32204 world development report 2006 Equity and Development world development report 2006 Equity and Development world development report 2006 Equity and Development A copublication of The World Bank and Oxford University Press ©2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 08 07 06 05 A copublication of The World Bank and Oxford University Press. Oxford University Press 198 Madison Avenue New York NY 10016 This volume is a product of the staff of the International Bank for Reconstruction and Devel- opment / The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISBN-10: 0-8213-6249-6 ISBN-13: 978-0-8213-6249-5 ISSN: 0163-5085 eISBN: 0-8213-6250-X DOI: 10.1596/978-0-8213-6249-5 Cover image: Dream of a Sunday Afternoon in Alameda Park 1947­48 (fresco) by Diego Rivera. The mural is located in Museo Mural Diego Rivera, Mexico City. Reproduction authorized by the Instituto Nacional de Bellas Artes y Literatura­Mexico; Copyright © Photograph by Francisco Kochen. Library of Congress Cataloging-in-Publication Data has been applied for. Contents Foreword xi Acknowledgments xiii Abbreviations and Data Notes xiv Overview 1 Inequity within and across nations 4 Why does equity matter for development? 7 Leveling the economic and political playing fields 9 1 Introduction 18 Equity and inequality of opportunity: the basic concepts 18 Inequality traps 20 A brief preview of the Report 23 Part I Inequity within and across countries 25 focus 1 on Palanpur 26 2 Inequity within countries: individuals and groups 28 Inequalities in health 29 Inequalities in education 34 Economic inequalities 36 The relationship between group differences and inequality 43 Agency and equity: inequalities of power 48 The inequality trap for women 51 3 Equity from a global perspective 55 Examples and concepts 55 Global inequalities in health 56 Global inequalities in education 60 Global inequalities in income and expenditure 62 v vi CONTENTS Global inequalities in power 66 A glimpse of the future 68 focus 2 on empowerment 70 Part II Why does equity matter? 73 4 Equity and well-being 76 Ethical and philosophical approaches to equity 76 Equity and legal institutions 78 People prefer fairness 80 Income inequality and poverty reduction 84 5 Inequality and investment 89 Markets, wealth, status, and investment behavior 89 The evidence on underinvestment 96 Inequalities and investment 101 focus 3 on Spain 106 6 Equity, institutions, and the development process 107 The distribution of power and institutional quality: circles vicious and virtuous 107 Institutions and political inequality matter for development: historical evidence 109 Institutions and political inequality matter for development: contemporary evidence 113 Transitions to more equitable institutions 118 Conclusion 124 focus 4 on Indonesia 126 Part III Leveling the economic and political playing fields 129 7 Human capacities 132 Early childhood development: a better start in life 132 Basic education: expanding opportunities to learn 135 Toward better health for all 141 Social protection: managing risk and providing social assistance 148 Summary 155 Contents vii 8 Justice, land, and infrastructure 156 Building equitable justice systems 156 Toward greater equity in access to land 162 Providing infrastructure equitably 168 Summary 175 focus 5 on taxation 176 9 Markets and the macroeconomy 178 How markets relate to equity 178 Achieving equity and efficiency in financial markets 179 Achieving equity and efficiency in labor markets 185 Product markets and trade reform 193 Macroeconomic management and equity 198 focus 6 on regional inequality 204 10 Achieving greater global equity 206 Making global markets work more equitably 207 Providing development assistance to help build endowments 218 Transitions to greater equity 221 Summary 223 focus 7 on drug access 224 Epilogue 226 Bibliographic note 231 Endnotes 233 References 247 Selected Indicators 275 Measuring Equity 277 Selected world development indicators 289 Index 309 viii CONTENTS Boxes 2.1 Unequal opportunities persist across generations 7.8 Better maternal health in Malaysia and Sri Lanka 144 in Brazil 29 7.9 Mobilizing support for universal coverage 2.2 Unequal assets, unequal opportunities: AIDS orphans in in Thailand 146 Southern Africa 33 7.10 Public works programs: key issues 152 2.3 Health improvements and greater health equity 7.11 Africa's orphans and public action 155 in Peru 34 8.1 Increasing legal literacy and public awareness: 2.4 Child test scores in Ecuador: the role of wealth, parental "My Rights" on Armenian public television 157 education, and place of residence 35 8.2 Affirmative action in India and the United States 158 2.5 Beware of intercountry comparisons of inequality! 38 8.3 State frameworks and customary institutions 2.6 Revisiting the Kuznets hypothesis for economic growth and in South Africa 160 inequality 44 8.4 The impact of legal aid in Ecuador 160 2.7 Inequitable agencies and institutions in Pakistan 48 8.5 Bogota, Colombia: civic culture program 161 2.8 Legacies of discrimination and the reproduction 8.6 Land reform in South Africa: picking up steam 164 of inequalities and poverty among the Batwa in Uganda 49 8.7 Clarifying how customary rights fit with formal systems 166 2.9 Sex ratios and "missing women" 51 8.8 Land and output tax combinations 168 3.1 Three competing concepts of inequality: global, international, and intercountry 57 8.9 Lagging infrastructure in Africa 170 4.1 A simple representation of different concepts 8.10 The distributional impact of infrastructure privatization in of equity 78 Latin America: a mixed bag 171 4.2 Capuchin monkeys don't like inequity either . . . 82 8.11 The pro-poor agenda for urban water in Senegal 173 4.3 Worker perceptions of unfairness, product quality, and 8.12 Addressing accountability and transparency in consumer safety 83 telecommunications in Brazil and Peru 174 6.1 Banking in the nineteenth century, Mexico and the United 9.1 Markets and development: policy, equity, and social welfare States 109 in China 180 6.2 Growth with poor institutions does not last 113 9.2 Too much and too little regulation: Russia before and after the transition 182 6.3 Polarization, conflict, and growth 118 9.3 Organizing in the informal economy 190 6.4 Aiding equitable growth in early modern Britain: the role of the Poor Laws 120 9.4 Employment protection legislation 191 7.1 ECD programs are an essential ingredient for the 9.5 Two cases of labor market reform: One comprehensive, attainment of education for all 134 one partial 192 7.2 School fees--an instrument of exclusion 9.6 Did the Russian 1998 crisis have equitable or accountability? 137 consequences? 201 7.3 Desegregating Roma schools in Bulgaria: 10.1 International law, globalization, and equity 207 the Vidin model 138 10.2 Making migrant worker schemes more development 7.4 Remedying education: the Balsakhi program friendly 210 in India 140 10.3 Cotton subsidies are huge--and tenacious 212 7.5 School vouchers: efficient and equitable? 141 10.4 Will improved working conditions in Cambodia's textile 7.6 Working with mothers to treat malaria 142 industry survive the end of the quota system? 214 7.7 Poor people and ethnic minorities receive 10.5 Expanding access to antiretroviral drugs lower-quality care 143 in South Africa 215 Figures 1 Wealth matters for the immunization of children 5 4 A long-run diverging trend in income inequality begins to 2 Opportunities are determined early 6 reverse because of growth in China and India 7 3 Life expectancy improved and became more equal--until 5 Children's performance differs when their caste is made the onset of the AIDS crisis 6 salient 8 Contents ix 6 Catching up through early interventions 11 3.11 Absolute poverty declined globally, but not in 7 Better to be close to economic opportunities 15 every region 66 1.1 The interaction of political, economic, and sociocultural 3.12 There is no one-to-one relationship between voice and inequalities 20 income 67 2.1 Infant mortality varies across countries but also by mother's 4.1 The distribution of observed offers in ultimatum education within countries 30 games 80 2.2 Stunting levels of children born in rural versus urban areas 4.2 Views on inequality from the World Values Survey 84 are far from the same 30 4.3 Growth is the key to poverty reduction . . . 85 2.3 Access to childhood immunization services depends on 4.4 . . . and, on average, growth is distribution-neutral 85 parents' economic status 31 4.5 The national growth incidence curves for Tunisia 2.4 Stunting and underweight in Cambodia 33 1980­1995 and Senegal 1994­2001 86 2.5 Education levels vary across countries, but they also depend 4.6 Greater inequality reduces the power of growth to reduce on gender of household head 36 poverty 87 2.6 Education levels vary by country and between rural and 5.1 In rural Kerala and Tamil Nadu, the rich access most of the urban sectors 37 credit and pay relatively low rates 90 2.7 The share of inequality in years of schooling attributable 5.2 Children's performance differs when their caste is made to differences between males and females has been public 96 declining 37 5.3 Returns to capital vary with firm size: evidence from small 2.8 Market capitalization controlled by the top 10 families in Mexican firms 97 selected countries, 1996 38 5.4 Inefficient allocation of resources; the example of the 2.9 Africa and Latin America have the world's highest levels of Gounders vs. the outsiders 98 inequality 39 5.5 Average returns for switching to pineapples as an intercrop 2.10 Between-group inequality decompositions: social group of can exceed 1,200 percent 98 the household head 40 5.6 Profit-wealth ratios are highest for the smallest 2.11 Between-group inequality decompositions: education of the farms 99 household head 41 6.1 Countries with more secure property rights have higher 2.12 Location, education, and social groups can make a average incomes 108 difference: regressions of total inequality on shares of 6.2 Low population density in 1500 is associated with a lower between-group inequality of different household risk of expropriation today 110 characteristics 43 6.3 Worse environments for European settlers are associated 2.13 Women work longer hours than do men 53 with worse institutions today 110 3.1 Vanishing twin peaks in life expectancy at birth 58 6.4 A worse environment for settlers is associated with fewer 3.2 Life expectancy is highly correlated with income, constraints on the executive at independence 111 particularly in poor countries 59 6.5 Constraints on the executive are greater in Mauritius than 3.3 The distribution of years of schooling improved greatly in in Guyana 116 the second half of the twentieth century 60 6.6 GDP per capita is rising in Mauritius, not 3.4 Mean years of schooling increased while inequality declined in Guyana 116 across birth cohorts 60 6.7 Inequality in Britain began to fall around 1870 121 3.5 Gender disparities in years of schooling declined but 7.1 Children from better-off households have a big edge in remained significant in some regions 61 cognitive abilities by age three 133 3.6 Incomes range broadly across countries 7.2 Early childhood interventions are good investments 133 and individuals 62 7.3 Catching up through early intervention 134 3.7 Since 1950, intercountry inequality increased while 7.4 Boosting enrollments is not enough to overcome the international inequality declined 63 learning gap 139 3.8 Unlike relative inequality, absolute inequality has been 7.5 Almost all countries spend more on social insurance than steadily increasing 63 on social assistance (percent of GDP) 149 3.9 The inequality decline between countries was neutralized by 8.1 Unequal initial land distributions go together with slower increases within countries 64 economic growth 163 3.10 Inequality between countries became much more 8.2 Title to land increases investment and access to important over the long run 65 credit 165 x CONTENTS 8.3 Poor families did not benefit from an expansion of access in 9.4 It's better for household welfare to be close to economic Africa 172 opportunities 195 8.4 Poorer households have lower-quality water and pay more 9.5 Weaker institutions are associated with macroeconomic in Niger 173 volatility and crises 199 9.1 Poland's stock market started slowly but then surpassed the 9.6 Labor shares fall during crises and don't fully recover Czech Republic's 185 afterward 200 9.2 Patterns of employment and unemployment vary widely 9.7 In Argentina, the wealthy had a way out during across African countries 187 the crisis 201 9.3 Different labor market institutional setups can yield equally 10.1 Wage differentials are substantially larger today than at the good productivity growth paths: Scandinavia versus the end of the nineteenth century 208 United States 188 10.2 More subsidies than aid 220 Tables 2.1 Decomposition of inequality between and within 9.2 Financial policy and institutions are often captured by the communities 42 few: case study evidence 181 2.2 Percentage of women who have ever experienced physical or 9.3 Fiscal costs of selected banking crises 200 sexual violence by an intimate partner 54 10.1 ODA as a share of GNI, 2002, 2003, and simulation 3.1 Increases in life expectancy at birth slowed down for 2006 220 dramatically in the 1990s 58 A1 Poverty 278 3.2 Mean years of schooling increased continuously while A2 Income/consumption inequality measures 280 inequality declined 61 A3 Health 282 3.3 Mobility matrix in absolute country per capita incomes, A4 Education 284 1980 to 2002 66 Classification of economies by region and income 291 5.1 The effect of income shocks on consumption, Côte d'Ivoire 92 1 Key indicators of development 292 5.2 Farm size productivity differences, selected countries 99 2 Poverty and income distribution 294 7.1 Examples of social protection programs 150 3 Economic activity 296 7.2 Targeting performance of conditional 4 Trade, aid, and finance 298 transfer schemes 153 5 Key indicators for other economies 300 9.1 Two pathologies in the interaction between equity and growth 179 Foreword Poverty reduction comes about through individuals, families and communities taking advan- tage of the opportunities available to them by working, investing and innovating to better their lives. But we live in a world of extraordinary inequalities in opportunity, both within and across countries. Even the basic opportunity for life itself is disparately distributed: whereas less than half of one percent of children born in Sweden die before their first birthday, this is the case for close to 15% of all children born in Mozambique. Within El Salvador, the infant mortality rate is 2% for children of educated mothers, but 10% for those whose mothers have no schooling. In Eritrea, immunization coverage is close to 100% for children in the richest fifth of the popu- lation, but only 50% for the bottom fifth. These children can not be blamed for the circumstances into which they are born, yet their lives--and their ability to contribute to the development of their nations--are powerfully shaped by them. That is why the World Development Report 2006, the twenty-eighth in this annual series, looks at the role of equity in the process of development. Equity is defined in terms of two basic principles. The first is equal opportunities: that a person's life achievements should be determined primarily by his or her talents and efforts, rather than by pre-determined circumstances such as race, gender, social or family background. The second principle is the avoidance of deprivation in outcomes, particularly in health, education and consumption levels. For many if not most people, equity is of intrinsic importance as a development goal in its own right. But this report goes further, by presenting persuasive evidence that a broad sharing of economic and political opportunities is also instrumental for economic growth and devel- opment. This is for economic reasons, because greater equity can lead to a fuller and more effi- cient use of a nation's resources. It is also for political and institutional reasons: excessive inequalities in power and influence can lead to political, social and economic institutions that are less conducive to long-term growth. Few today's prosperous societies, if any, developed by excluding the majority of their people from economic and political opportunities. The implication of this message for the work of the World Bank and others in the develop- ment community is that a focus on equity should be a central concern in the design and imple- mentation of policy for development and growth. This insight needs to be integrated into both analytical and operational work on core areas of development design, including the role and functioning of markets. Public action should seek to expand the opportunity sets of those who, in the absence of policy interventions, have the least resources, voice and capabilities. It should do so in a manner that respects and enhances individual freedoms, as well as the role of markets in allocating resources. Equity in the international arena is also a central concern, and can play a powerful comple- mentary role to domestic action. In a globally interconnected world, leveling the international playing fields, both economically and politically, will help domestic efforts to combine equity with efficiency and growth. In my view, the evidence that equity and economic efficiency as well as growth are comple- mentary in the long run helps to integrate the main two components of the World Bank's poverty reduction strategy. The focus on broadening opportunities strongly supports the first xi xii WORLD DEVELOPMENT REPORT 2005 pillar of the Bank's development strategy, namely enhancing the investment climate for every- one. Together with the interdependence between the economic and political dimensions of development it also reinforces the importance of empowerment. This report shows that the two pillars are not independent from each other in supporting development, but instead are intricately linked with one another. It is my hope that this report will have a real influence in the way that we and our development partners understand, design and implement development policies. Paul D. Wolfowitz President The World Bank Acknowledgments This Report has been prepared by a core team led by Francisco H.G. Ferreira and Michael Wal- ton, and comprising Tamar Manuelyan Atinc, Abhijit Banerjee, Peter Lanjouw, Marta Menén- dez, Berk Özler, Giovanna Prennushi,Vijayendra Rao, James Robinson, and Michael Woolcock. Important additional contributions were made by Anthony Bebbington, Stijn Claessens, Mar- garet Ellen Grosh, Karla Hoff, Jean O. Lanjouw, Xubei Lou, Ana Revenga, Caroline Sage, Mark Sundberg, and Peter Timmer. The team was assisted by Maria Caridad Araujo, Andrew Beath, Ximena del Carpio, Celine Ferre, Thomas Haven, Claudio E. Montenegro, and Jeffery C. Tan- ner. The work was conducted under the general guidance of François Bourguignon. Extensive and excellent advice was received from Anthony B.Atkinson,Angus Deaton, Naila Kabeer, Martin Ravallion, and Amartya Sen, to whom the team is grateful without implication. Many others inside and outside the World Bank also provided helpful comments; their names are listed in the Bibliographical Note. The Development Data Group contributed to the data appendix and was responsible for the Selected World Development Indicators. Much of the background research was supported by a multidonor programmatic trust fund, the Knowledge for Change Program, funded by Canada, the European Community, Finland, Norway, Sweden, Switzerland, and the United Kingdom. The team undertook a wide range of consultations for this Report, which included work- shops in Amsterdam, Beirut, Berlin, Cairo, Dakar, Geneva, Helsinki, Hyderabad, London, Milan, Nairobi, New Delhi, Oslo, Ottawa, Paris, Rio de Janeiro, Stockholm, Tokyo, Venice, and Washington, D.C.; videoconferences with sites in Bogota, Buenos Aires, Mexico City, and Tokyo; and an on-line discussion of the draft Report. The team wishes to thank participants in these workshops, videoconferences, and discussions, which included researchers, government officials, and staff of nongovernmental and private-sector organizations. Rebecca Sugui served as executive assistant to the team, Ofelia Valladolid as program assis- tant, Madhur Arora and Jason Victor as team assistants. Evangeline Santo Domingo served as resource management assistant. Bruce Ross-Larson was the principal editor. Book design, editing, and production were coordinated by the World Bank's Office of the Publisher under the supervision of Susan Graham and Monika Lynde. xiii Abbreviations and Data Notes Abbreviations The following abbreviations are used in this Report: AA Affirmative action NGO Nongovernmental organization AIDS Acquired immune deficiency syndrome ODA Official development assistance CCP Chinese Communist Party OECD Organisation for Economic Co-operation and DAC Development Assistance Committee Development DHS Demographic and Health Survey PPA Participatory Poverty Assessment ECD Early child development PPP Purchasing-power parity EPL Employment protection legislation PROMESA Promoción y Mejoramiento de la Salud FDI Foreign direct investment SMEs Small and medium enterprises GDP Gross domestic product TAC Treatment Action Campaign GHG Greenhouse gas TIMSS Third International Mathematics and Science GNI Gross national income Study HIPC Heavily Indebted Poor Countries TRIPs Trade-related aspects of intellectual property HIV Human immunodeficiency virus rights ICOR Incremental Capital-Output Ratio U.N. United Nations ICRISAT International Crop Research Institute UNCTAD United Nations Conference on Trade and in the Semi-Arid Tropics Development IDA International Development Association UNDP United Nations Development Programme ILO International Labour Organization UNAIDS Joint United Nations Programme on HIV/AIDS IMF International Monetary Fund UNICEF United Nations International Children's IMS Intercontinental Marketing Services Emergency Fund KDP Kecamatan Development Project VAT Value added tax MDG Millennium Development Goals WHO World Health Organization MMM Movement Militant Mauricien WTO World Trade Organization MSF Médecins Sans Frontières WWII World War II NAFTA North American Free Trade Agreement Data notes The use of the word countries to refer to economies implies The countries included in regional and income groupings in no judgment by the World Bank about the legal or other status this Report are listed in the Classification of Economies table of a territory. The term developing countries includes low- and at the beginning of the Selected World Development Indica- middle-income economies and thus may include economies in tors. Income classifications are based on GNP per capita; transition from central planning, as a matter of convenience. thresholds for income classifications in this edition may be The term advanced countries may be used as a matter of conve- found in the Introduction to Selected World Development nience to denote high-income economies. Indicators. Group averages reported in the figures and tables Dollar figures are current U.S. dollars, unless otherwise are unweighted averages of the countries in the group, unless specified. Billion means 1,000 million; trillion means 1,000 bil- noted to the contrary. lion. xiv Overview Consider two South African children born on great business idea (such as an innovation the same day in 2000. Nthabiseng is black, to increase agricultural production), she born to a poor family in a rural area in the would find it much harder to persuade a Eastern Cape province, about 700 kilometers bank to lend her money at a reasonable from Cape Town. Her mother had no formal interest rate. Pieter, having a similarly schooling. Pieter is white, born to a wealthy bright idea (say, on how to design an family in Cape Town. His mother completed improved version of promising software), a college education at the nearby prestigious would likely find it easier to obtain credit, Stellenbosch University. with both a college diploma and quite pos- On the day of their birth, Nthabiseng and sibly some collateral. With the transition to Pieter could hardly be held responsible for democracy in South Africa, Nthabiseng is their family circumstances: their race, their able to vote and thus indirectly shape the parents' income and education, their urban policy of her government, something or rural location, or indeed their sex. Yet denied to blacks under apartheid. But the statistics suggest that those predetermined legacy of apartheid's unequal opportunities background variables will make a major dif- and political power will remain for some ference for the lives they lead. Nthabiseng time to come. It is a long road from such a has a 7.2 percent chance of dying in the first (fundamental) political change to changes year of her life, more than twice Pieter's 3 in economic and social conditions. percent. Pieter can look forward to 68 years As striking as the differences in life of life, Nthabiseng to 50. Pieter can expect to chances are between Pieter and Nthabiseng complete 12 years of formal schooling, in South Africa, they are dwarfed by the Nthabiseng less than 1 year.1 Nthabiseng is disparities between average South Africans likely to be considerably poorer than Pieter and citizens of more developed countries. throughout her life.2 Growing up, she is less Consider the cards dealt to Sven--born on likely to have access to clean water and sani- that same day to an average Swedish tation, or to good schools. So the opportuni- household. His chances of dying in the ties these two children face to reach their full first year of life are very small (0.3 percent) human potential are vastly different from and he can expect to live to the age of 80, 12 the outset, through no fault of their own. years longer than Pieter, and 30 years more Such disparities in opportunity translate than Nthabiseng. He is likely to complete into different abilities to contribute to 11.4 years of schooling--5 years more than South Africa's development. Nthabiseng's the average South African. These differences health at birth may have been poorer, owing in the quantity of schooling are com- to the poorer nutrition of her mother dur- pounded by differences in quality: in the ing her pregnancy. By virtue of their gender eighth grade, Sven can expect to obtain a socialization, their geographic location, and score of 500 on an internationally compara- their access to schools, Pieter is much more ble math test, while the average South likely to acquire an education that will African student will get a score of only enable him to put his innate talents to full 264--more than two standard deviations use. Even if at age 25, and despite the odds, below the Organisation for Economic Co- Nthabiseng manages to come up with a operation and Development (OECD) median. 1 2 WORLD DEVELOPMENT REPORT 2006 Nthabiseng most likely will never reach that The second set of reasons why equity and grade and so will not take the test.3 long-term prosperity can be complementary These differences in life chances across arises from the fact that high levels of nationality, race, gender, and social groups economic and political inequality tend to will strike many readers as fundamentally lead to economic institutions and social unfair. They are also likely to lead to wasted arrangements that systematically favor the human potential and thus to missed devel- interests of those with more influence. Such opment opportunities. That is why World inequitable institutions can generate eco- Development Report 2006 analyzes the rela- nomic costs. When personal and property tionship between equity and development. rights are enforced only selectively, when By equity we mean that individuals budgetary allocations benefit mainly the should have equal opportunities to pursue a politically influential, and when the distri- life of their choosing and be spared from bution of public services favors the wealthy, extreme deprivation in outcomes. The main both middle and poorer groups end up with message is that equity is complementary, in unexploited talent. Society, as a whole, is some fundamental respects, to the pursuit then likely to be more inefficient and to miss of long-term prosperity. Institutions and out on opportunities for innovation and policies that promote a level playing field-- investment. At the global level, when devel- where all members of society have similar oping countries have little or no voice in chances to become socially active, politically global governance, the rules can be inappro- influential, and economically productive-- priate and costly for poorer countries. contribute to sustainable growth and devel- These adverse effects of unequal opportu- opment. Greater equity is thus doubly good nities and political power on development are for poverty reduction: through potential all the more damaging because economic, beneficial effects on aggregate long-run political,and social inequalities tend to repro- development and through greater opportu- duce themselves over time and across genera- nities for poorer groups within any society. tions. We call such phenomena "inequality The complementarities between equity traps." Disadvantaged children from families and prosperity arise for two broad sets of at the bottom of the wealth distribution do reasons. First, there are many market fail- not have the same opportunities as children ures in developing countries, notably in the from wealthier families to receive quality markets for credit, insurance, land, and education. So these disadvantaged children human capital. As a result, resources may can expect to earn less as adults. Because the not flow where returns are highest. For poor have less voice in the political process, example, some highly capable children, like they--like their parents--will be less able to Nthabiseng, may fail to complete primary influence spending decisions to improve schooling, while others, who are less able, public schools for their children. And the may finish university. Farmers may work cycle of underachievement continues. harder on plots they own than on those The distribution of wealth is closely corre- they sharecrop. Some efficient developing- lated with social distinctions that stratify peo- country producers of agricultural com- ple, communities, and nations into groups modities and textiles are shut out of some that dominate and those that are dominated. OECD markets, and poor unskilled workers These patterns of domination persist because have highly restricted opportunities to economic and social differences are rein- migrate to work in richer countries. forced by the overt and covert use of power. When markets are missing or imperfect, Elites protect their interests in subtle ways, by the distributions of wealth and power affect exclusionary practices in marriage and kin- the allocation of investment opportunities. ship systems, for instance, and in ways that Correcting the market failures is the ideal are less subtle, such as aggressive political response; where this is not feasible, or far manipulation or the explicit use of violence. too costly, some forms of redistribution-- Such overlapping political, social, cultural, of access to services, assets, or political and economic inequalities stifle mobility. influence--can increase economic efficiency. They are hard to break because they are so Overview 3 closely tied to the ordinary business of life. on property rights for all; and greater fair- They are perpetuated by the elite, and often ness in markets. But policies to level the eco- internalized by the marginalized or oppressed nomic playing field face big challenges. groups, making it difficult for the poor to There is unequal capacity to influence the find their way out of poverty. Inequality traps policy agenda: the interests of the disenfran- can thus be rather stable, tending to persist chised may never be voiced or represented. over generations. And when policies challenge privileges, The report documents the persistence of powerful groups may seek to block reforms. these inequality traps by highlighting the Thus, equitable policies are more likely to be interaction between different forms of in- successful when leveling the economic play- equality.It presents evidence that the inequal- ing field is accompanied by similar efforts to ity of opportunity that arises is wasteful and level the domestic political playing field and inimical to sustainable development and introduce greater fairness in global gover- poverty reduction. It also derives policy nance. implications that center on the broad concept Third, there may be various short-run, of leveling the playing field--both politically policy-level tradeoffs between equity and effi- and economically and in the domestic and ciency. These are well recognized and exten- the global arenas. If the opportunities faced sively documented. The point is that the by children like Nthabiseng are so much (often implicit) cost-benefit calculus that more limited than those faced by children like policymakers use to assess the merits of vari- Pieter or Sven, and if this hurts development ous policies too often ignores the long-term, progress in the aggregate, then public action hard-to-measure but real benefits of greater has a legitimate role in seeking to broaden the equity. Greater equity implies more efficient opportunities of those who face the most economic functioning, reduced conflict, limited choices. greater trust, and better institutions, with Three considerations are important at dynamic benefits for investment and growth. the outset. First, while more even playing To the extent that such benefits are ignored, fields are likely to lead to lower observed policymakers may end up choosing too little inequalities in educational attainment, equity. health status, and incomes, the policy aim is By the same token, however, those inter- not equality in outcomes. Indeed, even with ested in greater equity must not ignore the genuine equality of opportunities, one would short-term tradeoffs. If individual incen- always expect to observe some differences in tives are blunted by income redistribution outcomes owing to differences in preferences, schemes that tax investment and produc- talents, effort, and luck.4 This is consistent tion too steeply, the result will be less inno- with the important role of income differences vation, less investment, and less growth. in providing incentives to invest in education The history of the twentieth century is lit- and physical capital, to work, and to take tered with examples of ill-designed policies risks. Of course outcomes matter, but we are pursued in the name of equity that seriously concerned with them mainly for their influ- harmed--rather than spurred--growth ence on absolute deprivation and their role in processes by ignoring individual incentives. shaping opportunities. A balance must be sought, taking into Second, a concern with equality of oppor- account both the immediate costs to indi- tunity implies that public action should focus vidual incentives and the long-term benefits on the distributions of assets, economic of cohesive societies, with inclusive institu- opportunities, and political voice, rather than tions and broad opportunities. directly on inequality in incomes. Policies can While careful assessment of policy design contribute to the move from an "inequality in local contexts is always important, equity trap"to a virtuous circle of equity and growth considerations need to be brought squarely by leveling the playing field--through greater into the center of both diagnosis and policy. investment in the human resources of the This is not intended as a new framework. It poorest; greater and more equal access to means integrating and extending existing public services and information; guarantees frameworks: equity is central both to the 4 WORLD DEVELOPMENT REPORT 2006 investment environment and to the agenda Within-country inequities of empowerment, working through the have many dimensions impact on institutions and specific policy Direct quantification of inequality of designs. Some may value equity for its own opportunity is difficult, but one analysis of sake, others primarily for its instrumental Brazil provides an illustration (chapter 2). role in reducing absolute poverty, the World Earnings inequality in 1996 was divided Bank's mission. into one share attributable to four predeter- This report recognizes the intrinsic value mined circumstances that lie beyond the of equity but aims primarily to document control of individuals--race, region of how a focus on equity matters for long-run birth, parental education, and paternal development. It has three parts. occupation at birth--and a residual share. · Part I considers the evidence on inequal- These four circumstances account for ity of opportunity, within and across around one-quarter of overall differences in countries. Some attempts to quantify earnings between workers. Arguably, other inequality of opportunity are reviewed determinants of opportunity are equally but, more generally, we rely on evidence predetermined at birth but not included in of highly unequal outcomes across this set--for example, gender, family groups defined by predetermined cir- wealth, or the quality of primary schools. cumstances--such as gender, race, fam- Because such variables are not included in ily background, or country of birth--as the inequality "decomposition," the results markers for unequal opportunities. here can be seen as lower-bound estimates of inequality of opportunity in Brazil. · Part II asks why equity matters. It dis- Unfortunately, predetermined (and thus cusses the two channels of impact (the morally irrelevant) circumstances deter- effects of unequal opportunities when mine much more than just future earnings. markets are imperfect, and the conse- Education and health are of intrinsic value quences of inequity for the quality of and affect the capacity of individuals to institutions a society develops) as well as engage in economic, social, and political intrinsic motives. life. Yet children face substantially different · Part III asks how public action can level opportunities to learn and to lead healthy the political and economic playing fields. lives in almost all populations, depending In the domestic arena, it makes the case on asset ownership, geographic location, or for investing in people, expanding access parental education, among others. Consider to justice, land, and infrastructure, and how access to a basic package of immuniza- promoting fairness in markets. In the tion services differs for the rich and the international arena, it considers leveling poor across countries (figure 1). the playing field in the functioning of There is substantial inequality in access global markets and the rules that govern between, for example, Egypt, where almost them--and the complementary provi- everyone is covered (on the left), and Chad, sion of aid to help poor countries and where more than 40 percent of children are poor people build greater endowments. excluded (on the right). Yet the disparities The remainder of this overview provides a can be as large within some countries as they summary of the principal findings. are across all nations in the sample. In Eritrea, for instance, the richest fifth enjoys almost complete coverage, but almost half of Inequity within all children in the poorest fifth are excluded. and across nations Significant gender differences also per- From an equity perspective, the distribu- sist in many parts of the world. In parts of tion of opportunities matters more than East and South Asia, notably in certain areas the distribution of outcomes. But opportu- in rural China and northwest India, the nities, which are potentials rather than opportunity to life itself can depend on one actuals, are harder to observe and measure single predetermined characteristic: sex. than outcomes. These regions have significantly more boy Overview 5 Figure 1 Wealth matters for the immunization of children Percentage not covered 70 60 50 40 Poorest 30 20 10 0 Wealthiest i a (*) bia (*) ala (*) (*) en ali Egypt anda Peru oros Faso Haiti ublic M Africa KenyaM alaw Brazilbia Benin India Togo bodia NigerChad Bolivia Yem eroon Eritrea Rw VietnamTurkey orocco Ghana biqueGuinea Com Uganda auritani EthiopiaRep Pakistan JordanColom Zam Paraguay GuatemTanzaniaIndonesiaenistan M Philippines Cam M adagascar ozam Cam South Bangladesh Burkina M M Kazakhstan Turkm African Central Source: Authors' own calculations from Demographic Health Survey (DHS) data Note: * indicates that the poorest quintile have higher access to childhood immunization services than the wealthiest quintile. The continuous orange line represents the overall percentage of children without access to a basic immunization package in each country, while the endpoints indicate the percentages for the top and the bottom quintile of the asset ownership distribution. infants than girls, in part because of sex- groups can become internalized into behav- selective abortion and differential care after iors, aspirations, and preferences that also birth. And in many (though not all) parts of perpetuate inequalities. the world, more boys than girls attend Inequalities of opportunity are also school. The hundreds of millions of dis- transmitted across generations. The chil- abled children across the developing world dren of poorer and lower-status parents also face very different opportunities than face inferior chances in education, health, their able-bodied peers. incomes, and status. This starts early. In These inequities are usually associated Ecuador, three-year-old children from all with differences in an individual's"agency"-- socioeconomic groups have similar test the socioeconomically, culturally, and polit- scores for vocabulary recognition and are ically determined ability to shape the world close to a standard international reference around oneself. Such differences create population. But by the time they are five, all biases in the institutions and rules in favor have faltered relative to the international of more powerful and privileged groups. reference group, except for those in the This is seen in realities as diverse as the low richest groups and with the highest levels of chances for mobility of scheduled castes in parental education (figure 2). Such pro- a village in rural India and the frequent nounced differences in vocabulary recogni- episodes of discrimination against the tion between children whose parents had 0 Quichua people in Ecuador. Persistent dif- to 5 years of schooling and those whose ferences in power and status between parents had 12 or more years are likely to 6 WORLD DEVELOPMENT REPORT 2006 Figure 2 Opportunities are determined early ity, undernutrition, and the earnings a child Cognitive development for children ages three to five in Ecuador differs markedly across family can generate by working instead of study- backgrounds ing, many children leave school early. The Wealthiest and poorest quartiles Maternal education average person born between 1975 and Median score Median score 1979 in Sub-Saharan Africa has only 5.4 110 110 years of schooling. In South Asia, the figure rises to 6.3 years; in OECD countries, it is 100 Wealthiest 25% 100 12 or more years 13.4 years. 90 90 With such differences in education and health, compounded by large disparities in 80 80 access to infrastructure and other public 0­5 years Poorest 25th% services, it is not surprising that opportuni- 70 70 ties for the consumption of private goods 60 60 differ vastly between rich and poor coun- 40 50 60 70 40 50 60 70 tries. Mean annual consumption expendi- Age in months Age in months tures range from Purchasing Power Parity Source: Paxson and Schady (2005). (PPP) $279 in Nigeria to PPP $17,232 in Note: Median values of the test of vocabulary recognition (TVIP) score (a measure of vocabulary recognition in Spanish, standardized against an international norm) are plotted against the child's age in months. The medians by exact month Luxembourg. This means that the average of age were smoothed by estimating fan regressions of the median score on age (in months), using a bandwidth of 3. citizen in Luxembourg enjoys monetary resources 62 times higher than the average Nigerian. While the average Nigerian may carry over to their performance once they find it difficult to afford adequately nutri- enter primary school, and will likely persist tious meals every day, the average citizen of thereafter. Intergenerational immobility is Luxembourg need not worry too much also observed in rich countries: new evi- about buying the latest generation cell dence from the United States (where the phone on the market. Because of the much myth of equal opportunity is strong) finds greater restrictions on the movement of high levels of persistence of socioeconomic people between countries than within status across generations: recent estimates countries, these inequalities in outcomes suggest that it would take five generations among countries are likely to be much more for a family that earned half the national closely associated with inequalities in average income to reach the average.5 opportunities than within countries. Immobility is particularly pronounced for Global inequality trends have varied. low-income African Americans. Between 1960 and 1980 there was a pro- nounced decline in the inequality in life Global inequities are massive expectancy across countries, driven by Figure 3 Life expectancy improved and If unequal opportunities are large within major increases in the poorest countries in became more equal--until the onset many countries, they are truly staggering on the world (figure 3). This welcome develop- of the AIDS crisis a global scale. Chapter 3 shows that cross- ment was due to the global spread of health Population-weighted international country differences begin with the opportu- technology and to major public health distribution of life expectancy, 1960­2000 nity for life itself: while 7 of every 1,000 efforts in some of the world's highest mor- 0.05 American babies die in the first year of their tality areas. Since 1990, however, HIV/AIDS lives, 126 of every 1,000 Malian babies do. (predominantly in many African countries) 1990 Babies who survive, not only in Mali but in and a rise in mortality rates in transition 1960 2000 much of Africa and in the poorer countries economies (largely in Eastern Europe and of Asia and Latin America, are at much Central Asia) have set back some of the ear- greater nutritional risk than their counter- lier gains. Because of the AIDS crisis, life parts in rich countries. And if they go to expectancy at birth has fallen dramatically school--more than 400 million adults in in some of the world's poorest countries, developing countries never did--their sharply increasing the differences between 0 27 39 51 63 75 87 schools are substantially worse than those them and richer societies. Years attended by children in Europe, Japan, or Inequality in access to schooling has also Source: Schady (2005). the United States. Given lower school qual- been falling around the world, within most Overview 7 Figure 4 A long-run diverging trend in income Why does equity matter inequality begins to reverse because of growth in China and India for development? Why do these persistent inequalities-- Mean log deviation both within and across countries--matter? 1 The first reason is that the interconnec- 0.83 0.8 tions and resilience of these inequalities 0.69 Global inequality imply that some groups have consistently 0.6 Within-country inequality inferior opportunities--economic, social, 0.50 0.42 and political--than their fellow citizens. 0.4 0.36 Most people feel that such egregious dis- 0.37 0.33 0.33 parities violate a sense of fairness, particu- 0.2 larly when the individuals affected can do 0.05 Between-country inequality little about them (chapter 4). This is con- 0 sistent with the teachings of much politi- 1820 1850 1870 1890 1910 1929 1950 1960 1970 1980 1992 cal philosophy and with the international Source: Authors' manipulation of data from Bourguignon and Mor- risson (2002). system of human rights. The core moral and ethical teachings of the world's lead- ing religions include a concern for equity, countries as well as across them, as average although many have also been sources of schooling levels rise in the vast majority of inequities and historically have been linked countries. This too is a welcome develop- to unequal power structures. There is also ment, although concerns over the quality of experimental evidence suggesting that schooling provide reasons for guarding many--but not all--people behave in against complacency. ways consistent with a concern for fair- While our primary concern is with ness, in addition to caring about how they inequality of opportunities, the large dif- fare individually. ferences in income or consumption across Important as these intrinsic reasons are countries surely affect the life chances faced for caring about inequality of opportunities by children born today in those different and unfair processes, the primary focus of nations. Trends in life expectancy at birth this report is on the instrumental relation- and years of schooling were converging, at ship between equity and development, with least until 1990, but a different picture particular emphasis on two channels: the emerges for income and consumption. effects of unequal opportunities when mar- While the recent trends depend greatly on kets are imperfect, and the consequences of the specific concept chosen (discussed in inequity for the quality of institutions a great detail in chapter 3), global income society develops.6 inequality has steadily increased over the long run until the onset of rapid economic growth in China and India in the 1980s With imperfect markets, inequalities in (figure 4). power and wealth translate into unequal It is possible to decompose total opportunities, leading to wasted productive inequality across individuals in the world potential and to an inefficient allocation of into differences among countries and dif- resources. Markets often work imperfectly ferences within countries. Between-coun- in many countries, whether because of try differences were relatively small early in intrinsic failures--such as those associated the nineteenth century, but they came to with asymmetric information--or because account for a larger part of total inequality of policy-imposed distortions. Microeco- toward the end of the twentieth century. If nomic case studies suggest that an ineffi- China and India are excluded, global cient allocation of resources across produc- inequalities have continued to rise, owing tive alternatives is often associated with to the continuing divergence between differences in wealth or status (chapter 5). most other low-income countries and rich If capital markets worked perfectly, there countries. would be no relation between investment 8 WORLD DEVELOPMENT REPORT 2006 and the distribution of wealth: anyone with behalf of their children and because the a profitable investment opportunity would expected returns to investment are influenced be able to either borrow money to finance by location, contacts, and discrimination-- it, or to sell equity in a firm set up to under- on grounds of gender, caste, religion, or take it. But capital markets in just about race. Discrimination and stereotyping-- every country (developed and developing) mechanisms for the reproduction of inequal- are very far from perfect: credit is rationed ity between groups--have been found to across prospective clients, and interest rates lower the self-esteem, effort, and perform- differ considerably across borrowers, and ance of individuals in the groups discrimi- between lenders and borrowers, in ways nated against. This reduces their potential for that cannot be linked to default risk or individual growth and their ability to con- other economic factors affecting expected tribute to the economy. returns to lenders. For example, interest Striking evidence of the impact of rates decline with loan size in Kerala and stereotyping on performance comes from a Tamil Nadu in India, and across trading recent experiment in India. Children from groups in Kenya and Zimbabwe, in ways not different castes were asked to complete sim- explained by risk differences.7 In Mexico, ple exercises, such as solving a maze, with returns to capital are much higher for the real monetary incentives contingent on per- smallest informal sector firms than for formance. The key result of the experiment larger ones. is that low-caste children perform on par Land markets also have imperfections with high-caste children when their caste is associated with a lack of clear titling, histo- not publicly announced by the experi- ries of concentrated land ownership, and menter but significantly worse when it is imperfect rental markets. In Ghana, lower made public (figure 5). If a similar inhibi- security of tenure among women leads to tion of talent occurs in the real world, this an inefficiently low frequency of land fal- implies a loss of potential output owing to lowing and, hence, to progressive declines social stereotyping. in land productivity. The market for human capital is also Economic and political inequalities are imperfect, because parents make decisions on associated with impaired institutional development. The second channel through Figure 5 Children's performance differs when their caste is made salient which inequity affects long-run processes of development is the shaping of economic Average number of mazes solved, by caste, and political institutions (chapter 6). Insti- in five experimental treatments 8 tutions determine the incentives and con- Piece rate Tournament straints people face and provide the context in which markets function. Different sets of 6 institutions are the outcome of complex historical processes that reflect the interests 4 and structure of political influence of different individuals and groups in a soci- ety. From this perspective, market im- 2 High caste perfections may arise not by accident but Low caste because they distribute income or power in 0 particular ways. In this view, there will be Caste Caste Caste Caste Caste social conflict over the institutions of not announced not announced announced society and incentives for people who con- announced announced and segregated trol power to shape institutions in ways that benefit them. Source: Hoff and Pandey (2004). Note: The figure depicts the number of mazes correctly completed The central argument here is that by low-caste and high-caste children from a set of Indian villages in a number of different experiments. The difference between the unequal power leads to the formation of first two and the last three columns refers to payouts: whether institutions that perpetuate inequalities in children are paid per correct maze completed (piece rate) or only if they complete the most mazes (tournament). power, status, and wealth--and that typi- Overview 9 cally are also bad for the investment, inno- inequality is objectionable on both intrinsic vation, and risk-taking that underpin and instrumental grounds. It contributes to long-term growth. Good economic insti- economic inefficiency, political conflict, and tutions are equitable in a fundamental institutional frailty. What are the implica- way: to prosper, a society must create tions for policy, and do they give rise to an incentives for the vast majority of the agenda that is different from the poverty population to invest and innovate. But reduction agenda already embraced by the such an equitable set of economic institu- World Bank, other multilateral institutions, tions can emerge only when the distribu- and many governments? tion of power is not highly unequal and in We argue that an equity lens enhances situations in which there are constraints the poverty reduction agenda. The poor on the exercise of power by officeholders. generally have less voice, less income, and Basic patterns in cross-country data and less access to services than most other peo- historical narratives support the view that ple. When societies become more equitable countries moving onto institutional paths in ways that lead to greater opportunities for that promoted sustained prosperity did so all, the poor stand to benefit from a "double because the balance of political influence dividend." First, expanded opportunities and power became more equitable. benefit the poor directly, through greater One example comes from a comparison participation in the development process. of the early institutions and of the long- Second, the development process itself may term development paths of European become more successful and resilient as colonies in North and South America. The greater equity leads to better institutions, abundance of unskilled labor prevalent in more effective conflict management, and a the South American colonies--where either better use of all potential resources in soci- native Americans or imported African ety, including those of the poor. Resulting slaves were available in large numbers-- increases in economic growth rates in poor combined with the technology of mining countries will, in turn, contribute to a and large plantation agriculture to provide reduction in global inequities. the economic base for hierarchical and One manifestation of the greater partic- extractive societies, in which land owner- ipation of the poor in economic growth is ship and political power were highly con- the fact that the growth elasticity of centrated. In North America, by contrast, poverty reduction falls with greater income similar attempts to introduce hierarchical inequality. In other words, the impact of structures were foiled by the scarcity of (the same amount of) growth on poverty labor--except where agro-climatic condi- reduction is significantly greater when ini- tions made slavery economically feasible, tial income inequality is lower. On average, such as in the southern region of the United for countries with low levels of income States. Competition for free labor in the inequality, a 1 percentage point growth in northern areas of North America led to the mean incomes leads to about a 4 percent- development of less unequal land owner- age-point reduction in the incidence of $1 ship patterns, a faster expansion of the fran- per day poverty. That power falls to close to chise, and rapid increases in literacy and zero in countries with high income basic education. The resulting economic inequality.8 Policies that lead to greater and political institutions persisted over equity thus lead to lower poverty--directly time, with positive consequences for long- through expanding the opportunities of run economic development. the poor and indirectly through higher lev- els of sustained development. An equity lens adds three new--or at Leveling the economic least often neglected--perspectives to devel- and political playing fields opment policymaking: So a portion of the economic and political inequalities we observe around the world is · First, the best policies for poverty attributable to unequal opportunities. This reduction could involve redistributions 10 WORLD DEVELOPMENT REPORT 2006 of influence, advantage, or subsidies The analysis of development experience away from dominant groups. Highly clearly shows the centrality of overall politi- unequally distributed wealth associated cal conditions--supporting the emphasis with unduly concentrated political on governance and empowerment in recent power can prevent institutions from years. However, it is neither the mandate enforcing broad-based personal and nor the comparative advantage of the property rights, and lead to skewed pro- World Bank to engage in advice on issues of visioning of services and functioning of political design. In turning to policy impli- markets. This is unlikely to change cations, we focus instead on the core areas unless voice and influence, and public of development policy, while recognizing resources, shift away from the domi- that policy design needs to take account of nant group toward those with fewer the broader social and political context, and opportunities.9 that accountability mechanisms influence development effectiveness. · Second, while such equity-enhancing Because economic policies are deter- redistributions (of power, or access to mined within a sociopolitical reality, how government spending and markets) can policies are designed, introduced, or often be efficiency-increasing, possible reformed matters as much as which specific tradeoffs need to be assessed in the policies are proposed. Policy reforms that design of policy. At some point, higher result in losses for a particular