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Lect 4 responding to inequality
1. 1
Reducing Inequality
• Offering an overview of policy perspectives for
inequality reduction
• What are the available options?
• And the political feasibility?
Outline
• Static redistribution: taxation and expenditure
• Static redistribution: redistributing assets
• Pro-poor growth: areas of intervention
2. 2
Static redistribution via the budget: taxation
Progressivity of Taxation and Expenditure: (i) tax obligations which
accrue at an increasing rate with the income of the taxpayer; (ii)
benefits from government expenditures which rise inversely as a
proportion of beneficiary incomes
• Personal income tax and taxes on corporate profits: are
most progressive. Limitation: adverse incentives created by
rising marginal rates (e.g. work over leisure, saving and
investment, tax compliance).
• Indirect taxes: if applied uniformly, they are regressive,
because the poor consume a larger proportion of their income
than the rich. Exemptions and differential tax rates can be used
for items important in the consumption baskets of the poor.
• Wealth taxes: e.g. land and property holdings. These are little
used in developing countries (no significant revenues). Problem:
ability to establish value ownership. Scope for doing more:
taxation of mineral concessions, identifiable concentrations of
taxable assets.
3. 3
Static redistribution via the budget:
expenditure
Expenditure: (i) transfer payments; (ii) social services (education and
health)
• Transfer payments: unemployment benefits, state pensions, income
support schemes are affordable as economies develop. They are
potentially progressive, as long as they can be targeted on the poorest.
• On education: taking all levels together, delivery of schooling was
progressive in 31 of 55 studies, but was poorly targeted in more than
half. In Sub-Saharan Africa, the poorest income quintile receiving only
13% of benefits, against 32% for the top quintile.
• Primary schooling was everywhere progressive. Secondary education
was progressive in Asia and Latin America but not in Africa or the
Middle East. Tertiary education mostly benefited the richest quintile in
all regions; in Africa the poorest quintile received under 5% of benefits,
against 59% for the richest quintile.
• Health services are found to be progressive (transition economies and
sub-Saharan Africa). Results were not reported by service type.
Overall incidence of the budget: most progressivity in developing country
fiscal systems is derived from the expenditure side rather than from
taxes.
Strategy: establishing a broad tax base, which does not widen disparities,
in order to mobilise resources for progressive state spending.
4. 4
Static redistribution: redistributing assets
Land reform: Transferring the control of land from large landowners to
small farmers, allows them to transform their labour into food and cash,
and provides an insurance against shocks
• Problem: fiscal compensation payments to expropriated landowners.
• New approaches: development of land-rental markets and through
'market-assisted' processes. The latter relies on voluntary land transfers
based on negotiation between buyers and willing sellers, often mediated
through local government or traditional authorities, with the central
government establishing a legal framework and providing part of the
purchase price to eligible beneficiaries. Examples: Brazil, Colombia and
South Africa.
Privatisation of formerly publicly-owned enterprises is likely to increase
ownership inequalities; e.g. cases of 'crony capitalism’, where it is used
to reward the government's friends, but even where transparency
prevails it is the rich who are best able to take advantage of the new
investment possibilities.
• Other inequality-increasing consequences: short-term job losses, price
increases, for example, for utilities. Transparency and competition
policy are among the safeguards against the dangers of privatisation.
However, there are examples where privatisation has been beneficial,
as with Bolivia's use of divestiture to fund a flat, universal pension.
5. 5
Pro-poor growth: definition & areas of intervention 1
Redistribution with growth
• Absolute definition: A process in which the share of
the poor in increments to income exceeds their
pre-existing share.
• Relative definition: Growth is ‘pro-poor’ if the
incomes of poor people grow faster than those of
the population as a whole
• Policy interventions most likely to result in
progressive growth are those targeted on the poor
(e.g. health, education, micro-credit); but, trade-offs
might also arise (e.g. reduced aggregate savings)
7. 7
Pro-poor growth: areas of intervention 2
Policy framework
• Avoidance of crises: Macroeconomic management
(monetary policies, currency crises)
• Agricultural development: most of the poorest live in rural
economies (e.g. water management, rural infrastructures)
• Factor markets: (i) labour-intensive agriculture and
industrialisation (e.g. East Asia); (ii) improved access to
capital through financial sector reforms and micro-credit
schemes
• Infrastructural investment to reduce the remoteness of
many of the poorest;
• Social policies to promote education, health and social
capital;
• Measures to eliminate biases against women as
producers and consumers
8. 8
Summary
What have we learnt?
- What are the prospects for reducing inequalities?
- the difficulty stems from the fact that wealth equals power
- A substantial number of instruments have been identified
above but none are new and not all are of great proven
potency. But it would be wrong to conclude that there is
little that can be done
- Success stories tend to point particularly to the importance
of agricultural progress, rural development and, in some
cases, land reform as crucially important ingredients of
progressive growth.
