1Reducing Inequality• Offering an overview of policy perspectives forinequality reduction• What are the available options?...
2Static redistribution via the budget: taxationProgressivity of Taxation and Expenditure: (i) tax obligations whichaccrue ...
3Static redistribution via the budget:expenditureExpenditure: (i) transfer payments; (ii) social services (education andhe...
4Static redistribution: redistributing assetsLand reform: Transferring the control of land from large landowners tosmall f...
5Pro-poor growth: definition & areas of intervention 1Redistribution with growth• Absolute definition: A process in which ...
6Pro-poor growth
7Pro-poor growth: areas of intervention 2Policy framework• Avoidance of crises: Macroeconomic management(monetary policies...
8SummaryWhat have we learnt?- What are the prospects for reducing inequalities?- the difficulty stems from the fact that w...
9ReferencesCore readings:• Killick T., (2002), “Responding to Inequality”, ODI Inequality briefing paper No 3• Kanbur, R. ...
9ReferencesCore readings:• Killick T., (2002), “Responding to Inequality”, ODI Inequality briefing paper No 3• Kanbur, R. ...
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Lect 4 responding to inequality

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  • 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
  • Lect 4 responding to inequality

    1. 1. 1Reducing Inequality• Offering an overview of policy perspectives forinequality 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. 2Static redistribution via the budget: taxationProgressivity of Taxation and Expenditure: (i) tax obligations whichaccrue at an increasing rate with the income of the taxpayer; (ii)benefits from government expenditures which rise inversely as aproportion of beneficiary incomes• Personal income tax and taxes on corporate profits: aremost progressive. Limitation: adverse incentives created byrising marginal rates (e.g. work over leisure, saving andinvestment, tax compliance).• Indirect taxes: if applied uniformly, they are regressive,because the poor consume a larger proportion of their incomethan the rich. Exemptions and differential tax rates can be usedfor items important in the consumption baskets of the poor.• Wealth taxes: e.g. land and property holdings. These are littleused in developing countries (no significant revenues). Problem:ability to establish value ownership. Scope for doing more:taxation of mineral concessions, identifiable concentrations oftaxable assets.
    3. 3. 3Static redistribution via the budget:expenditureExpenditure: (i) transfer payments; (ii) social services (education andhealth)• Transfer payments: unemployment benefits, state pensions, incomesupport schemes are affordable as economies develop. They arepotentially progressive, as long as they can be targeted on the poorest.• On education: taking all levels together, delivery of schooling wasprogressive in 31 of 55 studies, but was poorly targeted in more thanhalf. In Sub-Saharan Africa, the poorest income quintile receiving only13% of benefits, against 32% for the top quintile.• Primary schooling was everywhere progressive. Secondary educationwas progressive in Asia and Latin America but not in Africa or theMiddle East. Tertiary education mostly benefited the richest quintile inall 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 andsub-Saharan Africa). Results were not reported by service type.Overall incidence of the budget: most progressivity in developing countryfiscal systems is derived from the expenditure side rather than fromtaxes.Strategy: establishing a broad tax base, which does not widen disparities,in order to mobilise resources for progressive state spending.
    4. 4. 4Static redistribution: redistributing assetsLand reform: Transferring the control of land from large landowners tosmall 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 throughmarket-assisted processes. The latter relies on voluntary land transfersbased on negotiation between buyers and willing sellers, often mediatedthrough local government or traditional authorities, with the centralgovernment establishing a legal framework and providing part of thepurchase price to eligible beneficiaries. Examples: Brazil, Colombia andSouth Africa.Privatisation of formerly publicly-owned enterprises is likely to increaseownership inequalities; e.g. cases of crony capitalism’, where it is usedto reward the governments friends, but even where transparencyprevails it is the rich who are best able to take advantage of the newinvestment possibilities.• Other inequality-increasing consequences: short-term job losses, priceincreases, for example, for utilities. Transparency and competitionpolicy are among the safeguards against the dangers of privatisation.However, there are examples where privatisation has been beneficial,as with Bolivias use of divestiture to fund a flat, universal pension.
    5. 5. 5Pro-poor growth: definition & areas of intervention 1Redistribution with growth• Absolute definition: A process in which the share ofthe poor in increments to income exceeds theirpre-existing share.• Relative definition: Growth is ‘pro-poor’ if theincomes of poor people grow faster than those ofthe population as a whole• Policy interventions most likely to result inprogressive growth are those targeted on the poor(e.g. health, education, micro-credit); but, trade-offsmight also arise (e.g. reduced aggregate savings)
    6. 6. 6Pro-poor growth
    7. 7. 7Pro-poor growth: areas of intervention 2Policy framework• Avoidance of crises: Macroeconomic management(monetary policies, currency crises)• Agricultural development: most of the poorest live in ruraleconomies (e.g. water management, rural infrastructures)• Factor markets: (i) labour-intensive agriculture andindustrialisation (e.g. East Asia); (ii) improved access tocapital through financial sector reforms and micro-creditschemes• Infrastructural investment to reduce the remoteness ofmany of the poorest;• Social policies to promote education, health and socialcapital;• Measures to eliminate biases against women asproducers and consumers
    8. 8. 8SummaryWhat 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 identifiedabove but none are new and not all are of great provenpotency. But it would be wrong to conclude that there islittle that can be done- Success stories tend to point particularly to the importanceof agricultural progress, rural development and, in somecases, land reform as crucially important ingredients ofprogressive growth.
    9. 9. 9ReferencesCore 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. andBourguignon, F. eds., Handbook of Income Distribution, North Holland-Elsevier, section 3Static redistribution:• Chu, K., Davoodi, H. and Gupta, S. (2000). Income Distribution and Tax, and Government SocialSpending Policies in Developing Countries. Helsinki: WIDER Working Paper 214.• Gemmell N. and Morrissey O., (2005), Distribution and Poverty Impacts of Tax Structure Reform inDeveloping 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 Povertyand Public Action. Oxford: Oxford University Press• Pablo Bandeira and José María Sumpsi, (2009), Access to Land, Rural Development and PublicAction: 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, PovertyResearch Unit at Sussex, working paper no.22Dynamic 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 toknow?, Pro-poor growth briefing note 1, February• DFID – Dept for International Development, (2004), How To Accelerate Pro-Poor growth: a Basicframework for Policy Analysis, Pro-poor growth briefing note 2, September• Hyun H. Son, (2007), Pro-Poor Growth: Concept s and Measures, Asian Development Bank Economicand 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. 10. 9ReferencesCore 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. andBourguignon, F. eds., Handbook of Income Distribution, North Holland-Elsevier, section 3Static redistribution:• Chu, K., Davoodi, H. and Gupta, S. (2000). Income Distribution and Tax, and Government SocialSpending Policies in Developing Countries. Helsinki: WIDER Working Paper 214.• Gemmell N. and Morrissey O., (2005), Distribution and Poverty Impacts of Tax Structure Reform inDeveloping 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 Povertyand Public Action. Oxford: Oxford University Press• Pablo Bandeira and José María Sumpsi, (2009), Access to Land, Rural Development and PublicAction: 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, PovertyResearch Unit at Sussex, working paper no.22Dynamic 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 toknow?, Pro-poor growth briefing note 1, February• DFID – Dept for International Development, (2004), How To Accelerate Pro-Poor growth: a Basicframework for Policy Analysis, Pro-poor growth briefing note 2, September• Hyun H. Son, (2007), Pro-Poor Growth: Concept s and Measures, Asian Development Bank Economicand 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

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