group will be tax rates to finance spending on more resisted by that group. If the group is pow- schools for the poorest will create so erful, it will usually subvert the reform. The much disincentive to effort or invest- sustainability of reforms, therefore, may ment (depending on how the taxes are depend on making information about its raised), that one should stop raising distributional consequences publicly avail- them. When making a policy choice able and, perhaps, forming coalitions of along such tradeoffs, the full value of the middle and poorer groups that stand to benefits from equity enhancement gain from them to "empower," directly or should be considered. If greater spend- indirectly, relatively disadvantaged mem- ing on schools for lower-caste children bers of society. means that, over the long term, stereo- How policies are implemented has a typing will decline in society, with atten- technical aspect as well. Just as we empha- dant increases in performance that are size that the full long-term benefits of redis- additional to the specific gains from tributions need to be taken into account greater schooling today, these gains when making policy choices, so must all should not be ignored. their costs. A focus on equity does not · Third, the dichotomy between policies change the facts that asset expropriations-- for growth and policies specifically even in instances of historical grievances-- aimed at equity is false. The distribution may have adverse consequences for subse- of opportunities and the growth process quent investment, that high marginal tax are jointly determined. Policies that affect rates create disincentives to work, or that one will affect the other. This does not inflationary financing of budget deficits mean that each policy needs to take tends to lead to regressive implicit taxation, equity into account individually: for economic disorganization, and reduced example, the best way to deal with investment and growth. In short, a focus on inequitable effects of a particular trade equity must not be an excuse for poor eco- reform is not always through fine-tuning nomic policy. trade policy itself (which might make it The report discusses the role of public more susceptible to capture) but through action in leveling the economic and politi- complementary policies for safety nets, cal playing field under four main headings. labor mobility, and education. The over- Three of the headings concern domestic all package and the fairness of the under- policies: investing in human capacities; lying process are what matter. expanding access to justice, land, and infra- Overview 11 structure; and promoting fairness in mar- Figure 6 Catching up through early interventions kets. The fourth turns to policies for greater Development quotient global equity, in terms of access to markets, 110 resource flows, and governance. Children of normal Stimulation and nutritional supplement Throughout the discussion, the report height 105 weighs a desire to be specific and practical Stimulation against the fact that the best specific policy 100 Nutritional supplement mix is a function of country context. The educational challenges facing Sudan are 95 different from those facing Egypt. The Control group 90 optimal sequencing of reform in the public sectors of Latvia and Bolivia are unlikely to 85 be the same. The capacity for implement- Baseline 6 12 18 24 ing health finance reform in China and Months Lesotho are also different. So the detailed, Source: Grantham-McGregor and others (1991). Note: The development quotient is an index of progress on four behavioral and cognitive indicators of childhood specific policy advice always needs to be development. Number of months refers to the time after entry into the program--generally at an age of nine months. developed at the country--or even subna- tional--level. Everything that is said below therefore retains some level of generality with children who started life at a normal and should be interpreted accordingly, and height (figure 6). This illustrates how deci- cautiously. sive and well-designed public action can substantially reduce the opportunity gaps Human capacities between those least privileged and the soci- Early childhood development. In many etal norm. Investing in the neediest people developing countries, the actions of the early in their childhoods can help level the state in providing services magnify--rather playing field. than attenuate--inequalities at birth. A guiding principle is to shape public action Schooling. The process continues through- so that the acquisition of human capacities out the school system. Actions to equalize is not driven by circumstances of their opportunities in formal education need to birth, although it can reflect people's prefer- ensure that all children acquire at least a ences, tastes, and talents. basic level of skills necessary to participate Because differences in cognitive devel- in society and in today's global economy. opment start to widen from a very early Even in such middle-income countries as age (see figure 2), early childhood develop- Colombia, Morocco, and the Philippines, ment initiatives can be central to more most children completing basic education equal opportunities. Evidence supports the lack an adequate level of achievement, as view that investing in early childhood has measured by internationally comparable large impacts on children's health and test scores (chapters 2 and 7). readiness to learn and can bring important Access to schooling matters--especially economic returns later in life--often in very poor countries--but, in many coun- greater than investments in formal educa- tries, it is only a small part of the problem. tion and training. Greater access needs to be complemented by An experiment in Jamaica focused on supply-side policies (to raise quality) and undersized children (ages 9 to 24 months) demand-side policies (to correct for the pos- and found that they suffered from lower sibility that parents may underinvest in the levels of cognitive development than those education of their children for various rea- of normal height. Nutritional supplements sons). There are no magic bullets for this, but and a program of regular exposure to men- increasing teachers' incentives, enhancing tal stimulation, helped offset this disadvan- the basic quality of the school's physical tage. After 24 months, kids who received infrastructure, and researching and imple- both better nutrition and more stimulation menting teaching methods to increase the had virtually caught up developmentally learning performance of students who do 12 WORLD DEVELOPMENT REPORT 2006 not do well when left to their own devices are ple with a safety net. In addition to ill health, some of the suggestions on the supply side. macroeconomic crises, industrial restructur- On the demand side, there is now a con- ing, weather, and natural disasters can con- siderable body of evidence showing that strain investment and innovation. The poor, scholarships conditional on attendance have with the lowest capacity to manage shocks, significant impacts. Such transfers work in generally are the least well covered by risk- countries from Bangladesh to Brazil, with the management structures, although in most impacts often greater for girls. There are also countries many among the non-poor risk promising approaches to bring in excluded falling into poverty. Broader social protec- groups--as in the Vidin model of reaching tion systems can help prevent today's Roma in Bulgaria--and to bring up those left inequalities--sometimes generated by bad behind through remedial education--as in luck--from becoming entrenched and lead- the Balsakhi program using young women as ing to tomorrow's inequities. Just as safety para-teachers in 20 cities in India. As argued nets can spur households to engage in riskier in World Development Report 2004, devel- activities that can yield higher returns, they oping the accountability of schools and can also help complement reforms that pro- teachers to students, parents, and the broader duce losers. community can help ensure effective service Safety nets typically target three groups: provider behavior. the working poor, people viewed as unable to work or for whom work is undesirable, and Health. Two areas stand out in reducing special vulnerable groups. If safety nets are inequity and tackling economic distortions designed in a manner appropriate to the local in the provision of health services. First, realities on the ground in each country, indi- there are many cases when the benefits spill vidual targeted interventions in these three over beyond the direct beneficiary in a categories can be combined to provide an range of areas of service provision: for effectively universal public insurance system. immunization, for water and sanitation, In such a system, each household that suffers and for information on hygiene and child a negative shock, and falls below some prede- care. Public assurance of provisioning termined threshold of living standards, makes sense in these areas. Demand-side would qualify for some form of state support. subsidies to provide incentives for maternal and child health increase use, offsetting Taxes for equity. Successful interventions to possible information problems as in Mex- level the playing field require adequate ico's Oportunidades program. resources. The main aim of good tax policy is Second, insurance markets for cata- to mobilize sufficient funding, while distort- strophic health problems are beset with fail- ing incentives and compromising growth as ures. (Here "catastrophic" is in relation to the little as possible. Because taxes impose effi- capacity of the household to deal with the ciency costs by altering individual choices direct costs and the loss in earnings.) The tra- between labor and leisure and consumption ditional supply-side model of relying on pub- and savings, most developing countries are lic hospitals works badly, especially for poor likely to be best served by avoiding high mar- and excluded groups.What can work better is ginal taxes on income and relying on a broad public provisioning or regulation that pro- base, especially for taxes on consumption. vides some insurance for all. Examples Public spending should play the primary role include risk pooling in Colombia, health in actively furthering equity. Nevertheless, cards in Indonesia and Vietnam, and Thai- there is some scope for making the overall tax land's "30-baht" universal coverage scheme. system moderately progressive without large As with education, these interventions need efficiency costs. Societies that desire such an to be combined with incentives for providers outcome can consider simple exemptions for to be responsive to all groups. basic foodstuffs, and an expanded role for property taxation, for example. Risk management. Social protection sys- While the capacity of the tax administra- tems shape opportunities by providing peo- tion and the structure of the economy influ- Overview 13 ence the ability to raise revenues, the quality Equity in laws and fairness in their imple- of institutions and the nature of the social mentation involve striking a balance between compact are also critical. When citizens can strengthening the independence of justice rely on services actually being provided, they systems and increasing accountability-- likely are more willing to be taxed. Con- especially to counter the risk that the pow- versely, a corrupt or kleptocratic state engen- erful and wealthy might corrupt, influence, ders little citizen trust in authority and little or ignore the law. Measures to make the incentive to cooperate. As a general rule, a legal system more accessible--mobile more legitimate and representative state may courts, legal aid, and working with custom- be a prerequisite to an adequate tax system, ary institutions--all help reduce the barri- even as the notion of adequacy varies from ers that excluded groups face. Customary country to country. institutions raise complex issues and may incorporate inequities (for example, with Justice, land, and infrastructure respect to gender), but they are too impor- The development of human capacities will tant to be ignored. South Africa is an exam- not broaden opportunities if some people ple of a country that is pursuing a policy face unfair returns on those capacities and that balances recognition of customary unequal protection of their rights, and have practices with the rights and responsibilities unequal access to complementary factors of in state law. production. Toward greater equity in access to land. Building equitable justice systems. Justice Broader access to land does not necessarily systems can do much to level the playing have to come through ownership (chapter 8). field in the political, economic, and socio- Instead, improving the functioning of land cultural domains, but they can also rein- markets and providing greater security of force existing inequalities. The report pays tenure for poorer groups may be a more attention to both codified law and the ways fruitful area for policy--as in rural Thailand in which the law is applied and enforced in and in urban Peru. Redistributive land practice. Legal institutions can uphold the reform can make sense in some circum- political rights of citizens and curb the cap- stances in which land inequalities are extreme ture of the state by the elite. They can equal- and the institutional context allows for ize economic opportunities by protecting designs that effectively redistribute land to property rights for all and ensuring nondis- smaller farms and support this with comple- crimination in the market. They underpin mentary services, without large transitional and reflect the rules of the game in society costs. But this can be difficult, and tradeoffs and thus are central to fair process--and to may be large when property rights have a the broad-based property rights and un- high degree of legitimacy. biased dispute resolution mechanisms so Expropriating land (with compensation) important for investment. is probably the most disruptive redistribution The law can also accelerate shifts in instrument. Divesting state lands and recu- norms, and justice systems can serve as a perating illegal settlements, possibly in progressive force for change in the social exchange for titling a portion of the settle- domain by challenging inequitable prac- ment, may be two cost-effective alternatives. tices. For example, the U.S. Civil Rights Act Market or community-based approaches that of 1964 and Medicare in 1965 enforced the allow community members to obtain subsi- desegregation of hospitals and led to large dized credit for land rentals or purchases reductions in infant mortality for African according to the willing-buyer-willing-seller Americans. Affirmative action programs principle, as in Brazil and South Africa, have also been shown to reduce group- appear promising. A land tax can be a useful based differences in earnings and educa- complement, generating revenues to pur- tion. But they can become politically chase land to redistribute or encouraging entrenched and limited to helping the bet- redistribution by disproportionately taxing ter-off among disadvantaged groups. large or underused plots. 14 WORLD DEVELOPMENT REPORT 2006 Providing infrastructure equitably. Access to Markets and the macroeconomy infrastructure--roads, electricity, water, Markets are central to shaping the potential sanitation, telecoms--is typically highly un- for people to convert their assets into out- equal across groups. For many people in comes. When market transactions are influ- developing countries, lack of access to enced by the wealth or status of participants, affordable infrastructure services means liv- they are both inequitable and inefficient-- ing in isolation from markets and services and can also influence the incentives for and having intermittent or no supply of different groups to expand their assets power or water for productive activities and (chapter 9). daily existence. This often results in a signifi- cant curtailment of economic opportunities. Financial markets. Captured banking sys- While the public sector will in many tems exchange favors: market power is pro- cases remain the main source of funds for tected for a few large banks, which then lend infrastructure investments aimed at broad- favorably to a few selected enterprises, which ening opportunities for those who have the may not be those with the highest expected fewest, the efficiency of the private sector risk-adjusted returns. This may lie behind a can also be harnessed. Although utility pri- cross-country association between greater vatizations have often been attacked for financial depth and lower income inequal- having unequal effects, the evidence indi- ity. Achieving more equal access to finance cates a more complex reality. Privatizations by broadening financial systems thus can in Latin America typically led to expansions help productive firms that were previously in access to services, particularly in electric- beyond the reach of formal finance. ity and telecommunications. In some cases, These relations are only suggestive, how- however, postprivatization increases in ever, so the report draws on case studies prices more than outweighed gains from from middle-income economies, such as quality and coverage, leading to widespread the Republic of Korea, Malaysia, Mexico, popular discontent. and the Russian Federation, and poorer Privatizations are therefore a classic case economies, including Indonesia and Pak- of a policy that may or may not make sense, istan, to provide more concrete evidence. depending on the local context. If the public These studies suggest an apparent paradox. system is highly corrupt or inefficient, and Societies with extensive inequalities in one expects postprivatization regulatory power and wealth, weak institutions, and capacity to be adequate, it can be a useful controlled financial systems typically suffer tool. In other cases, poorly designed privati- from narrow financial sectors that are ori- zations may be captured, transferring pub- ented to the influential and hide weak asset lic assets, at excessively low prices, into pri- quality. Opening the financial system would vate hands. seem to be an obvious solution. Liberaliza- Experience suggests that whether infra- tion, however, has also often been captured structure services are provided by private by the influential or wealthy, in countries operators or public utilities seems less ranging from Mexico (in the early 1990s) to important for equity than the structure of transition economies such as the Czech incentives facing providers and how Republic and Russia. accountable these providers are to the gen- Gradual deepening and broadening thus eral public. We argue that policymakers can needs to be combined with stronger horizon- improve the equitable provision of infra- tal accountability (in regulatory structures), structure services by focusing on expand- greater openness to societal accountability, ing affordable access for poor people and and, where feasible, external commitment poor areas--which often means working devices (such as the entry of Central Euro- with informal providers and targeting pean and Baltic states to the European subsidies--and strengthening the gover- Union). Programs targeted to the poor-- nance of the sector through the greater such as microcredit schemes--can help but accountability of providers and the are no substitute for the overall broadening of stronger voice of beneficiaries. access. Overview 15 Labor markets. Leveling the playing field in Figure 7 Better to be close to economic opportunities labor markets consists of seeking the right Changes in household welfare in Mexico, following trade liberalization in the 1990s (country-specific) balance between flexibility and protection to provide more equal access Changes in to equal employment conditions to as many household welfare workers as possible. Many countries have > 5 percent fairly extensive regulations and provisions for 4­5 percent 2­4 percent formal sector workers, and far fewer for "out- 0­2 percent siders"in the unregulated (and often less safe) informal sector. There is usually a degree of voluntary movement between the sectors, and great diversity within the informal sector itself, ranging from microentrepreneurs and some of the self-employed with incomes above formal sector workers to many with much worse employment conditions. This mix leads to inadequate protection for poorer workers, while regulations for formal workers can reduce the flexibility of employment and often are a poor deal for the workers them- selves, such as when job-related social secu- Source: Nicita (2004). rity systems are inefficient. Two broad labor market approaches are relevant for equity. First, interventions in Product markets. There is substantial het- the labor market should ensure effective erogeneity in the effects of opening a coun- application of the core labor standards try's product markets to trade, at least in the across the whole market, implying no slave short to medium term. This can be due to or indentured work, no dangerous forms of geographic location, as illustrated by the child labor, and no discrimination. Workers varying impact of trade liberalization in should be free to assemble and form associ- Mexico (figure 7). This illustrates the ations, and their unions should be free to importance of interactions between domes- have an active role in bargaining. Second, in tic product markets and patterns of infra- all areas the policy mix needs to be assessed structure provision. There are also often in ways that balance protection (for all strong interactions with skills in the labor workers) with allowances for the restructur- market. In many countries, opening to ing so central to dynamic growth and trade (often coinciding with opening to for- employment creation. eign direct investment) has been associated Worker security is often provided by vari- with rising inequality in earnings in the past ous excessively stringent forms of employ- two decades. This is especially so for mid- ment protection legislation, which, in general dle-income countries, notably in Latin make it costly to hire and, in some cases, America. Opening to trade often boosts the make it even costlier to hire unskilled, young, premium on skills as firms modernize their and female workers--exactly those the laws production processes (skill-biased technical seek to protect. For many countries, less dis- change, in the jargon of economists). This is tortionary and more inclusive policy alterna- bad for equity if the institutional context tives are available, which may make the play- restricts the capacity of workers to shift into ing field more even in labor markets. These new work--or limits future cohorts' access alternatives include unemployment insur- to education. ance schemes (more likely in middle-income countries) and low-wage employment Macroeconomic stability. This report argues schemes (ideally with an employment guar- that there are two-way relationships between antee), which can be applied successfully even inequitable institutions and macroeconomic in poor countries or states. crises, with mostly bad effects for equity and 16 WORLD DEVELOPMENT REPORT 2006 long-run growth.Weak and captured institu- countries. Indeed, most policy advice given to tions are associated with a greater propensity poor countries over the last several decades-- for countries to experience macroeconomic including that by the World Bank--has crises. When crises occur, they can be costly emphasized the advantages of participating for the poor, who have weaker instruments in the global economy. But global markets are to manage shocks. In addition, crisis resolu- far from equitable, and the rules governing tion is often regressive, through a variety of their functioning have a disproportionately mechanisms (most of them not captured in negative effect on developing countries traditional household survey instruments): (chapter 10). These rules are the outcome of declines in the labor share, at least for formal complex negotiating processes in which workers; capital gains for those who get their developing countries have less voice. More- money out; and fiscal workouts that bail out over, even if markets worked equitably, the influential at substantial cost. Such unequal endowments would limit the ability bailouts must be paid for through some of poor countries to benefit from global combination of higher taxes and lower opportunities. Leveling the global economic spending. Because taxes are typically propor- and political playing fields thus requires more tional and spending is often progressive at equitable rules for the functioning of global the margin (notably in Latin America), the markets, more effective participation of poor cost of bailouts is borne disproportionately countries in global rule-setting processes, and by poorer groups. High inflation has also more actions to help build and maintain the been found to be both bad for growth and endowments of poor countries and poor regressive in its impact. people. A concern for equity would lead, in gen- The report documents some of the many eral, to a highly prudent stance on macroeco- inequities in the functioning of global mar- nomic management and financial regulation. kets for labor, goods, ideas, and capital. Populist macroeconomic policy, sooner or Unskilled workers from poor countries, who later, is bad for equity and bad for growth. could earn higher returns in rich countries, Policy design can increase equity through the face great hurdles in migrating. Developing- pursuit of countercyclical fiscal policy, build- country producers face obstacles in selling ing safety nets before a crisis, reducing risky agricultural products, manufactured goods, lending, and supporting only smaller deposi- and services in developed countries. Patent tors in bailouts. But, as in other policy areas, protection restricts access to innovations these responses need to be underpinned by (particularly drugs) for poor countries, while institutional designs that combine greater new research is strongly oriented to the institutional freedom from political influence diseases of richer societies. Rich-country (such as independent central banks and auto- investors often get better deals in debt crises. nomous financial regulatory agencies) with In most cases, more equitable rules would greater information and debate in society. bring benefits to developed- and developing- country citizens. Benefits vary across markets The global arena and countries, with those from greater legal One predetermined circumstance that most migration likely to be greatest (and to accrue powerfully determines a person's opportuni- directly to migrants) and those from trade ties for leading a healthy and productive life is likely to accrue mostly to middle-income his or her country of birth. Global inequities rather than the least developed countries. are massive. Reducing them will depend pri- The report discusses options to reduce marily on domestic policies in poor countries inequities in the functioning of global mar- through their impact on growth and develop- kets, including the following: allowing greater ment. But global action can change external temporary migration into OECD countries, conditions and affect the impact of domestic achieving ambitious trade liberalization policies. In this sense, global and domestic under the Doha Round, allowing poor coun- actions are complementary. tries to use generic drugs, and developing We live in an integrated world in which financial standards more appropriate to people, goods, ideas, and capital flow across developing countries. Overview 17 The international laws that govern global devoting 0.7 percent of gross national income markets are the product of complex negotia- to aid. Larger volumes of aid will only help, tions. In some cases, as for human rights however, if aid is effective in alleviating con- covenants, the processes generating the laws straints and spurring development in the are perceived to be fair. In other cases, recipient countries. Greater effectiveness can processes and outcomes are perceived as be achieved by emphasizing results, moving unfair, even though the formal regulations away from ex ante conditionality, and pro- are equitable. Within the World Trade Orga- gressively shifting design and management nization (WTO), for example, each country from donors to recipients. Aid should not be has a vote and each can block proceedings. undermined by debt, for debt reduction that Even so, WTO processes are at times per- is not financed by additional resources can ceived as unfair because of the underlying actually undercut effective aid programs. power imbalance between strong commercial Innovative mechanisms to expand develop- interests and the public interest, in both ment assistance should be explored, includ- developed and developing countries. These ing global taxes and private contributions. imbalances manifest themselves, for instance, in the number of staff employed in Geneva Equity and development by different WTO members. More effective Bringing equity to the center of development representation of poor countries in global builds on and integrates the major emphases institutions would help improve processes in development thinking of the past 10 to 20 and may lead to more equitable rules. years--on markets, on human development, The impact of reducing imperfections in on governance, and on empowerment. It is global markets varies by country. The larger noteworthy that this year equity is the focus of and fast-growing developing countries stand both this World Development Report and the to benefit significantly from freer global Human Development Report of the United trade, migration, and capital flows, helping Nations Development Programme. The plea them sustain fast growth (while equitable for a more level playing field in both the pol- domestic policies both help underpin long- itics and the economies of developing coun- run growth and the broad internal sharing of tries serves to integrate the World Bank's this growth). Countries left behind in the twin pillars of building an institutional cli- global economy stand to benefit much less mate conducive to investment and empow- from global markets in the short run and will ering the poor. By ensuring that institutions continue to rely on aid. For them, global enforce personal, political, and property action that helps compensate for unequal rights for all, including those currently endowments is truly essential.Action to build excluded, countries will be able to draw on endowments is primarily domestic, through much larger pools of investors and innova- public investments in human development, tors, and be much more effective in provid- infrastructure and governance structures. But ing services to all their citizens. Greater global action can support domestic policies equity can, over the long term, underpin through resource transfers in the form of aid, faster growth. This can be helped by greater which is not offset by debt repayments, and fairness in the global arena, not least through investments in global public goods, particu- the international community's meeting its larly global commons. commitments made at Monterrey. Faster Aid levels need to be bolstered in line with growth and human development in poorer the commitments rich countries made at the countries are essential to reducing global 2002 Monterrey Conference and concrete inequity and to reaching the Millennium plans should be made to reach the target of Development Goals. Introduction 1 Nthabiseng and Pieter--the hypothetical Equity and inequality of South African children who opened the opportunity: the basic concepts c h a p t e r report's overview--are not unusual exam- What is equity? As with any normative con- ples of people who face highly disparate cept,the word"equity"means different things initial opportunities. A girl born to a lower- to different people. It is a difficult concept, caste family of nine in the slums of Dhaka with a history of different interpretations, has vastly different opportunities from a varying by country and academic discipline. boy born to well-educated and affluent Economists link equity to questions of distri- parents in the well-heeled neighborhoods. bution. Lawyers tend to think of principles An AIDS orphan in rural Zimbabwe is meant to correct the strict application of the almost certain to have fewer chances and law, which may lead to an outcome judged to choices in life than a compatriot born to be unfair in specific circumstances. Philoso- healthy and well-educated parents in phers have produced the most headway in the Harare. Those differences are even greater thinking about equity. Indeed, the attributes across borders: an average Swiss, American, that would characterize a just and fair society or Japanese child born at the same instant lie at the foundation of Western political phi- as Nthabiseng will have incomparably losophy, from Plato's Republic and Aristotle's superior life chances. Politics onward. Equity is also central to most Such staggering inequalities in opportu- of the world's great religions, including Bud- nity are intrinsically objectionable, and dhism, Christianity, Hinduism, Islam, and almost every culture, religion, and philo- Judaism, as well as to most other faith tradi- sophical tradition has developed argu- tions. More recently, social choice theory, and ments and beliefs that place great value on the closely related domain of welfare eco- equity for its own sake. In addition, Part II nomics, have been concerned with the aggre- of this report will argue that we now have gation of preferences into some form of considerable evidence that equity is also "social optimum." instrumental to the pursuit of long-term Summarizing such long-standing and prosperity in aggregate terms for society as nuanced characterizations is perilous, but a whole. But before one can describe the common denominator of these many inequity, or assess its impact on growth and different views is that equity relates to fair- development, a clear definition of the term ness, whether locally in families and com- is needed. munities, or globally across nations. We do This introductory chapter presents our not dwell on the different approaches to working definition of equity and briefly dis- equity here, but we do elaborate on them in cusses its main component--equality of chapter 4, which reviews various categories opportunity. It then turns from our central of evidence in support of the intrinsic normative concepts to one of the report's importance of equity. For this report, we key positive concepts: inequality traps. An think of equity as being defined in terms of inequality trap encapsulates the mutually two basic principles: reinforcing nature of various inequalities, which leads to their persistence and to an · Equal opportunity. The outcome of a inferior development trajectory. person's life, in its many dimensions, 18 Introduction 19 should reflect mostly his or her efforts connect to the rest of the world, the quality and talents, not his or her background. of the services available, the way institutions Predetermined circumstances--gender, treat them--relate to one another? And how race, place of birth, family origins--and do these factors vary across groups? Such an the social groups a person is born into approach would require a focus not only on should not help determine whether peo- the dispersion of univariate distributions ple succeed economically, socially, and (such as income inequality or life expectancy) politically.1 but also on the correlations among them · Avoidance of absolute deprivation. An (how do health outcomes vary across socio- aversion to extreme poverty, or indeed a economic groups?). This is the approach Rawlsian2 form of inequality aversion in taken in most of chapter 2, which summa- the space of outcomes, suggests that rizes information on inequalities (with em- societies may decide to intervene to pro- phasis on the plural) in the various building tect the livelihoods of its neediest mem- blocks of opportunity and on their interre- bers (below some absolute threshold of lationships. need) even if the equal opportunity In taking this route, the report recognizes principle has been upheld. The road that predetermined circumstances, or mem- from opportunities to outcomes can be bership in prespecified groups, affect oppor- tortuous. Outcomes may be low because tunities in two ways: of bad luck, or even because of a person's · The circumstances of one's birth affect the own failings. Societies may decide, for endowments one starts with, including all insurance or for compassion, that its kinds of private assets, such as physical members will not be allowed to starve, wealth (including land and financial even if they enjoyed their fair share of assets), family background (the human, the opportunity pie, but things some- social, and cultural capital of one's par- how turned out badly for them. ents), and access to public services and The equal opportunity principle is con- infrastructure (sometimes referred to as ceptually simple: circumstances at birth geographic capital). should not matter for a person's chances in · Group membership and initial circum- life. But to measure inequality of opportu- stances also affect how one is treated by nities is much harder. Chapter 2 briefly dis- the institutions with which one must cusses one approach, which decomposes interact. Two individuals may both live in observed income inequality into one part areas where formal labor markets exist, that can be attributed, in a statistical sense, where courts are agile, and where a police to predetermined circumstances--such as force is present. But if these two (other- race, place of birth, and parental back- wise identical) people, because of their ground--and one part that cannot. The gender, race, religion, sexual orientation, first component captures a lower bound political beliefs, residential address, or value for the opportunity share of income any other morally irrelevant reason, are or earnings inequality. But it is generally differently rewarded for the same work in very difficult to measure things like family the labor market, are discriminated background precisely: years of schooling against by the court of law, or are treated and broad occupational categories are with bias by the police force, then the imperfect proxies for a family's endow- rules are not being applied fairly. There- ments of human, physical, and social capi- fore, these two people do not have the tal. same opportunity sets. Equity also A superior approach would be to capture requires fairness in processes. the inherently multidimensional and group- based nature of inequality of opportunity. Endowments that are less unequal, How do the factors that determine a per- processes that are fair, and protection from son's chances in life--the access to health deprivation are not always mutually con- and educational opportunities, the ability to sistent. At the policy level, there may be 20 WORLD DEVELOPMENT REPORT 2006 tradeoffs among them. Indeed, some policies Figure 1.1 The interaction of political, economic, and or institutions developed to further one of sociocultural inequalities the principles may compromise the other. Political For example, a policy of affirmative inequalities action that seeks to correct past inequities in the access to educational opportunities Institutions for one group--to equalize endowments-- Sociocultural Economic may imply that individuals of greater merit inequalities inequalities (but from another group) are excluded, cre- ating unfair processes. For another exam- ple, the taxes needed to raise government revenues to make transfers to poor individ- uals (desirable to avoid deprivation) expro- priate some fruits of the efforts of hard- The interaction of political, economic, working men and women. This might be and sociocultural inequalities shapes the seen as violating property rights or the institutions and rules in all societies. The rights to appropriate the fruits of one's own way these institutions function affects peo- labor, again creating unfair processes. ple's opportunities and their ability to invest Whenever such tradeoffs exist--which is and prosper. Unequal economic opportuni- most of the time--no textbook policy pre- ties lead to unequal outcomes and reinforce scription can be provided. Each society must unequal political power. Unequal power decide the relative weights it ascribes to each shapes institutions and policies that tend to of the principles of equity and to the effi- foster the persistence of the initial condi- cient expansion of total production (or tions (figure 1.1). other aggregate). This report will not pre- Consider the status of women in patriar- scribe what is equitable for any society. That chal societies. Women are often denied prop- is a prerogative of its members to be under- erty and inheritance rights. They also have taken through decision-making processes their freedom of movement restricted by they regard as fair. social norms that create separate "inside" and "outside" spheres of activity for women and Inequality traps men. These social inequalities have economic If people care about equity, and if political consequences: girls are less likely to be sent to systems aggregate people's views into social school; women are less likely to work outside preferences, why don't the distributions we the home; women generally earn less than observe represent optimal choices? Why do men. This reduces the options for women inequalities of opportunity persist, if they outside marriage and increases their eco- are both unfair and inimical to long-term nomic dependence on men. The inequalities prosperity? And how do these inequalities also have political consequences: women are reproduce themselves? The short answer is less likely to participate in important deci- that political systems do not always assign sions within and outside the home. equal weights to everyone's preferences. These unequal social and economic Policies and institutions do not arise from a structures tend to be readily reproduced. If benign social planner who aims to maxi- a woman has not been educated and has mize the present value of social welfare. grown up to believe that "good, decent" They are the outcomes of political economy women abide by existing social norms, she processes in which different groups seek to is likely to transmit this belief to her daugh- protect their own interests. Some groups ters and to enforce such behavior among have more power than others, and their her daughters-in-law. An inequality trap views prevail. When the interests of domi- may thus prevent generations of women nant groups are aligned with broader col- from getting educated, restrict their partici- lective goals, these decisions are for the pation in the labor market, and reduce their common good. When they are not, the out- ability to make free, informed choices and comes need be neither fair nor efficient. to realize their potential as individuals. This Introduction 21 reinforces gender differences in power that networks that maintain economic rank. Rich tend to persist over time. parents can use their social connections to Similarly, the unequal distribution of ensure that their child gets into a good power between the rich and the poor-- school, or they can call a few good friends to between dominant and subordinate groups-- make sure that their son gets a good job. Con- helps the rich maintain control over re- versely, poor parents are more subject to sources. Consider an agricultural laborer chance. Connections open doors and reduce working for a powerful landlord. Illiteracy constraints. and malnourishment may prevent him from Social networks are closely allied with cul- breaking out of the cycle of poverty. But he is ture. (By "culture" we mean aspects of life also likely to be heavily indebted to his that deal with relationships among individu- employer, which puts him under the land- als within groups, among groups, and lord's control. Even if laws were in place that between ideas and perspectives). Subordinate would allow him to challenge his landlord's groups may face adverse "terms of recogni- dictates, being illiterate, he would find it diffi- tion,"the framework within which they nego- cult to navigate the political and judicial insti- tiate their interactions with other social tutions that might help him assert his rights. groups.6 One obvious expression is explicit In many parts of the world, this distance discrimination that can lead to an explicit between landlords and laborers is com- denial of opportunities and to a rational pounded by entrenched social structures: choice to invest less at the margin. landlords typically belong to a dominant But the process may also be less overt. A group defined by race or caste, tenants and person born into a low social class or a laborers to a subordinate group. Because socially excluded group may adopt the domi- members of these groups often face severe nant group's value system.7 Religious beliefs constraints from social norms against inter- may propel this: women may take on gen- marrying, group-based inequalities are per- dered beliefs about their economic and social petuated across generations. role, and low castes may absorb the upper Poor individuals in geographically isolated castes' view of their "inferior" status. In regions and racial and ethnic minorities also schools, a stigmatized group may face a have less political power and less voice in "stereotype threat," adopting the dominant many countries. This affects their ability to group's view of their ability to perform in propose and implement policies that would cognitive tests or in occupations historically reduce their disadvantage, even if such poli- controlled by dominant groups.8 This can cies might be growth-enhancing for the coun- affect a discriminated group's "capacity to try.3 The correlations between the unequal aspire."9 It also implies that"voice,"the capac- distribution of assets, opportunities, and ity of individuals to influence the decisions political power give rise to a circular flow of that shape their lives, is also unequally dis- mutually reinforcing patterns of inequality. tributed and that"effort"and"ability"are not Such a flow, and its associated feedback loops, necessarily exogenous (predetermined).10 help inequalities persist over long periods-- The existence of these inequality traps-- even if they are inefficient and deemed unfair with mutually reinforcing inequalities in the by a majority of the population.4 economic, political, social, and cultural Economic and political inequalities are domains--has two main implications for this themselves embedded in unequal social and analysis. The first implication is that, because cultural institutions.5 The social networks of market failures and of the ways in which that the poor have access to are substantially institutions evolve, inequality traps can affect different from those the rich can tap into. For not only the distribution but also the aggre- instance, a poor person's social network may gate dynamics of growth and development. be geared primarily toward survival, with This in turn means that, in the long run, limited access to networks that would link equity and efficiency may be complements, him or her to better jobs and opportunities. not substitutes.11 The rich, by contrast, are bequeathed with Capital, land, and labor markets in devel- much more economically productive social oping countries are imperfect. Informational 22 WORLD DEVELOPMENT REPORT 2006 asymmetries and contract enforcement prob- one segment of the labor market, such as lems imply that some people with good management, and if this brings a new pool project ideas (and thus a potentially high of talent into that segment, efficiency is marginal product of capital) end up con- likely to increase even in the short run.14 In strained in their access to capital. This, even other cases, however, expanding the oppor- as other people earn a lower return on their tunity sets for the disadvantaged may (more abundant) capital. In agriculture, require more costly redistribution. To land market failures mean that some farm- finance better-quality schooling for those ers exert too little effort on some plots who have the least educated parents, and (where they are sharecropping), and too who attend the worst schools, it may be much effort on other plots (which they necessary to raise taxes on other people. own).12 Investment in human capital can The basic economic insight that such taxa- also be allocated inefficiently, because of tion distorts incentives remains valid. Such intrahousehold disputes, because credit- policies should be implemented only to the constrained households lack the resources extent that the (present) value of the long- to keep their children healthy and in school, run benefits of greater equity exceed the or because discrimination in the labor mar- efficiency costs of funding them.15 ket reduces the expected returns to school- The point is that some of these long- ing for some groups. What do such diverse term benefits of pursuing greater equity are market failures have in common? They ignored in the conceptual calculus of policy cause differences in initial endowments-- design. The fact that better-schooled chil- such as family wealth, race, or gender--to dren who are poor and from a racial minor- make investment less efficient. ity will be more productive is usually taken There also are political and institutional into account. But the fact that they may reasons why equity and efficiency are long- acquire greater political voice and help term complements. Markets are not the make social institutions more inclusive-- only institutions in society. The function- which, in turn, may increase the stake of ing of states, legal systems, and regulatory that group in society, potentially leading agencies--indeed, of all the institutions to greater trust, less conflict, and more that assign and enforce property rights and investment--may not be. To the extent that mediate conflicts among citizens--is influ- such indirect (but important) benefits of enced by the distribution of political power equity-enhancing policies are ignored, too (or influence, or voice) in society. Unequal few of them are pursued--even assuming a distributions of control over resources and purely benevolent government. of political influence perpetuate institu- By placing equity and fairness as central tions that protect the interests of the most elements of an efficient development strat- powerful, sometimes to the detriment of egy, developing countries will be better able the personal and property rights of others.13 to reach sustainable growth and develop- Those whose rights are not protected ment trajectories. Such equitable growth have little incentive to invest, perpetuating paths are likely to lead to faster reductions poverty and reproducing inequality. Con- in the many dimensions of poverty, the cen- versely, good institutions that protect and tral objective of development everywhere.16 enforce personal and property rights for all The second implication of the existence citizens have led to higher sustained eco- of inequality traps is that no real-life policy nomic growth and long-term prosperity. or institution is entirely exogenous: no Equity can, once again, help societies grow existing organization or application of a and develop. policy idea has been implemented on a This does not mean, of course, that purely technocratic basis. All policies and efficiency-equity tradeoffs have somehow institutions exist because the political sys- been abolished. In some cases, equity tem has brought them into being or allowed enhancements bring immediate--as well as them to survive. The political system long-run--benefits for efficiency. If we reflects the distribution of power and voice reduce discrimination against women in attained at a particular time and place. This Introduction 23 distribution is, in turn, influenced by the A brief preview of the Report distribution of wealth, income, and other Part I summarizes evidence on inequity assets and outcomes in that society. Such within and across countries. Part II asks why "circular causality" for wealth, income, equity matters for development, both intrin- social and cultural capital, and power, sically and instrumentally. Part III turns to mediated through institutions, evolves the policy implications. If unequal opportu- throughout time and history. nities and absolute deprivation are inimical Acknowledging history and social and to long-term prosperity--as well as intrinsi- political institutions is crucial to avoid pol- cally objectionable--there is scope for policy icy mistakes. But a fatalistic view of the and institutional reform aimed at leveling the world is not only wrong, but also counter- economic and political playing fields. productive. To propose policies without An equity lens and the focus on leveling understanding history, or the specific con- the playing field add three basic points. First, text for developing these policies, often redistributions from richer and more power- leads to failure. But this acknowledgment is ful groups to poorer groups that face more not equivalent to the view that no policies limited opportunities are sometimes neces- should be suggested at all. Such a view fails sary and should be pursued. Second, when to recognize how purposeful social and considering policy tradeoffs between equity political action can achieve significant pol- and efficiency, the full long-term benefits of icy and institutional changes--and would equity--including on the development of result in fatalistic inaction. better and more inclusive institutions--need History is not endlessly repetitive and, as to be taken into account. Third, all categories this report documents, many countries have of economic policy--macro and micro-- taken on the challenge of breaking inequality have effects on both efficiency (and growth) traps with some success. Groups have also and equity (and distribution). Because our changed their circumstances or changed ultimate goal is the reduction of poverty social and political institutions. Consider through the equitable pursuit of prosperity, the civil rights movement in the United the policy suggestions in these chapters are States, the democratic overthrow of consistent with good poverty-reduction poli- apartheid in South Africa, the more partici- cies, which the World Bank has been advocat- patory budgeting practices in some Brazil- ing since at least the publication of the World ian cities, and the reforms in access to land, Development Report 1990.17 These sugges- education, and local government in the tions are also in line with the 2000 World Indian state of Kerala. The challenge for Development Report's three pillars of oppor- policy is to ask when and how such changes tunity, empowerment, and security.18 can be supported. Inequity within and across countries I P A R T f o c u s 1 o n Palanpur Inequality traps stifle economic development in a north Indian village Villagers differ markedly from one another in the opportunities they have to improve their welfare and in their abilities to use the assets and endowments available to them. Mirrored in village economic and social institutions--and in the politi- cal processes for seeking change--these deep-seated inequalities have prevented the village from improving human devel- opment and accelerating economic growth. T he village of Palanpur, in the north Caste Gender Indian state of Uttar Pradesh, has Caste in Palanpur defines opportunities Gender inequalities in Palanpur are pro- been the subject of intensive study and determines the activities villagers pur- nounced. In 1993 there were 84 females for by a group of development economists sue, even independent of occupation, edu- every 100 males, strikingly lower than in between the late 1950s and early 1990s.1 cation, and other standard household char- most parts of the world (where the ratio is Researchers visited the village repeatedly acteristics. The three largest castes in usually greater than one). Child mortality and collected detailed quantitative and Palanpur are Thakurs, Muraos, and Jatabs. rates are much higher among girls than qualitative information. While a single vil- At the top is a martial caste known as among boys. As the researchers reported, lage study covering a specific period of time the Thakurs, which accounted for about a "We witnessed several cases of infant girls cannot be used to draw inferences about quarter of the population in 1993. Thakurs who were allowed to wither away and die in development in rural India as a whole, it are disproportionately represented in jobs circumstances that would undoubtedly does provide a distinct window into the such as the army and police that accord well have prompted more energetic action in the kind of processes that can shape growth with their martial past. They are typically case of a male child."2 and equity over time. averse to wage employment in the village, Young girls leave their village to join The study documents modest economic because this would place them in a subordi- their husband's family. Marriage is "the gift progress over time with slow growth in per nate position. Alert to nonfarm employ- of a daughter." In the new household, the capita incomes and some declines in income ment opportunities outside the village, they girl is acutely vulnerable with no income- poverty. But alongside this sluggish growth is are well placed to take advantage of them, earning opportunities, no property, no pos- evidence of stagnation and even deteriora- thanks to stronger information and social sibility of returning home permanently. tion along other dimensions of well-being. networks. Giving birth to a child improves her sta- Different groups of villagers, defined by Just below the Thakurs is a cultivating tus--particularly if it's a boy. But family such predetermined characteristics as caste caste, the Muraos, also accounting for a planning practices are limited, leading to or gender, face radically different opportuni- quarter of the population. Muraos are tra- high fertility rates and short birth-spacing. ties for economic and social mobility. Their ditional cultivators who have continued to Repeated pregnancies take an enormous economic endowments differ markedly, as specialize in agriculture. Very hardworking, toll on women's general health and put do their education, health, occupational they have seen a rapid rise in wealth and their lives at risk at the time of delivery. Old mobility, and capacity to influence and economic status in the village. While they age is strongly associated with widowhood, shape social and political institutions in the may still not enjoy the same social status as in part because of the typically large age dif- village. Disadvantage in one dimension of Thakurs, they have become more prosper- ference between husbands and wives. To opportunity is generally reinforced by disad- ous and now challenge the previously survive, widows depend overwhelmingly vantage in others, combined in a way that unquestioned political and economic dom- on adult sons. perpetuate the stark inequities over genera- inance of the Thakurs. The participation of women in the labor tions. At the bottom are the scheduled castes force in Palanpur is extremely low. Of 313 These deep-seated inequalities of known as Jatabs, accounting for 12 per- women age 15 or older in 1993, only 14 had opportunity shape, and are shaped by, mar- cent of the population. Traditionally anything other than domestic work as their ket imperfections in the village, resulting in "untouchable" leather workers who now primary or secondary occupation. This low suboptimal investments and impeding engage primarily in agricultural wage female participation in the labor force and growth. Inequalities are also mirrored in labor, Jatabs have not seen any of the society, more generally, has extensive conse- village institutions. State and central gov- social mobility of the Muraos. They quences. For example, the survival disad- ernment policies that were introduced in remain a caste apart, with little or no land, vantage of girls compared with boys tends the village were inevitably filtered through a poor education, and little access to non- to narrow only when adult women have highly unequal distribution of power and farm employment outside the village. wider opportunities for gainful employ- influence. Rather than stimulating broad Despite some slight improvement over the ment. Similarly, the virtual exclusion