a rural home, uneducated head of household and income at extreme poverty levels Child with one sibling un an urban home, household head with secondary education in family income per capita of US$25 a day. Two Latin-american children Probability of finishing 6to grade on time

16. Two African children: Probability of completing 6th grade on time

17. The equality of opportunity principle Circumstances exogenous to the individual, like birth place, gender, ethnicity, income and education of parents should not determine the persons wellbeing

18. “ In Peru 4 out of 10 children less than 5 years do not have access to clean water”  Problem: access, coverage coverage “Those 4 children are indigenous”  Problem: circumstances affect children's chances. distribution There are two problems here

19. Human opportunity index  Inequality of opportunity-sensitive coverage rate that incorporates: A)The average coverage of a good or service. that should be universal, B) If it is allocated according to an equality of opportunity principle  access to key goods and services should not be determined by “circumstances” outside one’s control E.g. race, gender, parental education, wealth, geographic location).

20. In terms of school attendance, African countries are comparable with many countries in LAC region – in coverage and HOI Africa and Latin America (late 2000s) Note: All HOI used for these comparisons use the same definition of opportunities and comparable list of circumstances

21. Africa and Latin America (late 2000s) African countries compare poorly with most LAC countries on completion of primary on time - Late entry is a major problem in Africa

22. Encouraging trends for Africa on school attendance (late 1990s – late 2000s) Large improvements in school attendance for most African countries In almost all African countries change in HOI > change in coverage  reduction in inequality in attendance

23. But mixed picture on trends for primary school completion in Africa Little or no improvement in HOI for 4 out of 9 African countries Increase in HOI much smaller than increase in coverage for the 6 African countries showing an improvement  rise in inequality in primary school completion

24. Africa and Latin America - Access to Electricity (late 2000s) Source: World Bank using DHS data; work under progress (do not cite)

25. Changes in the HOI - Electricity (late 1990’s vs. late 2000’s)

26. What is behind observed inequality of opportunities among children? (Peru 2009)

27. What is behind observed inequality of opportunities among children? – the case of sanitation

28. Spatial dimensions of inequality Poor areas or poor people? Ex.: Differences in welfare in Thailand. Ex.: Differences in welfare in Thailand. Urban and rural areas: differences in people’s traits  equalize human capital. Urban and rural areas: differences in people’s traits  equalize human capital. Across regions: differences are due to returns to human capital  segmentation, lack of connectivity, migration Across regions: differences are due to returns to human capital  segmentation, lack of connectivity, migration (CCTs in 40 country, Rural Electrification in Peru, Power to the Poor in Laos) (The Padma and Jamuna bridges in BD, rural roads projects: PMGSY in India, rural Nepal)

29. Accessibility and poverty are highly correlated – West Bengal Distance Market Accessibility Poverty

30. The case for public policy to address the equity challenge

31. Gini after taxes and transfers Source: Goni, Lopez and Serven 2008

32. Taxes and Income – 2008 Source: WDI and OECD

33. Taxes as a % of GDP Latin America and OECD Tax collection is low - Not because of low rates - Because exemptions and loopholes loopholes - Progressive personal income taxes are barely income taxes are barely collected collected - Very high informality

34. …and informality seems to relates to the (perceived) quality and fairness of state services Government Effectiveness Impartiality of Courts

35. Does the social contract work? Does the social contract work? United Kingdom Colombia Taxes From: Breceda, Rigolini and Saavedra, 2009)

36. Increase in Tax Rate on middle class (US$13 a day +) required to eliminate extreme poverty Source: Ravallion 2008

37. The richer do not participate and opt out  The rich opting out into higher quality private provision (pension, security, private education, etc), leaving as demanders of public services those with less “voice”...and the poor also feel disengaged.  Differential access to public goods that should be universal equal access to property rights, to protection under the law, to judiciary services, to basic services Overall negative views about state services and the political system.  A system that gives me very little, and gives the others low quality services  In some cases continued perception of patronage and corruption in social assistance Implicit validation of widespread tax evasion  Much more EXIT than VOICE in Hirschman´s terminology Low taxation and informality reflect a social contract that does not work for all. Bad equilibrium of low taxes, weak states, regulators with low enforcement capacity, insufficient provision of public goods, unequal opportunties

38. Redistribution through taxes or through transfers? A Tax Reform in Mexico A Tax Reform in Mexico Progressive on the tax side Regressive on the tax side…matters? (% reduction in household incomes due to tax reform) (% reduction in household incomes due to tax reform)

39. Some hope on the expenditure side Brazil : Contributions to changes in inequality Source: Barros et al (2010).  Non-labor income has a more important role in explaining reduction in extreme poverty and inequality : mostly rural pensions, less CCTs

40. Thank you