9. 9
ReferencesCore readings:
• Killick T., (2002), “Responding to Inequality”, ODI Inequality briefing paper No 3
• Kanbur, R. (2000), “Income distribution and Development”, Chapter 13 in Atkinson, A. B. and
Bourguignon, F. eds., Handbook of Income Distribution, North Holland-Elsevier, section 3
Static redistribution:
• Chu, K., Davoodi, H. and Gupta, S. (2000). Income Distribution and Tax, and Government Social
Spending Policies in Developing Countries. Helsinki: WIDER Working Paper 214.
• Gemmell N. and Morrissey O., (2005), Distribution and Poverty Impacts of Tax Structure Reform in
Developing Countries: How Little We Know, Development Policy Review, 23(2): 131-144
• de Janvry, A., Gordillo, G., Platteau, J. and Sadoulet, E. (eds.), 2001, Access to Land, Rural Poverty
and Public Action. Oxford: Oxford University Press
• Pablo Bandeira and José María Sumpsi, (2009), Access to Land, Rural Development and Public
Action: The When and the How, Development Policy Review, 27(1): 33-49
• Justino P. and Acharya A., (2003), Inequality in Latin America: Processes and Inputs, Poverty
Research Unit at Sussex, working paper no.22
Dynamic redistribution:
• Bird K., (2008), “The Political Economy of Pro-Poor Growth”, ODI briefing paper 35, January
• Wiggins S., (2008), “Pro-Poor Growth and Development”, ODI briefing paper 33, January
• DFID – Dept for International Development, (2004), What Is Pro-Poor growth and Why Do We Need to
know?, Pro-poor growth briefing note 1, February
• DFID – Dept for International Development, (2004), How To Accelerate Pro-Poor growth: a Basic
framework for Policy Analysis, Pro-poor growth briefing note 2, September
• Hyun H. Son, (2007), Pro-Poor Growth: Concept s and Measures, Asian Development Bank Economic
and Research Dept Technical Note No. 22, June
• White, H. and Anderson, E. (2001). Growth versus Distribution: Does the Pattern of Growth Matter?,
Development Policy Review 19(3): 267-289
10. 9
ReferencesCore readings:
• Killick T., (2002), “Responding to Inequality”, ODI Inequality briefing paper No 3
• Kanbur, R. (2000), “Income distribution and Development”, Chapter 13 in Atkinson, A. B. and
Bourguignon, F. eds., Handbook of Income Distribution, North Holland-Elsevier, section 3
Static redistribution:
• Chu, K., Davoodi, H. and Gupta, S. (2000). Income Distribution and Tax, and Government Social
Spending Policies in Developing Countries. Helsinki: WIDER Working Paper 214.
• Gemmell N. and Morrissey O., (2005), Distribution and Poverty Impacts of Tax Structure Reform in
Developing Countries: How Little We Know, Development Policy Review, 23(2): 131-144
• de Janvry, A., Gordillo, G., Platteau, J. and Sadoulet, E. (eds.), 2001, Access to Land, Rural Poverty
and Public Action. Oxford: Oxford University Press
• Pablo Bandeira and José María Sumpsi, (2009), Access to Land, Rural Development and Public
Action: The When and the How, Development Policy Review, 27(1): 33-49
• Justino P. and Acharya A., (2003), Inequality in Latin America: Processes and Inputs, Poverty
Research Unit at Sussex, working paper no.22
Dynamic redistribution:
• Bird K., (2008), “The Political Economy of Pro-Poor Growth”, ODI briefing paper 35, January
• Wiggins S., (2008), “Pro-Poor Growth and Development”, ODI briefing paper 33, January
• DFID – Dept for International Development, (2004), What Is Pro-Poor growth and Why Do We Need to
know?, Pro-poor growth briefing note 1, February
• DFID – Dept for International Development, (2004), How To Accelerate Pro-Poor growth: a Basic
framework for Policy Analysis, Pro-poor growth briefing note 2, September
• Hyun H. Son, (2007), Pro-Poor Growth: Concept s and Measures, Asian Development Bank Economic
and Research Dept Technical Note No. 22, June
• White, H. and Anderson, E. (2001). Growth versus Distribution: Does the Pattern of Growth Matter?,
Development Policy Review 19(3): 267-289
Editor's Notes
The talk is structured around a distinction between static and dynamic redistribution (called progressive growth ). The former, essentially a zero-sum endeavour, involves transfers of existing income and/or wealth from the rich to the poor, whereas progressive growth requires only that increments to income and wealth accrue to the poor in proportions which reduce inequalities over time. We start with measures intended to redistribute incomes (or wealth) at a moment in time, before turning to more dynamic aspects.