of economic and social progress, public policy years, Jatabs continue to endure many women from most representative institu- has simply reproduced the prevailing pat- forms of discrimination, including that tions in Palanpur has limited the focus and terns of inequality. from government officials. quality of local politics and public action. Focus on Palanpur 27 Schooling often less strenuous and demanding than in the Jatabs, are the principal targets of fraud- Inequalities in education are wide, declining agriculture. Access to nonfarm jobs is far ulent accounting practices that have only slowly. In the late 1950s, just under 20 from equal, however. Workers who wish to resulted in a dizzying accumulation of percent of males age seven or older, and only obtain a regular job generally have to pay debts and dramatically raised the cost of 1 percent of females, were literate. By 1993, bribes and, more important, get a recom- borrowing for such households. Those male literacy had risen to 37 percent and mendation or introduction from a friend or without access to cheap formal credit have female literacy to just below 10 percent. Yet relative. Such rationing by personal con- to fall back on private moneylenders, at education is clearly of great value in Palan- tacts and influence implies that people with high interest rates. pur. Years of schooling strongly increase the low social status tend to be at a disadvan- likelihood that an individual will find tage in the competition for nonfarm jobs, Collective inaction employment in a regular job outside the vil- even for given education levels, skills, and The different bases of social division in lage. Among farmers, too, direct observation endowments. Palanpur have led to multiple solidarities strongly suggests that better-educated farm- The least advantaged segments of the and oppositions. The village society is ers in Palanpur have been crucial in techno- labor force in Palanpur are highly repre- highly fragmented, with few solid rallying logical innovation and diffusion. sented in agricultural wage labor. Casual points for collective action, whether coop- The perceived value of female education wage labor in agriculture can be described erative or adversarial. The limited reach of is quite different from that for boys, because as a "last-resort" occupation, one taken up collective action, in turn, is responsible for girls are expected to spend most of their by those who have no significant alterna- some of the most serious failures of its adult life in domestic work. Although there tive. Agricultural wage rates have risen over development. For example, the village is good evidence of the benefits of educa- time, but slowly, and there are prolonged assembly (panchayat) is constituted every tion in domestic activities, it is not clear periods of seasonal unemployment. few years, but it rarely meets. In 1984 it was that the effects of maternal literacy on child Econometric analysis indicates that-- made obligatory that at least one woman health, for example, are recognized. Even if controlling for a large number of house- participant be selected, but in Palanpur she benefits are correctly perceived, they might hold characteristics (caste, demographic is never consulted and has never attended not be of direct interest to the parents, characteristics, education, land, and so any panchayat meetings. All decisions and because daughters are "transferred" from on)--the probability of engagement in responsibilities are effectively taken by a vil- the village when they marry. Those who agricultural labor is 50 to 60 percent higher lage headman, who has always come from bear the costs of female education thus for households that had engaged in this one of the privileged groups. There also is share little in the benefits. occupation a decade earlier. Occupational ample scope for self-serving patronage and The upper-caste Thakurs have a view inequalities thus result in income inequal- fraud. Modern arrangements (elections, (adopted by many others) that education is ity, and they persist over long periods. reserved seats for low castes, and women on not important or even suitable for the lower the panchayat) have not profoundly altered castes. Blatant forms of discrimination Incomes, assets, and liabilities the elitist and nonparticipatory character of against children from disadvantaged castes Per capita incomes in Palanpur have grown local politics in the village. have disappeared from the schooling sys- at around 2 percent a year between 1957­8 The dominance of privileged groups tem, but subtler forms of discrimination and 1983­4 and income poverty fell from over collective institutions has had far- have remained--for example, the high- around 47 to 34 percent during this period. reaching consequences. Between the late caste teacher considered any form of con- Incomes in the village are distributed about 1950s and early 1990s, no fewer than 18 tact with Jatab children as "repulsive," as unequally as they are in India as a whole, types of government-provided programs which likely affected his or her rapport with and income inequality has remained rela- were introduced to the village: a public them and probably discouraged their atten- tively stable over time. works road-building program, free school- dance. An assessment of economic inequalities ing, free basic health care, old-age pensions, based on wealth provides a different pic- a fair-price shop, a farmer's cooperative, Work ture. Ownership of durables has expanded, and so on. Most of them remained non- Occupational divisions in Palanpur have and the value of land and other productive functional, particularly when there was a widened as the village has shifted from an assets has grown, implying a significant rise redistributive component. Only programs overwhelmingly agricultural economy to in gross wealth. But there has also been a that enjoyed strong backing from the polit- one in which nonagricultural activities have dramatic and uneven expansion of liabili- ically advantaged in the village were come to account for 30 to 40 percent of vil- ties. Inequality in the distribution of net allowed to succeed. The authors of the lage income. In 1957­58 some 13 villagers wealth has widened in Palanpur from a study conclude, "There is little prospect of (of 528) were employed in regular or semi- Gini of around 0.46 in 1962­3 to a conserv- major improvement in the orientation and regular nonfarm jobs. By 1993, this number atively estimated 0.55 in 1990. achievements of government intervention had increased more than four times to 57 Many of the liabilities come from pub- without a significant change in the balance jobs (the total population had only dou- licly provided and subsidized credit sources of political power, both at the state and at bled). that have expanded sharply over time, but the local level."3 Outside jobs are associated with higher that have been associated with pervasive and more stable incomes, and the work is corruption. Disadvantaged groups, such as Source: Drèze, Lanjouw, and Sharma (1998). Inequity within countries: individuals and groups 2 Across the world, individuals and groups country but also to compare across coun- face highly unequal opportunities to better tries, we use group definitions of broad c h a p t e r themselves economically and socially. relevance. Inequalities, as such, might not be of particu- Although economic inequalities are lar concern if outcomes varied for reasons clearly part of the story, this chapter goes that had to do mainly with individual efforts. beyond incomes to emphasize inequalities But, taking our cue from the first chapter, we in key dimensions of opportunity, such as are concerned here with systematic differ- health, education, and the freedom and ences in opportunities for individuals and capacity of people to participate in and groups who differ only in skin color, caste, shape society. There is a special concern gender, or place of residence, predetermined with inequalities that tend to perpetuate characteristics that can be argued to be differences across individuals and groups "morally irrelevant."As illustrated in focus 1, over time, within and across generations. on the Indian village of Palanpur, when such These result in "inequality traps" that are inequalities of opportunity are pronounced, pervasive in many countries. Such inequal- they are often reproduced over time and not ity traps reinforce our concern with equity only affect welfare directly but also act to sti- on intrinsic grounds, but they can also be fle human development and economic particularly detrimental to the development growth. process, because they act to curtail eco- On the basis of what predetermined nomic dynamism. characteristics should groups be defined A key objective here is to show how such that we would not want to see sys- inequalities combine, interact, and are tematic differences in their opportunities? reproduced through interlinked economic, Clearly there is no single answer. Roemer political, and sociocultural processes. Indi- (1998) argues that society has to make this viduals and groups differ markedly in their choice through some kind of ethical and power to influence these processes; indeed, political process. The circumstances could they differ even in their capacity to aspire include social origin variables outside an to such influence. The report emphasizes individual's control, such as sex, race, eth- that such "agency" is a dimension of nicity, caste, parental education and occu- opportunity, alongside education, health, pation, wealth, or place of birth. Cogneau and wealth. And inequalities of agency are (2005) notes that a society's choice of central in explaining how inequalities of circumstances establishes a direct link opportunity are transmitted over time between equality of opportunities and the (box 2.1). intergenerational transmission of out- This chapter presents evidence of a comes. In this chapter, we are largely com- high degree of inequality of opportunity pelled to let data availability dictate the in many developing countries--inequali- group definitions we consider. We can ties manifest in a variety of dimensions, thus present only a partial, and often rudi- such as health, education, and income. It mentary, picture of the full range of then focuses on the specific dimension of inequity that might exist in a country. inequality of power, or agency. Through- Because we wish not only to look within a out the chapter, we emphasize that 28 Inequity within countries: individuals and groups 29 inequalities in different dimensions can interact with, and reinforce, one another B O X 2 . 1 Unequal opportunities persist across generations over time. To highlight these connections, in Brazil we end by focusing on the specific case of gender inequity. As a prelude to the themes in this chapter, cohorts. Of the four, family background was we describe one attempt to quantify the most important. level and persistence of inequalities of This distribution of certain opportuni- Inequalities in health opportunity in Brazil, based on nationally ties and outcomes has persisted across gen- representative household survey data. Brazil erations.When the authors estimated Alongside the intrinsic importance of was selected for a reason.With a Gini coeffi- econometrically the relationship between health as a dimension of welfare, poor cient of per capita incomes just below 0.6 schooling and race, region of origin, health can directly influence an individ- and persistent over time, it is generally per- parental education, and father's occupation, ceived to be one of the world's most only the coefficient on parental education ual's opportunities--his or her earnings unequal countries.* seems to have fallen across cohorts. In other capacity, performance at school, ability to Brazil's main household survey, the words, race, region of origin, and father's care for children, participation in commu- Pesquisa Nacional por Amostra de Domicilios occupation continue to predict an individ- nity activities, and so on. This important (PNAD), included in 1996 a set of ual's education level. And even for educa- supplemental questions on the parents of tion, mechanisms are at work to reproduce instrumental function of health implies respondents.This permitted an analysis of schooling levels across generations, espe- that inequalities in health often translate the intergenerational persistence in cially at the lower end of the distribution. into inequalities in other dimensions of inequalities. Using four circumstance vari- Brazil underscores the need to look at a welfare. And these inequalities are repro- ables (parental schooling, father's occupa- range of outcomes (of which incomes are tion, race, and region of birth), Bourguignon, only one,with education,health and services duced over time. We focus here on chil- Ferreira, and Menendez (2005) investigated also of great concern).It also underscores the dren, while recognizing that differences in how inequalities of opportunity generate need to look at a range of processes--of social status, wealth, and health also mat- inequality in current earnings across differ- which income and economic wealth-based ent cohorts of adult individuals. Applying a mechanisms form only part,and for which ter for adults. conceptual framework closely related to group-based interactions are as central as Demographic and Health Survey (DHS) that in chapter 1, they decomposed earn- household and individual conditions,behav- data indicate that health status varies ings inequality into a lower bound compo- iors,and characteristics. sharply across population groups. To what nent attributable to the inequality of oppor- Source: Bourguignon, Ferreira, and Menendez tunity--to the effect of the four observed extent does it vary across population groups (2005). circumstance variables--and a residual * The perception of particularly high inequality defined by characteristics that are predeter- component, which would account for per- in Brazil may to some extent be a result of the mined and arguably have no moral rele- sonal effort, luck, measurement error, transi- way income is measured there. Alternative approaches to measuring inequality, based on vance? We draw on DHS data from 60 tory income, and other unobservable char- other welfare indicators, indicate that Brazil acteristics.They found that the four countries to examine how the health of may be less of an outlier in Latin America than variables accounted for more than a fifth of previously believed. See box 2.5 and also De children varies across population groups the total earnings inequality within gender Ferranti and others (2004). defined by mother's education, rural or urban residence, and parent's economic sta- tus, proxied by an index of household own- ership of consumer durables. (We look fur- below 50 (estimates from 1996), the rate ther at cross-country differences in health for children whose mothers have not been in chapter 3.) educated is roughly twice as high. Further analysis, not reported here, indicates that Infant mortality. For these countries, infant mortality rates are also sharply differ- infant mortality rates vary markedly-- entiated across population groups defined from a low of around 25 per 1,000 live by rural-urban residence and economic sta- births in Colombia and Jordan, to more tus, proxied by asset ownership. than 125 in Mali, Niger, and Mozambique (figure 2.1). But even where overall infant Stunting. Another dimension of health, mortality rates are high, the figures for extreme stunting (with height-for-age children whose mothers have a secondary below three standard deviations from the education or higher are dramatically reference population), also varies markedly lower. The risk of death among children across countries. Overall rates are as high with well-educated mothers in Mali, for as 30 percent in Pakistan and the Rep- example, is about the same as that for the ublic of Yemen, but negligible in Trinidad average child in Indonesia. And while the and Tobago and very low in Jordan, Arme- overall infant mortality rate in Brazil lies nia, Brazil, and Kazakhstan (figure 2.2). Figure 2.1 Infant mortality varies across countries but also by mother's education within countries Infant mortality rate per 1,000 live births 160 140 No education 120 100 80 60 40 Secondary or higher 20 0 e i bia ana ala en bia ali Peru oros Haiti ublic FasoChad'IvoireMalawEthiopiaRwanda M Africa BrazilTurkey EgyptTunisiababw India BoliviaEritreaSudanNepal eroonTogo bodia Niger bique UgandaYem Benin Guinea d Colom JordanLankaVietnam Sri Paraguay Thailand GhanaoroccoSenegalKenyaNigeriaSalvadorenistan M Com Zam Pakistan Rep Philippines Botsw Nicaragua GuatemIndonesia Zim Cam El Cam adagascar ozam South Bangladesh Turkm M Burkina Côte M African Central Source: Authors' calculations from Demographic Health Survey (DHS) data. Note: The continuous dark line represents the mean infant mortality rate in each country, while the endpoints of the whiskers indicate the infant mortality rates by different levels of mother's education. Figure 2.2 Stunting levels of children born in rural versus urban areas are far from the same Percentage of children severely stunted (z-score < 3) 35 30 25 20 Rural 15 10 5 Urban 0 e i (*) (*) bia ali ala bia en enia ibia M Brazil Egypt Haiti Benin Faso anda bodia Chad alaw JordanArm Lanka Tunisia Turkey Gabon enistan orocco Ghana Bolivia babw NepalNigeriaZam M Yem Ethiopia Colom Sri Nam M Senegal Guinea Ugandad'IvoireauritaniaTanzania Rw Pakistan Tobago RepublicParaguay Nicaragua Zim Côte M Cam Bangladesh Guatem and Burkina Kazakhstan Turkm inican Dom Trinidad Source: Authors' calculations from Demographic Health Survey (DHS) data. Note: The continuous dark line represents the percentage of severely stunted children in each country, while the endpoints of the whiskers indicate the percentages for urban and rural areas. * Indicates stunting level in urban areas are higher than in rural areas. 30 Inequity within countries: individuals and groups 31 Figure 2.3 Access to childhood immunization services depends on parents' economic status Percentage not covered 70 60 50 40 Poorest 30 20 10 0 Wealthiest i a (*) bia (*) ala (*) (*) en ali Egypt anda Peru oros Faso Haiti ublic M Africa KenyaM alaw Brazilbia Benin India Togo bodia NigerChad Bolivia Yem eroon Eritrea Rw VietnamTurkey orocco Ghana biqueGuinea Com Uganda auritani EthiopiaRep Pakistan JordanColom Zam Paraguay GuatemTanzaniaIndonesiaenistan M Philippines Cam M adagascar ozam Cam South Bangladesh Burkina M M Kazakhstan Turkm African Central Source: Authors' calculations from Demographic Health Survey (DHS) data. Note: The continuous dark line represents the percentage of children without access to a basic immunization package in each country, while the endpoints of the whiskers indicate the percentages for the top and the bottom quintile of the asset ownership distribution. * Indicates that the poorest quintile have higher access to childhood immunization services than the wealthiest quintile. The difference between children born in access to health services, proxied here as rural and urban areas can be dramatic, having received at least one of three key particularly at higher overall stunting lev- childhood vaccinations--bacille Calmette- els. In Guatemala, stunting rates for chil- Guérin; diptheria, pertussis, and tetanus; or dren in urban areas are around 10 percent, measles (figure 2.3). This is so even in but in rural areas they are as much as three countries where the overall percentage of times higher. Children in Guatemala clearly children without any coverage is as high as have no choice in deciding whether they 40 percent. Conversely, children whose par- are born in the countryside or the city, but ents are in the bottom quintile are much their opportunities to achieve good health more likely to lack access to such basic are clearly much less assured in rural than health care. In Morocco, where roughly 5 in urban areas. As for infant mortality percent of children have not received even rates, stunting among children is also one of these three vaccinations, the propor- sharply differentiated by mother's educa- tion for children in the poorest quintile is tion and household economic status. well above 15 percent. Access to immunization. Children born in High-impact health services. The World families whose asset ownership places them Bank (2003j), drawing on DHS data from in the top quintile of the distribution of 30 low- and middle-income countries, finds economic status have a high probability of that the poor are considerably less likely 32 WORLD DEVELOPMENT REPORT 2006 than the non-poor to have access to high- the main inequalities that affect health impact health services, such as skilled deliv- may not be in the income space. He cites ery care, antenatal care, and complemen- examples of other key dimensions of tary feeding. Similarly, Wodon (2005) draws inequality: land ownership, women's on household survey data from 15 African agency (health and fertility in India), and countries to indicate that, while virtually all democratic rights (in England in the urban households are within one hour's 1870s and in the U.S. South in the 1960s). travel time to a health center, the propor- In general, an individual's rank in the rele- tion in rural areas is generally only around vant hierarchy has been found to be im- half, and as low as 35­38 percent in Niger portant to health in animal and human and Ethiopia. experiments. Repeated stress associated with insults and the lack of control that Disability. Data from a number of coun- comes from low rank has a well-developed tries suggest that disabled people are biochemical basis.3 much more likely to be poor. Hoogeveen The consequences of poor health are (2003) reports that in Uganda the proba- reflected in education achievements, eco- bility of poverty for urban dwellers living nomic prosperity, and future generations. in a household with a disabled head is 38 Consider the plight of AIDS orphans in percent higher than for those who live in a southern Africa, the stark inequalities of household with an able-bodied head. The opportunity they face, and the possible role Serbian Poverty Reduction Strategy for public action (box 2.2). reports that 70 percent of disabled people DHS data (figures 2.1­2.3) provide are unemployed. In a study drawing on detailed insights into the relationship 10 household surveys in eight countries, between inequalities in health and some self-reported disability was found to be key circumstance variables. But they are more correlated with nonattendance at not particularly well suited to capturing school than other characteristics, includ- the contribution of detailed spatial factors, ing gender or rural residence.1 Sen (2004) such as place of birth, in overall inequality, emphasizes that the disabled face not only because of the limited sample size. In one an "earnings handicap," associated with a attempt to get around this problem, child lower probability of employment and height in Cambodia was estimated at the lower compensation for their work, but commune level based on a statistical pro- also a "conversion handicap." By this he cedure to combine DHS data with popula- means that a physically disabled person tion census data.4 The study documents requires more income than an able- considerable heterogeneity across Cambo- bodied person to achieve the same living dia's more than 1,600 communes in the standard. prevalence of stunting and being under- weight among children under the age of Social inequalities damaging health. Not five (figure 2.4). The analysis provides only are health outcomes correlated with clear evidence that in Cambodia a child's inequalities in other dimensions, but such opportunities for good health have a social inequalities can be argued to be strong spatial dimension to them. Yet detrimental to individual health out- clearly, no child is able to determine in comes.2 In his comprehensive review of which locality he or she is born. the literature, Deaton (2003) argues that, while it is certainly plausible that various Trends inequalities (such as those in power) cause Average health in most countries improved bad health, it is not clear that inequality of in the twentieth century (chapter 3). income is the main culprit. He provides Deaton (2004) documents that improve- evidence suggesting that, after controlling ments in health are likely to have accom- for an individual's income, income in- panied economic growth, but he also equality at the group level does not matter emphasizes the globalization of knowl- independently for individual health. Thus, edge, facilitated by local political, eco- Inequity within countries: individuals and groups 33 B O X 2 . 2 Unequal assets, unequal opportunities: AIDS orphans in Southern Africa It is hard to imagine people with fewer assets, savings,or other valuables.From an education in their most formative years and the paucity of through absolutely no fault of their own,than standpoint,it is vital to keep children in school, opportunities available to them thereafter. AIDS orphans.Left to fend for themselves on the where the acquisition of even basic skills can death of one or both parents from a progressively give them some viable prospect of being able to Avoiding infection debilitating,heavily stigmatized,and costly-to- move out of poverty.Where a child is the head of The most immediate priority,however,is ensuring treat disease,their plight would be of concern a household and perhaps its sole income earner, that AIDS orphans do not themselves become even if they numbered but a few.In southern however,the pressures to drop out of school are infected with the disease,thereby increasing the Africa,however,the United Nations Children's Fund enormous.Numerous studies document signifi- likelihood that they will perpetuate the cycle.AIDS (UNICEF) estimates that there were 12.3 million cantly higher dropout rates of AIDS orphans.In orphans face precisely such a risk,however, AIDS orphans in 2003,a veritable demographic Kenya,one extreme example found that"52 per- because the stigma of HIV/AIDS means that people group in their own right.By 2010,UNICEF projects cent of the children orphaned by AIDS were not often assume that the children of parents who died that there will be 1.5 million AIDS orphans in in school,compared to 2 percent of non- from AIDS must be infected,shunning,shaming,or South Africa;by 2014,1 million in Zambia. orphans"(UNAIDS 2002,135). exploiting them accordingly.Some AIDS orphans An entire generation of Africans is emerging Attending school is also important from a have even been denied access to schools and who will have been raised, if they are lucky, by civic perspective: it socializes children into the health clinics because of the fear their very grandparents or extended family members norms and mores of society,and gives them the presence generates.Children grieving the loss of a (themselves likely to be impoverished, confidence and capacity to participate more parent are also vulnerable to the sexual predations overwhelmed, and suffering from the disease). fully in it.Without such socialization,vulnerable of those putatively claiming to offer them comfort. At worst, they will grow up in child-headed young children are easy targets for those offer- Indeed,the desperation and apparent hopeless- households or in situations in which their basic ing them security and status through member- ness of their circumstances--all the more so if it rights to food, clothing, shelter, and adequate ship in a street gang,criminal network,or militia coincides with a natural disaster such as drought-- care are routinely denied. movement.If AIDS orphans continue to stay can drive AIDS orphans into prostitution. from school at their current rate,comments one The plight of AIDS orphans provides a Wills and schooling senior U.N.official,"you will have a society where graphic illustration of how cycles of disadvantage Beginning to overcome the huge disadvantages kids haven't been to school and therefore can't can perpetuate themselves,and how social isola- that AIDS orphans start life with requires special fulfill even basic jobs...a society where a large tion and exclusion (especially at a young age) can attention on numerous fronts (box 7.11 consid- proportion can have antisocial instincts because preclude the acquisition of assets and undermine ers a variety of policy options).From a legal their lives have been so hard.You [will] have a the capacity to sustain participation in the insti- standpoint,parents who know their death is generation of children who will be more vulnera- tutions that provide the best path out of poverty. imminent and who have young children need to ble to exploitation and to disease because they Sources: Avert.org (2004) http://www.avert.org/ be encouraged (even if they are illiterate) to pre- won't have the same sense of self-worth"(cited aidsorphans.htm. Accessed December 14, 2004. pare enforceable wills that will protect the inher- in Fleshman 2001,1).Such children face the dis- Fleshman (2001). Hargreaves and Glynn (2002), itance rights of their children to ensure that sur- mal prospect of failing to accumulate assets Lewis (2003), UNAIDS (2002), UNICEF (2003), USAID, viving adults do not just forcibly take their land, because of the extreme burdens thrust on them UNAIDS, and UNICEF (2004). nomic, and educational conditions. In the Figure 2.4 Stunting and underweight in Cambodia 1980s and 1990s, however, progress slowed--a result of the worldwide HIV/ AIDS epidemic and rises in cardiovascular mortality in Eastern Europe and former Soviet Union countries. How have inequalities in health evolved within countries? Data from DHS provide some clues. For a subset of countries, mul- tiple rounds of DHS data are available to document changes in infant mortality over time. Of some 36 "spells" of health change Stunting and underweight that could be identified, roughly 25 corre- (number of communes) sponded to improved health outcomes in Stunting low/underweight low (260) the form of lower infant mortality rates. Stunting low/underweight high (189) Stunting high/underweight low (365) Although overall health improved in these Stunting high/underweight high (780) 25 cases, the gaps between urban and rural Incomplete data areas, between groups defined by mother's 0 100 200 education, and between groups defined by kilometers durable asset ownership did not univer- Source: Fujii (2005). sally decline alongside the overall declines 34 WORLD DEVELOPMENT REPORT 2006 1990s, the overall decline in the infant B O X 2 . 3 Health improvements and greater health equity mortality rate to 7.9 in 1994 was accompa- in Peru nied by an increase in the ratio of black to white infant mortality rates from 1.6 in Paxson and Schady (2004),drawing on mul- Infant mortality rates in Peru varied 1950 to 2.2 in 1991. Inequality in health tiple rounds of DHS data,document the markedly with the education level of the does not inevitably fall as overall health declining infant mortality rate in Peru mother in late 1970s and the 1980s (see fig- between the late 1970s and late 1990s.A ure below). During the economic crisis, improves, but such a virtuous process is general downward trend exhibited a sharp increases in mortality were largest among possible (box 2.3). setback during the major economic crisis infants born to women with less education. between 1988 and 1992,but resumed after After the crisis, the gap between infant mor- Inequalities in education the crisis.The downward trend remained tality rates associated with different mater- evident even after adjusting for age of nal education levels declined steadily, sug- Education is of great intrinsic importance mother,recall period,education,and urban gesting an overall decline in inequality in when assessing inequalities of opportunity. status--indicating that the overall trend mortality alongside the decline in overall decline in infant mortality was not attributa- mortality rates. It is also an important determinant of indi- ble only to general improvements in educa- There is some support for the view that viduals' income, health (and that of their tion,an aging population,or urbanization.In changes in the amount and composition of children), and capacity to interact and com- addition,the fact that infant mortality rose public expenditures on social programs municate with others. Inequalities in educa- sharply around 1990,even after these drove these improvements. Real total adjustments,supports the notion that the expenditures increased two and a half times tion thus contribute to inequalities in other decrease in household income and the col- between 1991 and 2000, and such public important dimensions of well-being. lapse of public expenditures on health as a spending did not bypass the poor. Measuring inequality in education is result of the crisis were important. not easy. Census and survey data in most Adjusted infant mortality rates by maternal education countries can generally yield statistics on, Probability of dying in the first year for example, years of schooling. But such 0.15 information does not capture well the quality of education and how that might vary across individuals. Nor is it easy to 0.12 compare years of schooling across coun- tries, because those years might mean something quite different from country to 0.09 country. Years of maternal education 0.06 Test results. Despite the measurement diffi- 10th percentile or 0 year 25th percentile or 2 years culties, there is considerable evidence of 50th percentile or 5 years inequalities of opportunity in education in 0.03 75th percentile or 10 years the developing world. Consider the differ- 90th percentile or 11 years ences in test performance among Ecuado- rian children ages three to six years across 0.00 population groups defined by parental 1978 1982 1986 1990 1994 1998 education, region of residence, and wealth Source: Paxson and Schady (2004). (box 2.4). Test results among very young children capture well the inequality in opportunity in education, but such data are not readily in infant mortality.5 The improvements in available for large numbers of developing health were not necessarily shared across all countries. So we look instead at the percent- groups in the population. age of household heads with no education As Cornia and Menchini (2005) note, by gender and by urban-rural residence. mortality differentials across groups tend to narrow with an improvement of the Male and female household heads. The average only if policies focus explicitly on overall percentage of household heads equity. Without such a focus, improve- without any education varies dramatically ments in the average may not translate to across our sample of 60-odd countries declining group differences. For example, (figure 2.5). In the high-income countries, in the United States between the 1950s and the percentage rates are negligible. But at Inequity within countries: individuals and groups 35 the other extreme, in Burkina Faso and Mali, for example, the overall percentage is B O X 2 . 4 Child test scores in Ecuador: the role of wealth, more than 80 percent. What is similarly parental education, and place of residence striking is that, in most countries, the likeli- hood that the household head is uneducated That education achievements vary Wealthiest and poorest quartiles markedly by population groups--and that is dramatically higher than average when Median score this can have profound implications--is she is a woman. In the Laos People's Demo- brought out forcefully in a recent study by 110 cratic Republic, for example, although the Paxson and Schady (2005).They show that overall percentage of household heads with cognitive development of Ecuadorian chil- 100 Wealthiest 25% dren ages three to six years, as measured by no education is about 20 percent, the rate is a test of vocabulary recognition (TVIP), 90 closer to 70 percent for female household varies significantly depending on the heads. wealth of their household, their place of res- 80 idence, the education of their mother, and that of their father.The extent to which Poorest 25th% Rural and urban household heads. Simi- 70 these circumstance variables are associated lar patterns can be observed for rural and with performance on cognitive tests is typi- 60 urban areas (figure 2.6). In general, house- cally more pronounced for the older 40 50 60 70 children in their sample. hold heads are far more likely to have no Age in months These socioeconomic characteristics education when they are based in rural are significantly associated with cognitive Maternal education areas than in urban areas. Even in coun- development even after controlling for Median score tries where the overall percentage without child health and home environment.The 110 researchers point to the striking evidence education is very high, the rate in urban that, in Ecuador, the youngest children, areas can be dramatically lower. For exam- 100 irrespective of wealth quintile or educa- 12 or more years ple, in Burundi, the percentage of house- tion of their parents, perform broadly as 90 hold heads with no education in urban well as their comparators. But as children in Ecuador get older, their cognitive devel- areas compares with the national average opment, relative to this benchmark, falters 80 0­5 years in Mexico, the Dominican Republic, and significantly. Only children in the top half Brazil. of the wealth distribution and with highly 70 educated parents maintain their perform- ance relative to their comparators. By the 60 Access to teachers. A recent study of primary time they are six years old, most children 40 50 60 70 schools and health clinics in Bangladesh, in the sample are so far behind in their Age in months Ecuador, India, Indonesia, Peru, and Uganda cognitive development that it is uncertain whether and how they could ever catch has identified teacher absenteeism as an up. important, common, problem. The study Source: Paxson and Schady (2005). found that higher income areas generally have lower teacher absentee rates than poorer areas.6 It also found that higher paid teachers, generally more educated and expe- cation and to assess how much overall rienced, appear equally or more likely to be inequality of education can be attributed to absent than contract or less remunerated mean differences between "morally irrele- instructors, perhaps because these instruc- vant" groups. Araujo, Ferreira, and Schady tors sense a lower risk of being fired for their (2004) find that the inequality of adult absence. And although salaries in rural areas education, measured by years of schooling were often higher than in urban areas, for 124 countries, can be pronounced. They teacher attendance in these areas was typi- also find that it is strongly (and inversely) cally lower than in urban areas. In most sur- correlated with mean years of schooling veyed countries, the quality of infrastructure across countries.7 and the frequency of monitoring appeared to The data assembled by these authors also contribute to lower absenteeism. indicate that the inequality of education for specific subgroups of the population can Trends change. While female schooling achieve- Another way to assess inequalities of ments relative to male achievements were opportunity in education is to calculate an dramatically lower among the oldest cohorts, overall index of inequality for years of edu- particularly in Sub-Saharan Africa, South 36 WORLD DEVELOPMENT REPORT 2006 Figure 2.5 Education levels vary across countries, but they also depend on gender of household head Percentage of household heads with no education 100 80 Female 60 40 20 Male 0 n a (*) (*) (*) (*) IsraelChile Peru Lanka Italy Rica HaitiTimor Benin Maliso Finland Germany KingdomCanada Turkey Sweden NorwayStates Brazil PDRPoland JordanKenya Pakistan te Yemend'IvoireGhana Guinea Sri VietnamAlbania EcuadorPanamaBolivia Fa Tajikistan Romania MoldovaParaguay Thailand ColombianezuelaMexico Salvador Republic Lao Tanzania Burundi Morocco Ethiopia KyrgyzstanJamaica Kazakhsta Georgia Costa Indonesia Ve El HondurasNicaraguaGuatemala Cambodia Bangladesh Mauritania United Herzegovin de Madagascar Cameroon Cô United and Burkina Dominican Bosnia Bolivariana ública Rep Source: Authors' calculations from household survey data. Note: The continuous dark line represents the percentage of household heads with no education in each country, while the endpoints of the whiskers indicate the percentages for male and female-headed households. * Indicates that female-headed households have higher average levels of education than male-headed households. Asia, and to a lesser extent the Middle East individual over goods and services that can and North Africa, these disparities are be purchased in the market and that con- noticeably lower for the younger cohorts, tribute directly to well-being. It is clear too, particularly in Sub-Saharan Africa (figure that individuals' economic status can deter- 2.7). Additionally, disparities in years of mine and shape in many ways the opportu- schooling between urban and rural areas nities they face to improve their situations. have been falling in some regions, most Economic well-being can also contribute to strikingly in the Middle East and North improved education outcomes and better Africa and in Eastern Europe and Central health care. In turn, good health and good Asia. But in Sub-Saharan Africa there has education are typically important determi- been little, if any, change. The (urban-rural) nants of economic status. between-group contribution to inequality An ideal measure of economic well- in this region has hovered at around 30 per- being for assessing inequality will capture cent across all the cohorts examined. an individual's long-term economic status. But it is difficult to produce such a compre- Economic inequalities hensive indicator accurately. In practice, it is An individual's consumption, his or her common to work with measures of current income, or his or her wealth have all been income or consumption compiled from used as indicators of the command of an household survey data. While consumption Inequity within countries: individuals and groups 37 Figure 2.6 Education levels vary by country and between rural and urban sectors Percentage of household heads with no education 100 80 60 Rural 40 20 Urban 0 n a so es(*) Chile Peru Italy Rica HaitiTimor Benin MaliFa Finland Brazil PDRPoland JordanKenya Pakistan te Yemend'IvoireGhana Guinea Germany Swedengdom(*)Canada Stat Jamaica RomaniaIsrael(*) Moldova VietnamAlbania EcuadorPanamaBolivia Tajikistan Paraguay Lanka(*) ThailandGeorgia Burundi Ethiopia Indonesia ColombianezuelaMexico Salvador Republic Lao Tanzania Morocco Kin Norway(*)Kyrgyzstan Cambodia Cameroon Kazakhsta Ve Sri Costa Turkey(*) El HondurasNicaraguaGuatemala Herzegovin Mauritania de Madagascar Cô Bangladesh Burkina United and United Dominican Bosnia Bolivariana ública Rep Source: Authors' calculations from household survey data. Note: The continuous dark line represents the percentage of household heads with no education in each country, while the endpoints of the whiskers indicate the percentages for urban and rural households. * Indicates that rural households have higher average levels of education than urban households. and income inequality are expected to cor- Figure 2.7 The share of inequality in years of schooling attributable to differences between relate reasonably well with long-term well- males and females has been declining being, it is unclear exactly how well they Between-group contribution to total inequality actually do. And different measures of eco- (proportion) nomic welfare--based on income, con- 0.4 sumption, or wealth--can yield quite dif- Sub-Saharan Africa ferent assessments of inequality (see also Middle East and 0.3 North Africa box 2.5). For example, Sudjana and Mishra Europe and (2004), drawing on evidence produced by 0.2 Central Asia South Asia Claessens, Djankov, and Lang (2000), argue that wealth inequality in Indonesia is far more concentrated than suggested by com- 0.1 Other parable figures based on consumption (fig- East Asia ure 2.8). In 1996 more than 57 percent of Latin America and Caribbean the stock market capitalization in Indonesia 0.0 was controlled by 10 families. This is in 1935­9 1940­4 1945­9 1950­4 1955­9 1960­4 1965­9 1970­4 1975­9 stark contrast to neighboring countries, Year of birth such as Singapore and Malaysia, but it is Source: Araujo, Ferreira, and Schady (2004). 38 WORLD DEVELOPMENT REPORT 2006 B O X 2 . 5 Beware of intercountry comparisons of inequality! Because countries differ in their data collection · The degree of disaggregation of consump- Inequality: summary measures in a selection systems, cross-country data on economic tion items. of countries: consumption versus income inequality are generally based on a variety of · The methods for imputation of housing and Gini coefficient indicators that are treated interchangeably.The durables consumption. Year Consumption Income lack of a uniform basis for measuring economic Similarly, income inequality can vary depending inequality in different countries has serious on whether income-- Panama 1997 0.468 0.621 implications for comparability. One of the main sources of noncomparabil- Brazil 1996 0.497 0.596 · Is intended to capture pre- or post-tax income, ity of inequality is that some countries use · Includes actual and implicit transfers, and Thailand 2000 0.428 0.523 household income as indicator of well-being · Refers to full income or earnings only. Nicaragua 1998 0.417 0.534 while others use consumption expenditures (Atkinson and Brandolini 2001).These two indi- Additional factors confounding comparabil- Peru 1994 0.446 0.523 cators capture different aspects of economic ity include differences in survey nonresponse Morocco 1998 0.390 0.586 welfare, with the former perhaps seen better as rates across countries (which are likely to affect Vietnam 1998 0.362 0.489 a measure of welfare opportunity and the latter measured inequality--see Korinek, Mistiaen, as a measure of welfare achievement. In most and Ravallion forthcoming). Differences across Nepal 1996 0.366 0.513 countries, measured inequality based on countries in the availability of spatial price Albania 1996 0.252 0.392 income is higher than if it is based on consump- indexes can also affect conclusions.Thomas Bulgaria 1995 0.274 0.392 tion. But this is not inevitable, and the degree to (1987) demonstrates that adjusting for spatial which the two indicators disagree varies from price variation can affect conclusions about the Russian country to country (see table to the right). degree of income or consumption inequality. Federation 1997 0.474 0.478 The problem of comparability is not Across countries there tends to be little unifor- Bangladesh 2000 0.334 0.392 confined to the choice of welfare indicator. An mity in whether, and how, spatial price variation important but underappreciated additional is accommodated. Source: Authors'creation. issue is that, even for a given indicator, its defini- Cross-country datasets on economic tion varies considerably across countries and inequality generally incorporate some attempts even within countries over time. Consumption to improve comparability, but they typically fall inequality based on different definitions of con- far short of achieving strict comparability.With- sumption can vary markedly, and will depend out a concerted effort to harmonize data collec- on a variety of factors, including the following: tion across countries, it is unlikely that such global databases can be relied on to provide · The length of the recall period over which more than a tentative picture of differences in consumption is recorded. inequality across countries. Figure 2.8 Market capitalization only marginally higher than the figure for picture of how economic inequality is dis- controlled by the top 10 families in the Philippines. More generally, Davies and tributed across countries. The highest levels selected countries, 1996 Shorrocks (2005) report estimates pub- of recorded inequality occur in Africa, the Indonesia 57.7% lished by Merrill Lynch and Forbes that second highest in Latin America. But in- Philippines 52.5% some 20 percent of the world's millionaires equality measures for Latin America come Thailand 46.2% come from the developing world. Similarly, largely from income data, while those in Hong Kong, China 32.1% Morck, Stangeland, and Yeung (2000) find other regions, such as South Asia, come Republic of Korea 26.8% a higher ratio of billionaire wealth to gross mainly from consumption data. As box 2.5 Singapore 26.6% domestic product (GDP) in Latin America illustrated, income data tend to produce Malaysia 24.8% and the Caribbean, and East Asia, but not higher measured inequality. Within regions, Taiwan, China 18.4% India and South Africa (see chapters 6 and the data suggest that inequality can vary Japan 2.4% 9 for further discussion). These figures markedly between countries: consumption Source: Claessens, Djankov, and Lang (2000). imply that the distribution of wealth may, inequality in South Africa is extremely high, on average, be more concentrated in devel- while in Mauritius it is lower even than in oping countries than in the developed. OECD countries. When wealth is associated with political How much overall economic inequality influence, such inequalities also translate within countries is attributable to differ- into political capture and can provide a ences across population groups? Unlike window on this added dimension of health and education inequalities, the sys- opportunity. tematic decomposition of income inequal- Bearing in mind the warnings offered in ity by population groups has long been sub- box 2.5, figure 2.9 provides an approximate ject to analysis in the economics literature. Figure 2.9 Africa and Latin America have the world's highest levels of inequality Income and expenditure Gini coefficients Sub-Saharan Africa Europe and Central Asia Azerbaijan Mauritius Based on consumption Based on consumption Hungary Ethiopia Based on income Bosnia and Herzegovina Based on income Niger Czech Republic Tanzania Slovakia Benin Ukraine Mauritania Armenia Guinea Uzbekistan Ghana Serbia Mali Romania Mozambique Bulgaria Senegal Belarus Angola Slovenia Burkina Faso Kyrgyzstan Nigeria Kazakhstan Burundi Poland Cameroon Albania Uganda Croatia Kenya Russia Côte d'Ivoire Tajikistan Madagascar Lithuania Zimbabwe Moldova Gambia, The Latvia Malawi FYR Macedonia Zambia Turkey South Africa Estonia Lesotho Georgia Swaziland Turkmenistan Central African Republic Botswana Namibia High-Income Economies Taiwan, China Japan Finland Latin America and the Caribbean Sweden Peru Belgium Trinidad and Tobago Denmark Nicaragua Norway Jamaica Germany R.B. de Venezuela Austria Uruguay Netherlands St. Lucia Luxembourg Guyana France Costa Rica Switzerland Guatemala Italy Panama Ireland Dominican Republic Australia Mexico Canada El Salvador Spain Honduras United Kingdom Argentina Greece Chile New Zealand Ecuador United States Colombia Portugal Paraguay Hong Kong, China Bolivia Brazil Middle East and North Africa Yemen Egypt East Asia and Pacific Israel Algeria Vietnam Jordan Rep. of Korea Morocco Indonesia Tunisia Mongolia Iran Lao PDR Thailand South Asia Cambodia Philippines Pakistan Singapore Bangladesh China India Papua New Guinea Nepal Malaysia Sri Lanka 0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8 Source: Authors' calculations from household survey data. 39 40 WORLD DEVELOPMENT REPORT 2006 These decomposition exercises seek to measured levels of inequality. In that sense, understand what share of inequality can be some of the difficulties with cross-country attributed to differences between groups comparisons described in box 2.5 are atten- and what to inequality within groups. There uated by subgroup decompositions. are several attractions to studying certain population groups in this way and to com- Between-group shares paring findings across countries. of total inequality Our interest here is to define groups by While the "between-group" share of overall circumstances we might consider "morally inequality is an appealing indicator of the irrelevant," thereby gaining a window on salience of differences across groups in the the importance of inequality of opportu- overall assessment of inequality, there are nity in the economic sphere. Additionally, concerns about its interpretation.8 In par- decomposition results generally are far less ticular, empirical measures of between- sensitive to differences in definitions of group shares are generally found to be underlying welfare indicators than are quite low (see figures 2.10 and 2.11).9 The conventional presentation of between- group inequality is relative to total inequal- Figure 2.10 Between-group inequality decompositions: social group of the household head ity. Elbers and others (2005), however, note Sub-Saharan Africa that total inequality can be viewed as the South Africa between-group inequality that would be Madagascar Benin observed if every household in the popula- Côte d'Ivoire tion constituted a separate group. Clearly, Niger Guinea against such a benchmark, one would East Asia and Pacific rarely observe a high share of between- Vietnam group inequality. Europe and Central Asia Elbers and his colleagues propose an Kyrgyzstan Romania alternative, comparing the actual between- High-Income Economies group inequality with the maximum possi- United States ble inequality that would be obtained by Germany France keeping the number of groups and their sizes Luxembourg at actual levels. For example, an assessment United Kingdom Canada of the contribution of gender differences to Belgium Conventional inequality compares actual between-gender Switzerland Feasible Australia inequality with the hypothetical between- Ireland gender inequality that would be obtained by Norway Sweden sorting the income distribution so that all Austria males appeared at one end of the distribu- Finland Latin America and the Caribbean tion and all females at the other. This ratio Paraguay provides a measure of how far actual Guatemala between-group inequality lies below the Bolivia Panama maximum between-group inequality that is Peru Brazil feasible given the existing configuration of Guyana groups. Nicaragua St. Lucia Economic inequality can be decom- Middle East and North Africa posed in a large sample of countries based Israel on several population breakdowns, two of Jordan which are presented in figures 2.10 and South Asia 2.11: social group and education of house- Nepal Sri Lanka hold head. Such decompositions can follow Bangladesh the conventional decomposition method- 0 0.1 0.2 0.3 0.4 0.5 0.6 ology, complemented by the Elbers and Proportion others (2005) measure of feasible group Source: Authors' calculations from household survey data. decomposition. Inequity within countries: individuals and groups 41 Figure 2.11 Between-group inequality decompositions: education of the household head Sub-Saharan Africa High-Income Economies Cameroon Luxembourg Madagascar France Senegal Taiwan, China Burundi United States Uganda Ireland Côte d'Ivoire United Kingdom Benin Italy Mali Germany Guinea Finland Kenya Netherlands Switzerland Tanzania Sweden Burkina Faso Conventional Norway Conventional Nigeria Feasible Canada Feasible Mauritania Austria Ethiopia Australia Niger Belgium East Asia and the Pacific Latin America and the Caribbean Thailand Guatemala Indonesia Brazil Papua New Guinea Panama East Timor Peru Philippines Nicaragua Lao PDR Argentina Vietnam Chile Europe and Central Asia Paraguay Mexico Lithuania Colombia Romania Ecuador Serbia Jamaica Poland Haiti Turkey Bolivia Hungary Honduras Albania Costa Rica Macedonia Uruguay Estonia Dominican Republic Kyrgyzstan El Salvador Georgia R.B. de Venezuela Moldova Trinidad Tobago Bosnia & Herzegovina St. Lucia Russia Guyana Kazakhstan Suriname Ukraine Middle East and North Africa Armenia Tajikistan Morocco Azerbaijan Jordan Israel 0.00 0.15 0.30 0.45 Yemen Proportion South Asia Bangladesh Sri Lanka Pakistan Nepal 0.00 0.15 0.30 0.45 Proportion Source: Authors' calculations from household survey data. Different population breakdowns con- high. For example, in Paraguay, when tribute to differing extents to overall inequality is decomposed between groups inequality. In general, the conventional cal- by language spoken at home, the conven- culation of the between-group contribu- tional between-group share is approxi- tion points to a fairly low share attributable mately 30 percent (figure 2.10). And to between-group differences. But in some when inequality is decomposed for five countries even the conventional share is broad education groups in Guatemala, 42 WORLD DEVELOPMENT REPORT 2006 the between-group contribution is above ties account for a larger share of total 40 percent (figure 2.11). inequality as the number of localities In most countries, the between-group increases. The analysis confirms that for share is noticeably higher for decomposi- some countries the spatial dimension of tions based on the alternative,"feasible" cal- inequality is of considerable importance. culation. Based on this approach, observed This conclusion carries over even more between-group differences are indeed sub- powerfully at the global level, where the stantial in many countries--for the group between-country contribution to global definitions here. To the extent that these cir- inequality is dramatic (chapter 3). cumstances are judged "morally irrelevant," Other studies and methodologies cor- the findings suggest that in economic life, roborate the finding that spatial differences just as in health and education, a substantial within countries are important. Using farm- portion of observed inequality in many household data for rural China, Jalan and developing countries can be linked to Ravallion (1997) identify "spatial poverty inequalities of opportunity. traps," where poorer areas have lower provi- sions of essential public goods (such as Spatial differences roads) and, as a result, households in the As with inequalities in health, conventional area experience lower productivity on their survey data cannot say much about the con- investments. Various studies find spatial tribution of finely detailed spatial hetero- effects on living standards, even after con- geneity to overall inequality--because of the trolling for nongeographic household char- limited sample size. In an exercise analogous acteristics. Ravallion and Wodon (1999) to that for health in Cambodia (figure 2.4), a demonstrate that place of residence is an variety of studies have applied statistical important determinant of poverty in techniques to combine survey data with Bangladesh. They also note that important population census data to produce tentative spatial differences can be discerned even estimates of inequality at the community within urban areas--households in the dis- and district levels. Elbers and others (2004) trict of Dhaka are markedly better off than document the contribution to overall esti- their counterparts in other urban districts. mated inequality of differences in mean Many studies suggest that spatial differ- consumption for subdistricts in Ecuador, ences in incomes are driven by policy. In Madagascar, and Mozambique. They China, Kanbur and Zhang (2001) find a demonstrate that the between-subdistrict measurable polarization between inland and contribution to total estimated inequality coastal regions where factors unrelated to ranges from a low of 22 percent in Mozam- physical geography--development of heavy bique to more than 40 percent in Ecuador industry in certain provinces, trade open- (table 2.1). Based on a similar approach, ness, and government investment in coastal World Bank (2004e) reports between-com- regions--are associated with widening mune differences in Morocco, accounting interregional inequality. Escobal and Torero for 40 percent of overall estimated con- (2003) compare coastal Peru with the high- sumption inequality. The general impres- lands and find that average per capita expen- sion is that spatial differences across locali- ditures vary markedly and that this variance is associated with fewer and weaker infra- structure services in the highlands. Table 2.1 Decomposition of inequality between and within communities The role of infrastructure is thus central. Level of Number of Within-group inequality Between-group inequality Although it is not disputed that physical geog- decomposition communities (percent) (percent) raphy can also influence poverty directly, the Ecuador 1,579 58.8 41.2 association between geographic variation in Madagascar 1,248 74.6 25.4 poverty and geographic variation in infra- Mozambique 424 78.0 22.0 structure access is typically strong. Accord- Source: Elbers and others (2004). ingly, it is argued that the influence of Note: Our communities in Ecuador are zonas in urban areas and parroquias in rural areas. Communities in Madagas- regional geographic location on inequality car are firiasana (communes) and in Mozambique they are administrative posts. The decompositions are performed using the conventional methodology. will diminish as access to transport and Inequity within countries: individuals and groups 43 communications services improve; being Figure 2.12 Location, education, and social groups can make a difference: regressions of total geographically isolated will matter less inequality on shares of between-group inequality of different household characteristics because infrastructure improvements will Urban-rural Social group of the household head help compensate for distance.10 Overall inequality Overall inequality The relationship between group differences and inequality As is clear from the discussion here, our interest in the contribution of group differ- ences to total inequality extends beyond normative considerations of fairness and Between-group share Between-group share justice. Differences between groups are also thought to explain overall inequality out- Occupation of the household head Education of the household head Overall inequality Overall inequality comes, particularly the reproduction of inequalities over time. The basic idea is that between-group differences in income inequality, for example, will tend also to be mirrored in between-group differences in health and education inequalities--and in the agency of groups in influencing their circumstances (see below). These group dif- ferences will then reinforce one another. Between-group share Between-group share Group differences in education, for exam- Source: Authors' calculations from household survey data. ple, will translate into differences in Note: Regressions include as controls (X) regional area dummies and a welfare measure (Y/C) dummy. The shares of the between component of inequality across gender and age of the household head, and regions within the country incomes and in political voice and partici- were not significant. pation. These inequalities will, in turn, affect health inequalities between groups, which are passed on to education inequali- One interpretation of these findings is ties and so on. "Inequality traps" are the that between-group differences account for, result. A corollary of this idea is that efforts and possibly explain, a non-negligible por- to moderate overall inequality levels might tion of overall inequality. This is consistent require a focus on reducing between-group with the broader theme of this report: that differences. group differences reinforce one another It is difficult to systematically document and in this way contribute to the replica- this instrumental role of group differences. tion of inequality over time. But these sim- Figure 2.12 illustrates one attempt. Overall ple correlations, while suggestive, could inequality is correlated with the between- also be pointing to other processes and on group share for the sample of countries in their own cannot exclude other competing figures 2.10 and 2.11, controlling for region explanations. and whether the underlying welfare indica- tor is income or consumption. Nothing in Inequality and growth, economic the mechanics of the calculation forces structure, and trade overall inequality to be correlated with the Systematic exploration of the impact of share attributable to between-group differ- between-group shares on overall inequality ences. Yet, for this sample of countries, has not, to date, been a major topic of higher overall inequality is associated with a empirical investigation. A longer-standing larger between-group share of overall question in economics has been how inequality, which is attributable to the inequality evolves with economic growth rural-urban breakdown, to differences more generally. Pioneering work by Kuznets across social groups, to differences in edu- in the 1950s launched an enormous cation, and (weakly) to differences in broad amount of empirical work on this question, occupation class of the household head.11 stimulating much debate. There is still no 44 WORLD DEVELOPMENT REPORT 2006 B O X 2 . 