PEGNet conference 2015

Leave no one behind

Economists’ views diverge on whether economic transformation must always go along with rising inequality or whether poverty reduction is best achieved when governments try to stop social divides from widening. There is consensus, however, that governments must facilitate primary education for all to promote pro-poor growth.
Attending school helps children from poor families escape poverty: footwear seen in a Nairobi classroom. dem Attending school helps children from poor families escape poverty: footwear seen in a Nairobi classroom.

The worst economic scenario, according to Manuel Hinds, a former finance minister of El Salvador, is when business power and political power becomes one. This, he says, happens in financial crises, when governments decide they must bail out private-sector banks. In such a setting banks always win. If they make a profit, they keep the gains, and if they make losses, they can force others to bear the brunt.

Hinds says that, in his time at the World Bank, his job included telling governments in developing countries to avoid that kind of scenario. He finds it “scary” this has been happening in the USA and EU in the course of the global financial crisis. Those who control liquidity, he argues, must not control policy making as well, for otherwise the public interest will suffer.

However, Hinds does not consider inequality a major concern. New technologies, he points out, normally mean that some successful entrepreneurs become extraordinarily rich and influential. What matters more, however, is that, as the economy modernises and grows, masses of people eventually become better off. Hinds sees China as an example of spectacular growth not being shared equally, but nonetheless reducing poverty at great speed.

Income inequality, in this view, results from progress, and the crucial issue is that society as a whole benefits from progress. Whether some benefit much more than others, is not essential, Hinds argues. Less fortunate people, he adds, should be protected by some kind of safety net. Everybody should have access to health care, and all children must get basic education. At the same, he insists that the education of a highly-qualified elite is also necessary for development to happen.

Stephan Klasen of the University of Goettingen sees things in a different light. According to him, inequality can block modernisation and economic growth. That is the case when powerful elites ensure that they alone benefit from progress (also note my article "Managing globalsisation" in this issue).

Klasen points out that countries such as South Korea or Taiwan witnessed an economic transformation that raised income levels in general, without inequality increasing dramatically. He says that such a development path is more likely in places where assets such as land, savings, educational achievements are more equally distributed than in places with very unequal distribution. Assets, after all, allow people to grasp opportunities.

Klasen too considers China a good example. He points out that poverty reduction was most effective in the early years of the post-Mao liberalisation when livelihoods improved in rural areas in particular. In the past two decades, however, given that some Chinese people had already accumulated considerably more assets than others, growth has been leading to ever more pronounced inequality, while the impact on poverty has declined.

Klasen is in favour of redistributive policies that reduce inequality. Taxation, social-protection systems and education programmes serve that purpose. Klasen considers primary education particularly important, but says that secondary and tertiary education matter in the development process as well. In more general terms, he is in favour of governments building infrastructure, promoting human-capital formation, developing rural areas and ensuring the provision of health services. Policies of this kind allow many people to participate in economic growth.

In the experience of Georg Schäfer, who works for GIZ, inequality can “block economic transformation completely”. In Berlin in October, he told the annual conference of the Poverty Reduction, Equity and Growth Network (PEGNet) that, especially in least-developed countries, masses of people tend to be excluded from markets as well as political decision making. PEGNet links academic research institutes to policymakers and implementing agencies. The conference topic this year was pro-poor growth (see essay in D+C/E+Z e-Paper 2015/08, Page 32). According to Schäfer, inequality often hampers efficient resource allocation, social mobility, social cohesion and even political stability.   

Schäfer warns that inequality probably hurts expanding economies to a larger extent than generally assumed. He says that so far the emphasis in international discourse has been: “Don't hamper growth.” But as policymakers will have to tackle inequality sooner or later, another issue seems just as relevant to him: “Don't wait too long.”

Augustin Fosu of the University of Ghana emphasises that there are different kinds of inequality. Unequal incomes, according to him, are not as problematic as unequal access to education and health care. If these sectors are left to market forces, he argues, income inequality will result in unequal access to vital services and, ultimately, the exclusion of the poor. Government action, including official development assistance, can make the difference.

Economists use the Gini coefficient to measure inequality. At the global level, it has been going down in recent years. Fosu welcomes this trend, but adds that it is somewhat theoretical. His point is that people do not assess their own fate according to global averages. What matters in social and political terms is inequality a the national level, which is what people experience. For most nations, the Gini coefficient has lately been rising. Accordingly, tackling inequality is moving up on the political agenda in many countries.

Given the severe budget constraints that low-income countries face, Fosu says that primary education should be a top priority. Governments should spend money to spread literacy and numeracy. At the same time, they should ensure there are opportunities for secondary and tertiary education, but those opportunities can be provided by the private sector. Generous subsidies for higher education, Fosu warns, are likely to result in brain drain. “You educate them, they leave,” he says. The opposite is true of primary education: “You educate them, they stay.”

Hans Dembowski


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