Using its fiscal powers - both of taxation and to transfer resources through the budget - to achieve static redistribution. The key concept here is progressivity Obstacles to achieving progressivity in low income countries: (i) Tax revenues, relative to GDP, tend to be lower than elsewhere, which means simply that they have less leverage on the way income and consumption are distributed in society; (ii) tax structure is generally unfavourable to redistribution, with its large reliance on indirect taxes. Personal income tax progressivity creates incentives for evasion, which are most serious where tax administrations are weak and/or corrupt Much of the incidence of corporate taxes is nowadays seen as likely to fall on labour rather than capital. This occurs because of the higher mobility of capital relative to labour, especially unskilled labour. High rates of corporate tax are likely to result in outflows of capital (or discouragement of inflows), depressing domestic investment, reducing the demand for labour and thus tending to reduce real wages over time Sales taxes and VAT - taxes which have typically contributed growing proportions of total tax revenues over the years. Such taxes do not have to be regressive: e.g. exemptions provide an element of progressivity. But there are limits to what can be done. Too many exemptions reduce the revenue base. Multiple rates introduce distortions in relative prices. Information and enforcement costs are raised, and incentives created for evasion. But wealth taxes also generate costs and incentives for evasion, and make demands that may be too great for weak tax administrations. The strengthening of tax administrations thus emerges as a potentially important weapon in any fiscally-based attempt at redistribution. One device for achieving this that has become popular in recent years has been the establishment of separate revenue authorities, substantially autonomous of Ministries of Finance and civil service regulations, and with budgets related to actual revenues collected.
It is easier to impart progressivity to the expenditure side of the budget - although how much can be achieved depends on the size of the revenue base. Transfers: Some countries (for example, Jamaica and Sri Lanka) have experimented with food stamps and other food subsidy schemes. Transfers: targeting the needy is not easy. Providing state services to raise the welfare of the poor, say through a subsidy, must be targeted to defined groups. Subsidising everyone (universal provision) may be prohibitively costly. But defining the target groups might not be straightforward because of household income mobility and income misreporting. Education delivery reflects, in part, differential enrolment rates at the various levels of education among the children of the rich and poor. A survey of tax incidence studies of developing and transition economies found that, overall, tax systems were progressive in just over a third of cases, about a fifth were regressive and the remainder broadly neutral (Chu et al , 2000). Although there is much less information on the overall incidence of government spending , the results of an estimate for the Philippines may be fairly typical: the tax system was roughly neutral, but expenditures were progressive and this imparted a moderate degree of net progressivity overall (Devarajan and Hossain, 1995). Illustrative models, based on plausible values for the distribution of income, tax/GDP ratios and achievable progressivity, indicate that developing countries will rarely achieve major reductions in inequality through taxation, suggesting that the best strategy is to establish a broad tax base, which at least does not widen disparities, in order to mobilise resources for progressive state spending.
Successful examples: Kenya, South Korea, Taiwan and Vietnam and West Bengal. But there are other cases of reforms failing because they are excessively state-centred, vulnerable to political 'capture' Indeed, reforms can actually increase rural poverty, particularly when intended beneficiaries are exposed to increased risks if required them to grow crops or utilise techniques with which they are unfamiliar and where the state fails to provide support oriented to smallholder needs. Also, the development of land-sale markets following reforms can also tell against the poor, providing an instrument through which the wealthy can buy up their holdings in times of stress. Market assisted approaches are promising, although it remains to be seen how much land might move from the rich by such means and whether screening processes for beneficiaries will not favour the less-poor rather than the poorest.
This is dynamic redistribution as opposed to static, in the sense that it refers to a process of change in which a chosen measure of (income) inequality diminishes over time but where no transfer from rich to poor is involved. Note the modesty of what is involved in progressive growth: Depending on the size of initial inequalities, the bulk of GDP growth can still accrue to the non-poor so long as the share of the poor is rising. One important consideration here is that some inequalities are instrumental, while others are dysfunctional. Inequalities are likely to arise in a market economy as a result of rewards to risk-taking, enterprise, skill acquisition and saving. These are instrumental, resulting from an incentive structure that also produces a dynamic economy which, in turn, raises the poor. Other sources of inequality do not have this saving grace, for example when they arise from political connections and other forms of discrimination, from a colonial legacy or from inherited wealth. Tradeoffs are most likely to occur when reducing inequality affects instrumental disparities.
The absolute definition of pro-poor growth considers only the incomes of poor people. How ‘pro-poor’ growth is should be judged by how fast on average the incomes of the poor are rising. On this definition, the correct measure of pro-poor growth is that used on the vertical axis of the figure above. The relative definition of pro-poor growth compares changes in the incomes of the poor with changes in the incomes of people who are not poor. Growth is ‘pro-poor’ if the incomes of poor people grow faster than those of the population as a whole. In other words, for growth to be pro-poor on this definition, income inequality must fall.
Problems with (i): elasticity of substitution between K and L can be very small Another possibility for labour-intensity could be employment-creation schemes: public works programmes, self-employment schemes