6 Revisiting the Kuznets hypothesis for economic growth and inequality The starting point of the literature linking eco- from a long-run series of inequality indicators composition, and period of observation. See, nomic development and income inequality for England, Germany, and the United States, among others, Bourguignon and Morrisson dates to the well-known works of two Nobel and from a single observation in time for three (1989), Fields and Jakubson (1994), Deininger Prize winners,W. Arthur Lewis (1954) and Simon developing countries--India, Ceylon (Sri Lanka and Squire (1998), and Bruno, Ravallion, and Kuznets (1955). Lewis, in his classic 1954 article today), and Puerto Rico.These were the data Squire (1998). Bruno, Ravallion, and Squire "Economic Development with Unlimited Sup- available at that time, and Kuznets was well (1998), while drawing in part on cross-country plies of Labor,"developed a theoretical model in aware of the limitations of the empirical backing data, also analyzed one country--India--for which growth and accumulation in a dual econ- of his argument, in his own words, on"5 percent which relatively long time-series data had omy would start in the modern industrial sector, of empirical information and 95 percent specu- become available, and again found no sign that where capitalists would hire at a given wage lation, some of it possibly tainted by wishful growth increased inequality. and reinvest a share of their profits.The number thinking." Why the Kuznets curve does not hold in prac- of traditional agricultural laborers willing to Kuznets based his speculation primarily on tice probably has to do with the fact that devel- move to this high-productivity, high-wage sec- longitudinal data and called for in-depth case oping countries do not generally satisfy the tor was assumed to be unlimited. In this process studies of the economic growth of nations. But assumptions on migration processes and sectoral of development, and as long as these assump- many subsequent studies simply used development underlying the Kuznets hypothesis. tions would prevail, inequality in the aggregate cross-country data (often of not par- To explain international differences in inequality distribution of income would increase as aver- ticularly high quality) and reduced-form models of incomes,it is important that the link between age incomes rose.There would be a turning to explore and support the hypothesis of an economic inequalities and other factors,such as point after which inequality would fall again as inevitable tradeoff between development and economic dualism,land,education,and regional the surplus labor phase ends and the dualistic equality.The Kuznets curve became one of the differences,be more carefully analyzed. economy becomes a single-sector, fully industri- most quoted stylized facts of the study of No straightforward relationship between alized economy. income distribution for nearly four decades. income and inequality Although Kuznets did not explicitly model To conclude, there is today something of a con- the intersectoral shifts of population as part of Cross-country data can be misleading sensus that no straightforward relation between the development process, he did build on them for dynamic processes income and inequality can be established. As to articulate his basic idea of an inverted-U rela- With the development of much larger data sets, argued by Kanbur (2000) in his exhaustive tionship between economic growth and income such as the Deininger and Squire (1996) interna- review of the Kuznets curve literature in the inequality (the"Kuznets curve"). In his presiden- tional inequality database (following on from Handbook of Income Distribution: "it seems to us tial address at the Annual Meeting of the Ameri- Fields 1989), empirical"tests"of the Kuznets far better to focus directly on policies, or combi- can Economic Association in 1954, he hypothe- curve were widely conducted. But it has become nation of policies, which will generate growth sized that in the process of growth and understood that the use of cross-country data without adverse distributional effects, rather industrialization, inequality would first increase, to analyze what are essentially dynamic than rely on the existence or nonexistence of an because of the shift from agriculture and the processes can be strongly misleading. Moreover, aggregative, reduced form relationship between countryside to industry and the city, and then numerous studies have shown that the per capita income and inequality." decrease as returns across sectors equalized.The evidence in favor of the Kuznets curve is not at data Kuznets used to make this statement came all robust to econometric specifications, sample Source: Authors'creation. consensus on a systematic relationship A large body of literature has also between the long-term growth processes of explored the relationship between trade industrialization and urbanization--and openness and inequality but has not reached overall inequality (box 2.6). a consensus. For example, Dollar and Kraay Cross-country studies have also analyzed (2002) and Dollar and Kraay (2004) find no the relationship between inequality and eco- effect of trade openness on inequality, but nomic structure. Bourguignon and Morri- Lundberg and Squire (2003) do find such son (1990), for example, argue that"develop- an effect. Ravallion (2001) and Milanovic ing countries which are comparatively (2002) report that at low incomes openness endowed with mineral resources and land may be inequality-increasing, but that this (climate) tend to be less egalitarian than oth- effect reverses at higher incomes. ers, although the effect of the agricultural comparative advantage may be offset by the Trends distribution of land." They also find that the The discussion above highlights the many labor productivity difference between agri- mechanisms for hypothesizing how aggre- culture and the rest of the economy is a pow- gate economic growth, and the evolution of erful explanatory factor for differences in different sectors of the economy, can influ- income inequality in a number of developing ence economic inequality. Popular lines of countries in the 1970s and 1980s.12 argument have emphasized Lewis-Kuznets Inequity within countries: individuals and groups 45 type processes, the race between relative sup- round--Hong Kong (China), Republic of ply and demand for skills along with house- Korea, Malaysia, Singapore, and Taiwan hold adjustments to participation, educa- (China). A complete picture of the factors tion, and fertility; the transitions from behind this process is as yet unclear. controlled to market-oriented economic Although it is likely that at least part of the systems; and various forms of power and story is linked to intersectoral transfers, as bargaining-related views of the world. In emphasized by Lewis (box 2.6), Ravallion the end, and perhaps not surprisingly, it is and Chen (2004) indicate that inequality in difficult to identify a single overarching China grew fastest during periods when explanation. Until recently, this did not economic growth and poverty reduction seem to matter much because there was a were slow. They argue that China provides general perception that inequality does not little support for the view that rising vary markedly over short periods.13 In ear- inequality is inevitable with rapid economic lier studies, few countries having data on growth and poverty reduction. inequality over multiple time periods indi- Third, South Asia has generally been cated sharp changes. perceived as a region with relatively low inequality. This probably is due, in part, to For countries and regions. Empirical investi- inequality being measured by consump- gation of how inequality evolves in a country tion. In this region, too, the prevailing view is subject to concerns similar to those for has been that inequality changes little over comparisons of levels (see box 2.5). But there time. But the stylized fact of low and stable is a growing sense that the impression of sta- inequality in South Asia has also been chal- ble, unchanging income inequality may well lenged. In India, the largest country in the be misleading. A few recent examples of region, some uncertainty remains over how changing inequality bear mentioning. First, inequality has evolved, because of well- careful work by Atkinson (2003) has docu- publicized issues concerning data compa- mented the evolution of inequality in OECD rability over time.14 The best available esti- countries during the second half the twenti- mates suggest that inequality in India has eth century. He finds that inequality in the been rising, but with no solid assessment of United States has been rising steadily since by how much.15 the early 1970s (after seeing little change, and In Bangladesh, Nepal, and Sri Lanka, possibly some decline, in the preceding however, recent and reliable data show very decades) and has risen dramatically in the large increases of inequality in the late United Kingdom since 1980. Between 1984 1980s and 1990s. In Bangladesh, income and 1990, the Gini coefficient in the United inequality (as opposed to consumption Kingdom rose by 10 percentage points (but inequality) has been documented to have then did not increase further)--an unprece- risen from a Gini of 0.30 to 0.41 between dented increase over such a short time. Else- 1991 and 2000.16 In Sri Lanka, the increase where in the OECD, inequality changes have in consumption inequality has been very been less marked. But to the extent that the similar, from 0.32 to 0.40 between 1990 and early and middle decades of the twentieth 2002.17 And, in Nepal, the Planning Com- century were associated with declining mission has produced estimates suggesting inequality in these countries, this trend that consumption inequality rose from 0.34 seems to have halted by the century's later to 0.39 between 1995­6 and 2003­4.18 Only decades. in Pakistan is the evolution of inequality Second, inequality in China was not clear, because of difficulties with data markedly higher at the end of the 1990s comparability. than it had been in the early part of the In other regions of the world, the recent 1980s. In general, the recent evidence in picture on inequality trends is more diffi- East Asia suggests that inequality has risen cult to summarize. For Latin America, De faster in the second round of high growth Ferranti and others (2004) indicate that Asian economies--such as China and Viet- inequality increased in most countries, by a nam--than had been observed in the first sizable margin, during the "lost decade" of 46 WORLD DEVELOPMENT REPORT 2006 the 1980s. But during the 1990s, inequality income inequality will thus differ across continued to rise in only about half of the countries. countries in the region, and less rapidly. The authors note that, in Argentina, inequality Across generations. Our assessment will also has risen sharply in the growth period and depend on the degree to which inequalities during the crisis years. In Brazil and Mex- are transmitted across generations. The ico, the 1990s witnessed some small study of intergenerational transmission of declines. In Eastern Europe and Central welfare is not straightforward, because of Asia, changes in inequality during the early the scarcity of datasets containing informa- 1990s, associated with the transition to the tion on various generations of adults in the market economy, have been difficult to doc- same family. Data from long panels are rare, ument systematically because of data prob- and questions about family background of lems, according to World Bank (2000c). individuals are not always asked in surveys Between 1998 and 2003, consumption (the Brazil data described in box 2.1 are a inequality declined in the former Soviet rare exception). Information about educa- Union countries (with the exception of tion or occupation for various generations Georgia and Tajikistan), while there was no can be captured relatively easily in recall clear trend in eastern and southern Euro- questionnaires. But information about pean countries (World Bank, 2005a). In other dimensions, such as the incomes, Africa and the Middle East, it is difficult to earnings, or even health status of earlier point to broad trends, largely because of generations, is not easily remembered by concerns with data comparability over individuals (not least because they often time. change during a lifetime). The scarcity of To what extent does our examination of intergenerational data is particularly strik- levels and trends in income inequality bear ing in developing countries. Even though on the themes of this report? This report is the persistence of inequalities across gener- most concerned about changes in inequali- ations is often thought to be much more ties in incomes, and other specific dimen- acute in developing countries, studies on sions, if these dimensions are associated intergenerational mobility in the develop- with changes in underlying inequalities of ing world remain few and far between. opportunities. Rising income inequality in Even when the data exist, differences in Russia during the 1990s, for example, is of methodologies and data often limit the concern precisely because of its strong asso- scope for comparisons across countries. ciation with rising political influence and The most widespread measure of intergen- state capture. erational mobility in the economics litera- But this is not inevitably the case. A ture is the intergenerational earnings elas- recent study of income distribution dynam- ticity, or the elasticity of sons' earnings ics in six East Asian and Latin American with the earnings of their parents. This countries by Bourguignon, Ferreira, and measure generally comes from a log-linear Lustig (2005) decomposes income distri- regression of sons' earnings (although it bution dynamics into the underlying driv- could also be income or years of schooling) ing forces. They show that complex and on fathers' observed earnings (or its pre- country-specific interactions between dicted value using such other information powerful underlying social and economic as education or occupation). The closer the phenomena imply that distributional expe- elasticity is to zero, the more mobile the riences must be assessed country by country. society is supposed to be. This elasticity has For example, improvements in education been widely used in the U.S. literature, (equalizing opportunities) may be associ- where longitudinal data are relatively ated in one case with falling income inequal- abundant. And for comparability, it has ity--Brazil or Taiwan, China--but in also been calculated in most other coun- another country with rising inequality-- tries' recent studies.19 Indonesia or Mexico. Our assessment of Until recently, estimates of the intergener- the equity implications of changes in ational elasticity of earnings were thought to Inequity within countries: individuals and groups 47 be around 0.4 in the United States, suggest- tinuing research (on international evi- ing a reasonably mobile society in incomes.20 dence of intergenerational mobility) will More recently, however, Mazumder (2005) improve our understanding of why the uses new data and recent econometric tech- intergenerational transmission of eco- niques to correct for transitory fluctuations nomic status is strong in some countries in earnings--he shows that the previous esti- and weak in others."23 mates of intergenerational elasticity were The intergenerational transmission mech- biased downward by about 30 percent. He anisms of inequalities will differ across coun- argues that the true estimate is somewhere tries and within countries across different around 0.6 for the United States. population groups. As described above, Mazumder (2005) points to rather low lev- An intergenerational elasticity of 0.6 com- pared to 0.4 paints a dramatically different els of intergenerational mobility in the picture of mobility in American society. For United States. He also highlights an impor- example, it implies that a family whose earn- tant racial dimension to this limited mobil- ings are half the national average would ity and finds evidence of substantial immo- require five generations instead of three bility at the ends of the distribution. He before it substantially closed the gap. Obvi- shows that of the individuals whose fathers ously a difference of two generations, or were in the bottom decile of the earnings about fifty years, is quite substantial and sug- distribution, 50 percent will be below the gests the need to examine policies that foster thirtieth percentile and 80 percent below greater mobility.21 the sixtieth percentile. He finds the evidence In parallel analyses, estimates of inter- to be consistent with the hypothesis that generational mobility in Canada, Finland, such immobility "might be due to the or Sweden, among others, have tended to inability of families to invest in their chil- report elasticities closer to 0.2 or lower, sug- dren's human capital due to the lack of gesting that these societies are considerably resources." By contrast, more than 50 per- more mobile than the United States. A rela- cent of the individuals whose parents were tively early study of mobility in the United in the top decile will remain above the Kingdom (Atkinson, Maynard, and Trinder eightieth percentile and two-thirds will be 1983) reports an elasticity of 0.43, while a above the median. more recent study by Dearden, Machin, and In another U.S. study, Hertz (2005) con- Reed (1997) estimates an elasticity of 0.57. firms the findings of Mazumder (and oth- These studies indicate that people in the ers) on the size of the intergenerational United Kingdom are about as mobile as elasticity. He then shows evidence that it is those in the United States. Because of the largely driven by the especially low rate of data limitations, only a few exceptional mobility of black families from the bottom studies on intergenerational earnings elas- of the income distribution. While only 17 ticities for less-developed countries have percent of whites born to the bottom decile been carried out. These provide evidence of of family income remain there as adults, the relatively low mobility.22 corresponding figure is 42 percent for In another literature review of cross- blacks. He also finds that "rags-to-riches" country differences in intergenerational transitions from the bottom quartile to the earnings mobility, Solon (2002) asks top were less than half as likely for black as whether there is any link between cross- for white families. He further provides evi- sectional inequality within a generation dence that the black-white mobility gap is and the intergenerational transmission of not "appreciably altered by controlling for inequality. Although there is greater cross- parents' years of schooling." Last, he pro- sectional inequality in the United States vides evidence that the incomes of black and the United Kingdom than in Sweden children are unresponsive to small changes or Finland, Canada also has relatively high in parents' incomes at the bottom of the inequality. The evidence needed to pro- distribution. vide a clear answer to this question is To recap, summary measures suggest that therefore still fragmentary, and only "con- even in such developed countries as the 48 WORLD DEVELOPMENT REPORT 2006 United States and United Kingdom there is poverty the inequalities in capacity to forge rather limited intergenerational mobility the institution or society can be as impor- across generations. Research in these coun- tant as inequalities in health, income, and tries has highlighted important hetero- education.24 geneities in the patterns of reproduction of A recent study of inequalities in gover- different inequalities across populations nance in four slums of Delhi found that groups. For most developing countries, rela- access to formal government by slum tively little is known about intergenerational dwellers is more available to the better off income mobility. But given the acute group- and to those who have good contact net- based inequalities in many developing coun- works.25 Community leaders in these slums tries, there appears to be little basis for facilitate access primarily to their caste expecting much intergenerational mobility. members, and slum dwellers are more likely to delegate custodianship of their interests to better-educated community leaders. The Agency and equity: study concludes that because access to inequalities of power bureaucracy and political representation for The foregoing discussion has raised explic- slum dwellers in Delhi is largely the pre- itly the question of how inequalities are serve of the better off and better connected, determined and reproduced. It has pointed decisions of formal policymakers do not to the potentially important role of group seek to represent slum interests as a whole, differences in this process. This focus on producing interventions that do not target process and the factors that account for the those in most need. The lack of broadly dis- persistence of inequality over time puts the tributed "voice" thus results in patterns of spotlight on how much inequality is rooted resource allocation, and income generation, in deeper institutions in society--institu- that are far from egalitarian. tions of governance, access to land, control The nature of this unequal capacity can of labor, market regulation. Chapter 6 deals be captured through the sociological con- with the emergence and effects of such cept of agency. Agency refers to people's institutions in more detail. Here we turn to capacity to transform or reproduce such different kinds of evidence--and tradi- societal institutions. Some of this capacity is tions of analysis--to discuss the unequal conscious--for example, when interest capacity of people to influence the form groups lobby for a change in land tenure taken by these institutions and the conse- legislation, or when women refuse to accept quences of unequal institutions for contin- laws around marriage that systematically uing inequality in such capacities. For disadvantage them. Some of it is uncon- B O X 2 . 7 Inequitable agencies and institutions in Pakistan A recently completed Human Development the extremely poor paid a bribe, while only 4.3 most immediate representatives of the formal Report for Pakistan provides rich documenta- percent of the non-poor had to do so. In urban justice system), who are involved in only 1 per- tion of the skewed distributional impact of cor- areas, the extremely poor paid on average 8,700 cent of their disputes but nearly 5 percent of the ruption (United Nations Development rupees in bribes, while the non-poor paid only disputes of the non-poor.The poor perceive that Programme 2003).The report notes that corrup- 1,200 rupees. the police will be slow and inefficient in tion raises the costs of getting things done--for Similar patterns emerge for mediating dis- handling their cases, and they frequently experi- setting up a new business, for crossing borders, putes.The extremely poor not only pay a higher ence outright harassment and intimidation. for obtaining a driver's license. In Pakistan these price to seek a resolution than the non-poor, but Even to register a case of kidnapping with the costs fall most heavily on those least able to also they are less likely to receive a satisfactory police requires paying a bribe. In these afford them: the poor. According to the Pakistan outcome (38.5 percent versus 80.8 percent). situations, it is hardly surprising that the poor Human Development Report, 16.7 percent of Indeed, the fee the extremely poor must pay is find it more expedient to take the law into their the extremely poor reported paying a bribe to often higher than their annual household own hands, creating in many urban areas a host run their business enterprise, handing over an income, leaving many to choose to suffer the of new problems related to gang violence and average of 6,800 rupees. Only 6.7 percent of the consequences of a dispute even when they are vigilantism. non-poor paid a bribe, of 9,300 rupees. In rural clearly in the right. In addition, the extremely Source: United Nations Development Programme areas, the contrast is even starker: 20 percent of poor receive less assistance from the police (the (2003). Inequity within countries: individuals and groups 49 B O X 2 . 8 Legacies of discrimination and the reproduction of inequalities and poverty among the Batwa in Uganda The Batwa,who are described in many parts as of power differences among Batwa and other respond in ways that--however rational and self- pygmy peoples,live in Eastern Uganda,eastern affected groups,nor consider Batwa preferences. protecting--often reproduce the extent to which Democratic Republic of Congo,and Rwanda. All communities were viewed as uniform,a prac- they are excluded.The same PPA reports some Batwa have been subject to negative stereotypes tice that the authorities later recognized"did not Batwa children saying that they did not attend since at least 1751,when Edward Tyson take into account Batwa realities and left them school because it was so unfriendly to them. concluded that pygmies were not human but with nothing"(Zaninka (2003),170). When asked what they wanted to do upon com- rather apes or monkeys.They suffer multiple Non-Batwa locals have resisted efforts to pro- pleting school,one child replied that she wished asset depletion and wide ranging forms of dis- vide more appropriate compensation to the to be"a cleaner."Discrimination and prejudice crimination,a situation that public actions have Batwa.A Participatory Poverty Assessment (PPA) diminish the capacity to aspire to and imagine a at times made worse.Though longstanding forest highlighted persistent discrimination,describing different future. dwellers,the British sought to expel them to cre- the Batwa as a"group of people who are Repudiation and discrimination can also ate forest reserves in the 1930s.In 1991,the despised"and who"have no means of production lead the Batwa to self-exclude from the public Uganda National Park authorities increased such as land,credit and training.They are sphere.The PPA notes that no Batwa attended efforts to enforce this exclusion from forest areas. regarded by other ethnic groups in Kisoro as a PPA exercises. Non-Batwa locals explained: Although the World Bank--which was funding people with no rights."This leads to everyday and "Batwa would never come to such meetings, so some of the park authorities'work--required that institutionalized forms of exclusion,with the there is no point in mobilizing them." the government assess the impact on indigenous Batwa suffering discrimination in access to both communities and follow defined compensation public spaces and services.While some Batwa Source: Moncrieffe (2005), citing Participatory procedures,these did not take sufficient account respond to this by organizing themselves,others Poverty Assessment reports. scious--for example, when people engage the very norms that frame their social lives. in land transactions without questioning Being so routinely treated with contempt by them, they reproduce the institutions of government officials, employers, and fellow land tenure and the markets in land. When citizens--and encountering such enormous a disadvantaged group accepts its disadvan- obstacles to advancement--means that tage as "taken for granted," the effect is to excluded groups can, over time, come to allow the continuing existence of the rela- subscribe to norms about themselves and tionships that create such disadvantage. their situation "whose social effect is to fur- The internalization of disadvantage ther diminish their dignity, exacerbate their leads to pernicious forms of agency that inequality, and deepen their lack of access perpetuate inequalities. From inequalities to material goods and services."28 in agency come inequalities in power, voice, In these circumstances, the poor are not and self-confidence--a major part of our only persistently and overtly discriminated story (box 2.7). Inequalities of agency are as against. Their problems are further com- much products of dominant institutions as pounded and consolidated by their apparent sources of those institutional arrangements. complicity in it, their revealed "adaptive Maintaining these arrangements both preference"29 for menial occupations and reflects and produces the distribution of ascription to norms and subservient behav- power among people. As for health, educa- iors that only legitimize and perpetuate their tion, and income, though, this distribution powerlessness. Dire material circumstances, can change--and it has. Indeed, it has often rational expectations about their limited changed in relation to changes in these prospects for upward mobility, and strong other distributions. beliefs about the legitimacy and immutabil- ity of their situation conspire to create a Internalization of disadvantage vicious circle from which it may be very dif- and inequalities of agency ficult for the poor to escape (see box 2.8).30 Recent work on urban slum dwellers in Inequality traps may cause crime and India26 (and elsewhere)27 suggests that a key violence. First, people who perceive their form of powerlessness for the poor involves poverty as permanent may be driven by living with "negative terms of recognition." hostile impulses rather than rational pur- This concept highlights the conditions and suit of their interests. Second, sensitivity constraints under which the poor negotiate to inequality, especially by those feeling 50 WORLD DEVELOPMENT REPORT 2006 trapped at the bottom, may lead to higher- positions of elites, and the effectiveness of risk tactics like crime, when the expected governments to implement approved courses payoffs from socially legitimate activities of action. The capacity of subordinate groups are poor. Third, people may be particularly is influenced by their "economic" capital-- sensitive to group-based inequalities. If, for their education and economic resources-- example, racial heterogeneity and income their"capacity to aspire,"and the closely asso- inequality are correlated and consolidate ciated capacity to organize.33 status distinctions in a society, this could In Indonesia, the Kecamatan Develop- spell potential for violence. Finally, as Mer- ment Project (KDP) illustrates change ton (1938) elegantly states, occurring through action from above and below: it aims to improve the terms of recog- . . . when a system of cultural values empha- sizes, virtually above all else, certain common nition and the political agency of marginal symbols of success for the population at large groups, and to create new institutions for while its social structure rigorously restricts greater agency to lead to material changes in or completely eliminates access to approved patterns of public investment. Consistent modes of acquiring these symbols for a con- with the ongoing process of democratization siderable part of the same population, . . . anti- in Indonesia, the source of change comes social behavior ensues on a considerable from public policy rather than nongovern- scale. (italics reflect original emphasis) mental action, allowing the project to oper- A lack of upward mobility in a society, com- ate on a large scale (see also focus 4 for exam- bined with a high premium on economic ples of change occurring at the local level). affluence, results in anomie--a breakdown of A recent study34 of the efficacy of the standards and values.31 KDP on challenging and changing the terms of recognition of participants sug- Changing between-group inequalities gests that it does provide villagers with a set of agency and institutional power of deliberative routines for more equitably Inequality of agency often leads to institu- managing the conflicts it inevitably trig- tions that reproduce such inequality. But gers.35 These routines introduce marginal these relationships are not immutable. actors to more equitable spaces of engage- There are ample cases in which interven- ment with more organized and influential tions--by civil society, reformist public actors. But building this conflict manage- officials, external actors, religious institu- ment capacity among marginal groups tions, and others--have given more self- depends on more than just forging collabo- confidence and assertiveness to disadvantaged rative routines. It also requires a set of groups, worked against the internalization of rules--defined by the KDP--that limit the disadvantage, and created new channels for unfair exercise of power by dominant excluded groups to exercise voice with greater groups. With the KDP cultivating collabo- effect. These changes improve the terms of ration and tangible points of political recognition for the powerless: they become power for marginalized groups, the results recognized by more powerful groups who include a well-functioning school or med- otherwise would not acknowledge them at all, ical clinic but equally important a style of leading to empowerment of disadvantaged group (re)definition and defense. groups in economic, social, and political Changes in the agency of indigenous realms. peoples in Ecuador since the 1960s provide Empowerment can occur in many ways.32 another example in which mobilization Change typically occurs through the interac- from below came to change national and tion between the opportunities for action local structures. These changes are clear at created by dominant political structures and both local and national levels. In the 1960s the capacity of poorer or middle groups to in the Andean province of Chimborazo, engage. The "political opportunity struc- the indigenous Quichua people suffered ture"--that shapes the possibilities for multiple deprivations. They were subject action--is itself a function of the openness to everyday forms of violence and to dom- of political institution, the coherence and ination and racism in their interactions Inequity within countries: individuals and groups 51 with other ethnic groups and with author- ities.36 Power was concentrated in the tri- B O X 2 . 9 Sex ratios and "missing women" umvirate of landowner, priest, and local Gender inequity causes many societies to Juvenile (newborn to four years old) sex ratios in government authority. Much indigenous display some preference for male children. China, the Republic of Korea, India, and Punjab labor was tied to large rural estates on But the"son preference"is strong enough and Haryana, 1950­2000 which labor relations were sometimes vio- to result in substantial excess female child lent and returns to labor manifestly unfair. mortality in parts of East and South Asia-- China leading to the phenomenon of what Life expectancy was short, alcoholism 1953 Amartya Sen calls"missing women."(Sen, 1964 severe, and children's access to education 1990). In China and India the practice of 1982 1990 and health acutely constrained. female infanticide was noted at least a 1995 At the start of this twenty-first century, century ago, and in the Republic of Korea 2000 and India high juvenile sex ratios (the pro- indigenous people now occupy several Republic of Korea portion of male to female children below 1949 county mayorships and have a majority of the age of 4) have been documented since 1960 councilors in several counties. The provin- the first modern censuses were taken. By 1970 contrast there seems to be little son pref- 1980 cial prefect is also Quichua. Similarly at a 1990 erence in Southeast Asia or in most other national level, former leaders of national 1995 parts of the developing world. 2000 indigenous people's organizations are now The reasons for this seem to stem from India ministers. And the national Confederation rigid patrilineal inheritance systems.While 1951 most societies deny women inheritance 1961 of Indigenous Nationalities of Ecuador has rights, in other parts of the world there is 1971 control of the directorate of bilingual edu- 1981 some flexibility in these rules. In peasant 1991 cation, the indigenous development coun- Europe and Japan, for instance, women 2001 cil, and the office of indigenous health. It could inherit land if their parents had no Punjab and Haryana (India) sons. Despite egalitarian laws, customary also played a big part in negotiating and 1951 practices in China, the Republic of Korea, 1961 administering a World Bank and Interna- and northwest India permit a man, if he 1971 1981 tional Fund for Agricultural Develop- does not have sons, to adopt one from 1991 ment­supported national Program for the other male kin. In the past, it would also 2001 have been possible to take another wife. Development of Indigenous and Afro- The driving motivation is to use whatever 1.00 1.05 1.10 1.15 1.20 1.25 Ecuadorian Peoples. By any calculation, means possible to continue the male fam- power relationships have changed in ily line.Thus, girl children are undervalued. risen. In the Republic of Korea stark declines Ecuador, becoming more equitable, with During pregnancy, sex-selection may have become only apparent in the last lead to aborting female fetuses, reflected in decade--perhaps because of indigenous people participating more sex ratios at birth that are more masculine improvements in labor market opportuni- completely (and more equitably) in their than the biological rate of 105 boys for ties for women. India, as a whole, does not society. every 100 girls. Sex-selection can also hap- have juvenile sex ratios that are far different pen through infanticide, although the data from many other parts of the world. But The inequality trap for women make it difficult to distinguish between northwest India has seen some particularly selective abortion and infanticide.The third, worrying trends, with sex ratios sharply ris- Unequal opportunities in health, education, and most common, mechanism is the neg- ing between 1981 and 2001, much attribut- economic welfare, and political agency can lect and other practices that result in higher able to the higher incidence of sex- mortality rates for girls than boys during selection in abortion. Other parts of India, be readily observed in most developing early childhood.37 especially the south, have more equitable countries. The preceding sections have In China, intense efforts by the govern- labor markets and fewer restrictions on emphasized that these different manifesta- ment resulted in a brief improvement in the women's mobility and inheritance. tions of inequity are not generally inde- sex ratio during 1953­64 (see figure to the right). But since the 1980s it has steadily Source: Das Gupta and others (2003). pendent from one another and that this interdependence can replicate inequalities over time. This interrelationship can be vividly illustrated by examining the nature sions in the home, affecting investments in and implications of the inequality that traps children and household welfare (box 2.9). many women in developing countries. Gender inequity is the archetypical Men and women around the world have "inequality trap." Most societies have norms starkly different access to assets and opportu- that preserve the prevalent social order, delin- nities, reinforced by unequal norms and eating different roles and spheres of influence social structures, perpetuating gender differ- for men and women. The male sphere is typi- ences over centuries. Gender inequity directly cally outside the home in market work and affects the well-being of women and deci- social interactions that enhance the family's 52 WORLD DEVELOPMENT REPORT 2006 status and power.The female sphere is usually In addition to being denied inheritance inside the home--looking after household and property rights, women in many soci- work, rearing children, and contributing to eties face restrictions on their mobility. For the stability of the household. So, women's example, in the state of Uttar Pradesh in activities serve primarily as inputs into the northern India close to 80 percent of household's collective well-being, while men women require their husband's permission are ostensibly at its center--its breadwinners to visit a health center, and 60 percent have and its link to the larger world where eco- to seek permission before stepping outside nomic and social status are determined. their house.43 These mobility restrictions Marriage and kinship systems preserve may be socially imposed, as with gunghat these structures of patriarchy. Most societies among Hindus--or have religious sanc- are "patrilocal," with women moving from tions, as with purdah among Muslims. Such their parents to their husband's home after practices are not just socially enforced, they marriage. Marriage can therefore be thought can be internalized by women who treat of as a framework that serves to exchange them as marks of honorable behavior. These women between households, and marriage norms are transmitted by parents to their decisions are made with a view toward ensur- children, ensuring their continuity over gen- ing that this exchange of women promises the erations; in many societies, they are enforced maximum gain to both households. The by older women in the community.44 man's household is the point of reference-- Restrictions on mobility and rules of kin- while the woman is simply an input into the ship and inheritance help shape social per- processes for households controlled by men ceptions about women's roles. If women are to generate economic and social returns.38 socially and economically directed to focus Inheritance tends to be consistent with their attention and energy on activities in the this pattern. Most societies are not just home, this is not just what men expect of patrilocal--they are also patrilineal, with them--it is also what other women expect of inheritance and property rights primarily them. In much of the developing world, passed on to men. The majority of countries, women's participation in the labor market is outside of Europe and Central Asia and Latin more a function of adversity than active America and Caribbean, restrict inheritance choice--because husbands cannot earn an rights to women.39 Some countries have leg- adequate income or because of an unantici- islation that guarantees equality in inheri- pated shock, such as a child's illness. tance laws. But these laws often are not Bangladeshi women described it this way, enforced, and real authority over decisions "Men work to support their families, women on inheritance rests in the hands of village work because of need."45 Women around the elders and chiefs, who follow customary world participate in a fair amount of market- practices that discriminate against women. based activity for a wage,but they have to con- Most countries that have unequal inheri- tinue to perform most household chores (fig- tance laws also have unequal property rights ure 2.13). They thus face a time squeeze, regimes.40 Indeed, the vast majority of land spending more time at work, both in and out owners are men.41 Many societies compound of the home, than men do. this by denying women the right to divorce. Because social and economic factors This inequality in property rights regimes determine women's life chances more in mar- persists even in countries where agricultural riage than in labor markets,parents invest less production depends heavily on women's in their human capital. Throughout the labor, such as many in Sub-Saharan Africa. developing world, women are much less In Cameroon, women make up more than likely to be enrolled in secondary school or 51 percent of the population and do more university than men.46 So, they typically work than 75 percent of the agricultural work, but in less lucrative occupations. Moreover, labor they are estimated to hold fewer than 10 per- markets may themselves be discriminatory, cent of all land certificates.42 So, if women paying women less than men for the same work on farms, they are usually working on work. For these reasons, even when women farms owned by men. participate in the labor market, they earn less Inequity within countries: individuals and groups 53 than men. Low earnings are a further disin- Figure 2.13 Women work longer hours than do men centive for women to enter the labor market, Women Men perpetuating traditional social roles. Nonmarket Market Market Nonmarket Inequality in the home activity activity activity activity For a long time, economists did not ade- Australia quately recognize that gender inequity has an Austria impact in the home, and models of the Bangladesh Canada household assumed that decisions were taken Colombia by one person--with no room for different Denmark choices across spouses. The consequence of Finland this world view is not just academic. It sug- France gests, for instance, that policy interventions Germany that attempt to alleviate poverty should not Guatemala Indonesia bother with targeting by gender--or suggests Israel that taxes on a household will not affect the Italy allocation of resources within it. Kenya, rural Economists now question this view, Kenya, urban developing models of household decision Nepal, rural making that allow for inequality between Nepal, urban Netherlands spouses. The new models start with the Norway assumption that households are efficient, in Philippines the sense that they make decisions that max- United Kingdom imize the use of the household's resources. United States With this assumption, the models show that R.B. de Venezuela a spouse's share in household resources is 400 0 400 determined by two factors. The first is the Minutes a day fallback option for the spouse in the event of Source: United Nations Development Programme (1995). Note: Data refers to rural Bangladesh in 1990, urban Colombia 1983, rural Guatemala 1977, urban Indonesia 1992, rural divorce--laws of inheritance, property, and Kenya 1988, urban Kenya 1986, rural Nepal 1978, urban Nepal 1978, rural Philippines 1975­77, urban Venezuela 1983, divorce would matter here. Second is the rel- Australia 1992, Austria 1992, Canada 1992, Denmark 1987, Finland 1987-88, France 1985­86, Germany 1991­92, Israel 1991­92, Italy 1988­89, the Netherlands 1987, Norway 1990­91, the United Kingdom 1985, and the United States 1985. ative size of the spouse's contribution to the household's income, which is determined by benefit more than when men are better off. their opportunities in the labor market.47 If The most obvious way to explain bargaining husbands and wives have different prefer- and sharing is to assume that women intrin- ences, an increase in a woman's outside sically care more about children than men do, options or in her labor market opportuni- but this risks being tautological. ties should reflect consumption choices Perhaps the explanation can benefit from more in line with her preferences. understanding that social and economic dif- Econometric work confirms that an in- ferences outside the household can matter crease in a woman's relative worth and an not only for determining bargaining power improvement in her fallback options have but also for socially determined perceptions effects on consumption patterns.48 The of what men and women consider impor- health of Brazilian children improves when tant. If men and women occupy different additional nonlabor income is in the hands of "outside"and"inside"spheres of influence, it women.49 In the United Kingdom, when leg- seems to make sense that improvements in islation ensured that child support payments women's incomes would have a greater were made directly to mothers, expenditures impact on investments in the household. on children's clothing tended to rise.50 In Improvements in the income of men, by Bangladesh and South Africa, women bring- contrast, are more likely to result in socializ- ing more assets into the marriage increase ing activities outside the home and in pur- household expenditures on children's educa- chases that reflect social status. tion.51 The patterns seem to indicate that, Another consequence of this separation when women are better off, children seem to between inside and outside roles is that 54 WORLD DEVELOPMENT REPORT 2006 Table 2.2 Percentage of women who have ever tic violence is that it allows husbands to experienced physical or sexual violence by an institute a regime of terror to control their intimate partner wives' behavior. In India, Bloch and Rao Physical violence Sexual violence (2002) find that husbands systematically use Bangladesh, rural 42 violence as a means of extracting a larger Brazil, urban 27 10 dowry from their wives. This "instrumental" Ethiopia, rural 49 59 use of violence has widespread acceptance Namibia, urban 31 17 among both men and women. Surveys have Peru, rural 62 47 found that large percentages of respondents Samoa 41 20 in developing countries report that men Serbia and have the right to beat their wives when they Montenegro 23 6 answer back or disobey them.52 Tanzania, urban 33 23 Gender inequity is thus the result of an Thailand, rural 34 29 overlapping set of economic, social, cultural, and political inequalities that reinforce each Source: Unpublished data from the WHO Multi-Country Study on Women's Health and Domestic Violence Against Women obtained other.They cause women to have less access to from a presentation by Claudia Garcia-Moreno at the World Bank's property rights, wealth, and education--and Conference on Gender-Based Violence. The final published com- parative report is forthcoming. limit their access to labor markets and to Note: Data refer to different time periods. Brazil, Peru, and Thailand refer to 2000. Reference period for Bangladesh, Ethiopia, Namibia, spheres of activity outside the home. This, in Samoa, Serbia and Montenegro, and Tanzania are unknown. turn, constrains their ability to influence household decisions. Also limiting this influ- inequalities in the home are also manifested ence are asymmetries of information in the in differences in access to information, household and the use of violence to control which can be used to manipulate intra- women's behavior.All of this maintains a clear household bargaining. In an ethnographic demarcation between the roles of women and study of Bangladeshi garment workers, men, readily reproduced across generations. Kabeer (1997) found that men and women There are some signs that changes in tried to control information about their labor markets and interventions by the state incomes from their spouses so that they can break this inequality trap. The develop- could make purchases without consulting ment of the garment industry in Bangladesh them. Women may also hesitate to share has resulted in a sharp and visible increase in information with their husbands, or to col- women's access to a lucrative labor market, laborate efficiently in farming their plots of expanding their ability to influence house- land, to retain control over their property. In hold choices.53 Higher wages for women studying the farms owned by men and those seem to compensate for restrictive practices, owned by women in Ghana, Udry (1996) such as purdah, by reducing limits on found, keeping other things constant, that women's physical mobility, and increasing women-owned farms were less productive their say in household decision making.54 than those owned by men. When wives and Globalization has expanded opportunities husbands are not sharing information, or for women in Mumbai and increased their manipulating the flow of information, they access to schooling.55 A comparative study of clearly are not using their resources opti- the Philippines, Sumatra, and Ghana found mally. In other words, intrahousehold that patterns of land inheritance and invest- behavior is not efficient--contradicting an ments in schooling have became more egali- important assumption in economic models. tarian because of changes in labor market The widespread domestic violence in the opportunities for women.56 And although family is another type of inefficiency. Recent China, Republic of Korea, and India started World Health Organization (WHO) data out with similar discriminatory social struc- show that both physical and sexual violence tures, intervention by the state has improved are widespread in diverse parts of the world gender equity much more in China than in (table 2.2). An important reason for domes- Republic of Korea or India.57 Equity from a global perspective 3 In examining the inequality of opportuni- ties to live a free, healthy, and fulfilled life. ties within countries, the previous chapter As Angus Deaton writes, c h a p t e r emphasized people's "predetermined cir- cumstances," or life chances beyond their We are living with appalling inequalities, in control, as distinct from their "efforts" and which the poor of the world die of AIDS, and, "talents" as individuals. One of these cir- more broadly, where poor people around the world die of diseases that are readily prevent- cumstances is a person's place of birth. In able elsewhere, including in the first-world many countries, access to basic public hospitals and clinics that serve the rich in health services, for example, is significantly poor countries.1 lower in rural areas than in urban areas. That can mean much for surviving the first In 2000 the life expectancy of a child born year of life--the infant mortality rate in Rio in Sierra Leone (37 years) or Botswana (39 de Janeiro was 3.3 percent in 1996, less than years) was less than half that for a child half the 7.4 percent in northeast Brazil. born in the United States (77 years).2 The But, just as being born in a village or a average educational attainment (uncondi- city is one circumstance that should be tional on quality of schooling) of an indi- irrelevant to a person's chances in life, being vidual born in a Sub-Saharan country born in a specific country is another. Why is between 1975 and 1979 is less than 6 years, it objectionable for, say, Turkish women to but more than 12 years in OECD coun- have inferior opportunities and outcomes tries. Inequalities in income are also high compared with Turkish men, but not so among individuals in different parts of the objectionable if the comparison is between world.3 Turkish men and English women? After all, How do we view large average improve- in many dimensions of well-being, major ments in the world, set against this picture differences in opportunities and outcomes of unacceptable inequalities between coun- exist between citizens of different countries, tries? Sen (2001) describes the current state in some cases differences larger than those of the world while making the case for a between various groups within countries. fairer distribution of the fruits of globaliza- This chapter tries to answer two questions. tion: "Even though the world is incompara- First, how much does one's country of birth bly richer than ever before, ours is also a determine one's opportunities in life? Second, world of extraordinary deprivation and does one's country of birth mean less for life staggering inequality." He argues that chances today than in the near or distant whether there have been some gains for all past? To answer these questions, we discuss is not as important as whether the distribu- inequalities in health, education, income, and tion of gains has been fair. Inequalities in power in the global arena. We show that the affluence--and in political, social, and eco- inequalities between countries are staggering nomic power among countries--are cen- despite some improvements over time. tral to the debate on globalization. As long as the sharing of potential gains from glob- Examples and concepts alization is viewed as unfair by many, the There is no doubt that we live in a world inequalities described in this chapter will with massive inequalities in the opportuni- be deemed unacceptable. This, despite the 55 56 WORLD DEVELOPMENT REPORT 2006 fact that absolute poverty has declined in The debate on inequalities in various the last two decades--though by no means dimensions of well-being and their relation uniformly. to globalization rages on as you read this To put global inequalities in well-being in report.4 It is indeed harder to assert whether perspective, it helps to examine two coun- inequalities increased or decreased over tries at opposite ends of the spectrum-- time. Various questions have to be answered Mali, one of the world's poorest countries, first: inequality of what, over which time and the United States, one of the richest. A period, using which concept of inequality? baby born in Mali in 2001 had an approxi- While there is some evidence of convergence mately 13 percent chance of dying before in opportunities in health and education reaching age one, with this chance declining and some divergence in incomes (or at least only slightly (to 9 percent) even if the baby lack of convergence), these results cannot be were born to a family in the top quintile of stated without many qualifications and the asset distribution. By contrast, a baby caveats. Box 3.1 introduces some underlying born in the United States the same year had concepts that need to be clarified. a less than 1 percent chance of dying in its first year. The picture for under-five mortal- Global inequalities in health ity is even more egregious: 24 percent of The unweighted and weighted international children will not reach age five in Mali, distributions of life expectancy at birth compared with less than 1 percent of Amer- (ignoring the distribution of life expectancy ican children. Even a child born into the at birth within countries) both show a clear richest quintile in Mali is more than 16 "twin-peakedness" in 1960.7 Data show that times likely to die before age five than an 50 countries had life expectancies between average American child. 35 and 45 years, 41 countries had life The picture does not improve for educa- expectancies between 65 and 75 years, and tion. The average American born between there was relatively little mass in the middle 1975 and 1979 has completed more than 14 of the distribution. years of schooling (roughly the same for By 1980 the left-hand mode of the distri- men and women, and in urban and rural bution had decreased considerably in size. areas), while the average school attainment The distributions began to look more for the same cohort in Mali is less than two right-skewed, unimodal, especially in the years, with women's attainment less than weighted international distribution: 73 half that for men, and virtually zero in rural countries had a life expectancy between 65 areas. If one considers the quality of the and 75, compared with 31 countries between education received, the inequalities in learn- 55 and 65, and 35 countries between 45 and ing achievement are possibly much larger. 55. But by 2000 the two modes become evi- It is not surprising, then, that many citi- dent once again, especially in the unweighted zens of Mali, having survived immense distribution, although there is more mass in hardships as children and without much the right mode of the distribution. education, can barely eke out a living as In 1980, the average life expectancy in adults, on average living on less than $2 a four regions--Middle East and North Africa, day ($54 a month) in 1994. By comparison, East Asia (excluding China and Japan), the average American earned $1,185 a South Asia, and Sub-Saharan Africa--was month, more than 20 times that for the below the world average.8 Between 1980 and average Malian. 2000, rapid increases in life expectancy in the While there is probably some consensus first three of these regions were globally that inequalities in health, education, inequality-reducing, while the decline of life income, and voice are large globally, there is expectancy in Sub-Saharan Africa in the much less agreement on whether things 1990s boosted inequality by stretching the have been getting better or worse. Is one's bottom tail of the distribution. By 2000, country of origin more or less pertinent only South Asia and Sub-Saharan Africa today to the life chances that she faces at were below the world average, with the dif- birth than it was 20, 50, or 200 years ago? ference in life expectancy at birth between Equity from a global perspective 57 B O X 3 . 1 Three competing concepts of inequality: global, international, and intercountry On the welfare gains from globalization, the tional inequality, the inequality in the distribu- the division of the gains from globalization. two sides of the debate often make tion of all of the world's citizens, but with each The measures most widely quoted by the crit- statements that are diametrically opposed, all person assigned the mean income of his/her ics of globalization treat each country as one the while examining the same data.While country instead of his/her own income. Global observation, while decompositions of world there are some differences in and problems inequality is calculated by simply adding inter- inequality into between-country and within- with data, the wide discrepancy in views on national inequality to within-country inequality. country components described above give the topic seems to stem from the fact that the people equal weight, whether they live in Intercountry inequality: each country has two sides do not share the same values about China or Chad. one representative at its mean income what constitutes a just distribution of the Note that in the globalization debate, the These two concepts, however, are not enough to gains from globalization. choice of the measure of inequality can also settle the debate.Think of the following state- Considered here are three different depend on the question one is trying to ment in support of the argument that inequality concepts of inequality, drawing from Milanovic answer. If one is interested in the impact of in the world has been increasing:"The GDP per (2005) and Ravallion (2004a). Both authors, and some"globalizing"policies on growth or distrib- capita of the richest country in the world was the globalization debate in general, discuss utional outcomes at the country level, it might about 9 times that of the poorest around 1870 these"competing concepts"in the domain of be preferable to use a measure of intercountry compared with 45 times by 1990."6 Notice that incomes. But these concepts can be extended to inequality. while this statement seems to be referring to other dimensions, such as health and education something akin to international inequality, there Why use international inequality-- (especially for inequality between countries). is a subtle but very important difference: the as we do in this report? The conclusions one would draw in each of size of the richest or the poorest country plays Alternatively, if we are trying to determine these dimensions of well-being then depend on no role in this statement.The statement remains whether world poverty or inequality decreased the concept of inequality adopted. It is impossi- the same whether the richest country is Palau as a result of"globalizing"policies, then we ble for the two sides to communicate without and the poorest country is Jamaica, or whether might be more inclined to examine measures of first making these concepts clear. they are China and India. international inequality. Has global income inequality increased or This is why a third concept is needed. In this not? Before we can answer this, we have to No right or wrong choice concept, all countries of the world (instead of all define what we mean by global inequality and Arguments can be made in favor of each of citizens) line up together, and each of them is how that differs from what we will call interna- these two concepts when assessing trends in assigned her mean income.We will call the tional and intercountry inequality. inequality between countries.This choice is not inequality in this distribution (of roughly 200 or a matter of what is right or wrong. When it Global inequality: forget country so countries of the world) intercountry inequal- comes to judging inequality, intelligent people boundaries, each person has his ity. Milanovic (2005) refers to our intercountry, can disagree about whether countries or peo- or her real income international, and global inequality concepts as ple should be weighted equally--something Global inequality is easy to define: simply forget Concept 1, Concept 2, and Concept 3 inequality, that Ravallion (2004a) argues in detail.The countries, line up all citizens of the world, and respectively (see figure below). point: the judgments (or the questions of inter- calculate the inequality in the distribution of Why use intercountry inequality est) that affect the choice of the inequality con- their real incomes, adjusted for purchasing The implicit value judgment in using inter- cept employed in empirical work matter greatly power parity.5 The global inequality measures country inequality instead of international to the assessment one can make about the dis- that belong to the general entropy class, such as inequality is that countries, not people, should tributive justice of current globalization a mean log deviation or Theil's index, can be get equal weight in assessing the fairness of processes. neatly decomposed into inequality attributable to inequalities between persons within each country and the mean differences of income between countries (Shorrocks 1980). Three concepts of inequality illustrated Within-country inequality is what the overall inequality in the world would be if there were no differences in mean consumption across Intercountry inequality: countries but each country had its actual Three countries and three representatives inequality level. Between-country inequality can with mean incomes (height) be interpreted as measuring what the level of inequality in the world would be if everyone within each country had the same (the country- International inequality: average) consumption level.Total inequality in Entire population included, the world is the sum of these two parts, and the but with mean incomes ratios of the respective parts to total inequality provide a measure of the percentage contribu- tion of between-country and within-country inequality to total inequality. International inequality: each person has Global inequality: his or her country's mean income All individuals with their actual income Throughout the rest of the report, we will refer to this between-country inequality as interna- Sources: Milanovic (2005) and Ravallion (2004a). 58 WORLD DEVELOPMENT REPORT 2006 Figure 3.1 Vanishing twin peaks in life expectancy at birth 1960 1980 2000 Estimated density, unweighted 0.05 0.05 0.05 0.04 0.04 0.04 0.03 0.03 0.03 0.02 0.02 0.02 0.01 0.01 0.01 0.00 0.00 0.00 29 35 41 47 53 59 65 71 77 83 89 29 35 41 47 53 59 65 71 77 83 89 29 35 41 47 53 59 65 71 77 83 89 µ = 50.2 µ = 62.3 µ = 66.4 1960 1980 2000 Estimated density, weighted 0.05 0.05 0.05 0.04 0.04 0.04 0.03 0.03 0.03 0.02 0.02 0.02 0.01 0.01 0.01 0.00 0.00 0.00 27 33 39 45 51 57 63 69 75 81 87 27 33 39 45 51 57 63 69 75 81 87 27 33 39 45 51 57 63 69 75 81 87 µ = 53.4 µ = 61.0 µ = 64.8 Source: Schady (2005). these two regions having increased from 5.8 consistent improvements in life expectancy years to 15.6. Between-country inequality at birth came to a screeching halt in the declined until the early 1990s and then 1990s (table 3.1). Between-country inequal- increased back to its 1980 level by 2000. The ity among developing countries is as high as large decline in life expectancy at birth in it has ever been since 1960. Sub-Saharan Africa more than offset the So, there is some convergence in life inequality-reducing effect of growth in expectancy at birth over a long period, South Asia in the 1990s. although there are significant losses in the Over a longer period (1820­1992) Bour- 1990s in Sub-Saharan Africa, mainly caused guignon, Levin, and Rosenblatt (2004a) by AIDS, and in some European and Central show tremendous gains in life expectancy at Asian countries.9 With the developed coun- birth (rising from approximately 27 years to tries reaching a biological limit at the top of 61 years), unequally distributed at first, the distribution and many regions catching then equalizing in three waves between late up to them, the inequality of life expectancy nineteenth century and 1990. Decades of in the world will become more a function of changes in health and population growth in Sub-Saharan Africa--barring a major health Table 3.1 Increases in life expectancy at birth slowed down dramatically in the 1990s catastrophe elsewhere in the world. (We 1960 1970 1980 1990 2000 revisit this issue at the end of the chapter.) But for now there remain two worlds with Mean 53.4 57.4 61.0 64.0 64.8 significantly different life expectancies: the Coefficient of variation 0.233 0.203 0.183 0.173 0.194 gap in life expectancy between Sub-Saharan Theil-T 0.027 0.021 0.017 0.016 0.020 Africa and Europe and North America in Theil-L 0.028 0.022 0.018 0.017 0.021 2000 is higher than it was in 1950.10 Source: Schady (2005). Health outcomes of even the rich citi- Note: Theil-L and Theil-T are two inequality measures that belong to the general entropy class, with parameters 0 and 1, respectively (unweighted). zens in poor countries remain well below Equity from a global perspective 59 the average in OECD countries. For exam- Figure 3.2 Life expectancy is highly correlated with income, particularly in poor countries ple, for all countries with average per capita Life expectancy, 2000 GDP below the $2 a day threshold, the child 85 mortality rate of the richest 20 percent of Japan Mexico Argentina Spain the population is more than 10 times the OECD average of six years.11 While this is 75 Germany United States China Rep. of Korea also certainly the case with many other Brazil indicators, it is difficult to make statements 65 Russia about how large differences between coun- Pakistan tries are in comparison with inequalities India 55 within countries. Unlike the income Gabon inequality literature, there are no accepted South Africa practices for decomposing inequalities in 45 Namibia health into within-country and between- Botswana country components.12 35 Consider, however, a simple thought 0 10,000 20,000 30,000 experiment. In the 45 developing countries GDP per capita, 2000, current PPP $ for which a Demographic Health Survey Source: Deaton (2004). was available in 2000, 4.9 million infant Note: The curve is nonparametrically fitted, weighted by population. The figure plots country life expectancy (using circles whose size is proportional to population) against GDP per capita in purchasing power parity (PPP) dollars at the deaths could be prevented by bringing their turn of the twenty-first century. infant mortality levels to the OECD aver- age. But if one eliminated the infant mortal- ity gap between the rich and the poor within each of the same countries by lower- ing the infant mortality rate for everyone to the adoption of even inexpensive tech- the level of the top decile, 3.1 million infant niques, adequate nutrition, and water and deaths could be prevented.13 While the sanitation infrastructure. Life expectancy average infant mortality rate for the rich in increases steeply with income among the these poor countries is almost five times poorest countries (figure 3.2).15 larger than the OECD average, it seems But differences in income growth ex- that eliminating within-country differences plain less than a sixth of the variation in between the rich and the poor (by improv- improvements in life expectancy at birth. ing the health of the poor), at least in this More important determinants are clean particular case, would get us about two- water, health systems, demand for ade- thirds of the way to the number of total pre- quately operated and equipped health sys- ventable deaths (by moving everyone to the tems, and basic sanitary knowledge, the lat- OECD average). ter two having much to do with education, So, while large differences in health out- particularly women's education.16 comes remain between countries and within While life expectancy at birth continued them, it is not possible to make definitive to increase, and the infant and child mortal- statements about the relative weight of ity rates declined, the last decade of the these components in global health inequali- twentieth century has seen a divergence ties. One can say, however, that there is no between rich and poor countries.17 The dif- clear presumption that inequalities between ficulties faced by Europe and Central Asia countries dwarf those within them. This countries during transition, and the spread finding, as we will see later in this chapter, of HIV/AIDS and civil conflicts, were major stands in sharp contrast to that in incomes factors in this, but they are not solely but is congruent with that in education. responsible.18 Cornia and Menchini (2005) While technical change in private and cite changes in health spending, public public health knowledge may be more health programs, and the structure and sta- important to account for the overall better bility of households as possible reasons for health,14 income may be important in the the slowdown in health progress in devel- poorest countries, through its impact on oping countries. 60 WORLD DEVELOPMENT REPORT 2006 Figure 3.3 The distribution of years of schooling improved greatly in the second half of the twentieth century 1960 1980 2000 Estimated density, unweighted 0.20 0.20 0.20 0.15 0.15 0.15 0.10 0.10 0.10 0.05 0.05 0.05 0.00 0.00 0.00 0 1 3 5 7 9 11 13 0 1 3 5 7 9 11 13 0 1 3 5 7 9 11 13 µ = 3.3 µ = 4.6 µ = 6.3 1960 1980 2000 Estimated density, weighted 0.20 0.20 0.20 0.15 0.15 0.15 0.10 0.10 0.10 0.05 0.05 0.05 0.00 0.00 0.00 0 1 3 5 7 9 11 13 0 1 3 5 7 9 11 13 0 1 3 5 7 9 11 13 µ = 4.4 µ = 5.6 µ = 6.6 Source: Schady (2005). Global inequalities in education Many of these countries saw large in- The unweighted distribution of adult creases in enrollments in the 1960s, 1970s, school attainment was clearly left-skewed and 1980s. As these younger cohorts aged, in 1960 (figure 3.3). This reflects the fact the mean years of schooling in their coun- that many countries, particularly in Africa tries increased, and the skewness in the and Asia, had mean years of schooling close unweighted international distribution of to zero. The weighted distribution, like that schooling disappeared. Note that the bi- for life expectancy at birth, was bimodal, modal distribution of schooling across per- with one peak around two years of mean sons (weighted by population) persisted schooling and a smaller peak around eight until the 1990s and then gave way to a uni- years. modal distribution only by 2000. By any measure the international distri- Figure 3.4 Mean years of schooling increased while inequality declined across birth cohorts bution of years of schooling has undergone dramatic changes between 1960 and 2000. Inequality in years of schooling Mean years of schooling As mean levels have risen, inequality has 1.0 9 Inequality in years of schooling fallen, decade after decade (figure 3.4). The 0.8 8 mean years of educational attainment for the world almost doubled from 3.4 to 6.3 0.6 7 (table 3.2). Sub-Saharan Africa, the Middle East and North Africa, and South Asia 0.4 6 started with high inequalities (not shown Mean years of schooling 0.2 5 here) and reduced them over time--the Middle East and North Africa region was 0.0 4 particularly successful. Latin America and 1935­9 1940­4 1945­9 1950­4 1955­9 1960­4 1965­9 1970­4 1975­9 the Caribbean and East Asia also had some Year of birth inequalities, which they essentially elimi- Source: Araujo, Ferreira, and Schady (2004). nated for their youngest cohorts. Despite the Note: Inequality in years of schooling is measured using GE (0.5), that is, the general entropy class inequality measure with an inequality aversion parameter of 0.5. progress, mean levels of educational attain- Equity from a global perspective 61 ment in Sub-Saharan Africa and South Asia Table 3.2 Mean years of schooling increased continuously while inequality declined remain low even for the youngest cohorts. 1960 1970 1980 1990 2000 While significant disparities remain in Mean 3.38 3.82 4.67 5.55 6.30 educational attainment across countries Coefficient of variation 0.739 0.705 0.612 0.518 0.461 despite evidence of significant catch-up by Theil-T 0.281 0.259 0.195 0.143 0.115 poorer countries in the past half century, Theil-L 0.392 0.365 0.250 0.179 0.144 there is also large variation within countries (chapter 2). In fact, less than 20 percent of Source: Schady (2005). Note: Theil-L and Theil-T are two inequality measures that belong to the general entropy class, with parameters 0 and the inequality in educational attainment 1, respectively (unweighted). between adults born between 1935 and 1979 is attributable to that between coun- Figure 3.5 Gender disparities in years of schooling declined tries, a share that has been steadily declining but remained significant in some regions over time. While both inequality within and between countries is declining, the rate of Male to female schooling ratio convergence in country means has been OECD faster. East Asia Europe and Central Asia The story remains the same when decom- South Asia posing inequality in educational attainment Latin America and the Caribbean into inequalities between men and women. Middle East and North Africa Sub-Saharan Africa Roughly a quarter of global inequality in edu- 4 cational attainment is attributable to differ- ences between men and women, but this gap is again declining over time, from 31 percent in the oldest cohort in our sample, to 16 per- 3 cent in the youngest. But there are large dif- ferences in this convergence by region (figure 3.5).While Latin America and the Caribbean, 2 East Asia, and Europe and Central Asia seem to have reached gender parity in education, along with other developed countries, the 1 progress in South Asia, Sub-Saharan Africa, and the Middle East and North Africa has 1935­9 1940­4 1945­9 1950­4 1955­9 1960­4 1965­9 1970­4 1975­9 been slower. Women still lag far behind men Year of birth in educational attainment. Source: Araujo, Ferreira, and Schady (2004). It should not be assumed that high attainment necessarily implies high achieve- ment, and vice versa. An analysis of the rela- of Australia, Finland, and Ireland are much tionship between attainment (measured by higher than their rankings in attainment. the percentage of 25 to 34 year olds with Achievement differences between devel- upper-secondary education) and achieve- oping countries and OECD countries re- ment (measured by reading proficiency of main strikingly large. Using internationally 15 year olds) in 27 OECD countries (plus comparable assessments of reading, mathe- Brazil) shows a rank correlation coefficient matics, and science, Pritchett (2004b) between these two variables of 0.57. It is shows that developing countries do not just clear that the rankings of countries accord- constitute the lower tail of the learning dis- ing to these two indicators are not the same. tribution, but that most actually do far worse The Republic of Korea and Japan (at the top than the poorest performing OECD coun- of the OECD distribution) and Mexico, Por- tries. For example, children in Argentina, tugal, and Turkey (at the bottom) have simi- Mexico, and Chile perform about two lar ranks for both attainment and achieve- (OECD) standard deviations below chil- ment. But the Czech Republic, Norway, and dren in Greece--one of the poorest per- the United States do worse in achievement forming countries in the OECD. In reading than attainment. And achievement rankings competence (based on PISA 2001), the 62 WORLD DEVELOPMENT REPORT 2006 average Indonesian student performed at between 1997 and 2002, as well as the dis- the level of a French student at the seventh persion of those incomes within each coun- percentile. Considering children who have try (figure 3.6). Large differences across never attended school, those who enrolled countries and across people within coun- but dropped out, and those who completed tries are striking. For example, an indi- grade nine but whose test scores remain vidual in the tenth percentile in the U.S. more than one standard deviation below distribution enjoys a level of income higher the OECD mean in mathematics, Pritchett than an individual earning the mean finds that 96 percent of 15 to 19 year olds in income in Brazil or Argentina.20 While a Morocco lack achievement in "adequate Chinese individual living in a rural area has learning."19 a mean income similar to an average Cam- bodian, an urban Chinese enjoys a similar Global inequalities income to an average Brazilian.21 A South in income and expenditure African at the bottom of the income distri- The answers to basic questions--such as bution in her country earns as much as the whether income inequality has been increas- average individual in Mali while a South ing or decreasing--depends, among other African at the ninetieth percentile of that things, on which concept of inequality is income distribution enjoys a standard of under the microscope: intercountry inequal- living (in income) comparable to that of a ity (in the distribution of unweighted coun- median Irish individual. try means), international inequality (in the The difference in the evolution of inter- distribution of country means weighted by country (unweighted) and international their population size), or global inequality (weighted) inequality between 1950 and (in the distribution of individual incomes). 2000--borrowing from Milanovic (2005), We start the discussion by presenting the who calls this the "mother of all inequality median and mean incomes of selected disputes"--could hardly be more dramatic countries by region for a range of years (figure 3.7). When countries are the unit of Figure 3.6 Incomes range broadly across countries and individuals Mali Sub-Saharan Africa Ethiopia South Africa Cambodia India, rural South Asia Pakistan India, urban China, rural East Asia Indonesia China, urban Nicaragua Latin America and Argentina the Caribbean Brazil Yemen Middle East and Morocco North Africa Israel Russia Europe and Albania Central Asia Poland Ireland OECD countries Denmark United States 0 250 500 750 1000 1250 1500 1750 2000 2250 2500 Income per capita (1993 PPP $) Source: Authors' calculations. Note: Years range from 1997 to 2002 as measured by adjusted (1993 PPP $) monthly per capita income (blue box) or consumption (orange box). The lowest point of each line represents the income level at the tenth percentile, followed by that at the median, the mean (the two edges of each box), and the ninetieth percentile (top of each line). Equity from a global perspective 63 Figure 3.7 Since 1950, intercountry inequality Figure 3.8 Unlike relative inequality, absolute increased, while international inequality declined inequality has been steadily increasing Gini index Indexes, 1970 = 100 0.6 International inequality Kolm index (0.3) Absolute Kolm index (3.0) (weighted) measures Absolute Gini index Gini index International inequality Theil index Relative without China and India Mean logarithmic measures 0.5 deviation 250 225 Intercountry inequality (unweighted) 200 0.4 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 175 Source: Milanovic (2005). 150 observation, (intercountry) inequality has 125 been undeniably increasing, especially since the 1980s. But international inequality has 100 been steadily declining, thanks mostly to the income growth in some populous coun- 75 tries, mainly China and India. Note that 1970 1975 1980 1985 1990 1995 2000 intercountry inequality and international Source: Atkinson and Brandolini (2004). inequality without China and India track each other quite closely from 1980 onward, coinciding with the period of rapid growth absolute terms or relative terms. There is no in these two countries, the slower average economic theory that tells us that inequality growth in other developing countries, and is relative, not absolute. Again, as with inter- the declines in measured output in Eastern country and international inequality, it is Europe and former Soviet Union countries. not that one concept is right and the other If Luxembourg and Nicaragua, at oppo- one wrong. Nor are they two ways of meas- site ends of the world income distribution, uring the same thing. Instead, they are two grew at the same annual rate of 2 percent different concepts. The revealed preferences per capita a year for the next 25 years, the for one concept over another reflect implicit per capita yearly incomes in Luxembourg value judgments about what constitutes a would increase from $17,228 (PPP-adjusted) fair division of the gains from growth. to $28,264, an increase of more than Those judgments need to be brought into $10,000 dollars. That of Nicaragua, by con- the open and critically scrutinized before trast, would increase by a mere $375, from one can take a well-considered position in $573 to $940, during the same period. this debate. Atkinson and Brandolini (2004) note that An examination of international inequal- "with annual per capita growth rates of 5 ity using absolute rather than relative meas- percent in China and 2 percent in the ures of inequality reveals a steady increase United States, the absolute income gap over the long run, as well as in recent between the two countries would widen for decades--this latter finding contrasts with a further 41 years before starting to narrow, relative international inequality trends. Atkin- to finally disappear in 72 years." son and Brandolini (2004) find that absolute The evaluative judgments drawn about indexes of inequality, such as the Absolute the distributional changes associated with Gini and the Kolm Index22 (with various globalization may depend crucially on parameters of inequality aversion), have been whether one thinks about inequality in increasing steadily since 1970 (figure 3.8).23 64 WORLD DEVELOPMENT REPORT 2006 What happened to global inequality in Most of the world's income inequality the past 20 years or so has been the subject can be explained by the differences in coun- of fierce debate in the context of globaliza- try means--that is, by international (or tion and is perhaps the hardest question to between-country) inequality. Our estimates answer. Some authors24 claim that global show that the share of global inequality, inequality increased slightly, while others25 which can be attributed to inequality argue that they have declined. between countries, declined steadily from Examining global inequality requires 78 percent around 1988 to 74 percent knowledge of the distribution of inequal- around 1993 and to 67 percent by around ity within each country. Household sur- 2000. With global inequality staying roughly veys that collect such data are a relatively the same during this period, within-group new phenomenon, having become more inequality increased at a somewhat steady common since the 1980s even in develop- pace (figure 3.9). These results are consis- ing countries. So, if we want to know tent with the evidence (in chapter 2) of about the distribution of income for increasing inequality within countries in everyone in the world, we are confined to many parts of the world, including a much shorter time period. We have Bangladesh, China, the United Kingdom, selected three waves, similar to those used and the United States. by Milanovic (2005): 1986­1990, 1991­96, The between-country share of global and 1997­current. inequality is also consistent with Milanovic Global inequality (measured by the (2005), who puts this figure at about 71 per- mean log deviation) did not change signif- cent in 1998. It is possible that the icantly over this period, although there is a Milanovic figures overestimate between- slight decrease between 1993 and 2000 country inequality because he assigns all (figure 3.9). The mean log deviation for households in a decile the same income the world would have increased without instead of estimating a Lorenz curve (for China and India, consistent with the con- percentiles). Our results use slightly sensus in the literature that international improved data from Milanovic in three inequality declined in this period thanks aspects. First, for many countries, we calcu- largely to these two countries. But if global late our welfare measures using raw data at inequality stayed roughly the same while the household level, while Milanovic (and international inequality declined, inequal- many others) use grouped data. Second, we ity within countries must have increased incorporate more recent data for the cur- by approximately the same amount--a rent period, possibly providing an improve- subject that we discuss below. ment in data quality, especially for Eastern European countries. Third, for the coun- tries with grouped data, we estimate Lorenz Figure 3.9 The inequality decline between countries was neutralized by increases within countries curves instead of assigning everyone in the group with the same income.26 That most Mean log deviation Percent of the global inequality in incomes is 1.15 Global inequality Between-country explained by between-country inequality (left axis) share (right axis) seems to be a robust finding in the litera- 100 0.90 0.87 ture, in stark contrast with the picture in 0.84 0.82 health and education. 74 78 75 67 Over a much longer period (1820­1992) 0.65 Bourguignon and Morrisson (2002) esti- 0.65 0.64 50 mate that global inequality has been Between-country 0.55 inequality (left axis) Within-country steadily increasing, because of a rapid 0.40 inequality (left axis) 25 increase in international inequality until 0.27 0.22 World War II, and then to smaller increases 0.19 0.15 0 in both within-country and international 1988 1990 1992 1994 1996 1998 2000 inequality between 1970 and 1992 (figure Source: Authors' calculations. 3.10).27 They also argue that international Equity from a global perspective 65 inequality was essentially negligible at the Figure 3.10 Inequality between countries became turn of the nineteenth century (accounting much more important over the long run for roughly 12 percent of global inequality), Mean log deviation but that it increased very rapidly until 1 World War II, and then continued to 0.83 increase, but at a much slower pace. Within 0.8 0.69 Global inequality country inequality, however, reached its peak around 1910 and declined dramati- 0.6 Within-country inequality 0.50 cally between the two world wars (mainly 0.42 0.4 0.36 because of equalizing forces in the now- 0.37 0.33 developed countries), and started creeping 0.33 0.2 back up only since the 1970s. The combined 0.05 Between-country inequality effect of these changes is an increase in the 0 share of international inequality from 1820 1850 1870 1890 1910 1929 1950 1960 1970 1980 1992 roughly 10 percent in 1820 to more than 60 Source: Authors' manipulation of data from Bourguignon and Mor- percent by 1992. risson (2002). In summary, while the world got richer, income inequality--relative and absolute, ance) between 1960 and 1990; however, international and global--increased tremen- there also were large differences by region. dously over a long period of time Inequality between the countries of OECD (1820­1992). But the story is less clear-cut (and the rest of Europe including Turkey) for a more recent time frame. In the decreased by 50 percent during this post­World War II era, intercountry inequal- period, at the end accounting for only one- ity (unweighted) has continued to increase third of total inequality. During the same while international inequality (weighted for period, international inequality in Sub- population) declined. International in- Saharan Africa nearly doubled, causing its equality declined in the final decades of the share in total inequality to increase from twentieth century, because the inequality- 20 percent to 36 percent. In both Sub- reducing effects of income growth in Saharan Africa and Latin America and the China and South Asia more than offset the Caribbean, overall inequality levels remain inequality-boosting effects of continued high, while high-income countries show steady income growth in the now-developed signs of convergence. countries and the declining incomes in Sub- One can also examine inequality trends Saharan Africa. by focusing on the mobility of countries Pritchett (1997), examining the period rather than by taking an anonymous between 1870 and 1990, argues that while approach to inequality comparisons. Poor there was convergence of incomes for countries' mobility from the bottom has today's developed countries (what Maddi- been limited in the past 25 years. With the son 1995 calls the "advanced capitalist" exception of China, the six countries that countries), the growth rates between devel- occupied the bottom decile (population- oped and developing economies show con- weighted) in 1980--all in Sub-Saharan siderable divergence. He provides evidence Africa--had no growth worth noting.29 that "the growth rates of developed coun- While there is significant upward mobil- tries are bunched in a narrow group, while ity between 1980 and 2002--the 97.08 per- those of less developed countries are all cent entry in the first row of table 3.3 is over with some in explosive growth and China--there is also troubling stagnation others in implosive decline."28 and downward mobility. Note that approxi- Further evidence of convergence among mately 8 percent of each of the second and rich countries and divergence between rich third income ranges fell into the bottom and poor countries comes from Schultz range over these two decades. "It is clear (1998), who estimates that international that no Pareto improvement has taken place inequality accounted for about two-thirds in the world between 1980 and 2002, which of total inequality (measured by log vari- leaves room for different value judgments 66 WORLD DEVELOPMENT REPORT 2006 Table 3.3 Mobility matrix in absolute country per capita incomes, 1980 to 2002 While some populous countries, almost Income in 2002 exclusively in Asia, such as Bangladesh, Income in 1980 <710 711­1,100 1,101­2,890 2,891­10,000 10,001> China, India, and Pakistan, made signifi- cant headway against extreme poverty, <710 1.28% 1.64% 0.00% 97.08% 0.00% almost all increases in extreme poverty-- 711­1,100 8.23% 3.89% 87.88% 0.00% 0.00% especially in countries with high initial 1,101­2,890 8.09% 0.56% 59.08% 32.28% 0.00% headcount rates--took place in Sub-Saha- 2,891­10,000 0.00% 0.00% 0.98% 90.84% 8.17% ran Africa.32 Among the larger countries 10,001> 0.00% 0.00% 0.00% 3.99% 96.01% with rising headcount rates are Nigeria, Source: Bourguignon, Levin, and Rosenblatt (2004a). South Africa, and Tanzania. Note: Incomes are per capita (constant PPP dollars). If the poverty trends discussed here con- tinue, the Millennium Development Goal of Figure 3.11 Absolute poverty declined globally, but not in every region halving the proportion of people living on Headcount ($1 per day) in 2001 less than $1 a day will be met. But only East and South Asia will reach this goal. We can- AFR not be satisfied if this were to happen. Other 80 EAP NGA things equal, we would prefer to see the ECA ZAM poverty rate falling at the same pace in all LAC MDG countries. Currently, hundreds of millions 60 CAF MLI MENA NER BDI ZWE of people in numerous developing countries SAR MWI BF A TZA lack the opportunity to avoid hunger, poor LSO R W A 40 health, and low access to vital services, such GHA NIC MOZ KHM IND as education and clean water.33 NAM KEN BGD CIV GAM ETH MON 20 Global inequalities in power CMR MAU VEN BWA GTM CHN UZB YEM LAO MYS ZAF MEX One of the main arguments in the conclud- PHL SEN P AK RUS COL BRA THA ARG UKR TUR ing chapter of this report is that the rules VNM 0 SLE EGY and processes in global markets can be LKA JOR MAR unfair to developing countries. A country's 0 20 40 60 80 power in decision making in multilateral Headcount ($1 per day) in 1981 banks is usually correlated with its eco- Source: PovcalNet (http://iresearch.worldbank.org/PovcalNet/jsp/index.jsp). nomic strength. Even when each country has equal representation in an international body, such as the United Nations system or the World Trade Organization (WTO), pow- about the evolution of world welfare, inequality, and relative poverty."30 Milanovic erful forces can chisel away at developing- country interests (through separate bilat- (2005) also point out the "downward mobil- eral agreements, for example). And the ity"of many countries in the past 40 years or capacity of developing countries to make so. Those who do not share the view that informed decisions can be limited. inequality between countries fell in the past 20 to 25 years--that is, those who take the Poor countries lack the financial and human "unweighted" view of the world--may have capital resources that would allow them to be such mobility concerns in mind. equal participants in the international bodies Absolute poverty rates have declined in in which decisions are taken that affect them and, beyond that, in setting the rules under the past 20 years or so, and a variety of which the international system operates.34 studies have confirmed this trend (figure 3.11).31 Overall, while there are roughly In the International Bank for Recon- 400 million fewer people who live on less struction and Development (IBRD)--the than a $1 a day in 2001 than there were in market-lending arm of the World Bank--a 1981, the number of poor people in Sub- country's voting power depends on the per- Saharan Africa almost doubled, from centage of IBRD shares it holds. The largest approximately 160 million to 313 million. shareholders are the United States with 16.4 Equity from a global perspective 67 percent of the vote, Japan with 7.9 percent, Figure 3.12 There is no one-to-one relationship Germany with 4.5 percent, France and the between voice and income United Kingdom with 4.3 percent. Each has a Denmark representative on the Board of Directors. By Ireland contrast, all Sub-Saharan countries together United States have two representatives and 5.2 percent of Poland the vote. China and India both have 2.8 South Africa percent of the vote.35 Country influence in Israel setting the agenda for the institutions is not India limited to board membership.A 1998 study by Brazil Filmer and others (1998) shows that roughly Mail two-thirds of the senior management­level Argentina positions at the World Bank are occupied by Nicaragua citizens of Part I (mainly OECD) countries, Albania although these countries account for less Morocco than one-fifth of the global population and Indonesia a smaller share of the number of member Russia countries. Cambodia At the WTO, each member country has Yemen Voice and one vote. Moreover, because decisions are accountability Pakistan by consensus, each country effectively has Income category Ethiopia veto power. So the WTO is, at least on 0 20 40 60 80 100 paper, perhaps the most democratic of international organizations. In practice, the Source: Kaufmann, Kraay, and Mastruzzi (2004). Note: "Voice and accountability" refers broadly to the extent to ability of countries to influence the agenda which citizens have freedom of expression, a free press, and open and decisions depends crucially on their elections based on a statistical compilation of responses on the quality of governance given by a large number of enterprise, citi- capacity to be present, to follow negotia- zen, and expert survey respondents in industrial and developing tions, to be informed, and to understand countries, as reported by a number of survey institutes, think tanks, nongovernmental organizations, and international organizations. fully the impact of the complex issues at Countries' relative positions on these indicators are subject to margins of error that are clearly indicated. Consequently, precise hand. A rough indicator of a country's country rankings should not be inferred from these data. capacity is the size of its representation in Geneva. A study by Blackhurst, Lyakurwa, and Oyejide (2000) found that only 8 of the ative assessment to date, integrate data col- 38 Sub-Saharan countries had close to five lected by 25 separate sources constructed by (the WTO average) resident delegates listed 18 (commercial and advocacy) organiza- in the WTO directory. Worse, 19 of the 38 tions. The authors used the data to provide countries--half of the Sub-Saharan WTO a common empirical basis to assess the rela- membership--had no delegate resident in tive differences among countries of the Geneva. Only Nigeria had a delegation that quality of their "governance." deals solely with the WTO.36 Figure 3.12 summarizes information on Even when country representation in the "voice and accountability," which refers international arena is considered adequate, broadly to the extent to which citizens have it is debatable whether the representatives freedom of expression, a free press, and of some countries are fully accountable to open elections, using standardized meas- their citizens. There are considerable differ- ures for selected countries (the same ones as ences among countries in the extent to in figure 3.6). The upper bar for each coun- which their political and legal institutions try represents the country's percentile rank provide citizens with fair, transparent, and in the "voice and accountability" distribu- inclusive environments to enhance and tion with the intersecting black rule line leverage their assets. While there are numer- representing the confidence interval. The ous problems with trying to measure such lower bar is the average percentile score for things, Kaufmann, Kraay, and Mastruzzi the income category to which the country (2004), in the most comprehensive compar- belongs.37 The top of the "voice" rankings is 68 WORLD DEVELOPMENT REPORT 2006 filled with wealthy countries, such as Den- What explains the convergence in health mark, the United States, Ireland, and Israel. and education and the lack of it in incomes? The voice ranking of such countries as Deaton (2004) points out that, while gains South Africa, Poland, and especially Mali in income were undoubtedly important for and India exceed their ranks in incomes. improving nutrition and funding better The opposite is true for China, Ethiopia, water and sanitation schemes, some coun- Pakistan, and the Russian Federation. Cam- tries made progress in reducing child mor- bodia and the Republic of Yemen are both tality even in the absence of economic quite poor and rank low in freedom of growth. These improvements came from expression. It is clear that there is no one- the globalization of knowledge, facilitated to-one relationship between citizens' voice by local political, economic, and education and average income at the country level. conditions. A possible explanation for the disconnect between the convergence in A glimpse of the future education and the divergence in incomes is Despite improvements over time, inequali- that education is not translating into ties among countries in various dimensions human capital and that the rise in per remain unacceptably high. Each year 10.5 worker schooling explains only a small part million child deaths are preventable in the of the growth in output per worker.39 sense that these children would not have We have seen that the story of income died if they had been born in rich coun- inequality in the world has been a story of tries.38 The mean educational attainment falling international inequalities and ris- level for adults born in 1975­79 in Sub- ing within-country inequality. For global in- Saharan Africa remains at 5.4 years, com- equality, these two effects are offsetting, and pared with 10.1 years in Latin America and the conclusion drawn depends on knowing Caribbean and 13.4 years in developed which effect dominated.The decline in inter- countries. Developing countries also face national inequality is largely due to fast massive challenges in influencing the global income growth in China and South Asia.40 rules and processes that determine out- But as China and South Asia catch up to the comes, which matter greatly to the well- world average, their equalizing effect will being of their citizens. diminish. And if they continue to develop at International inequalities in educational similar rates to that in the past two decades, attainment have been steadily declining. the effect of their growth will increase inter- This is also true in health--one's country national inequality.41 Without the offsetting of birth 50 years ago was much more perti- effect of declining international inequality, nent to survival than it is today. In this global inequality would also be on the rise sense, opportunities across countries are again unless inequality within countries equalizing. But improvements in life starts to decline and Sub-Saharan African expectancy at birth have reversed since the economies begin to experience healthy early 1990s, because of the devastating growth. This suggests that the future of effects of HIV/AIDS and the difficult cir- world income inequality will increasingly cumstances facing citizens of some transi- be a function of economic growth in Africa tion economies. The world distribution of (and some other low-income countries incomes, by contrast, was becoming secu- under stress), especially if the population larly more unequal from the early nine- growth rates in Africa remain above the teenth century until about the end of World world average. That both population War II. Since the war, international in- growth and economic growth in Africa have equality between countries has decreased been stunted by the AIDS tragedy is doubly immensely, because of the fast growth in disturbing. China and India in more recent times, and On whether today's poor countries with global inequality has leveled off. Because stagnant economies will take off, some China and India are only two countries, researchers are optimistic. Lucas (2003) intercountry inequality in incomes has con- suggests that the countries that have not yet tinued to increase. joined the industrial revolution (which he Equity from a global perspective 69 attributes to socialist planning, lawlessness, Thus, millions of babies are being infected and corruption) will become the miracle at birth, which is mostly preventable with economies of the future. He reckons that proper interventions. Life expectancy in the growth rates in these catch-up countries Africa would not improve much, and cer- may be quite high and that they will also go tainly not soon, if these assumed improve- through a similar demographic transition ments in HIV/AIDS prevalence rates do not experienced by today's developed countries. materialize. The world population will stop rising and Because South Asia has almost caught up world production growth will stabilize until to the world average in life expectancy, Sub- all countries, economically, start resembling Saharan Africa will be the only region signif- countries like the United States, thanks to icantly affecting health inequalities between free trade and the diffusion of technology. countries, barring a major catastrophe else- Pritchett--who calls this idea "advantage where.46 So, improvements in life expectancy to backwardness"42--remains more cau- in Sub-Saharan Africa are the key to future tious. Conceding that such rapid gains in declines in international health inequalities. productivity are a possibility, he argues that Chapter 2 documented within-country "the cases in which backward countries, and inequalities in health opportunities for chil- especially the most backward of countries, dren born to poor or rich parents, educated actually gain significantly on the leader are or uneducated mothers, in rural or urban historically rare."43 He observes that there areas, and so on. Steep gradients in health are also forces for "implosive" declines in opportunities and outcomes exist along these countries, suggesting that backward- these dimensions in many countries.A confi- ness may also carry "severe disadvantages." dent assessment of past and future trends in On health in Sub-Saharan Africa, the health inequality awaits future research. UN Population Division projects that life If the trends that brought about the expectancy at birth in Africa will decline catching up of many poor countries outside over the next 5 to 10 years and then start of Africa continue in health, education, and climbing again, reaching 65 years by about incomes, the biggest challenges will remain 2050.44 These projections assume that in Africa and some poor countries in other HIV/AIDS prevalence rates in Africa will regions. Growth with equity needs to be peak sometime before 2010 and then revived in stagnating economies around the decline over the next decades. But the Joint world, and the AIDS tragedy (along with United Nations Programme on HIV/AIDS the folly of preventable diseases) needs to estimated that 43 percent of pregnant be addressed urgently, especially in Sub- females in 2000 were HIV positive in Saharan Africa. These remain the biggest Botswana and 19 percent in South Africa.45 global challenges in development today. f o c u s 2 o n empowerment Popular participation and equitable transitions at the local level Promoting equity through public action requires changes in the existing configurations of power and influence. Because established institutions privilege certain interests and marginalize others, making governance institutions more democratic and more equity-enhancing calls for reforms that increase the possibilities for effective participation by tradi- tionally marginalized groups. L ocal government is a critical domain These two initiatives have much in com- representation in the population.3 Moreover, for the exercise of democratic rights mon. They were both conceived as direct both these initiatives have created a new and for making effective public and conscious efforts to break with the cadre of grassroots politicians who either did choices. But several factors have conspired elite-dominated and clientelistic politics of not exist before (delegates in Brazil) or who against good governance, democracy, and local government by promoting redistribu- previously had no powers (the 14,000 equity at the local level in much of the tive policies through broad popular partici- elected panchayat councilors in Kerala). The developing world. The social and economic pation. Thus, they both shifted the political local public sphere--the sine qua non of any power of local elites has often translated opportunity structure and involved action vibrant democracy--has become more into disproportionate influence over the to strengthen the agency of subordinate extensive, more inclusive, and more mean- political process, and top-down, insulated, groups.2 Both have, in effect, comple- ingful. and nontransparent decision-making mented representative forms of democracy structures have made it difficult for ordi- with participatory forms of democracy by Extending democracy nary citizens to have voice.1 Democratic opening institutions to the direct engage- These initiatives have been marked by the deepening in the developing world often ment of civil society. And both have extension of democracy, specifically public begins with the democratization of local strengthened public authority and public decision making in arenas of authority pre- government, and that is precisely what two action by increasing both the depth and viously dominated by private and state participatory governance initiatives--in the scope of democratic decision making. elites. Municipal budgets in Brazil have long Indian state of Kerala and in a variety of been the preserve of oligarchic parties and municipalities in Brazil--have tried to do. Deepening democracy narrow sectoral interests. Panchayats in In 1996 the state government of Kerala The evidence shows that these initiatives Kerala have long been little more than pas- launched what is widely viewed to be the have deepened democracy, expanding the sive recipients of top-down projects most ambitious initiative for democratic range of social actors participating in the designed and delivered by state bureaucra- decentralization in India: the People's Cam- political arena. In Porto Alegre, an esti- cies. In both cases, citizens now have a voice paign of Decentralized Planning. The gov- mated 100,000 adults have participated at in determining how public resources are ernment not only devolved significant some point in the budgeting assemblies. allocated. In the most successful participa- resources and authority to Kerala's 1,214 Other cities that have adopted some form tory budgeting cases, the entire budget of panchayats (village councils) and munici- of the process have also experienced active the municipality is discussed and approved palities, but it also promoted direct citizen participation, including municipalities by delegates acting on priorities established participation by mandating village assem- without established civil societies. In by neighborhood assemblies, with citizens blies and citizen committees to plan and Kerala, nearly one in four households deliberating on capital and operational seg- budget local development expenditures. attended village assemblies in the first two ments of the budget. In Brazil, the city of Porto Alegre years of the campaign, and despite rou- In some municipalities, direct partici- launched a participatory budgeting initia- tinization of the process in subsequent pation has been extended to thematic tive in 1990 that has since been copied in at years, these assemblies continue to draw areas, such as economic development, least 400 municipalities throughout the large numbers. Hundreds of thousands of public transportation, education, social country. The process begins with neighbor- citizens have undergone training in plan- services, and urban planning. In Kerala, hood assemblies in which citizens deliber- ning and budgeting, and the committees panchayats have been given authority for ate and set budgeting priorities, and ends that actually design and budget specific up to 35 percent of the development with a citywide budget formulated by dele- projects have been composed primarily of budget, a fivefold increase in their gates directly elected by neighborhood civil society actors. resources base. Panchayats have ranked, assemblies. The success in Porto Alegre has A redesign of institutional incentives and designed, and implemented hundreds of seen its steady diffusion, with at least 100 new mobilizational efforts saw women projects a year across all development sec- municipalities, including São Paulo, imple- account for 40 percent of the participants in tors. These have included housing for the menting variations of participatory budget- village assemblies (a level otherwise unheard poor, small-scale irrigation, local roads ing in 1996­2000, and some estimated 250 of in India) and the participation rate of dal- and infrastructure, agricultural projects, municipalities in 2000­04. its (scheduled castes) has exceeded their support services in health and education, Focus on empowerment 71 and a range of projects specifically tar- the economy is otherwise growing, the capacity to realize their interests and aspira- geted at women and dalits. most marginalized social groups--widows, tions that would have been denied them slum dwellers, sex workers, the very poor-- otherwise.7 Young, female, often illegal Enhancing equity may continue to be excluded. What can be immigrants, contractually bound to work These initiatives have generally had equity- done? The challenge is greater when the long hours for ruthless bosses, and facing enhancing effects. In Porto Alegre, the best extent of commitment from above and sure rejection by their families if they man- known and most documented case, there is mobilization from below is less than in aged to escape and return home, the sex clear evidence that expenditures on poorer these two cases. workers had virtually no capacity to exer- areas of the city increased steadily with the As discussed in chapter 2, the most mar- cise their voices and realize their interests. introduction of participatory budgeting. In ginal groups are often stuck in more severe Persistent efforts to organize the women other large cities with participatory budget- forms of an "inequality trap"--a situation into a union, however, eventually gave them ing, such as Belém and Belo Horizonte, characterized by dire material circum- the confidence and competence to bring expenditures have also targeted the poor. A stances, rational expectations about limited about a change in condom use by clients. statistical analysis of all Brazilian munici- mobility opportunities, and internalized In Indonesia, the Kecamatan Develop- palities in 1997­2000 revealed that partici- beliefs regarding the legitimacy and ment Project (KDP), which operates in patory budgeting cities had significantly immutability of their circumstances. Break- 28,000 villages across the country, seeks to higher expenditures on sectors that affect ing out of such inequality traps and improving the "terms of recognition" and the poor most directly.4 improving the terms by which the poor are political agency of marginalized groups. 8 In Kerala, a large survey of key respon- "recognized" by others starts with building The project allocates grant money at the dents found that "disadvantaged" groups both a "capacity to aspire" and, equally subdistrict level, for which several groups of were the prime beneficiaries of targeted important, a "capacity to engage."6 This poor villagers (two of whom must be schemes. Case studies show that panchayats includes being able to envision and enact women) are invited to compete for funds have emphasized the need to bring all alternative futures, believing that it is desir- on the basis of the presentation of a formal households up to a certain basic level of able and possible to move out of poverty, subproject proposal. KDP's procedures, well-being, with a heavy emphasis on pro- and being able to more meaningfully par- institutions, and norms are largely decen- viding sanitation facilities, decent housing, ticipate in forums where decisions affecting tralized, they focus on joint public problem and safe water to needy families. their welfare are made. solving, they invite broad public participa- In both cases, there is also strong evidence Acquiring a "capacity to aspire" is largely tion and scrutiny, and they occur in a more that the incidence of rent-seeking has fallen a product of developing more broadly or less continuous and institutionalized sharply.5 The greater transparency of the accessible and equitable mechanisms for way.9 budgeting process alone has raised the trans- interaction between the poor and elites, Recent work assessing the impact of action costs of predation and patronage. mechanisms that are reciprocally linked to KDP on local decision making finds that attaining greater voice in associational KDP helps marginalized groups cultivate interactions. It thrives in and through access to more constructive spaces and pro- Empowering the most group organizing and public dialogue, and cedures for addressing project and non- marginal groups the opportunities these afford for practice, project conflicts.10 The beginning stage of The Kerala and Porto Alegre cases illustrate repetition, exploration, conjecture, and such a transformation--in which unequal the value of improving the accessibility, refutation. groups build the capacity to peacefully transparency, and accountability of local An association of sex workers in a Cal- engage one another--is a humble but non- government. However, even when such ini- cutta slum, for example, gave its individual trivial outcome for a development project. tiatives have been undertaken, and where members a voice, a public presence, and a Why does equity matter? II IN THE FIRST PART OF THIS REPORT, WE SUMMARIZED some of the evi- dence on inequalities in several dimensions. In addition to affecting well-being directly, such dimensions as health, education, income, P A R T voice, and access to services shape the opportunities people face for future progress and achievement. We emphasized the interconnections between these various dimensions. Not only is there inequality in the distributions of income, health status, and educational attainment, but--even more important--these indicators tend to be correlated. The rich tend to be both healthier and better educated than others. The poorest of the poor tend to have the lowest attainment in years of schooling and some of the worst health indicators. These correlations generally also extend to public services, with the poor gaining access to infrastructure, electricity, water, sanitation, and garbage disposal much later than others, if at all. Because education and wealth help a person gain influence in soci- ety, voice and political power are also generally thought to be correlated with economic well-being. The interaction between these mutually reinforcing economic, social, and political inequalities perpetuates them across generations. Chapter 2 discussed evidence indicating that a 10 percent difference in economic status between two families in one generation tends to imply, on average, a 4 percent to 7 percent differ- ence in the next generation, depending on the country and measure- ment details. Opportunities clearly are not independent from social and family background, or from group identity. Do such disparities matter? Are people concerned with the large observed differences in access to education and health, and in eco- nomic opportunities, or merely with the fact that some people have low absolute levels of income, years of schooling, and access to serv- ices? Should policymakers worry about the unequal opportunities 74 WORLD DEVELOPMENT REPORT 2006 that arise from discrimination, unequal political voice to most or all of society. One access to justice or other unfair processes? set of reasons for this arises from failures in Should an institution like the World Bank, capital, land, and labor markets. Those fail- whose primary objective is to assist its client ures imply that productive opportunities countries in eradicating extreme poverty, are not necessarily seized by those with the care about inequalities--in opportunities, highest potential returns on their talents or outcomes, and processes--at all? ideas, but instead by those with greater Opinions on these questions are wide- wealth, better connections, or larger land ranging. Support for equal opportunities parcels. This would not happen if markets has long been a theme in domestic policy worked perfectly, as resources would flow to in the United States, for instance. Franklin those with the most productive investment D. Roosevelt once said that "We know that projects. But given that markets are not per- equality of individual ability has never fect, scope arises for efficient redistribution existed and never will, but we do insist that schemes. equality of opportunity still must be Chapter 5 documents cases in which sought." 1 Some participants in the consul- aggregate efficiency could be improved by tations for this report were even offended redistributing wealth or power toward that the question "Does inequality mat- poorer or marginal groups. Sometimes, the ter?" was asked at all, because they consid- evidence of inefficiency is seen in differ- ered its answer to be "Obviously, yes." One ences in marginal products of capital across participant felt that the very question indi- firms. We know that smaller entrepreneurs cated that "we are suffering [from] a terri- pay interest rates much higher than the ble tolerance to horror."2 marginal product of capital accruing to The next three chapters in this report other firms. We know that some farmers address the following question: should allocate effort between plots in a way that is good development policy be concerned not socially efficient, because they own one with equity? Equity, as discussed in chapter plot and sharecrop in another. We have 1, is understood here as the pursuit of equal experimental evidence suggesting that opportunities and the avoidance of severe groups discriminated against perform deprivation. Equity is not the same as equal- below their own capacity, either because ity in incomes, or in health status, or in any they internalize the stereotype or because other specific outcome. It is the quest for a they expect to be treated unfairly. Each of situation in which personal effort, prefer- these pieces of carefully researched empiri- ences, and initiative--rather than family cal evidence, and others discussed in chap- background, caste, race, or gender-- ter 5, provide reasons why more equitable account for the differences among people's economies would, in most cases, also be economic achievements. A situation in more efficient.3 which all institutions are color-blind and Chapter 6 complements this picture by nonmarket institutions are equally respon- looking at historical evidence, suggesting sive to the rich and the poor. In which per- that large inequalities in political rights and sonal and property rights are enforced power give rise to exclusionary institutions equally for all. And in which all have access that generally impair development processes. to the public services and the infrastructure Greater political equality, by contrast, estab- to leverage their productivity and their lishes limits on predation by the most pow- chances of success in the markets. erful in each society. This tends to lead to The evidence we review here has been institutions that level the playing field and assembled in disciplines ranging from eco- provide opportunities for advancement and nomics and history to sociology and mobility to those from underprivileged anthropology. On balance, this evidence backgrounds. suggests that the pursuit of sustainable, Such institutions seem to be associated long-term prosperity is inseparable from a with more sustained growth. One example broadening of economic opportunities and comes from contrasting the exploitative Why does equity matter? 75 labor practices of the Spanish conquista- Equity and fairness matter not only dores in the mining centers of their Ameri- because they are complementary to long- can colonies from the sixteenth to the eigh- term prosperity. It is evident that many teenth century, with the greater freedom people--if not most--care about equity and opportunity afforded to early settlers in for its own sake. Some see equal opportu- North America. Another example of nities and fair processes as matters of inequitable treatment of citizens by the social justice and thus as an intrinsic part state, which was also enormously costly for of the objective of development. In chapter efficiency, was the very high taxation of 4, we briefly review arguments and evi- poor African farmers by state-owned or dence suggesting that most societies parastatal agricultural marketing boards in exhibit a pervasive and long-standing con- Ghana, Nigeria, and Zambia, which pre- cern for equity. vailed a few decades ago. Equity and well-being 4 People from many cultures seem to share a come from religion. Several major world reli- concern for equity that is reflected in reli- gions endorse the notions of social justice gious and philosophical traditions, as well and a duty toward the poor. Buddhists see a c h a p t e r as in legal institutions, both national and duty to care for the poor. Christians are to international. Religions from Islam to Bud- "love their neighbor as themselves." The dhism and secular philosophical traditions Hebrew word for "charity" is the same as the from Plato to Sen have shown both a con- one for "justice." One of Islam's five pillars of cern for equity and an aversion to absolute faith is zakat, providing for the poor and deprivation. In modern legal institutions, needy. The World Faiths Development Dia- equity remains a fundamental tenet of the- logue (1999) states that "all religions would ory and practice. see the extreme material poverty in the world That a concern with equity is so pervasive today as a moral indictment to contemporary across cultures, religions, and philosophical humanity and a breach of trust within the traditions suggests that a fundamental pref- human family."And religious views on equity erence for fairness is deeply rooted in human are not restricted to poverty. Despite varying beings. We review experimental evidence interpretations, and a wealth of differences in showing that many people place a monetary perspective, a belief in the fundamental dig- value on "fairness" and are prepared to give nity of human beings is a theological tenet in up real money if they feel that a process they most major religions. While there are impor- are involved in is unfair. Complementing this tant differences in how this belief manifests evidence are data from opinion surveys, and itself across faiths, and even among different surveys on subjective well-being, suggesting groups within the main religions, some ana- that higher inequality in incomes is, on aver- lysts see a growing emphasis on this principle age, associated with lower aggregate levels of of equality within various faiths.1 subjective well-being. Equity is also a key theme in secular An empirical link between income philosophical traditions. Western political inequality and poverty reduction reinforces and ethical philosophy, for instance, has the conceptual link between the aversion to long been concerned with distribution. In inequality and the quest to avoid absolute ancient Greece, Plato argued that "if a state deprivation. We highlight the obvious fact is to avoid . . . civil disintegration . . . extreme that, if inequality falls during a growth poverty and wealth must not be allowed to spell, poverty generally falls by more than if rise in any section of the citizen-body, inequality had not changed. We also docu- because both lead to disasters."2 Roman law, ment the less obvious fact that higher- while discriminating against slaves, as in all income inequality reduces the effectiveness ancient empires, also laid the foundations of future economic growth in reducing for some of the principles of equality that absolute income poverty. underlie modern legal principles in many countries. Those principles applied only to Roman citizens who were free, but in mod- Ethical and philosophical ern nations they have become all-inclusive. approaches to equity In the modern era, Western thinking Perhaps the oldest manifestations of concern about social justice was greatly influenced with equity and the avoidance of deprivation by utilitarianism--the idea, originally from 76 Equity and well-being 77 Bentham (1789), that the social goal should tunities of the least privileged group. (The be to achieve "the greatest happiness for the Difference Principle is also known as Rawls's greatest number." Although utilitarians "maximin"principle). were essentially unconcerned with the dis- Sen (1985) thought that different peo- tribution of happiness, enjoining societies ple might have different "conversion fac- simply to maximize the sum of utilities tors" from resources to actions and wel- across all individuals, the approach has fare. He argued that all goods, including earned the somewhat misbegotten reputa- Rawls' "primary goods," are inputs to a tion (at least among economists) of having person's functionings--the set of actions a egalitarian implications.3 person performs and of states the person Modern theories of distributive justice values or enjoys. For Sen, the concept to be have largely moved beyond utilitarianism, in equalized across people is the set of possi- part because of its fundamental lack of con- ble functionings from which a person cern with the distribution of welfare. Since the might be able to choose (which he called a early 1970s, a number of influential thinkers, "capability set"). including John Rawls, Amartya Sen, Ronald Dworkin (1981b) and Dworkin (1981a) Dworkin, and John Roemer, have made sepa- argued that justice required that individuals rate and important contributions to the way should be compensated for aspects of their we think about equity. Although the theories circumstances over which they had no con- of justice and social choice proposed by each trol, or for which they could not be held of them are different in important respects, responsible. He argued for a distribution of they share much in common. resources that compensated people for All four reject final welfare (or utility) as innate differences that they could not have the appropriate space in which to judge the helped, including differences in talent. fairness of a given allocation or system. All Roemer (1998) argued that equity acknowledge the importance of individual demanded an"equal opportunity policy."He responsibility in moving from resources to acknowledged that individuals bear some final outcomes, including welfare. All prefer responsibility for their own welfare, but also to see some combination of the set of liber- that circumstances over which they have no ties and resources available to individuals as control affect both how much effort they the right space to form a social judgment. invest and the level of welfare they eventu- All seem to appeal, at some stage, to the "veil ally attain. He argued that public action of ignorance" argument, from Harsanyi should therefore aim to equalize "advan- (1955), that a fair allocation of resources tages" among people from groups with dif- should be one that all "prospective members ferent circumstances at every point along of society"would agree on, before they knew the distribution of efforts within the group. which position they would occupy. They Despite important (but subtle) differ- used this thought experiment to argue that ences, all four thinkers have contributed to justice implies equality in the allocation to shifting the focus of social justice from out- all people of some fundamental concept, comes to opportunities. We also take a leaf such as primary goods. from Nozick (1974), who is usually regarded What Rawls, Sen, Dworkin, and Roemer as an anti-egalitarian. He argued that theo- disagree on is what exactly this concept should ries of justice generally placed an excessive be. Rawls (1971) argued that social justice emphasis on outcomes, such as welfare, required that two basic principles should utility, or even capabilities. Nozick reminded hold. The first "demands the most extensive us of the (obvious) fact that outcomes are liberty for each, consistent with similar liberty the result of processes and argued that the for others."4 The second requires that oppor- correct focus for a theory of justice should tunities--which he related to the concept of be on the fairness of processes. If a particu- "primary goods"--should be open to all lar allocation departs from a fair initial members of society. Under the Difference state, and is arrived at through a fair Principle, he proposes that the chosen alloca- process, it should be judged to be fair-- tion should be one that maximizes the oppor- even if it is unequal. 78 WORLD DEVELOPMENT REPORT 2006 The concept of equity we adopt in this B O X 4 . 1 A simple representation of different concepts report draws on the contribution of these of equity four thinkers by focusing on opportunities, rather than on welfare, utilities, or some The figure below (adapted from figure 11-1 in · If, instead, it wanted to maximize the other corresponding individual outcome. Atkinson and Stiglitz 1980),* can help sum- opportunity set of the"poorest"group, it We do not dwell on the fine distinctions marize what this report hopes to achieve-- should aim for point R. and what it does not.Suppose that a society · If it insisted on absolute equality of between Sen's capabilities and Roemer's consists of only two groups of people (1 and opportunities, it must lie along the 45- opportunities. As in both frameworks, we 2) and let the axes of the diagram depict the degree ray through the origin, and would acknowledge the central role of individual opportunity levels of each group.Opportu- aim for point E. nity sets are obviously multidimensional,but responsibility and effort in determining out- What this report will not attempt to do imagine for simplicity that the various dimen- comes. We focus on eliminating disadvan- is to advise countries on which of these cri- sions can be meaningfully conflated onto an tage from circumstances that lie largely teria of social justice, or indeed any other, an "opportunity index,"O1 for type 1s,and O2 for individual society should aim for. Each of beyond the control of the individual but that type 2s.Now let the curved frontier AC repre- these three points can be defended by logi- sent the"opportunity possibility frontier"for powerfully shape both the outcomes and the cal arguments, under different degrees of this society.** It reflects the maximum oppor- actions in pursuit of those outcomes. aversion to inequalities in opportunity. tunity indexes that types 1 and 2 can obtain, These different perspectives on what a What the report will try to do is as follows: given the available resources and technology. social optimum should be can shed light on The fact that it does not monotonically · Describe the inequalities in opportunity decline from A to C incorporates the fact that actually observed in society (at a point an important point for this report--one when type 1 individuals have very limited such as X). previously mentioned in chapter 1. It is not opportunities,type 2 people can also benefit · Investigate whether some of those dis- for us to advise countries on what exactly from an expansion in type 1 opportunity sets, parities (which in this diagram greatly constitutes an equitable distribution in and vice versa.Over some ranges,improve- favor type 2) might actually be prevent- ments in the opportunity sets of the"poor- their societies. Instead, our role is to point ing the society from enjoying higher est"types can be Pareto-improving--that is, aggregate opportunities (and welfare, on out the inequities we can observe and to can benefit everyone.Put another way,there another space). note that reducing them may be perfectly is scope for efficient,growth-promoting redis- · Suggest possible policy and institutional consistent with--perhaps even necessary tribution. approaches that might help move from Eventually, however, tradeoffs set in. for--greater efficiency and prosperity in the points such as X to whichever point soci- Between points P and R, if society is on the long run. Box 4.1 draws on a classic public ety considers equitable, on the opportu- opportunity possibility frontier, any nity possibility frontier. economics discussion of these philosophi- improvement in type 1 sets must imply a reduction in type 2 sets, and vice-versa. cal perspectives to illustrate this point. Points B, R, and E are translations to this *Atkinson and Stiglitz (1980) refer, in turn, to a "opportunity space"of the welfare concepts Equity and legal institutions figure 1 in Buchanan (1976). associated with Bentham, Rawls, and full **In Atkinson and Stiglitz (1980), utilities are The concerns with equity that feature in egalitarianism, respectively. used instead of opportunities.While that dis- tinction is fundamental in almost every moral, religious, and ethical debates around · If this society wished to maximize the respect, it is not for the point being made here, the world are reflected in real-world institu- sum of total opportunity indexes, it namely that different social justice criteria should aim for point B. imply different optimal allocations. tions, through which people have sought to An illustration of choices between the opportunities of two types of people promote justice throughout history. Chief among them are legal institutions, where "equity" has a distinct--and specific--inter- P O2 B pretation as a set of principles intended to B: Maximize sum of total opportunity guide and correct the application of the law. X (O1 + O2) R According to Kritzer (2002), how these prin- R: Maximize opportunities for group 1 (O1) ciples merge with the written, codified law E: Absolute equality of opportunities varies across legal traditions, but the over- between group 1 (O1) and group 2 (O1) arching concept of "fairness" is a cross- A cultural reality. And in practice, definitions E often refer directly to shared values within a particular community5 as well as to the belief that people should not suffer before the law Opportunity possibility frontier as a result of having unequal bargaining C O1 power.6 In Western philosophy, Aristotle is regarded as the first author to distinguish between justice and equity.7 He found that Equity and well-being 79 courts enact justice according to law--that is, not a purely Western concept--it can be by applying general rules that give an equi- found in legal systems around the world, table solution in the majority of cases.In some including those that do not share European cases, however, the results are inequitable. origins.11 For example, the distinction Equity then rectifies law in so far as the law is between justice and equity is also found in defective on account of its generality.8 The Islamic law, in which the former is referred to Romans operationalized this concept of as adala, the latter as insaf, and in Jewish law, equity by distinguishing between ius strictum with the distinction between din and tsedek.12 (strict law) and ius aequum (equity), with the In today's more integrated world, legal latter used to interpret the law and to comple- understanding of equity has also influenced ment it. Equity prevailed in instances of con- international law--serving as the basis for flict between the two. individualized justice, creating specific In modern legal traditions, equity re- principles of fairness and reasonableness, or mains a fundamental tenet of legal theory being identified with international equi- and practice. In common law systems, equity table standards for sharing resources and was historically a separate branch of law redistributing wealth. Perhaps the foremost administered by Chancery Courts.9 The example of the development of interna- Judicature Act of 1873 in the United King- tional principles of equity is the interna- dom "fused" the courts of law and equity, tional human rights regime. International doing away with a bifurcated system of human rights law is rooted in a commit- courts, while establishing the supremacy of ment to protect the "equal and inalienable equity in cases of conflict between equity and rights of all members of the human family," common law. Equitable principles, based on which itself is considered to be the "founda- conscience and fairness, have continued to tion of freedom, justice and peace in the develop and be applied in common law juris- world."13 dictions around the world to mitigate harsh The U.N. Charter laid the foundation for and unfair results produced by the applica- contemporary international human rights tion of formal legal rules in specific cases.10 law. The preamble to the Charter states that In general, the use of equity as a source the U.N. community "reaffirms faith in fun- of law in the civil law traditions of the Euro- damental human rights, in the dignity and pean continent is more limited than in the worth of the human person, in the equal common law tradition. Civil legal codes, rights of men and women and of nations which have their origins in the Enlighten- large and small."14 The Universal Declara- ment era, aim at integrating equity into tion of Human Rights, adopted by the Gen- formal law--that is, by designing laws eral Assembly of the United Nations on aimed at producing equitable results. December 10, 1948, is viewed as the "source Equity is seen as part of law and, therefore, of inspiration and . . . the basis for the U.N. should be achieved by applying the formal in making advances in standard setting as rules. Provisions in the codes that refer contained in the existing human rights explicitly to equity, however, are used to instruments."15 It has become a highly visi- correct inequitable results of the applica- ble and widely recognized statement of tion of other formal provisions, in a way moral, ethical, and political standards at the which is similar to common law systems. international level.16 Both the common law and the codified The contemporary international human systems from the continental European tra- rights regime comprises a broad array of dition have spread to countries around the legal instruments,17 many operating under globe, and equity is now a global legal con- the aegis of the United Nations. There also cept. The legal systems of Latin American exist regional human rights regimes in countries, such as Argentina, Brazil, and Europe (European Convention on Human Mexico, have approaches to equity similar Rights and Fundamental Freedoms), the to those in continental Europe, while Americas (Inter-American Convention on Bangladesh, India, and Nigeria follow the Human Rights), and Africa (African Char- common law tradition. Importantly, equity is ter on Human and Peoples' Rights). In 80 WORLD DEVELOPMENT REPORT 2006 addition, the laws of some other interna- First, some people behave in ways clearly tional entities, such as the European Union, inconsistent with the rational self-interest incorporate human rights norms (Treaty of hypothesis. According to Fehr and Fisch- Nice, Charter of Fundamental Rights of the bacher (2003), such people regularly display European Union). Together, these different a willingness to engage in two specific forms legal instruments are aimed at protecting of behavior: "altruistic rewarding, a propen- people against a variety of harms, including sity to reward others for cooperative, norm- potential harm by their governments, and abiding behavior, and altruistic punishment, at committing to the fundamental princi- a propensity to impose sanctions on others ples of equality and nondiscrimination. for norm violations" (785). These behaviors are observed in contexts in which it is possi- People prefer fairness ble to rule out individual motivation by a Different cultures and religions around the desire for reciprocity or a concern with rep- world may differ in important respects, but utation. While reciprocity and reputation they all share a concern with equity and fair- are important additional determinants of ness. This suggests something quite funda- cooperation in many settings, the experi- mental about the value human beings place mental evidence suggests that they are not on them. A fairly recent body of literature in the only factors that influence cooperative economics sheds some light on these shared behavior. human preferences. It has amassed convinc- A classic example is the Ultimatum ing evidence on individuals' preferences for Game, in which a player (the Proposer) is fairness, based on controlled laboratory asked to suggest a one-time division of a experiments. In these experiments, individ- certain sum of money (say, $100) between uals interact through behavioral games and himself or herself and another player. The play with real money under tightly con- second player (the Responder) has the trolled conditions. Results from such experi- power to simply accept or reject the offer. ments over the last 10 or so years reject the Acceptance leads to the implementation of hypothesis in standard economic models the offer, whereas rejection leads to a zero that all individuals are exclusively concerned payoff for both players. Monetary stakes are with their material self-interest. This new for keeps, and neither player knows the real body of literature is large and rich, but its identity of the other player. Both players are main findings can be summarized under told that they will never play with each three main points. other again. In such circumstances, standard game Figure 4.1 The distribution of observed offers in theory predicts a unique equilibrium: the ultimatum games Proposer should offer the smallest possible Offers and rejections in high- and low-stakes ultimatum games amount, and the Responder should accept (since a penny is higher than zero). But time Frequency and again, across hundreds of experiments 0.4 in highly heterogeneous cultural circum- Low monetary stake ($10 pie) stances and with amounts ranging from one 0.3 High monetary stake hour's to one week's local wages, observed ($100 pie) offers are substantially higher and, even so, rejections are often observed.18 In many 0.2 experiments, the modal (most frequent) Accept offer is actually at 50 percent. Figure 4.1 Reject Accept depicts the actual distribution of observed 0.1 Reject offers in two sets of Ultimatum Games, one with lower monetary stakes (bar on the left) 0.0 and one with higher (bar on the right). 0 1­10 11­20 21­30 31­40 41­60 51­60 61­70 Proportion of pie offered (%) Second, people are heterogeneous. A sizable Source: Based on data from Hoffman, McCabe, and Smith (1996). fraction of people in most experiments (20 Equity and well-being 81 to 50 percent) engage in altruistic giving or toward us that attract reward or punish- altruistic punishment--expending real ment, while others think it is their outcomes resources in a way that is unambiguously or opportunities.19 These studies do not costly to them, without any hope of eliciting usually distinguish explicitly between out- personal gain if the other person is ration- comes or opportunities. But it is possible to ally self-interested. But the behavior of oth- speculate that the aversion to very unequal ers (a majority) is consistent with rational payoff distributions in the Ultimatum Game self-interest. This is brought out quite arises from the arbitrary and unequal nature starkly in the Dictator Game, a variant of of the endowments (or power) implicit in the Ultimatum Game in which the respon- the initial allocation of the roles of Proposer der is purely passive. The second player is and Responder. simply a Receiver, with no right to reject the The experiments also show that people's offer. Positive offers in the Dictator Game views of fairness are complex and do not are observed, but they are both rarer and depend entirely on outcomes. Some players smaller on average than under the Ultima- are prepared to punish noncooperators until tum Game, in which the Responder may-- they receive less than other people, because always at a cost--punish the Proposer. of what they perceive to be the unfairness of These results point to the importance of their actions in the process of the game. This investigating more precisely the conditions is consistent with our emphasis that observed under which people exhibit self-interested distributions of certain outcomes--such as and other-regarding behavior. incomes--are the product of complex pro- cesses, and that the primary interest for Third, fair-minded people can behave self- those concerned with equity is not the out- ishly, and self-interested people can behave come, but the fairness of the processes they fairly. Behaviors depend on the rules of the participate in over their lifetimes. An game. In games where competitive pressures income distribution in which some people are introduced, mimicking a competitive are much richer than others because, given market, players tend to quickly converge similar chances, they have worked much toward actions consistent with self-inter- harder, may be regarded as fair. But the same ested behavior. An example is an Ultimatum income distribution may be regarded as Game with Multiple Proposers. If the unfair if it was generated by the richer group Responder can choose among various offers having access to much better schools or jobs, from different Proposers, with all noncho- solely because of the wealth or connections sen Proposers receiving zero, observed of their parents. behavior quickly tends to the Nash equilib- A separate but related point is made by rium. In the Nash equilibrium, all Proposers the social identity literature in social psy- offer the full amount--or very close to it-- chology (see Haslam 2001) and epidemiol- despite this giving rise to a very unequal dis- ogy (see Marmot 2004), which suggests that tribution, in which the Responder captures individual behavior and performance are the entire surplus, and all Proposers get zero. heavily conditioned by group identity (for In other settings, however--such as the example, caste, gender, occupation); by Repeated Public Good Game with Punish- whether those groups are seen as subordi- ment in Fehr and Gachter (2000)--even a nate to others (for example, doctors and small number of altruistic players can sus- patients, the status accorded minority eth- tain a cooperative equilibrium. nic communities); and by whether the These findings have been interpreted to boundaries among groups are regarded as suggest that a sizable fraction of human permeable (for example, the rules shaping beings in most societies care not only about whether and how employees get promo- their own individual opportunities and out- tions, immigrants become citizens, and so comes but also about"fairness."There is also on). Civil servants with low status and few broad agreement that fairness consists of a upward mobility prospects suffer from concern for others, although some authors higher mortality.20 Employees of low-status suggest that it is other people's intentions firms undergoing a merger more readily 82 WORLD DEVELOPMENT REPORT 2006 laboratory, it is plausible that large inequal- B O X 4 . 2 Capuchin monkeys don't like inequity either . . . ities in real life also reduce their well-being (particularly if the inequalities are not seen Research is under way on the roots of the equality test, but this rate rose to more to reflect only differences in effort or human altruism and the aversion to than 50 percent under the inequality test. inequity, whether cultural or genetic. But The refusal rate rose even further (to merit). This provides support for the statis- there is some evidence that aversion to more than 80 percent) under an alternative tical association that the subjective well- unfairness is not just human. In a recent arti- treatment, known as"effort control."In this being literature finds between income cle in Nature,"Monkeys Reject Unequal Pay," treatment, the first monkey received a inequality and self-reported happiness--a Brosnan and De Waal (2003) report the grape with no effort--with no need to pick results of exchange experiments with up a token and exchange it for food. subject we now turn to. brown capuchin monkeys (Cebus apella). Although few monkeys were used, these The animals were given a token that they differences were all statistically significant. Income inequality could immediately redeem for food by In both treatments,refusal rates and subjective well-being returning it to the experimenter.They were increased over time,as the experiment was placed in adjoining compartments with repeated (never more than once a day) many To what extent do the concerns with equity visual and vocal contact. times.Interestingly,only female monkeys shown in tightly controlled lab experiments In the baseline treatment (the equality completed these tests,as earlier experiments test), both specimens received a quarter of suggested that male capuchins are much also manifest themselves in the attitudes, a cucumber slice for each token exchanged. less sensitive to the distribution of rewards. feelings, and opinions of "regular people?" A In one treatment of interest (the The authors concluded that"tolerant recent study of labor strife in the United "inequality test"), the first monkey received species with well-developed food sharing States suggests that worker perceptions of a grape, while the second was given the and cooperation, such as capuchins [. . .] usual slice of cucumber.That capuchin may hold emotionally charged expectations whether they have been treated fairly or monkeys prefer grapes to cucumber slices about reward distribution and social unfairly can affect their efforts, and thus had apparently been amply established by exchange that lead them to dislike product quality, in important ways (box 4.3). previous research.The results were striking. inequity"(Brosnan and De Waal 2003, 299). Other studies investigate the associations Monkeys failed to exchange their tokens for food around 5 percent of the time under Source: Brosnan and De Waal (2003). between the narrower concept of income inequality and measures of subjective well- being. One recent study of European nations and the United States relies on indi- accept the new organizational structure vidual answers to the following question: because it benefits them individually, while "Taken all together, how would you say members of the higher-status firm are more things are these days--would you say that likely to resist change and act collectively in you are very happy, pretty happy, or not too terms of their premerger identity.21 happy?"22 Based on the variation in answers The experimental and subjective well- to this question, across European countries being literature in economics and social and U.S. states, and on objective income- psychology remind us that there is some- inequality measures, Alesina, Di Tella, and thing deep and fundamental about our taste MacCulloch (2004) find that "individuals for fairness and equity. Such "human altru- have a lower tendency to report themselves ism," argue Fehr and Fischbacher (2003) in happy when inequality is high, even after Nature, may be what accounts for the much controlling for individual income, a large greater complexity of cooperative patterns set of personal characteristics, and year and in human societies compared with those of country [. . .] dummies" (2009).23 other animals (box 4.2). Equity, it seems, One reason that inequality might make matters intrinsically and fundamentally for people less happy, even when controlling human beings. for absolute income levels, is that it violates Whatever the exact form of the true their sense of fairness. It may be that (at motives of individuals, the main implica- least some) people feel that a very unequal tion for this report from this large body of income distribution reflects unfair processes experimental evidence is that a good pro- and unequal distributions of opportunity. A portion of people in most societies appear 2001 study of Latin American countries by to dislike unfair outcomes and behaviors, so Latinobarometro, a reputable Chile-based much so that they are prepared to pay to opinion survey company, asked respondents punish those responsible for them. If people the following question: "Do you think that are prepared to pay real money to reduce the income distribution in your country is inequalities that appear unfair to them in a very fair, fair, unfair, or very unfair?" On Equity and well-being 83 B O X 4 . 3 Worker perceptions of unfairness, product quality, and consumer safety Do people change their behavior because they were related to 271 deaths and more than 800 time concessions were demanded and the old feel they are being treated unfairly, when they injuries.The most common source of failure of contract expired,which occurred before replace- are outside laboratories? And if so, is this likely the recalled tires was tread separation, a sudden ment workers were hired.Through early 1995, to have any serious consequence? A study of detachment of the rubber tread from the steel when many replacement workers were making industrial relations in Illinois, United States, sug- belts that caused the tire to blow out. tires,there were no excess claims in the Decatur gests that the answer to both questions is yes. Krueger and Mas (2004) compare the num- plant.It was not until the end of 1995,when many Since the 1940s,Firestone tire plants had ber of claims of defective tires in the Decatur returning strikers were working side by side with adhered to the industrywide bargain with labor plant with those from the two other North replacement workers,that the excess number of unions.But when negotiations for a new contract American plants where Firestone ATX tires were claims became high.On the basis of this and a began in 1994,Bridgestone/Firestone proposed produced: Joliette, Quebec, and Wilson, North much broader analysis,it appears likely that the deviating from the industrywide bargain in a way Carolina. Neither of these two plants chemistry between the recalled strikers and the that worsened the terms for labor at a time when experienced labor strife in the relevant period. replacement workers,or the cumulative impact of company profits were increasing.The company Tires produced during the labor dispute labor strife in general,created the conditions that proposed moving from an 8- to a 12-hour shift (1994­96) at Decatur had a much higher failure led to the production of many defective tires. that would rotate between days and nights.It rate than those produced at Joliette or Wilson, The authors of the study"recommend that also proposed cutting pay for new hires by 30 although before and after the dispute period the reader exercise caution in extending our percent.The union at the plant in Decatur,Illinois, the rate of claims was similar for tires manufac- results to other settings; our paper provides a called a strike and,shortly after the strike,the tured in Decatur and in the other plants.The detailed case study of only one firm in one company hired replacement workers. pattern suggests that changes in technology unique period of its history"(Krueger and Mas Labor strife at the Decatur plant closely cannot explain the rise in complaints against 2004, 257). At least in that instance, it appears coincided with lower product quality and defec- Decatur tires, because no such rise occurred in that perceptions of unfair treatment influenced tive tires. In August 2000, Firestone announced Joliette or Wilson. worker attitudes--and product quality and the the recall of 14 million ATX and AT tires, most of Nor does it appear that the lack of experience safety of consumers. them on the Ford Explorer.The U.S. government of replacement workers is to blame.There was a reported that Firestone tires under investigation spike in claims in the first half of 1994,around the Source: Krueger and Mas (2004). average, 89 percent of respondents re- based not exclusively on actual incomes, but garded the distribution in their countries also on processes, and that some differences to be either unfair or very unfair. In 17 of in outcomes may be considered fair (for the 18 countries surveyed, fewer than 20 example, because of differences in effort), percent of respondents answered fair or while others are not (for example, because of very fair.24 differences in opportunities). People are Such results may be particularly strong in clearly aware that income differentials can Latin America, which is one of most provide incentives for work and investment, unequal regions in the world, but they are including in education, if they are coupled not exclusive to that region.A recent analysis with opportunities for reward to those of several OECD countries (which are less actions. This comes across very clearly from unequal than most developing countries) the answers to one question in the latest wave was based on data from the International of the World Value Survey, which split Social Survey Program. To construct a proxy respondents around the world more or less measure of cross-national attitudes toward evenly into those who felt that income income inequality, Osberg and Smeeding inequality was too high and those who felt it (2004) ask what a number of different pro- was too low. fessions25 "should earn" and what they "do earn." They find that citizens of most high- Income inequality and incentives: income countries26 appear on average to What do people say? have similar attitudes toward inequality, The World Value Survey is a multicountry generally thinking that less well-paid profes- survey of individuals designed and spon- sions should be paid more and that better- sored by the Inter-university Consortium paid professions should be paid less. for Political and Social Research, based at Osberg and Smeeding (2004) findings the University of Michigan. The survey reinforce the view that the normative prefer- aims to "enable a cross-national compari- ences people have over distributions are son of values and norms on a wide variety 84 WORLD DEVELOPMENT REPORT 2006 Figure 4.2 Views on inequality from the World Values Survey want more of them (although this ten- dency was less pronounced in countries Income: more equal or more unequal? Views on inequality vary by income Mean score (lower values indicate with either very low or very high levels of Frequency (percent) preference for more equality) inequality). 20 7.0 The balance of the survey evidence sug- gests that, although inequality in incomes 15 seems to be associated with lower aggregate 6.5 levels of subjective well-being, there is con- 10 siderable heterogeneity in opinions about 6.0 whether it should be reduced or not. 5 Poorer people, and people in countries at 0 5.5 very high or very low inequality levels, 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 seem likelier to favor a reduction in in- Preference for inequality Income deciles equality. People recognize that some inequality is important to generate incen- Source: Inglehart and others (2004). Note: Author's calculations are based on data for the years 1999­2000. Preference for inequality ranges from agree- tives for investment and effort; however, ment with 1, "Income should be more equal," to agreement with 10, "We need larger income differences as incentives when asked about relative pay scales across for individual effort." professions, they would on average prefer smaller differentials. While in Latin Amer- of topics." Four main waves have been ica, for instance, a majority judges the fielded since the early 1980s. In the latest income distribution to be unfair, there is no wave, Inglehart and others 2004) asked rep- worldwide agreement that income dispari- resentative samples of people in 69 coun- ties should be reduced everywhere. This is tries to place their views on a scale from 1 to generally consistent with a view that what 10, where 1 implied agreement with the matters for ethical judgment is not income, statement that "Incomes should be made but fair processes and opportunities. more equal," and 10 implied agreement with the statement that "We need larger Income inequality and poverty income differences as incentives for indi- reduction vidual effort." Figure 4.2a suggests considerable polar- To the philosophical and legal arguments ization on views about inequality. The for equity, and to the survey-based and median answer is 6, suggesting no strong experimental evidence that fairness matters agreement with the two polar statements. intrinsically to people, we add a final argu- Yet almost 20 percent of all respondents ment: high levels of inequality make it more were in strong agreement with each of the difficult to reduce poverty. First, we high- two extreme views, represented by scores of light the fact that if inequality falls during a 1 and 10. Figure 4.2b shows a positive corre- growth spell, poverty generally falls by more lation between the score (which is nega- than it would have if growth had been dis- tively correlated with inequality aversion) tribution-neutral. Second, we document and a respondent's own income. This is the finding that the effectiveness of future consistent with the evidence on the impor- economic growth in reducing absolute tance of relative incomes for welfare: if you income poverty declines with initial income are richer, you are less inclined to favor a inequality. reduction in income inequalities than if you are poorer. If inequality falls, poverty falls more The World Values Survey results caution during spells of growth against any preconceived notion that By raising the incomes and consumption of income inequality is viewed everywhere as people across the distribution of income, inherently undesirable. When asked about economic growth is the main driver of income differences explicitly "as incentives poverty reduction in the developing world. for individual effort," (many) people seem The negative association between the aver- quite happy to have them and, indeed, to age annual rate of change in poverty and Equity and well-being 85 the average annual rate of growth in mean Figure 4.3 Growth is the key to poverty reduction . . . incomes is immediately clear from figure Change in log poverty headcount index (x100) 4.3, suggesting that countries experiencing 500 higher rates of economic growth can be BUL expected to reduce poverty much faster 400 LVA than those that grow more slowly.27 The 300 PER slope of the simple regression line, ­2.4, is MDA ARG the average total elasticity of poverty with 200 HUN MLI respect to economic growth. It implies that, POL CIV LAO 100 PAR YEM VEN SVN without controlling for any characteristics TTOCOL MNG ZWE BGD ROM SLV LSO BDI of the country, 1 percentage point growth in BWA 0 GEO NERHRVRUS 0ZAF VNMNICGHA ZMBNGA UGA UZB MDG ETH EGYLKA BRA BOL INDBFAPHLHON MEX a country's mean income can be expected to KEN TURPAN DZA LTU SEN MAU ECU GMB CMR ­100 URY ALB GUY CHN GTM reduce the incidence of poverty in that AZE CRI MAR EST IDN PAK country by about 2.4 percentage points. ­200 y = ­2.3841x + 2.3517 IRN TUN THA This powerful association between eco- t-stat = 9.30 JAM R2 = 0.5225 LYS nomic growth and poverty reduction is ­300 KAZ N = 73 one of the central stylized facts of develop- ­400 ment economics. Its qualitative nature has ­150 ­100 ­50 0 50 100 150 long been understood, and it has recently Change in log mean consumption or income between surveys (x100) been quantified by Ravallion and Chen Source: Authors' calculations. (1997), Dollar and Kraay (2002), and others. Indeed, the growth-poverty relationship is Figure 4.4 . . . and, on average, growth is distribution-neutral probably more powerful than surprising: it Change in log Gini index (x100) merely reflects the fact that, on average, 50 the growth in the incomes of the poor is 40 PAR similar to the growth of mean incomes LVA NER MLI CRI (figure 4.4). Put differently: aggregate eco- 30 NGA BUL POL ZWE BDI SVN EST LAO BWA nomic growth is, on average, distribution- 20 CHN HRV MDA ARGHUN BGD GHA neutral.28 LSO PHL MEX PER ECU COL NIC 10 CIV SLV EGY GMB There is, however, considerable variation MDG VNM AZEBRAIDN HON GTM GEO URYMAR PAN 0 IND LYS around those averages. About half the total ROM TTO RUS LTUALBUGACMR PAK THA VEN ZAF IRNTUR TUN BFA variation in poverty reduction is accounted ­10 MNG DZA ZMB JAM GUY YEM KAZ MAU for by economic growth (see the explana- BOL ­20 KEN y = ­0.0288x + 3.3717 SEN tory power of the underlying regression for ETH ­30 t-stat = 0.515 figure 4.3).29 The other half must reflect R2 = 0.004 changes in the underlying distribution of ­40 N = 73 relative incomes. This happens because the UZB ­50 LKA incidence of economic growth (its distribu- ­60 tional pattern) can vary dramatically ­150 ­100 ­50 0 50 100 150 across countries. Two countries with simi- Change in log mean consumption or income between surveys (x100) lar rates of growth in mean incomes can Source: Authors' calculations. have very different growth profiles across the population. As one would expect, reductions in inequality at a given growth mean incomes from the household survey rate add a "redistribution component" to was close to 2.5 percent. In Tunisia, where the "growth component," leading to faster the distribution of this growth was rela- overall poverty reduction. tively more beneficial to the poor, the head- The contribution of inequality reduc- count index of poverty fell by 67 percent tion alongside growth is illustrated by a (from 30 percent to 10 percent). This cor- comparison of the growth incidence curves responds to an annual rate of decline in (GIC) for Tunisia (1980­2000) and Senegal poverty of 5.4 percent. In Senegal, where (1994­2001) (figure 4.5). In both coun- growth was less pronounced for the bottom tries, the average annual growth rate in the half than for the upper half of the distribu- 86 WORLD DEVELOPMENT REPORT 2006 Figure 4.5 The national growth incidence curves for Tunisia 1980­1995 and Senegal 1994­2001 reduction in two countries with the same distribution-neutral growth rate may well Tunisia Senegal Annual growth rate, % Annual growth rate, % be different. Perhaps the most flexible way to capture 4 4 Growth incidence curve the variation in growth elasticity with 3 3 inequality across the sample of countries available for these exercises is simply to 2 Growth rate in mean 2 compute the total and the partial growth Growth rate in mean elasticity of poverty reduction for each sin- 1 1 Growth incidence curve gle country (in a single spell per country) 0 0 and to plot it against the initial Gini coeffi- cient (figure 4.6).30 A positive relationship is ­1 ­1 apparent for both partial and total elasticity 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 concepts, for all four poverty line/poverty Population percentile Population percentile measure combinations.31 The absolute value Sources: Ayadi and others (2004) for Tunisia and Azam and others (2005) for Senegal. These are two of 14 country case studies from the World Bank's "Operationalizing Pro-Poor Growth" Study. of the growth elasticity of poverty reduction falls as countries become more unequal, both for the total and for the partial con- tion, poverty fell by only 15 percent (from cepts. The slope of the line fitted through 68 percent to 57 percent), corresponding to panel (a) suggests that a 10 percentage an annual rate of poverty reduction of 2.3 point increase in the Gini coefficient is, on percent. Although some of this difference is average, associated with a decline of 1.4 in due to the fact that the actual growth rate the (absolute value) of the elasticity. Given was marginally higher in Tunisia (2.7 per- that the average elasticity is 2.53, this is not cent versus 2.3 percent in Senegal), much of a small effect. it is clearly due to the different patterns in The fact that very unequal countries the incidence of growth, which is evident in (with a Gini coefficient near 0.6) have a figure 4.5. total elasticity near zero in this sample This contribution of declines in should not be overemphasized. It is caused, inequality to poverty reduction holds more in part, by increases in inequality in some generally. According to Datt and Ravallion of these countries during the recorded (1992), a decomposition of changes in growth spells. This is evident from the fact poverty into growth and inequality compo- that the partial elasticity (which controls nents has been widely applied. Redistribu- for changes in distribution) does not reach tion components are usually smaller than zero for the same sample. Growth still con- growth components and, because inequal- tributes to poverty reduction, even in high- ity often rises, they often have the "wrong" inequality countries. The robust finding sign. But when inequality falls, this helps relates to the sign of the slope of the line, reduce poverty. not its exact intercepts: higher initial A second and separate point is that the inequality means that growth reduces power of growth to reduce poverty declines poverty by a lesser amount. with higher initial income inequality. A It has been argued that this is a mechan- reduction in inequality today therefore ical result in that, given a fixed functional also tends to have a future impact on the form for the income distribution, greater effectiveness of (even distribution-neutral) inequality results in slower poverty reduc- growth in reducing poverty. This occurs tion even if each individual's income grows because the shape of most income distri- at the same rate. Indeed, as indicated here, butions means that the growth elasticity distributional change is on average uncor- of poverty reduction tends to be smaller related with mean growth rates so that, on in more unequal countries. Put another average, the poor see their incomes grow at way, because the initial distributions of the same rate as other people's. That does income are different, the rate of poverty not, however, follow from any law of nature. Equity and well-being 87 Figure 4.6 Greater inequality reduces the power of growth to reduce poverty a. Total elasticity vs. Gini (headcount ratio, $1) b. Partial elasticity vs. Gini (headcount ratio, $1) Total elasticity Partial elasticity 10 10 DZA 5 PAR KEN 5 UKR ETH KGZ NGA NIC LSO RUS 0 UGAUZB RUS BWA HON GTM 0 CHNU CRI NGA ZWE BFA BWAHON GTM MAU UGAECUGMB PAN CHNU PAKCRIINDU PHL ECU MAU INDU THA MEX BFA GUY PAN BRA PAK PHL GUYSEN ROM IDN NERGEO TUR GMB INDR IDN BDIAZENER THA MDGMEXNIC BOL EST BOL PAR JAMTUN LSOKEN BRA MNG VNM AZE ZWE MDG CMR SEN ZAF BGD VNM ETH CMR MYS ALB TUN EST ROM GEO TUR UZB COL YEM LYS DZA IRN KGZ ZAF ­5 BDI JAM VEN MAR URY INDR MLIMAR ­5 ALB MNG KAZ EGY CIV COL ARG VEN MLI KAZ IRN BUL EGY CIV BGD LAO UKR YEM PER ­10 ­10 y = 13.758x ­ 8.2332 y = 8.2813x ­ 6.0475 t-stat = 2.45 t-stat = 2.97 ­15 ­15 R2 = 0.0911 R2 = 0.1231 LAO URY N = 62 N = 65 ­20 ­20 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 Gini Index, initial period Gini Index, initial period c. Total elasticity vs. Gini (squared poverty gap, $2) d. Partial elasticity vs. Gini (squared poverty gap, $2) Total elasticity Partial elasticity 11 11 8 8 RUS KEN 5 PAR 5 DZA ECU NIC LSO 2 NGA ETH KGZ 2 BDI VNM DZA ECU UKR UZB BGD KEN EGY PAKCRI UGA UGA MEXRUS BWA GTM CHNU CRI ETH HON ZAF GUY ZAF MAU MDG PAN ­1 CHNU MAU LAO PAK MEX GTM INDU PHL GMB NERNGAZWEPHLTHA GMBBFA COLBWA THA ­1 HON INDR TUN EST IDN MDGCMRMYSBFA BUL IDN INDU GUY SEN AZEMAR TUN BOL PAN BRA EST PAR JAM VEN LSO ALB MNG VNM YEM TUR AZE MLI CIV UZBCMRMYS BRA ­4 MNG ARG BGD COL SEN BOL INDR NIC NER ­4 UKR CIV ALB TUR KGZ ZWE KAZ YEM BDI JAM IRN VEN IRN GEO MAR PER ­7 LAO MLI ROM KAZ ­7 y = 15.039x ­ 8.7066 URY y = 6.5129x ­ 4.8068 GEO ­10 ­10 EGY ROM t-stat = 3.24 t-stat = 1.97 URY R2 = 0.1468 R2 = 0.0585 ­13 ­13 MDA N = 63 N = 65 ­16 ­16 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 Gini Index, initial period Gini Index, initial period Source: Authors' calculations. Note: The figure shows the scatter plots of country-level elasticities against initial-year Gini coefficients. Panel (a) shows the total elasticity for the headcount measure of poverty incidence, with a $1 per day poverty line. Panel (b) shows the partial elasticity for the same measure and the same line. Panels (c) and (d) also show the total and partial elasticities respectively, but now for the squared poverty gap index FGT(2) and with respect to a $2 per day line.32 Income distributions in individual coun- reduces the effectiveness of economic tries can and do change during spells of growth in reducing poverty. This means growth (see figure 4.5).33 There is no that, if all else remains the same, a reduction mechanical rule that states that the incomes in income inequality today has a double of the poor must grow at the same rate as dividend: it is likely to contribute to a con- the rest of the population.34 If on average temporaneous reduction in poverty, and it they do and if, given the shape of the empir- is likely to make future growth reduce ical income distributions, the poverty elas- poverty faster. ticities are lower in countries with higher Evidently, the caveat "if all else remains initial inequality, this is an empirical fact. the same" is of crucial importance. The dis- The balance of the evidence does not, tribution of incomes is a reflection of the therefore, allow much room for doubt that general equilibrium of an economy, based growth elasticities of poverty reduction are on the social, political, and institutional stronger in more equal societies. Inequality structures that condition its behavior. 88 WORLD DEVELOPMENT REPORT 2006 Simple-minded attempts to change the way cies are likely to lead to faster poverty incomes are distributed, without taking reduction in the future, for any amount of into account the effects of policies on the growth that the economy generates. incentives of all agents in the economy, are It turns out, however, that some inequali- bound to fail. We return to the issue of ties--not necessarily those of incomes--are appropriate policy design in part III of this also detrimental to economic growth itself. report. All that can be said about the results Such inequalities in power, assets, and access here is that, if policies exist that can lead to a to markets and services are most likely to be less unequal distribution of resources with- the ones on which policy can productively out major costs to the (static and dynamic) focus. The next two chapters turn to a dis- efficiency of resource allocation, such poli- cussion of these "inefficient inequalities." Inequality and investment 5 In a world in which markets worked per- One of the great advances in development fectly, investment decisions would have lit- economics in the past 15 years is the accre- c h a p t e r tle to do with the income, wealth, or social tion of a substantial body of evidence on status of the decision maker. They would be documenting how well (or badly) asset and determined by the returns an investment financial markets work in developing coun- promises and by the market price of capital, tries. The fact that these markets rarely meas- adjusted for the extra risk it entails. If peo- ure up to their ideal creates the possibility ple had good investment opportunities, it that wealth and social status, defined as one's really would not matter whether they had position in society both in ascriptive identity the money--they could always borrow and in connections, will have an important what they needed, and if the risk bothered influence on investment decisions. It seems them, they could always sell shares in their natural to start with this evidence. business and buy safer assets with the money from the sale. Markets, wealth, status, However, for various reasons--mainly and investment behavior economic but also political--markets are not perfect. If borrowers can willfully default The market for credit on their loans, lenders prefer to make loans In a perfect credit market, there is a single to borrowers who can provide collateral interest rate and everyone can borrow or assets. Private returns for politically con- lend as much as they want at that rate. That nected firms can be higher than for those individuals can borrow as much as they want without such connections, and so these firms at the current rate explains the presumption may attract more capital, even though social of a separation between the wealth or status returns may not be any greater.1 Members of of the investors and the amount they invest. groups subject to discrimination may ration- Whether they are rich or poor, well-con- ally invest less in their human capital than nected or just off the streets, an extra dollar they would in the absence of such explicit or of investment will be profitable for them subtle stereotypes. only if the return they get from it is more After we give up the idea that markets than the interest rate. If the interest rate is work anywhere close to perfectly, the scope higher, they would be better off lending that for a direct link between investment and money if it was their own, or borrowing less the distribution of wealth or power widens if it were someone else's. So, two people with substantially, in many instances leading to the same return on investment would end up underinvestment by those who have good investing the same amount.4 growth opportunities.2 Correcting the How close are real markets to this ideal market failures directly is often not feasi- market? Chambhar is a market town in ble, and in these cases certain redistribu- Sindh (Pakistan), on the east bank of the tions of wealth, power, and resources can Indus. In 1980­81 farmers from the area serve as second-best alternatives.3 In other around Chambhar got most of their credit words, interventions to enhance equity can from about 60 professional moneylenders. improve efficiency. Based on detailed data from 14 of these 89 90 WORLD DEVELOPMENT REPORT 2006 lenders and 60 of their clients, Aleem The same pattern--high and variable bor- (1990) calculated the average borrowing rowing rates, much lower deposit rates, and interest rate charged as 78.5 percent. But if low default rates--shows up in the "Sum- these farmers wanted to lend their money, mary Report on Informal Credit Markets in the banking system would pay them only India."5 This report summarizes results from about 10 percent. It is possible, however, case studies commissioned by the Asian that they may not have been depositing in Development Bank and carried out under the banks. An alternative measure of the the National Institute of Public Finance and deposit rate that is relevant for these farm- Policy. ers is the opportunity cost of capital to the For the urban sector, the data are based moneylenders, 32.5 percent. In either case, on various case surveys of specific classes of it suggests a gap of at least 45 percentage informal lenders. For the broad class of points between the borrowing and lending nonbank financial intermediaries called rates. finance corporations, the maximum deposit The borrowing rate also varied enor- rate for loans of less than one year is 12 per- mously across borrowers. The standard devi- cent. These corporations offer advances for ation of the interest rate was 38.1 percent, one year or less at rates that vary from 48 compared with an average lending rate of percent per year to the utterly astronomical 78.5 percent. In other words, an interest rate 5 percent per day. The rates on loans of of 2 percent and an interest rate of 150 per- more than one year varied between 24 per- cent are both within two standard deviations cent and 48 percent. Default, once again, is of the mean. One possibility is that these dif- only a small part of the story: default costs ferences in interest rates reflect differences in explain only 4 percent of total interest costs. the default rate: perhaps the expected repay- For hire-purchase companies in Delhi, the ment was the same for everybody, because deposit rate was 14 percent and the lending those who paid higher rates were more likely rate was at least 28 percent and could be as to default. Also the expected repayment high as 41 percent. Default costs were 3 per- could have been equal to the actual interest cent of total interest costs. rate paid to the depositors, if the default rate For the rural sector, interest rates are was high enough. But default was rare: for high, but they are also variable (figure individual lenders, the median default rate 5.1). This finding is based on surveys of was between 1.5 percent and 2 percent, with six villages in Kerala and Tamil Nadu, car- a maximum of 10 percent. ried out by the Centre for Development Studies, Trivandrum. The rich (with Rs 100,000 or more in assets) get most of the Figure 5.1 In rural Kerala and Tamil Nadu, the rich access most of the credit and pay relatively low credit (nearly 60 percent) and pay a rela- rates tively low rate (33 percent), while those with assets between Rs 20,000 and Rs 125 Average interest rate (%) [left scale] 5000 30,000 pay rates of 104 percent and get Average loan size (Rs) [right scale] only 8 percent of the credit. The average 100 Cumulative 4000 interest rate charged by professional mon- proportion of credit eylenders (who provide 45.6 percent of 75 [left scale] 3000 the credit) is about 52 percent. While the average deposit rate is not 55 2000 reported, the maximum from all the case studies is 24 percent, and in four of them it is no more than 14 percent. In the category of 25 1000 professional moneylenders, about half the loans were at 60 percent or more, but 0 0 0­ 5,000­ 10,000­ 15,000­ 20,000­ 30,000­ 50,000­ 100,000 another 40 percent or so had rates below 36 5,000 10,000 15,000 20,000 30,000 50,000 100,000 and above percent. Default rates were higher than in the Asset group (Rs) urban sector, but they still cannot explain Source: Dasgupta, Nayar, and Associates (1989) more than 23 percent of the interest costs. Inequality and investment 91 The fact that credit access depends on relative to what would happen if markets social status is also shown by Fafchamps' functioned properly. The capital released (2000) study of informal trade credit in because they underinvest is absorbed by the Kenya and Zimbabwe. It reports an average non-poor, who may actually end up overin- monthly interest rate of just over 2.5 per- vesting relative to how they would invest in cent (corresponding to an annualized rate perfect markets. This is the reason: because of 34 percent), but it also notes that the rate the poor cannot borrow, the non-poor can- for the dominant trading group (Indians in not lend as much as they would like to (this Kenya, whites in Zimbabwe) is 2.5 percent a is why deposit rates in developing countries month, while the blacks pay 5 percent a are often very low). And because the non- month in both countries.6 Chapter 9 also poor cannot lend, it makes sense for them to provides evidence that in many countries keep investing in their own firms, even when "insiders" effectively lobby to limit access to the returns are low. financial institutions and that lending is Because the poor underinvest, and be- skewed toward the rich, consistent with the cause the opportunity cost of capital to the evidence in figure 5.1. non-poor is thus lower than it would other- None of these facts is surprising. Contract wise be, the composition of the investors enforcement in developing countries is often also changes. In particular, firms that would difficult, and it is not easy to get courts to not be viable if markets functioned per- punish recalcitrant borrowers.7 As a result, fectly (for example, because the interest rate lenders often spend at lot to make sure that would be too high) can survive and even their loans get repaid: it is plausible that expand because markets are the way they these are the resources that drive a wedge are. In other words, the "wrong" firms end between the borrowing rate and the lending up investing. rate. Indeed, Aleem (1990) shows that the resources spent by lenders to monitor bor- The market for insurance rowers explain the nearly 50 percentage The ideal insurance market is one in which point gap between the lending and borrow- people bear no avoidable risks. In a setting in ing rates in his data. It is easy to imagine that which a single village constitutes a separate borrowers who are easier to monitor will insurance market closed to the rest of the enjoy better rates, which would explain why world (so that only people in the village can lending rates vary so much. insure other people in the village, in some These imperfections in credit markets kind of mutual insurance arrangement), have immediate implications for the rela- individual consumption should respond tionship between wealth and investment. only to aggregate (village-level) income fluc- First, with the rate of interest on deposits tuations and not to fluctuations in the much lower than that on loans, the oppor- income of specific individuals. Put in blunter tunity cost of capital for those who just terms, as long as aggregate consumption is want to invest their own money is much unchanged, individual income fluctuations lower than the opportunity cost for those should not translate into fluctuations in who have to borrow. This means that the individual consumption. When insurance wealthy will end up investing much more markets work well, risk considerations than the indigent, even if they face exactly should not have a significant impact on the the same returns on their investment. Sec- choices people make, irrespective of their ond, the lower interest rates charged to rich wealth, given that what an individual does people reinforce this conclusion, because has little impact on aggregate uncertainty. the rich then face a lower opportunity cost While a perfect insurance market is more when they too are borrowing. Third, in complex than a perfect credit market, and some cases, those who are unable to provide thus harder to detect, there have been collateral will have no access to credit at any attempts to test the prediction about the interest rate. irrelevance of fluctuations in one's own We would thus expect the poor to under- income. The Côte d'Ivoire Living Standards invest, certainly relative to the rich, but also Measurement Surveys from 1985 to 1987 92 WORLD DEVELOPMENT REPORT 2006 provide panel data on the income and con- be much more effective than others in pro- sumption of nearly 800 households, with viding insurance to their residents. each household tracked for two consecutive Townsend describes in detail how insurance years (1985 and 1986 or 1986 and 1987). In arrangements differ across villages. While in table 5.1, the relationship between changes one village there is a web of well-function- in consumption and changes in incomes is ing, risk-sharing institutions, the situations reported separately for the three main in other villages are different. In one village, regions and separately for 1985­86 and the institutions exist but are dysfunctional; 1986­87. The first row of the first block for in another, they are nonexistent; in a third, each year reports the basic correlation close to the roads, there seems to be no risk- between income and consumption: a fall in sharing whatsoever, even within families.10 income always hurts consumption, although As for credit, the failure of insurance the coefficient varies between a low of 0.15 could have something to do with informa- (a $1 reduction in income means that con- tional asymmetries. It is not easy to insure sumption goes down by $0.15) to a high of someone against a shock that he alone 0.46. The next row does the same thing, but observes, because he has every incentive to now there is a village dummy intended to always claim that things had gone badly. But pick up any village-level changes in con- as Duflo and Udry (2004) demonstrate, sumption. Remarkably, the coefficients on spouses in Côte d'Ivoire do not seem to be own income, which under perfect insurance willing to insure each other fully against should have fallen to zero after controlling rainfall shocks that affect them differen- for village-level changes, barely budge.8 tially. Because rainfall obviously is observ- Not all the evidence is quite so pes- able, at least part of the problem has to be simistic. Townsend (1994) used detailed elsewhere. One possibility is limited com- household-level data from four villages, mitment. People may be happy to claim which were intensively studied by the Inter- what was promised to them when it is their national Crop Research Institute in the turn to be paid, and then default when the Semi-Arid Tropics (ICRISAT) in India, to time comes for them to pay. This may be see whether the full insurance hypothesis is particularly easy in a setting in which the consistent with the data. He found that social relations between the sets of people while the data did reject the exact predic- who are insuring each other are not partic- tion, it did not miss by very much. In other ularly close, perhaps explaining why words, his evidence suggested that villagers Townsend found no insurance in the village do insure each other to a considerable closest to the road. extent: movements in individual consump- Lack of insurance should have an effect tion in his data seem largely uncorrelated on the pattern of investment. That many with movements in income. insurable risks are uninsured means that Later work by Townsend, based on data one cannot invest without personally bear- he collected in Thailand, turned out to be ing a significant part of the concomitant less encouraging.9 Some villages seemed to risk. Indeed, big corporations able to sell Table 5.1 The effect of income shocks on consumption, Côte d'Ivoire West Forest East Forest Savannah All Rural OLS 1985­6 No dummies 0.290 (6.2) 0.153 (3.2) 0.368 (5.8) 0.259 (8.8) Village dummies 0.265 (5.7) 0.155 (3.5) 0.373 (5.7) 0.223 (7.7) OLS 1986­7 No dummies 0.458 (8.8) 0.162 (5.3) 0.168 (4.0) 0.239 (10.4) Village dummies 0.424 (8.1) 0.173 (5.6) 0.164 (3.8) 0.235 (10.1) Source: Adapted from Deaton (1997), table 6.5, 381. Note: Absolute value of t-statistics are shown in brackets. The first row of each panel shows the coefficient on income change of a regres- sion of consumption changes on income changes. The second row reports the same result when village dummies are included in the regression. OLS = Ordinary Least Squares. Inequality and investment 93 their equity in organized equity markets lates maximum contract terms of 3 years may be the only players who can really hope for traditional technologies and 15 years for to diversify away a large part of the risk of a modern technologies. particular project. Given this fact and the It is often unclear who has the right to reasonable assumption that the poor are sell a particular plot of land, when no single more risk-averse than the rich, we are likely person or family has a clear, undisputed, to be in a perverse situation in which the legal title to the land. This ambiguity reflects poor may also find it hardest to reduce their encroachments and land grabs in the evolu- exposure to risk. Thus, they are likely to shy tion of land rights, as well as the importance away from riskier and higher-return invest- of custom in governing land relations, espe- ments, reinforcing the prediction that the cially in Africa. The recent popularity of poor invest too little. land titling as a social intervention is a direct consequence. The market for land Where lease contracts exist, they are not In a perfect land market, individuals can always of the fixed-rent type, at least when buy or lease as much land as they want for the land is used for cultivation. Many coun- as long as they want at a price that depends tries, including the United States, have a only on the quality of the land (and the long tradition of an alternative contractual length of the lease). The lease should be at a form: sharecropping. Under sharecropping, fixed rent, so that the lessor is the residual the farmer gets only a fraction of the pro- claimant on the produce of the land. That duce, but he does not need to pay a fixed land can be freely bought and sold ensures rent. As Alfred Marshall pointed out more that there is no particular advantage or dis- than one hundred years ago, this weakens advantage to owning land compared with incentives and reduces the productivity of any other asset of similar value. That the the land, but the near universality of share- lessor is a residual claimant means that the cropping suggests that it is a response to a land is put to optimal use. Not so, however, real need. There is some disagreement in practice. among economists about the exact nature Many developing (and some developed) of that need.11 It is plausible, however, that countries have regulations about who can the need is related to the fact that farmers buy land and how much or how little they are often poor, and making them pay the can buy. Binswanger, Deininger, and Feder full rent when their crop does poorly is dif- (1995) argue that almost every developing ficult and probably not desirable. country today has gone through a phase Leaseholds in developing countries tend when it had regulations intended to con- to be short-lived. The norm is either a year centrate landownership. By contrast, Besley or a season. Longer leases are not unknown, and Burgess (2000) provide a list of regula- but they are rare. This might reflect the fact tions from different states in India, each of that custom, rather than law, secures most of which is an attempt to limit the concentra- these leases: perhaps it is too much to rely on tion of ownership in land. custom to enforce leases of arbitrary length. Governments also directly limit trans- The imperfect salability of land can, of actions in land, with the ostensible aim of course, hurt anyone who owns it. But the preventing the accumulation of land in the rural poor probably have more of their hands of a few people. In Ethiopia in the wealth in land than most people, so making late 1990s, Deininger and others (2003) land nonsalable might be particularly harsh note that selling and mortgaging land were on them. against the law. While rentals were offi- What tends to discourage investment in cially allowed (after being disallowed for the land is the lack of an explicit title, or the two decades), local leaders and govern- insecurity of tenure more generally (caused, ments were free to restrict even these for example, by the short duration of leases rental transactions in land. For example, and the possibility that the landlord might the Oromia region allowed farmers to rent threaten to take the land away at the end of only 50 percent of their holding and stipu- the lease). It clearly helps if land is owned 94 WORLD DEVELOPMENT REPORT 2006 by the person contemplating the invest- may be more a product of culture and tradi- ment. That most who work in agriculture tion than of the cold calculation of benefits. tend to be too poor to buy out the land they Benefits are relevant, but the responsiveness are cultivating is thus a potential source of to them may not be as large as one might underinvestment. have expected. In the market for human capital, the The market for human capital reward should be based entirely on the One thing makes the market for human human capital supplied, not on other attrib- capital different from all the other asset utes of the person supplying the skills. Dis- markets: many decisions about investing in crimination based on gender, caste, religion, human capital are made by parents (or or race obviously violates this, but so does a other family members) for their children. In system of job allocation based on contacts. other words, those making the decisions are Until very recently, job discrimination based different from those who receive the human on gender was the norm all over the world, capital. It is not hard to imagine why this and the number of countries where such separation might introduce important dis- discrimination is still either legally or tortions to the functioning of this market. socially accepted is dwindling but signifi- Gary Becker's classic formulation avoids cant. Even where such discrimination is this issue by assuming that the family can explicitly frowned on, there is some evi- borrow against the child's future income, dence of continuing discrimination. The turning the problem into a conventional same is true of race, caste, and religion. Most investment decision. Under that assump- discrimination--unless legally mandated tion, the amount invested will not depend through affirmative action in favor of a his- on the family's means. torically disadvantaged group, such as low In practice, however, although human castes in India and African Americans in the capital is an asset, it cannot be legally United States--flies in the face of explicit pledged or mortgaged, for the simple rea- laws against it. son that pledging your human capital One reason discrimination is so hard to would be tantamount to selling yourself eliminate comes from its sheer insidious- into slavery.12 This obviously constrains ness. Beliefs about differences are embedded people's ability to borrow money to finance in everyday attitudes and practices in a way investments in their education. that neither the discriminator nor the dis- When parents cannot borrow against criminated against may be conscious of, their children's future income--true most of even though these beliefs transform how the time in most developing countries-- they both behave. This is what underlies the they may still hope that those children will power of the stereotype. In a telling exam- take care of them in their old age. The hope ple, Stone, Perry, and Darley (1997) asked all might be that the children do grow up to participants in a recent experiment (Ameri- reap the benefits of their parent's investment can Caucasians, hereafter referred to as and that they will pay their parents back. But whites) to listen to the same running children know that they have no legal obli- account of an athlete's basketball perform- gation to do so. If they do repay their par- ance on the radio. Half the participants were ents, it is because they love their parents or led to believe that the target player was because society expects them to do so. white, half that he was African American. Investments in human capital may thus The results indicated that information was be driven as much by parents' sense of what less likely to be absorbed if it was discordant is the right thing to do, as by any calculation with the prevailing U.S. stereotypes that of costs and benefits. Once we accept this, it whites are more academically talented than becomes clear that children's human capital African Americans, and that African Ameri- may not be very different from any other cans are more athletically gifted. The white consumption good--so richer families will target player was perceived as exhibiting less tend to invest more in their children's health natural athletic ability but more "court and education. And human capital decisions smarts." The African-American target player Inequality and investment 95 was perceived as exhibiting fewer court erate self-reinforcing behavior. If members smarts but more natural athletic ability. of the discriminated group invest less in Such biases have also been documented their own education, or in searching for in real-world settings. A recent study of the employment, others might use this under- effect of stereotyping on judgment finds investment to confirm their prejudice that prison inmates with more Afrocentric against that group. features receive harsher sentences than Stereotypes can be self-fulfilling not only those with less Afrocentric features, con- because they influence perceptions of the trolling for race and criminal history.13 target of the stereotype, but also because Bertrand and Mullanaithan (2003) show they influence the behavior of the individu- evidence from a field experiment proving als who are stereotyped. Stone and others beyond reasonable doubt that there is a (1999) asked college undergraduate volun- high degree of African-American discrimi- teers to play a miniature golf course. Perfor- nation in the United States. They sent the mance was measured by how many strokes same resumes to a large number of compa- were needed to put the ball in the hole: nies under either a stereotypically white fewer strokes meant better performance. name or a stereotypical African-American The variable that the experimenters manip- name, and found a 50 percent higher call- ulated was the description of the task. In back rate when the name was white. The one treatment, the task was described as a data say that having a white name is worth "standardized test of natural athletic abil- as much as eight additional years of job ity," in the other as a "standardized test of experience. Moreover, the discrimination sports intelligence." When the task was tended to be greater when the resume cor- described as a test of natural athletic ability, responded to someone who was better edu- the African-American participants per- cated, suggesting that investment in human formed better than the whites: they aver- capital among African Americans probably aged 23.1 strokes to complete the 10-hole is significantly underrewarded. golf course, compared with 27.8 for the A very different form of discrimination whites. But when the task was described as a comes from the allocation of jobs based on test of sports intelligence, the race gap was contacts. Munshi (2003) presents persua- reversed: African Americans averaged 27.2 sive evidence that contacts are very impor- strokes, whites 23.3. tant in the allocation of jobs for migrant One way to interpret this behavior is that labor in the United States. The employment social ideas--stereotypes about the talents prospects for Mexican migrants there, it of different social groups--impose bounds turns out, are much better when they are from within. Under the rational, self-inter- from areas where there was an earlier out- est hypothesis, individuals change their flow of migrants. Quite remarkably, it helps behavior only when their preferences or if migrants are from an area where there external constraints change. But the behav- was a drought several years ago, which ior of real individuals depends as well on pushed out a cohort of migrants to the belief systems that society impresses on United States. These migrants then help the them. Negative stereotypes create anxiety later generations of migrants from that area that may interfere with performance: that is to find jobs. This is the clincher: it does not why the psychologist Claude Steele termed help to be from an area where there was a this kind of behavior "stereotype threat."14 recent drought. The beliefs underlying the stereotypes, if The perception of discrimination, con- deeply internalized, can affect early deci- scious or not, can affect investments in sions about prospective careers, and atti- human capital. Those who expect to be dis- tudes toward society, by changing what criminated against in a particular labor Appadurai (2004) calls a person's "capacity market--rightly or wrongly, consciously or to aspire." The reader may recall the exam- otherwise--will tend to invest less in ple (from chapter 2) of the Batwa girl who acquiring the type of human capital that the wanted to be a cleaner upon completing market rewards. This could, perversely, gen- school. Positive stereotypes, by contrast, can 96 WORLD DEVELOPMENT REPORT 2006 boost self-confidence and lead individuals formance of the low caste, regardless of to expend greater effort. whether the payment scheme was piece rate Stereotypes influence behavior twice-- (that is, participants were paid 1 rupee per through their impact on individuals' self- maze solved) or tournament (that is, the confidence, and through their impact on the participant who solved the most mazes was way individuals expect to be treated. To paid 6 rupees per maze solved, while the examine the effect of stereotypes on the abil- other participants received nothing). When ity of individuals to respond to economic caste was announced, the low-caste children incentives, Hoff and Pandey (2004) under- solved 25 percent fewer mazes on average in took experiments with low- and high-caste the piece-rate treatments, compared with children in rural north India. The caste sys- the performance of subjects when caste was tem in India can be described as a highly not announced. When caste was announced stratified social hierarchy in which groups of and groups were composed of six children individuals are invested with different social drawn from only the low caste (a pattern of status and social meaning. segregation that for the low caste implicitly In the first experiment, groups composed evokes their traditional outcast status), the of three low-caste ("untouchable") and decline in low-caste performance was even three high-caste junior high school students greater. While we cannot be sure from these were asked to solve mazes and were paid data what the children were thinking, some based on the number of mazes they solved. combination of loss of self-confidence and In one condition, no personal information expectation of prejudicial treatment likely about the participants was announced. In a explains the result. second condition, caste was announced with The expectation by the low-caste sub- each participant's name and village. In a jects of prejudicial treatment may be third condition, participants were segre- rational given the discrimination in their gated by caste and then each participant's villages. But the discrimination itself may name, village, and caste were announced in not be fully rational. Cognitive limitations the six-person group. may prevent others from judging stigma- When caste was not announced, there tized individuals fairly. That people are was no caste gap in performance (figure bounded in their ability to process informa- 5.2). But increasing the salience of caste led tion creates broad scope for belief sys- to a significant decline in the average per- tems--in which some social groups are viewed as innately inferior to others--to Figure 5.2 Children's performance differs when their influence economic behavior. If such beliefs caste is made public persist, it will generally be rational for those Average number of mazes solved, by caste, discriminated against to underinvest (with in five experimental treatments respect to others) in the accumulation of 8 skills for which the return is likely to be Piece rate Tournament lower for them. This rational calculation is 6 additional to any reduction in their "capac- ity to aspire," arising from the internaliza- tion of those beliefs. 4 The evidence on 2 High caste underinvestment Low caste Highly imperfect markets suggest consider- 0 able scope for underinvestment. Caste Caste Caste Caste Caste not announced not announced announced announced announced and Industry and trade segregated Direct estimates of marginal products show Source: Hoff and Pandey (2004). that there are many unexploited investment Note: A vertical line in the figure indicates that the caste gaps are statistically significant. opportunities. For small Mexican firms Inequality and investment 97 with less than $200 invested, the rate of Figure 5.3 Returns to capital vary with firm size: return reaches 15 percent per month, well evidence from small Mexican firms above the informal interest rates available in Monthly returns (%) pawn shops or through microcredit pro- 30 grams (on the order of 3 percent a month) (figure 5.3).15 Estimated rates of return 20 decline with investment, but the rates remain high--7 percent to 10 percent a month for firms with investments between 10 $200 and $500, and 5 percent for firms with investments between $500 and $1,000. All 0 these firms are thus too small and could reap large gains from increased investment. 0 100 200 300 400 500 600 700 800 900 1000 Trade credit is an important form of Nonrented capital (US$) credit everywhere, perhaps especially where Source: McKenzie and Woodruff (2003). the formal institutions of the credit market are underdeveloped. Fisman (2001a) looked at the relation between access to trade credit includes small industry. In January 1998, and capacity utilization for 545 firms in the limit on total investment in plants and Côte d'Ivoire, Kenya, Tanzania, Zambia, and machinery for a firm to be eligible for inclu- Zimbabwe. He finds that firms that receive sion in the small industry category was trade credit from three main suppliers (on raised from Rs 6.5 million to Rs 30 million. average, about one of the three suppliers The researchers first show that, after the provides trade credit) have 10 percent better reforms, newly eligible firms (those with capacity utilization than firms that receive investment between Rs 6.5 million and Rs no trade credit. The relation is much 30 million) received, on average, larger stronger in industries in which it is impor- increments in their working capital limit tant to carry large inventories. than smaller firms. They then show that the Such studies present serious method- sales and profits increased faster for these ological issues, however. The basic problem firms during the same period. Putting these comes from the fact that investment levels two facts together, researchers can estimate are likely to be correlated with omitted vari- the impact of the increased access to work- ables. For example, in a world without credit ing capital on the growth in profits. Allow- constraints, investment will be positively ing for the possibility that the firms in the correlated with the expected returns to priority sector were paying less than the investment, generating a positive "ability true cost of capital for the extra money bias."16 McKenzie and Woodruff (2003) from the bank, they estimate that the attempt to control for managerial ability by returns to capital in these firms must be at including the firm owner's wage in previous least 94 percent. employment. This goes only part of the way, A different kind of evidence for underin- however, if individuals choose to enter self- vestment comes from the fact that many employment precisely because their expected people pay the high interest rates reported productivity in self-employment is much earlier. Given that this money typically goes higher than their productivity in an into financing trade and industry, the pre- employed job. Conversely, if capital is allo- sumption is that the people borrowing at cated to firms to avoid their failure, there these rates of often 50 percent or more must could be a negative ability bias. have a marginal product of capital that is Banerjee and Duflo (2004a) take advan- even higher. But the average marginal prod- tage of a change in the definition of the uct in developing countries seems to be "priority sector" in India to circumvent nowhere near 50 percent. One way to get at these difficulties. All banks in India are the average of the marginal products is to required to lend at least 40 percent of their look at the incremental capital-output ratio net credit to the "priority sector," which (ICOR) for the country as a whole.17 For 98 WORLD DEVELOPMENT REPORT 2006 Figure 5.4 Inefficient allocation of resources; the example of the Gounders vs. the outsiders twice as much capital as the outsiders on average. Gounder firms of all ages own Gounder firms of all ages own more capital Gounders lose early lead in sales around fifth year more capital, although there is a strong ten- log capital stock (100,000 Rs) log sales value (100,000 Rs) dency toward convergence as the firms age 3.5 7.0 (figure 5.4a). The Gounders, despite own- 6.5 ing more capital, lose their early lead in sales by about the fifth year, and end up sell- 3.0 6.0 Gounders ing less (figure 5.4b). In other words, out- 5.5 siders invest less and produce more. They Gounders are clearly more able than the Gounders,19 2.5 5.0 but because they are less cash-rich and do 4.5 not have the right connections, they end up Outsiders Outsiders working with less capital. 2.0 4.0 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 Agriculture Years of experience Years of experience There is also direct evidence of high rates of Source: Banerjee and Munshi (2004). returns on productive investment in agricul- Figure 5.5 Average returns for the late 1990s the International Monetary ture. In the forest-savannah in Southern switching to pineapples as an Fund (IMF) estimates the ICOR to be more Ghana, cocoa cultivation, receding for many intercrop can exceed 1,200 percent than 4.5 for India and 3.7 for Uganda. The years because of the swollen shoot disease, Per hectare profits (1,000 Cedis) implied upper bound on the average mar- has been replaced by a cassava-maize inter- 20,000 ginal product is 22 percent for India and 27 crop. Recently, pineapple cultivation for Pineapple profits 15,000 percent in Uganda. export to Europe offered a new opportunity 10,000 That many firms in India have a mar- for farmers in this area. In 1997 and 1998 Non-pineapple profits ginal product of 50 percent or more, while more than 200 households cultivating 1,070 5,000 the average marginal product is only 22 per- plots in four clusters in this area were sur- 0 cent or so, is strong prima facie evidence for veyed every six weeks for about two years. ­5,000 the misallocation of capital. The firms with Pineapple production dominates the tradi- 0 20 40 60 80 100 the marginal product of 50 percent and tional intercrop (figure 5.5),20 and the aver- Cumulative percent of plots more are clearly too small, while other firms age returns associated with switching from Source: Goldstein and Udry (1999). (the ones who bring the average down to 22 the traditional maize and cassava intercrops percent) must, in some sense, be too large. to pineapple is estimated to be in excess of A specific example of this kind of misal- 1,200 percent! Yet only 190 out of 1,070 location of capital comes from a study of plots were used for pineapple. When the the knitted garment industry in the south- authors asked farmers why they were not ern Indian town of Tirupur.18 Two groups farming pineapple, the virtually unanimous of people operate in Tirupur: Gounders response was, "I don't have the money,"21 and outsiders. The Gounders, who issue although some heterogeneity in ability from a small, wealthy, agricultural commu- between those who have switched to pine- nity from the area around Tirupur, moved apple and those who have not, cannot be into the readymade garment industry entirely ruled out. because there were not many investment Evidence from experimental farms sug- opportunities in agriculture. Outsiders gests that, in Africa, the rate of returns to from various regions and communities using chemical fertilizer (for maize) would started joining the city in the 1990s. also be high. But the evidence may not be The Gounders, unsurprisingly, have realistic if the ideal conditions of an experi- much stronger ties in the local community, mental farm cannot be reproduced on and thus better access to local finance. But actual farms. Foster and Rosenzweig (1995) they may be expected to have less natural show, for example, that the returns to ability for garment manufacturing than the switching to high-yielding varieties were outsiders, who came to Tirupur precisely actually low in the early years of the green because of its reputation as a center for gar- revolution in India, and the returns were ment export. The Gounders own about even negative for farmers without an educa- Inequality and investment 99 tion. This, despite the fact that these vari- Table 5.2 Farm size productivity differences, selected countries eties had been selected precisely for having Farm size Northeast Brazil Punjab, Pakistan Muda, Malaysia high yields, in proper conditions. But they Small farm 563 274 148 required complementary inputs in the cor- (hectares) (10.0­49.9) (5.1­10.1) (0.7­1.0) rect quantities and timing. If farmers were Largest farm 100 100 100 not able or did not know how to supply (hectares) (500+) (20+) (5.7­11.3) them, the rates of returns were actually low. Source: Berry and Cline (1979). Chemical fertilizer, however, is not a new Note: 100 = land productivity in the largest farm size. technology, and the proper way to use it is well understood. To estimate the rates of Figure 5.6 Profit-wealth ratios are highest for the returns to using fertilizer on farms in smallest farms Kenya, Duflo, Kremer, and Robinson Profit/wealth ratio (2004), in collaboration with a small non- 0.4 governmental organization (NGO), set up 20th percentile small randomized trials on people's farms. 0.3 Each farmer in the trial delimited two small plots. On one randomly selected plot, a field 40th percentile officer from the NGO helped the farmer 0.2 apply fertilizer. Other than that, the farmers continued to farm as usual. The rates of 0.1 60th percentile 80th percentile return from using a small amount of fertil- izer varied from 169 percent to 500 percent, 0 depending on the year, although marginal 10 12 14 16 18 20 22 24 returns declined quickly with the quantity Monsoon onset, standard deviation (weeks) of fertilizer used on a plot of a given size. Source: Rosenzweig and Binswansger (1993). Evidence for a different type of underin- Note: The standard deviation of the date of monsoon onset is a measure of underlying risk. The onset date of the monsoon was the vestment in agriculture is the negative size- single most powerful of eight rainfall characteristics to explain productivity relationship, the idea that the gross farm output. The data come from the Indian ICRISAT villages. smallest farms tend to be the most produc- tive (table 5.2). The gap in the productivity of small and large farms within a country reasonable measure of land quality, which, can be enormous: a factor of 5.6 in Brazil however, is not entirely clear. There are also and a factor of 2.75 in Pakistan.22 It is residual doubts about whether the returns smaller in Malaysia (1.5), but a large farm in are well measured--it is possible that the Malaysia is not very large. This is strong land of the smaller farms is degrading faster, prima facie evidence that markets are some- but the degradation is not being counted how not allocating the right amount of land while calculating the returns. to those who currently farm the smaller For these same firms, when risk goes up, plots. the average return goes down. In part this The problem with this kind of evidence is may be inevitable, but it may also reflect the that it ignores the many reasons why the big- fact that the lack of insurance encourages ger farm may be inherently less productive, people to avoid risky (but remunerative) for example, lower soil quality. Even so, sim- choices.23 This is consistent with the fact that ilar (but somewhat less dramatic) results profitability falls faster for the poorer farm- show up even after controlling for differ- ers (less able to self-insure) as the risk goes ences in land quality. The profit-wealth ratio up. Specifically, a one-standard-deviation in- in Indian ICRISAT villages is the highest for crease in the coefficient of variation of rain- the smallest farms, and when risk is compar- fall leads to a 35 percent reduction in the atively low, the gap is more than 3:1 (figure profit of poor farmers, a 15 percent reduc- 5.6). Because wealth includes the value of tion in the profit of median farmers, and no the land, the measure implicitly takes into reduction in the profit of rich farmers. The account differences in the quality of the study also finds that input choices are land. It does so as long as land prices are a affected by variability in rainfall, and in par- 100 WORLD DEVELOPMENT REPORT 2006 ticular, poor farmers make less efficient input and Rosenzweig (1986) and Shaban (1987) choices in a risky environment. both show that productivity is 30 percent In related work, Morduch (1993) specifi- lower in sharecropped plots, controlling for cally investigated how the anticipation of a farmers' fixed effects (that is, comparing the credit constraint affects the decision to productivity of owner-cultivated and farmed invest in high-yielding variety seeds. Using land for farmers who cultivate both their a methodology inspired by Zeldes (1989), own land and that of others) and for land he splits the sample into two groups--one characteristics. Shaban (1987) shows that group of landholders expected to have the all the inputs are lower on sharecropped ability to smooth their consumption, and land, including short-term investments one group that owns little land, expected to (fertilizer and seeds). He also finds system- be constrained. He finds that the more con- atic differences in land quality (owner- strained group devotes a considerably cultivated land has a higher price per smaller fraction of land to high-yielding hectare), which could in part reflect long- variety seeds for rice and castor. term investment. Another consequence of the lack of On the impact of security of property, insurance is that it may lead households to Do and Iyer (2003) find that a land reform use productive assets as buffer stocks and that gave farmers the right to sell, transfer, or consumption smoothing devices, which inherit their land-use rights also increased would be a cause for inefficient investment. agricultural investment, particularly the Rosenzweig and Wolpin (1993) argue that planting of multiyear crops (such as coffee). bullocks (an essential productive asset in Laffont and Matoussi (1995) use data from agriculture) serve this purpose in rural Tunisia to show that a shift from sharecrop- India. They show, using ICRISAT data cov- ping to owner cultivation raised output by ering three villages in semiarid areas in 33 percent, and moving from a short-term India, that bullocks, which constitute a large tenancy contract to a longer-term contract part of households' liquid wealth (50 per- increased output by 27.5 percent.25 cent for the poorest farmers), are bought Security of property rights is often and sold quite frequently (86 percent of linked to the local power structure. The households had either bought or sold a bul- connection between inequalities in power lock in the previous year). Moreover, they and underinvestment is nicely exemplified buy when they are flush with money and by the Goldstein and Udry (2002) study of sell when they are broke. investment in land in a setting where land is Since people are not simultaneously sell- allocated by custom (rural Ghana). They ing and buying land, they are not selling show that individuals are less likely to leave these animals because they no longer need their land fallow (an investment in long- them for production. Indeed, from the view run productivity of the land) if they do not point of production, most of these farmers hold a position of power within either the should own two bullocks and never sell hierarchy of the village or the hierarchy of them. If they are selling, the reason is that the lineage. The problem is that the land they need the money for consumption. The gets taken away from them when it is lying data suggest that, for poor or midsize farm- fallow. Because women rarely hold these ers, there is considerable underinvestment positions, women's land is not left fallow in bullocks, presumably because of the bor- enough and is much less productive than rowing constraints and the inability to bor- men's. row and accumulate financial assets to smooth consumption: almost half the Human capital households in any given year hold no bul- According to the report of the Commission locks (most of the others own exactly on Macroeconomics and Health (2001), two).24 returns to investing in health are on the There is also compelling evidence that order of 500 percent. But these numbers, sharecroppers lack incentives. Binswanger arrived at through cross-country growth Inequality and investment 101 regressions, are not as easy to interpret as Measured returns to private investment in what would actually happen if someone education tend not to be quite so high. were to invest an extra dollar in health. That Banerjee and Duflo (2004b) survey cross- said, there clearly are examples of specific country evidence, and conclude that-- health interventions that have enormous Using the preferred data, the Mincerian rates private and social returns. There is substan- of returns seem to vary little across countries: tial experimental evidence that supplemen- the mean rate of returns is 8.96, with a stan- tation in iron and vitamin A increases pro- dard deviation of 2.2. The maximum rate of ductivity at relatively low cost. returns to education (Pakistan) is 15.4 per- · Basta, Soekirman, and Scrimshaw (1979) cent, and the minimum is 2.7 percent (Italy).29 study iron supplementation among rub- ber tree tappers in Indonesia. Baseline But most of the educational benefits of health measures indicated that 45 per- deworming mentioned above would be cent of the study population was anemic. captured by a child whose parents are The intervention combined an iron sup- willing to spend $0.50 on the deworming medicine. This clearly offers a return plement and an incentive (given to both much higher than the measured Mincer- treatment and control groups) to take ian returns at affordable absolute cost, the pill on time. Work productivity although they are not strictly compara- among those who got the treatment ble. Deworming does not require the increased by 20 percent (or $132 a year), child to spend more years in school, but at a cost per worker-year of $0.50. Even it does help the child get more out of the taking into account the cost of the incen- years he or she is already spending in tive ($11 a year), the intervention sug- school. However, when the deworming gests extremely high rates of returns. medicine was offered free to the chil- dren, the take-up was only 57 percent. In · Thomas and others (2005) obtain lower this sense, it is clear that at least some but still high estimates in a larger experi- causes of underinvestment have to be ment, also in Indonesia. They found that found in the way the family makes deci- iron supplementation experiments in sions, rather than in the lack of Indonesia reduced anemia, increased the resources. probability of participating in the labor market, and increased earnings of self- The fact that a lack of connections alters employed workers. They estimate that, the nature of human capital investment is for self-employed males, the benefits of nicely demonstrated in a recent paper by iron supplementation amount to $40 per Munshi and Rosenzweig (forthcoming). year, at a cost of $6 per year.26 They show that, in India, trade liberaliza- · The cost-benefit analysis of a deworming tion increased returns to knowing the Eng- program27 in Kenya reports estimates of lish language in families with connections a similar order of magnitude. Taking in the blue-collar sector compared with into account externalities (because of the families with no connections. However, contagious nature of worms), the pro- there is a much bigger gap between girls and gram led to an average increase in boys in the increase in enrollment in Eng- schooling of 0.14 years. Using a reason- lish-medium schools. This is attributed to able figure for the returns to a year of the fact that girls never really expected to education, this additional schooling will get these blue-collar jobs, while for their lead to a benefit of $30 over the life of the brothers, it depended on whether they had child, at a cost of $0.49 per child per year. the right contacts. Not all interventions have the same rates Inequalities and investment of return, however. A study of Chinese cotton mill workers28 led to a significant Four important points follow from this increase in fitness, but no corresponding body of evidence: first, markets in develop- increase in productivity. ing countries are highly imperfect, and 102 WORLD DEVELOPMENT REPORT 2006 those who do not have enough wealth or might depend on the set of economic social status tend to underinvest. The opportunities available. resources underused because of this under- The microcredit community, in particu- investment end up being used for some less lar, has long debated this last issue in trying productive purpose, reducing overall pro- to decide whether microcredit is best instru- ductivity. In the example from the knitted ment for helping the poorest of the poor. garment industry in Tirupur, the Gounders This clearly turns partly on whether the were overinvesting in their own relatively poorest are the ones who have the projects unproductive firms, while the much more with the highest returns, which could be the productive firms of the outsiders were case if the poor and the less poor have the starved of capital. The land owned by same kinds of production functions, and if Ghanaian women was getting degraded, there are diminishing returns to scale. If, because they did not have the social status instead, the most productive technology in needed to hold on to the land during the this area had a fixed cost of production but fallowing period. This, once again, is a pure (say) diminishing returns otherwise, giving loss for society. The fact that other people the poorest access to more capital may not who do have status and can fallow their be very productive: even with all the capital land as needed is not, in any way, compen- they can get, they may not be able to cover sating for the loss of productivity on the the fixed cost. It may be more effective to lands of the powerless. This creates a strong help people who are slightly richer, because presumption that certain specific types of with some help they may actually be able to redistribution, by empowering certain peo- start a business. ple or increasing their access to resources How good or bad is the assumption of or contacts, can promote efficiency and decreasing returns in the production func- equity. tion of an individual firm? As mentioned Second, this hypothesis would imply a bias above, McKenzie and Woodruff (2003) esti- in favor of those kinds of redistribution that mate a production function for small Mexi- target the specific lack of access to resources or can firms, suggesting strong diminishing influence causing the inefficiency. In some sit- returns. Mesnard and Ravallion (2004) find uations this will mean redistributing assets, weak diminishing returns using Tunisian but it also might mean redistributing access to data. But estimating a production function capital, perhaps by promoting microcredit, that exhibits local increasing returns is strengthening women's land rights or access inherently difficult. A firm is likely to grow to jobs and welfare programs, designing (or shrink) quickly when it is in the region affirmative action programs to break down of increasing returns. So we will observe few stereotyping, and improving access to justice firms in this region, and be likely to reject systems. too often the assumption of local increasing Third, because investments build wealth returns. Certainly the natural interpretation and wealth makes it easier to invest in a of the results in Banerjee and Duflo (2004a), world where markets do not function very showing close to 100 percent returns in well, a little help can go a long way. Starting medium firms in India, is that there are the right business might be the biggest chal- increasing returns over some range. lenge: once started, the business might pro- A corollary of this discussion is that the pel itself forward without any further help. redistribution that maximizes productivity Fourth, it is not clear that the beneficiar- growth is not necessarily the one that has ies from this kind of efficiency-promoting the strongest immediate effect on poverty. redistribution have to be the poorest of the Nor is it the one that does most to reduce poor. Because the ideal is to promote pro- inequality. Indeed, except under very spe- ductive investments, the target should be cial circumstances, this discussion tells us those most likely to make these invest- nothing about the relation between some ments. Whether the poorest are the right global measure of inequality and the effi- people from this point of view is an empiri- ciency of resource use or investment. Con- cal question, and one for which the answer sider the case, discussed above, in which the Inequality and investment 103 production function has a fixed cost but inequality and changes in growth, including also diminishing returns. If all firms are several studies that do the analysis at the sub- equal and the maximum they can each national level within the same country, find a invest is less than the fixed cost, no one will positive effect. be able to start a firm. Increasing inequality Both Banerjee and Duflo (2003) and will raise the productivity of capital by Voitchovsky (2004) conclude that there is no making it possible for some firms to pay the reason to give one of these sets of results pri- fixed cost. Because there are also diminish- ority over the other. Indeed, both could be ing returns, however, there will be a point at right. For example, in the short run, policies which any further increase in overall that allow large cuts in real wages might inequality would be counterproductive. encourage investment, but in the long run, More generally, the effect of inequality the consequent increase in poverty might will depend on the shape of the production make it harder for the population to maintain function, and the size of the investment its human capital. Or both could be wrong. potential of the average person relative to Most important among the many reasons for the fixed cost. Obviously, the issue gets even both the cross-sectional and the time series more complicated if different firms have dif- evidence to be misleading are the following: ferent production functions and if produc- the possibility of a nonlinear relationship tivity is correlated with the owner's wealth between inequality and growth, problems (as it might be if the owner's education is an with comparability of cross-country data, important input into production and richer and the difficult question of identifying the people tend to be more educated). direction of causality when both variables are Several authors have tried to look for a likely to influence one another. systematic relation in cross-country data This lack of clear-cut results is perhaps dis- between inequality and growth (presumably appointing, but it is worth emphasizing that what investment is meant to achieve). A our focus here has been on redressing spe- lengthy body of literature30 estimated a long- cific inequalities in productive opportunities run equation, with growth between 1990 and rather than some overall measure of inequal- 1960, for example, regressed on income in ity. Despite the great attention devoted to the 1960, a set of control variables, and inequal- question of a systematic relationship between ity in 1960. Estimating these equations overall inequality and growth at the country tended to generate negative coefficients for level, the body of evidence remains uncon- inequality. But there are obvious concerns vincing. But there clearly are situations in about whether such a relation could be which there is a strong presumption that driven entirely by omitted variables. To reducing a specific inequality would promote address this problem, Li and Zou (1998), better investment. Forbes (2000), and others used the time One such example comes from Opera- series dimension of the Deininger and Squire tion Barga, a tenancy reform in the Indian data set to look (effectively) at the effect of state of West Bengal in the late 1970s and short-run changes in inequality on changes 1980s. It has been known, at least since the in growth.31 The results change rather dra- work of the great Victorian economist matically: the coefficient of inequality in this Alfred Marshall, that sharecropping pro- specification is positive and significant. vides poor incentives and discourages A recent review paper by Voitchovsky effort. In such an environment, a govern- (2004) concludes that both these effects are ment intervention that forces the landlords quite robust. Most studies that look at the to give their sharecroppers a higher share of cross-sectional relationship between inequal- the output than the market would give ity and subsequent growth over a relatively them should increase effort and productiv- long period in cross-country data, and espe- ity. This is exactly what happened in West cially those that use measures of asset Bengal, India, when a Left Front govern- inequality, find a negative relationship, often ment came to power in 1977. The tenant's significant.32 By contrast, most studies that share of output was set at a minimum of 75 look at the relationship between changes in percent as long as the tenant provided all 104 WORLD DEVELOPMENT REPORT 2006 inputs. In addition, the tenant was guaran- money goes to the grandfather. (Boys are teed a large measure of security of tenure, essentially unaffected.) The estimates sug- which may have encouraged him or her to gest that receipt of the pension (which was undertake more long-term investments on about twice the per capita income among the land. Survey evidence shows a substan- blacks) was enough to help girls bridge half tial increase in both the security of tenure the gap in height-for-age between South and the share of output going to the share- African and American children. cropper. The fact that the implementation These examples show that it is possible to of this reform was bureaucratically driven, enhance both equity and efficiency simulta- and proceeded at different speeds in differ- neously. Judicious redistribution--of income ent areas, suggests the possibility of using to grandmothers, of power to poor women variation in the implementation of the farmers, of credit to entrepreneurs in small reform to evaluate its impact. The evidence firms--can increase the productivity of suggests that there was a 62 percent increase resources, such as land, human capital, and in the productivity of the land.33 physical capital. If markets fail, resources do A different program, also promoting not always flow to where their return is great- equity and efficiency, had to do with redress- est, particularly if that happens to be in proj- ing the effects of intrafamily inequality. A ects run by people with limited wealth or long line of research claims that income and influence. Careful microeconomic case study expenditures are often controlled by the evidence, some of which was summarized in male members of the family and that this this chapter, suggests that certain forms of leads to underinvestment, especially in the redistribution can reduce waste and con- health and education of girls. One fallout of tribute to a better use of resources, while also dismantling the apartheid regime in South reducing inequality of opportunity. In fact, it Africa was the expansion of the South enhances efficiency precisely because it African social pension program to the black reduces inequality of opportunity. population. Pension entitlements would This is not to say that one cannot easily accrue to elderly males and females, and imagine certain types of redistribution that many older women living alone were entitled hurt efficiency. But given the near universal- to receive the benefit. In many cases, children ity of market failures and underinvestment of very poor parents were sent to live with in poor countries, it should be possible, with grandparents who began to receive these a combination of good research and careful pensions. Duflo (2003) compared the impact thinking, to identify opportunities for redi- of these new transfers on the nutrition of recting resources to poorer people who are children living with their grandparents, sepa- in a position to make good use of them. rately for households in which the pension In making the case for improvements was given to the grandmother and those in in equity that are also efficiency-enhanc- which it was assigned to a grandfather. ing, this chapter used mainly micro- For children born before the expansion, economic evidence on markets, wealth, in 1990 and 1991, height-for-age was slightly and agency of individuals. The next chap- lower in families in which the grandmother ter uses a different set of historical, macro- would eventually get the pension. For chil- economic, and institutional evidence to dren born after the expansion, in 1992 and argue that complex historical processes, 1993, the children are significantly taller combined with inequalities in influence and (except for the newborns) in those families. power, may lead to bad political and eco- There is no difference between noneligible nomic institutions, which severely impair families and families in which pension the development of poor countries. f o c u s 3 o n Spain Equity and development in the Spanish transition to democracy In the last half century, Spain has gone from authoritarianism and underdevelopment to democracy and wealth. Spain's history illustrates how the distribution of political agency and economic assets greatly influences the policy choices avail- able to a society. The fundamentals of economic and political structure influence and constrain the choices. But the process is not deterministic: political agency and policies can shift the underlying fundamentals (as happened in Spain in the 1960s and 1970s) and open the space for new choices. Before the civil war: new elections were held, with a victory for contracts. Emphasis on permanent jobs and social and economic polarization the left. The threat of more radical policies cheap housing was seen as a substitute for Until the second half of the twentieth cen- prompted a military uprising, supported by the lack of direct social policies, an attempt tury, Spanish contemporary history was a the landed classes, much of the bourgeoisie, by the regime to win legitimacy. tale of political and economic failure. After and the church. Spain became engulfed in a In the late 1950s, Spain eventually a period of territorial expansion and Euro- three-year civil war. The social polarization moved to break with this interventionist pean hegemony in the early modern ages, locked Spain into a zero-sum gain over the system. An acute political crisis--associated Spain lapsed into economic decline and distribution of wealth. There was little with a wave of strikes, an economic re- cultural stagnation in the following cen- political space for compromise or reformist cession, and severe balance-of-payment turies. During most of the nineteenth cen- solutions. The "haves" opposed all attempts crisis--led the government to adopt a stabi- tury, its industrial takeoff was blocked by at even minimalist reform. The "have-nots" lization plan in March 1959. In addition to political instability, inefficient legal institu- wanted radical change, not gradual reform. fiscal and monetary restraint, the plan tions, substantial inequalities, and a poorly included wide-ranging measures to liberal- educated population. In 1929, per capita The Franco regime: ize the economy. It was an outright success. income was $3,000 (in 1990 dollars)-- from autarky to growth From 1960 to the outbreak of the first oil two-fifths that of Britain and less than two- With the defeat of the Republican govern- crisis, output expanded at an average annual thirds that of France. ment by the Nationalist army in 1939, Gen- rate of more than 7 percent with very little Spain was polarized by entrenched social eralissimo Francisco Franco established an interyear volatility. Per capita income and economic inequalities. In a country still authoritarian regime that lasted until his almost tripled from about $3,000 (in 1990 eminently agrarian, the distribution of land death in 1975. The destruction caused by the dollars) to $8,500 in 15 years. Productivity was very unequal. About 1 percent of the civil war depressed the Spanish economy. Per growth averaged 6 percent. holdings occupied 50 percent of the land. capita income fell to its 1900 level and did The transformation of the Spanish econ- Educational attainment remained low, not reach its 1918 level until 1950. The pro- omy led to significant structural changes in strictly linked to circumstances of birth. portion of the active population in industry Spanish society. The combination of eco- Social mobility was almost nonexistent. declined to 22 percent in 1940 (the level in nomic growth, industrial expansion and Except for Catalonia and the Basque coun- 1920) and the share of employed in agricul- internal migration produced a substantial try, which industrialized in the nineteenth ture rose above 50 percent. Growth averaged decline in the levels of interregional century, Spain lacked a large middle class. only 1.2 percent a year in the 1940s. inequality (from a standard deviation in per Against this backdrop of relative stagna- Spain's economic recovery was ham- capita income of 0.37 in 1955 to 0.27 in tion and high inequality, democratic insti- pered, above all, by the autarkic and statist 1973). Interhousehold inequality also tutions were introduced in 1931--only the policies of the Franco regime. Inspired by declined considerably: the Gini coefficient second time in Spanish history. They did the corporatist ideologies of Italian Fascism for wages and salaries of employees (agrar- not last long. The brief democratic period and German Nazism, Franco's regime gen- ian and industrial) declined from 0.29 in (1931­36) was characterized by huge politi- eralized a system of price controls and 1964 to 0.23 in 1973; the Gini coefficient for cal instability and social agitation. The first rationing and regulated foreign trade household income fell from 0.39 in 1964 to Republican government pushed ahead with through quantitative controls. This inter- 0.36 in 1974. The income share of the three a strong reformist program: separation of ventionist strategy extended to the labor central deciles went up from about 51 per- church and state; a single system of state and housing market. To quell one of the cent to 59 percent in that decade. schools and a goal to universalize educa- main forces that opposed the military insur- Still, significant social and economic tion; a process of land reform; a law to rection, Franco outlawed any independent inequities remained. Although the illiteracy decentralize political power to Catalonia; labor unions. Instead, workers and employ- rate had fallen to 10 percent by 1970, only 6 and stepped up efforts to reform the army. ers had to affiliate in a national trade union percent of the population had completed These reforms elicited a strong reaction organization. This repressive stance was secondary studies. Wages remained damp- from the right, which came to power in "compensated" by strict labor legislation ened by repressive labor institutions. Taxa- 1933 and quickly moved to halt them. Two that made it hard for employers to dismiss tion and public spending were low, and and a half years later, in the spring of 1936, workers or to hire them through temporary redistributive social programs nonexistent. 106 WORLD DEVELOPMENT REPORT 2006 Transitioning to democracy the 1960s and 1970s. Rapid industrializa- secondary education--10 times more and building the welfare state tion and urbanization deflated past con- than in the mid-1970s. An ambitious pub- Following Franco's death in 1975, King flicts around the distribution of land. The lic investment program tripled the public Juan Carlos became the Spanish head of expansion of literacy and the increase in highway network, revamped and expanded state. He immediately launched a process of productivity and incomes generated a large metropolitan transportation, and modern- political change. Employing the legal mech- middle class. Sustained growth defused ized the railroad system. anisms put in place by the very technocratic social conflict with the credible promise of Spain's transition to democracy and the generation that had reformed the economy higher incomes and more social mobility. resulting expansion of its welfare state in the early 1960s, as well as pointing to In short, Spain had overcome the zero-sum shows how a mutually reinforcing package wide popular support for democracy, he game it had been locked in for the past cen- of policy and institutional choices leading secured the consent of the old Francoist tury and a half. to greater equity helped underpin the Cortes to establish a truly democratic par- Economic growth resulted in a different development and modernization of the liament elected through direct, competitive economic structure and better distribu- Spanish economy and its integration into elections. tional outcomes, supporting a swift and the European Union. It illustrates how The political reform was ratified with successful transition to democracy. In turn, political and economic structures shape the overwhelming popular support in a ref- the transition to democracy changed the possibilities for policy choice, a theme of erendum in December 1976. Although role and size of the public sector. chapter 6. But it also illustrates that specific conducted in a climate of uncertainty, par- Democratization reinforced social de- policy choices matter--across social sec- ticularly over the reaction of the army and mands for progressive and redistributive tors, infrastructure, the workings of mar- the extent to which terrorist violence or policies--especially for public infrastruc- kets, and international integration--and labor mobilization could disrupt the negoti- ture, and education, health, and social that there can be important complementar- ations, democratic elections were held in programs. In 1979 more than 70 percent ities for both equity and dynamic growth, June 1977. After protracted negotiations, a of Spaniards agreed with the statement notably between greater social provisioning new constitution was approved in 1978 with that "the distribution of wealth in this and greater reliance on markets. This takes the support of all parliamentary groups. To country is totally unjust." In 10 years, us to the issue of practical policy design, the reinforce the political pact in parliament, social expenditure almost doubled to central theme of part III of this report. the government also struck a wide eco- reach 80 percent of the European average. nomic and social deal with employers and Public expenditure in education steadily trade unions that same year. increased from 2 percent of GDP in 1975 Spain's democratization was rooted in to 4.5 percent in 1995. By 2001 almost 50 Sources: Synthesized from Boix (2005), with references to Gunther, Montero, and Botella (2004); North and Thomas the new economic and social conditions of percent of the population had completed (1973); and Revenga (1991). Equity, institutions, and the development process 6 Product, land, labor, and capital markets are such as Haiti or Barbados in the eighteenth crucial for the allocation of resources and century. Even though property rights in land c h a p t e r development. Market institutions, however, and people were well defined and even well exist and function in the context of a whole enforced (although subject to potential slave set of nonmarket and political institutions. rebellions), most people had no property The nature of these other institutions--and rights and were thus subject to expropriation the way they function--are influenced by by others, particularly their masters. For 95 inequalities in the political and social realm. percent of society, there were no incentives to The most obvious of these other institu- engage in socially desirable activities. A simi- tions are those that define and enforce prop- lar, although somewhat less extreme, example erty rights and contracts. People will not of inequitable institutions is South Africa invest if property rights are not well defined under apartheid. Institutions there were good and enforced, or if they believe that the con- for the whites but left 80 percent of the popu- tracts they write will not be honored or that lation without incentives or opportunities to courts of law will not be fair. The state must engage in economically productive activities. also provide a whole set of other inputs apart from social order and fair contract enforce- The distribution of power ment. These include various types of public services and regulations. Lying behind well- and institutional quality: functioning markets are legal systems, judges, circles vicious and virtuous policemen, and, ultimately, social groups and How do societies develop equitable non- politicians. market institutions? First, there must be This chapter considers the circumstances sufficient political equality--equality in and processes for creating institutions that access to the political system and in the dis- promote prosperity. These circumstances are tribution of political power, political rights, closely related to the concerns of this report. and influence. In essence, societies that create institutions to Poor institutions will emerge and persist generate sustained prosperity are equitable in in societies when power is concentrated in important ways. Because talent and ideas are the hands of a narrow group or an elite. Such widely distributed in the population, it is cru- an elite may grant property rights to itself,but cial that the property of all people is secure the property rights of most citizens will be and that there is equality before the law for unstable. There may be equality before the all, not just for some. Predetermined circum- law for a particular elite group, but not for the stances should not constrain anyone's inno- majority of people. Government policies may vation or investment opportunities. This favor such an elite, granting them rents and implies that a good institutional environment monopolies, but most people will be will not block entry into new lines of business excluded from entering profitable lines of and that the political system will provide business. The education system may invest access to services and public goods for all. heavily in the children of such elites, but most Institutions must be equitable. will be excluded. To take an extreme example, institutions Many things determine the distribution of were severely inequitable in slave societies, political power in society--the constitution, 107 108 WORLD DEVELOPMENT REPORT 2006 the nature of checks and balances, and the ous today are so because they have developed ability of different groups to solve collective more egalitarian distributions of political action problems. But economic inequality power, while poor societies often suffer from often underpins political inequality. In a soci- unbalanced distributions. We also consider ety with large inequalities of assets and how some societies made the transition from incomes, the rich will tend to have more one equilibrium to the other. influence and an advantage in adapting and Because institutions have distributional distorting institutions to their benefit. effects, conflict arises naturally. One set of Because the distribution of power, institutions will benefit some people, while through its impact on institutions, helps to another will benefit different people. Thus, determine the distribution of income, the there will be incentives for people to control possibility of vicious and virtuous circles is power to create or keep the institutions that clear. A society with greater equality of con- benefit them and to avoid or weaken the trol over assets and incomes will tend to institutions that disadvantage them. If the have a more equal distribution of political groups in conflict are defined along ascriptive power. It will therefore tend to have institu- lines, such as ethnicity, then this may induce a tions that generate equality of opportunity more severe form of conflict than when for the broad mass of citizens. This will tend groups are defined along other lines, or when to spread rewards and incomes widely, there are cross-cutting cleavages. More polar- thereby reinforcing the initial distribution of ized conflict seems to be an independent incomes. In contrast, a society with greater force leading to bad institutions that can help inequality of assets and incomes will tend to to explain the relatively weak performance in have a less egalitarian distribution of power some societies (discussed below in a compar- and worse institutions, which tend to repro- ison between Guyana and Mauritius). duce the initial conditions. Political equality also matters for the qual- The evidence in this chapter suggests that ity of public policy. The basic role of the state the first type of society will tend to be more is to provide public services. But politicians prosperous. We argue that societies prosper- have the correct incentives to provide public services only when they have to appeal to the broad mass of citizens to attain power. If they can win power with a small number of Figure 6.1 Countries with more secure property rights have higher average incomes key supporters, or with few votes, they will GDP per capita, PPP in 1995 (log) tend to be clientelistic and more inclined to 11 buy votes or make individual exchanges of LUX patronage for support without providing the USA KWT JPN DNK CAN CHE AUS 10 QAT SGPSWEBELNOR ITA FRA ISLNLD AUT FIN GBR goods and services critical to raising the mass OMN BHS IRL ESP NZL ISR MLT SAUGRCBHR KORCZE PR T of people out of poverty. ARG URY TTO GAB MYS HUN 9 ZAF RUS Some simple patterns in the cross-country VEN MEXPOLCHL PRY TURTHA BWABRA BGR IRN PAN TUN CRI COL SLV DZA data show that more egalitarian distributions PER ROM JAM GTM SYR DOM ECU EGY PHL JOR MAR IDN 8 BOL GUYLKA ZWE GIN PNG CHN HND of political power and income are associated COG PAK CMR CIV IND NICAGO SEN HTI VNM STP with sustained and enduring prosperity. Fig- SDN MNG BGD KEN GHA 7 GMB BFA SLE YEM ZMB TGO ure 6.1 indicated that more secure property MLI MDG NER UGA NGA MOZ MWI GNB ETH ETH TZA rights are associated with higher incomes. 6 ZAR Crucially, however, better institutions and 5 secure property rights are associated with 3 4 5 6 7 8 9 10 greater political equality. Average protection against risk of Although there is no perfect way of expropriation, 1985­95 measuring political equality, protection Sources: Political Risk Services, International Country Risk Guide (ICRG) and World Bank database. against expropriation risk is highly corre- Note: The figure shows the relationship between GDP per capita in 1995 and a measure of the security of property rights, "protection against expropriation risk," averaged over the period 1985 to 1995. The data on institutions come lated with measures of democracy and from Political Risk Services, a private company that assesses the risk that investments will be expropriated in different countries. These data, first used by Knack and Keefer (1995) and subsequently by Hall and Jones (1999) and Acemoglu, measures of "constraints on the executive" Johnson, and Robinson (2001, 2002a, 2004), are imperfect as a measure of the relevant institutions because they pertain from the Polity IV database. This second to investments by foreigners only. Even so, they seem in practice to capture how stable property rights are in general. The findings are robust to using other available measures of related institutions. variable is designed to capture the extent to Equity, institutions, and the development process 109 which those who control political power are constrained or checked by others. The types B O X 6 . 1 Banking in the nineteenth century, of checks and balances and separation of Mexico and the United States powers written into the U.S. Constitution are classic examples of such constraints. Much recent work on growth and develop- had done so.The broadening of the suffrage, how- ment has focused on financial and capital ever, served to undermine the political coalitions There is a negative correlation between con- that supported restrictions on the number of bank markets. A central issue is to understand charters.That is, it created a second source of polit- straints on the executive and the Gini coeffi- why financial systems differ. For example, ical competition--competition within states over cient of income distribution. studies of the development of banking in who would hold office and the policies they would enact (10). The simple correlations suggest comple- the United States in the nineteenth century demonstrate a rapid expansion of financial mentarities between a relatively egalitarian The situation was very different in Mex- intermediation, which most scholars see as distribution of political power, good institu- ico. After 50 years of endemic political insta- a crucial facilitator of the economy's rapid bility, the country became unified under the tions, and prosperity, and a relatively egali- growth and industrialization. Haber (2001) highly centralized 40-year dictatorship of investigated the development of banks in tarian distribution of economic resources. Porfirio Díaz until the revolution in 1910. the nineteenth century in Mexico and the The correlations are consistent with many In Haber's argument, political United States. He shows that"Mexico had a institutions in the United States allocated different causal stories, but recent research series of segmented monopolies that were political power to people who wanted suggests that one can tell a causal story awarded to a group of insiders"(24). In 1910 access to credit and loans. As a result, they "the United States had roughly 25,000 about this data along exactly the lines we are forced state governments to allow free banks and a highly competitive market suggesting, which the rest of this chapter competitive entry into banking. In Mexico, structure; Mexico had 42 banks, two of political institutions were very different. discusses. The different evolutions of bank- which controlled 60 percent of total bank- There were no competing federal states, ing systems in Mexico and the United States ing assets, and virtually none of which actu- and suffrage was highly restrictive. As a ally competed with another bank." in the nineteenth century provide a good result, the central government granted Why this huge difference? The relevant example of the sort of historic argument we monopoly rights to banks, which restricted technology was certainly widely available, credit to maximize profits.The granting of rely on (box 6.1). and it is difficult to see why the various monopolies turned out to be a rational way types of moral hazard or adverse selection for the government to raise revenue and connected with financial intermediation redistribute rents to political supporters Institutions and political should have limited the expansion of banks (North 1981). in Mexico but not the United States. Indeed, inequality matter for Haber (2001) documents that market Haber shows when the U.S. Constitution regulation was not aimed at solving market development: historical evidence was put into effect in 1789, the structure of failures, and it is precisely during this period U.S. banking looked remarkably like that Figure 6.1 showed the relationship between that the huge economic gap between the arising later in Mexico. State governments, security of property and prosperity for the United States and Mexico opened (on stripped of revenues by the Constitution, which see Coatsworth 1993, Engerman and whole world, but to interpret this causally we started banks as a way to generate tax rev- Sokoloff 1997). Haber and Maurer 2004 enues and restricted entry to generate need to find a source of variation in institu- examined in detail how the structure of rents.Yet this system did not last because tions. Doing this is not easy, but Acemoglu, banking influenced the Mexican textile states began competing among themselves industry between 1880 and 1913.They Johnson, and Robinson (2001) provide a for investment and migrants. As Haber show that only firms with personal contacts partial answer. They show that the same (2001) puts it, with banks were able to get loans and that basic pattern holds for a smaller sample of The pressure to hold population and business in such firms were less efficient. Even though the state was reinforced by a second, related, fac- countries--those colonized by Europeans economic efficiency was hurt by tor: the broadening of the suffrage. By the 1840s, regulations, those with political power were after 1492. Indeed, colonization of much of most states had dropped all property and literacy requirements, and by 1850 virtually all states . . . able to sustain them. the world by Europeans provides something of a large natural experiment. Beginning in the early fifteenth century and massively intensifying after 1492, Euro- tions in development. It also provides fairly peans conquered many other nations. Colo- clear-cut evidence to support our conjectures nization transformed the institutions in about the joint evolution of prosperity and many diverse lands conquered or controlled political and economic equality. by Europeans. Most important, Europeans created very different sets of institutions in Colonial origins of contemporary different parts of their global empire, as institutions exemplified most sharply by the contrast Acemoglu, Johnson, and Robinson, building between the institutions in the northeast of on the research of Engerman and Sokoloff America and those in the plantation societies (1997), explain that Europeans created good of the Caribbean. This experience persua- institutions in some colonies, particularly the sively establishes the central role of institu- United States, Canada, and Australasia (what 110 WORLD DEVELOPMENT REPORT 2006 Crosby (1986) calls the neo-Europes),and bad ment, and the factor endowments that influ- ones in others (particularly in Latin America enced economic organization.1 There is a and Sub-Saharan Africa). These institutions strong inverse relationship between popula- had a strong tendency to persist and thus, tion density in 1500 and current protection today, generate the results seen in figure 6.1. against expropriation risk for former Euro- Why did different institutions develop in pean colonies (figure 6.2).And colonies with different European colonies? The simplest disease environments that were worse for answer is that Europeans shaped the institu- European settlers also have worse institu- tions in various colonies to benefit themselves. tions today (figure 6.3). And because conditions and endowments dif- Other aspects of factor endowments are fered among colonies, Europeans con- more difficult to measure directly, but Enger- sciously created different institutions. There man and Sokoloff (1997) point out that are several important empirical regularities where the climate and soils were suitable for connecting initial conditions to current out- crops such as sugarcane--which could be comes. Of particular importance are initial grown on large plantations with slave labor, population density, the disease environ- such as northeastern Brazil--much worse institutions and more skewed distributions of political power evolved than in climates Figure 6.2 Low population density in 1500 is associated with a lower risk of expropriation today where wheat or other nonplantation crops Average protection against risk of expropriation, 1985­95 could be grown. 10 USA Why did Europeans introduce better CAN NZL AUS SGP institutions in previously relatively unset- 9 tled and healthy areas than in previously GMB IND 8 BRA MYS densely settled and unhealthy areas? How GAB BWA CHL BHS MEX IDN did factor endowments influence institu- COL TTO VEN PNG JAM MLT 7 URA MAR PR Y tions? Europeans were more likely to intro- CRI CIV ZAF MWI TZA TGO EGY ZMB MOZ ECU GIN DZA ARG CMR TUN DOM GHA VNM duce or maintain bad institutions where 6 ZWE KEN SEN LKA PPAK GUY PAN SLE MMR BOL PER AGO PHL NGA there were a lot of resources and rents to NIC HND LBY 5 GTM BGD NER SLV extract--gold, silver, and, most important, COG GNB MDG UGA BFA people to provide the labor. In places with a 4 MLI SDN HTI large indigenous population, Europeans ZAR 3 SOM could exploit the population through taxes, ­4 ­3 ­2 ­1 0 1 2 3 4 5 tributes, or employment as forced labor in Population density in 1500 (log) mines or plantations. And where plantation Source: Political Risk Services, International Country Risk Guide (ICRG) and Acemoglu, Johnson, and Robinson (2002). crops could be profitably grown, slave- based societies emerged. These types of Figure 6.3 Worse environments for European settlers are associated with worse institutions today colonization were incompatible with insti- tutions providing economic or civil rights or Average protection against risk of expropriation, 1985­95 equality of opportunity to the majority of 10 USA the population. So, a more developed civi- NZL CAN AUS SGP 9 lization with a denser population structure, IND GMB and particular climatic and agricultural con- 8 MYS BRA CHL GAB MEXBHS ditions, made it more profitable for the IDN Europeans to introduce bad institutions. MLT COL VENTTO PNG MAR JAM CIV 7 URY CRI ZAF EGY PRY TGO ECU TZA GIN DZA VNM In contrast, in places with little to extract, TUN CMR ARG DOM GHA PAK LKA SEN 6 GUY PER KEN where plantation agriculture was not prof- PAN SLE MMR BOL NGA itable, and in sparsely settled places where HND AGO GTM BGD NIC 5 SLV NER COG GNB BFA the Europeans became the majority of the MDG UGA 4 SDN population, it was in their interests to intro- HTI MLI ZAR duce much better institutions. In addition, 3 2 3 4 5 6 7 8 the disease environments differed markedly Settler mortality (log) among the colonies, with obvious conse- Source: Political Risk Services, International Country Risk Guide (ICRG) and Acemoglu, Johnson, and Robinson (2002). quences for the attractiveness of European Equity, institutions, and the development process 111 settlement. When Europeans settled, they Figure 6.4 A worse environment for settlers is associated with fewer constraints on the established institutions under which they executive at independence themselves had to live. Constraint on the executive at independence This research suggests that most of the 1.0 AUS USA CAN MUS IND BOLURY PNG NZL ECU CRITTO ZAF CHL JAM gap in per capita income between rich and COL PAK PRY poor countries today is due to differences in FJI NIC BRA MDG 0.8 VEN PAN institutions. More precisely, if one takes two ARG DOM HND typical countries--in the sense that they LKA SLV BEN BGD MLI 0.6 HTI MYS both lie on the regression line--with high MEX NER GUY GTM and low expropriation risk, such as Nigeria CAF PER and Chile, almost the entire difference in 0.4 GNB COG TUN VNM MRT GHA SGP MMR EGY KENSEN AGO GMB income per capita between them can be MAR LAO TZA IDN CIV DZA UGA GIN explained by the differences in the histori- 0.2 DJI CMR SLE BDI BFA TGO cally shaped measure of the security of TCD RWA NGA AFG property rights.2 The research also pre- 0.0 SDN ZAR sented regression evidence showing that 2 3 4 5 6 7 8 Settler mortality (log) once the effect of institutions on GDP per Source: Acemoglu, Johnson, and Robinson (2002a). The analysis indicates that that the same factors that gave rise to capita is properly controlled for, geographic good institutions gave rise to a more egalitarian distribution of power. Without some measure of voice, it is impossible variables--such as latitude, whether or not for a person's property rights to be guaranteed or for them to have real access to the legal system to make sure that contracts are honored. A more egalitarian distribution of political power is also associated with a more egalitarian dis- a country is landlocked, the current disease tribution of economic resources. To get a better understanding of the mechanisms, we need to look further into histori- environment--have no explanatory power cal analysis. for current prosperity. Different types of societies thus devel- ish conquistadors the right to Amerindian oped in different colonies with radically labor),3 the mita (a system of forced labor different implications for subsequent devel- used in the mines), and the repartimiento (the opment. Crucially, the societies that emerged forced sale of goods to Indians, typically at in the neo-Europes had distributions of eco- highly inflated prices). Pizzaro created 480 nomic resources and political power that encomenderos, under whose care the entire were much broader. And they placed con- Indian population was placed. In other straints on the exercise of political power colonies the situation was similar. For and the ability of elites to adopt policies instance, in the territory of modern Colom- favorable to themselves but deleterious for bia, there were about 900 encomenderos.4 society (figure 6.4). The encomienda did not last for long in all parts of the empire because the Spanish Development and inequality Crown attempted to curtail it by the end of in the Americas: A case study the sixteenth century. But the mita (from in colonial origins the Quechua word mit'a, meaning "turn") The colonization of Latin America began became a central institution until inde- with the discovery of the"Indies"by Colum- pendence, and forced labor lasted far bus in 1492, the assault on Mexico by Cortés beyond this in most of Latin America (until after 1519, and the conquest of Peru by Piz- 1945 in Guatemala). The effects of the zaro after 1532. From the beginning, the encomienda also persisted because the con- Spanish were interested in the extraction of centration of political power that it was gold and silver, and later in taking tribute associated with led to the emergence of and raising taxes. The colonial societies that large landed estates.5 The feasibility and emerged were authoritarian, based on the attraction of this type of economic system political power of a small Spanish elite who was determined by the higher population created a set of institutions to extract wealth densities of indigenous people in many from the indigenous population. parts of the Spanish empire and the extent After Pizzaro conquered Peru, he imposed to which such societies had already devel- institutions to extract rents from the newly oped into "complex societies."6 conquered Indians. The main such institu- Other institutions were designed to rein- tions were the encomienda (which gave Span- force this system. For instance, indigenous 112 WORLD DEVELOPMENT REPORT 2006 people were not allowed to give testimony Historical accounts show that initial con- in some cases, and in others the testimony ditions had a large impact on the institutions of 10 indigenous people was equal to that of that the settlers built. Because there was low 1 Spaniard.7 Although indigenous people population density and no way to extract did use the legal system to challenge aspects resources from indigenous peoples, early of colonial rule, they could not alter the commercial developments had to import main parameters of the system. In addition, British labor. And, relative to much of the the Spanish Crown created a complex web colonial world, the disease environment was of mercantilistic policies and monopolies benign, stimulating settlement. Indeed, the from salt to gunpowder, from tobacco to Pilgrim fathers decided to migrate to the alcohol and playing cards, to raise revenues United States rather than Guyana because of for the state. the high mortality rates in Guyana.10 But Spanish colonies that had small popula- these same conditions made it impossible to tions of Amerindians, such as Costa Rica, profitably exploit labor, whose bargaining Argentina, or Uruguay, seem to have fol- power forced elites to extend political rights lowed different paths of institutional devel- and create equal access to land and the law. opment. The sharp contrasts along many These forces were reinforced by the fact that institutional dimensions between Costa plantation agriculture and slavery were not Rica and Guatemala (where population profitable, at least in the northern United density was greater) have been much stud- States and Canada. ied. Although the formal political institu- These colonies ultimately provided ac- tions of the Spanish empire were the same cess to land to a broad cross-section of soci- everywhere, the way they functioned ety and the legal system became fairly depended on the local conditions.8 impartial, ensuring secure property rights The institutions that emerged in the for smallholders and potential investors. main Spanish colonies greatly benefited the The new institutions made investment pos- Spanish crown and the Spanish settler elite, sible through financial development and but they did not promote prosperity in secure contracting and business relation- Latin America. Most of the population had ships. Underpinning these institutions were no property rights, nor incentives to enter fairly representative political institutions socially desirable occupations or to invest. and a fairly egalitarian distribution of Europeans developed coercive regimes resources. As in Latin America, there was a monopolizing military and political power synergy between economic and political and respecting few constraints on their institutions, but this time it was virtuous, power (unless imposed by the mother not vicious. Institutions giving and protect- country in Europe).9 ing property rights for the mass of people In North America, the initial attempts at and institutions of democratic politics colonization were also based on economic complemented each other, ensuring an motives. British colonies were founded by environment conducive to investment and such entities as the Virginia Company and economic progress. the Providence Island Company with the aim Representative political institutions in of profits. The model was not so different Virginia were a direct result of the authori- from that of the Spanish or Portuguese (a sys- ties realizing that, because of the different tem that other British colonizing entities, conditions, the colonization strategy that such as the East India Company, used to great worked in Peru would not work in the effect). Yet these companies made no money. United States. Virginia had many competing Indeed, both the Virginia Company and the and fragmented tribes, not a large central Providence Island Company went bankrupt. tribal empire. It had no gold or silver, and Because of the absence of a large indigenous the Indians, not used to paying tribute or population and complex societies, a colonial engaging in forced labor, would not work. model involving the exploitation of indige- So, the settlers of Jamestown starved.11 In nous labor and tribute systems was simply response to these early failures, the Virginia not feasible in these places. Company tried various incentive schemes, Equity, institutions, and the development process 113 B O X 6 . 2 Growth with poor institutions does not last The elite had good investment opportunities in ate institutions to take advantage of the huge suffrage"(21). From this point onward political Argentina in the golden age from the 1870s to economic opportunities emerging on world conflicts intensified, with a stream of coups and the 1920s, in Czarist Russia in the decades lead- markets, but the structure of the political rules, redemocratizations that lasted until 1983. ing up to World War I, in Colombia in the half such as their overrepresentation in national Though among the richest countries in the century after 1900, and in the Côte d'Ivoire for political institutions, guaranteed the interior world in the 1920s, Argentina gradually slid back the first two decades after independence (Wid- provinces a large slice of the benefits (Samuels to being a developing country. ner 1993). Such situations are rarely sustainable, and Snyder 2001). Argentina shows that, even with poor insti- for three reasons. First, the possibilities for sus- Although the majority was excluded from tutions for political inclusion and conflict man- tained growth are, by definition, limited because the political system, the economy boomed with agement, growth is possible if elites have good institutions exclude the majority of the popula- the property rights of the Pampean elite guar- investment opportunities and can manage to tion from effectively investing. Second, in the anteed. But the huge rents created by this sys- forge compromises. But the booms eventually rare situations in which elites manage to create tem began to cause conflict. In the 1890s, the unravel. Even when elites, such as the agricul- arrangements so that they can benefit directly Radical Party emerged under Hipólito Yrigoyen, turalists of the Argentine Pampas, face very from growth without the need to create good and after a series of revolts it was incorporated good investment opportunities, growth cannot institutions more generally, such arrangements into the political system by the democratizing be sustained forever by agricultural export tend to be fragile, vulnerable to shocks or crises. impact of the Sáenz Peña Law in 1912. booms. Moreover, the rents created by bad Third, bad institutions create power struggles Although Yrigoyen was elected president in institutions create conflict without fundamen- that undermine growth, because they generate 1916, the traditional interests were confident tal balances of power in society.This meant that large rents for those who control power. that they could keep control of the polity and democracy in Argentina after 1912 was unsta- Consider the growth of Argentina in the half the economy.They were mistaken. Significant ble.The unchecked power of President century before 1930. After its independence changes in the social structure had occurred, Yrigoyen in the 1920s induced a coup in 1930, from Spain in 1816, Argentina plunged into 50 with rapid immigration from Europe, induced by as did that of Perón in the 1940s and in 1955 years of civil wars and conflicts over control of economic success, and the associated urbaniza- and again in 1976 after his return from exile. the country, mainly clashes between those in tion.The vote share of the Conservatives Although temporary political solutions can control of Buenos Aires and the littoral and declined rapidly and the prospect of a Radical sometimes ease conflict for a while, as they did those in the interior.These conflicts abated after Party majority was a key factor behind the coup in Argentina after 1853, in the absence of the 1853 constitution and the presidency of Bar- of 1930. Smith (1978) notes"this situation con- broader institutional inclusion, conflict tolomé Mitre with a compromise between the trasts sharply with that in Sweden and Great ultimately reemerges, undermining the incen- Pampas and the interior. Pampean mercantile Britain . . . where traditional elites continued to tives to investment. and agrarian interests would be allowed to cre- dominate systems after the extension of including a highly punitive, almost penal, Institutions and political effort to make money. Such efforts quickly inequality matter collapsed, however, and by 1619 the Com- for development: pany had created an unusually representa- tive set of institutions for that era: a general contemporary evidence assembly with adult male suffrage. Our review of comparative history supports The early history of the United States two conclusions. First, institutions, espe- shows a possible path to good institutions. cially those that underpin property rights Early attempts to create an oligarchic soci- for all and broad-based investment, have a ety with close control of labor quickly causative influence on long-run develop- collapsed. What emerged instead was a ment processes. And second, greater polit- relatively egalitarian society, with represen- ical equality can lay the basis for better tative institutions giving even the poorest economic institutions. By greater political colonists access to the law and some politi- equality, we mean, in particular, checks on cal representation. This laid the basis for the predatory behavior of political and eco- economic and social institutions that nomic elites, and the political need for the underpinned the takeoff of the United state to be responsive to middle and poorer States in the nineteenth century and its population groups. The basis for greater divergence from the fortunes of much of political equalities is often associated with Latin America. Some countries with weak underlying economic structures, although and unequal institutions have experienced causation can run both ways. periods of rapid growth, but these have How does this perspective relate to the proved to be unsustainable over the long variety of contemporary development expe- term (box 6.2). riences? It is consistent with the perspective 114 WORLD DEVELOPMENT REPORT 2006 that institutions and governance are central anything more than a transitory solution, as to a wide variety of development perform- may have been the case in Indonesia under ance, from growth to service delivery.12 the New Order. While debate continues, an important thrust The rapid economic development of the of this research has been to support the view Republic of Korea after the mid-1960s was that causation runs, at least in part, from bet- not due to a set of institutions put in place ter institutions to higher incomes, rather through a domestic balance of political than the other way.13 What is additional to power. Instead, as in Indonesia under the this (ongoing) debate is the second part of New Order regime, a precarious geopolitical the argument--that the nature and manage- situation, particularly after the rundown of ment of inequalities in power shapes the for- U.S. aid in the early 1960s, induced the Park mation of institutions. Some cross-country regime to create a pro-growth environ- analysis is suggestive: Rodrik (1999a) argues ment.14 This at least led to a contingent com- that the capacity of societies to manage mitment to good institutions, as it did under adverse shocks--itself a crucial determinant an authoritarian regime in Taiwan, China, of growth--depends on the depth of latent where a fairly egalitarian distribution of social conflict and the strength of conflict assets and incomes, perhaps eased the transi- management mechanisms. tion in the 1990s toward democracy, a To illustrate the argument, we continue greater equality of political influence, and to draw on comparative development expe- good institutions. As in much of East Asia, riences. We first look at East Asia, and then there was a political necessity to deliver look at agricultural pricing polices in income growth and services to the peasantry. Africa. We then examine in greater depth In Indonesia, Suharto's New Order gov- the comparative experience of Mauritius ernment also recognized that economic and Guyana, countries that started with growth was necessary to keep the regime in similar initial conditions, but then followed power and that, to achieve this, good eco- radically different development paths. This nomic policies had to be in place. This is also related to different experiences in induced Suharto to delegate macroeconomic managing polarization, which can be con- policy to technocrats and to respond to the tributory factors for violent social conflict. oil booms wisely. It also led him to intervene to attempt to control corruption and excesses Shared growth in East Asia: that would put in jeopardy the underpin- the Republic of Korea, Taiwan nings of the regime.15 (China), and Indonesia Yet this constraint, real though it was, at Elites may be forced by threats of social disor- least in the 1960s and 1970s, is only part of der to promote the prosperity of most citi- the story about Indonesian growth. Suharto zens. Indeed, societies that have a political managed to create a system that, while not necessity to appeal to or appease middle and introducing good institutions, induced lower groups (initially the peasantry) can investments and growth from which the grow substantially in the short run. Long- regime could benefit. One of the secrets run prosperity, however, requires institution- behind this appears to have been the role of alized, rather than contingent checks and Sino-Indonesian businessmen, the cukong balances on elite power and capacities to entrepreneurs. Many firms and businesses adjust to changing circumstances. The were controlled by Indonesians of Chinese response of elites to social disturbances origin who were very marginal politically. sometimes leads to solutions that perma- Suharto granted such businessmen mono- nently change the political equilibrium in a poly rights and placed members of the mil- beneficial way, as may have happened with itary and his supporters on their boards of the agrarian reforms in the Republic of directors.16 Rock (2003) argues, "There is Korea and Taiwan, China, in the late 1940s little doubt that the . . . distortions in New and early 1950s. More often, however, the Order microeconomic policies thwarted transitory ability of citizens to act collectively competition, rewarded cronies, and en- dissipates without elites having to propose couraged substantial investment in uneco- Equity, institutions, and the development process 115 nomic projects" (10). Yet they also gener- through co-optation or repression, poses a ated wealth, economic growth, and rents serious challenge to their interests . . . Their for the regime. It was precisely the political response has been to try to appease urban marginality of the cukong entrepreneurs interests not by offering higher money wages that made them an attractive business part- but by advocating policies aimed at reducing the cost of living, and in particular the cost of ner for the regime. food. Agricultural policy thus becomes a by- The economic success of Indonesia after product of political relations between gov- 1966 elevated it into the class of an Asian ernments and urban constituents (33). "miracle economy."17 The East Asia financial crisis in 1997, however, exposed and exacer- In contrast to the situation in Ghana, bated Indonesia's institutional weaknesses, Nigeria, and Zambia, Bates (1981), Bates plummeting the country into an economic (1989) showed that agricultural policy in and political crisis from which it is only now Kenya over this period was much more pro- beginning to recover, doing so on the basis of farmer. The difference was due to who con- a new foundation of decentralization and trolled the marketing board. In Kenya, farm- democracy, which have progressively institu- ers were not smallholders, as they were in tionalized greater relationships of accounta- Ghana, Nigeria, and Zambia, and concen- bility between citizens and state. (See focus 4 trated landownership made it much easier on Indonesia for a further discussion of the to act collectively. Moreover, farming was relationship between social and political con- important in the Kikuyu areas, an ethnic text and policy choices.) group closely related to the ruling political party, the Kenya African National Union Agricultural pricing policies (KANU), under Jomo Kenyatta.19 Farmers in Africa in Kenya therefore formed a powerful lobby and were able to guarantee themselves high Another important example illustrating the prices. Even though the government of connections between institutions, the dis- Kenya engaged in land reform after inde- tribution of political power and growth pendence, Bates (1981) argued that-- comes from the seminal studies of price regulation prices in agricultural markets in 80 percent of the former white highlands were Africa by Robert Bates.18 Bates (1981) left intact and . . . the government took elabo- demonstrated that poor agricultural per- rate measures to preserve the integrity of the formance in Ghana, Nigeria, and Zambia large-scale farms . . . [which] readily combine in defense of their interests. One of the most was due to government-controlled market- important collective efforts is the Kenya ing boards systematically paying farmers National Farmer's Union (KNFU) . . . The prices much below world levels. The mar- organization . . . is dominated by the large- keting board surpluses were given to the scale farmers . . . [but] it can be argued that government as a form of taxation. As a the KNFU helps to create a framework of result of this pernicious taxation, reaching public policies that provides an economic up to 70 percent of the value of the crop in environment favorable to all farmers (93­4). Ghana in the 1970s, investment in agricul- Bates concluded that in Kenya "large farm- ture collapsed, as did the output of cocoa ers . . . have secured public policies that are and other crops. In poor countries with a highly favorable by comparison to those in comparative advantage in agriculture, this other nations" (95). meant negative rates of economic growth. Bates demonstrated why economic poli- Why were resources extracted in this way? cies were better in Kenya than Ghana in the Although part of the motivation was to pro- 1960s and 1970s, but this advantage did not mote industrialization, the main one was to survive the coming to power of Daniel arap generate resources that could be either expro- Moi in Kenya.20 The change in the ethnic priated or redistributed to maintain power. basis of the regime, from Kikuyu to Kalenjin, As Bates (1981) put it, undermined the coalition that had sup- governments face a dilemma: urban unrest, ported good agricultural policies, because which they cannot successfully eradicate the export farmers were not only large, but 116 WORLD DEVELOPMENT REPORT 2006 Figure 6.5 Constraints on the executive also predominantly Kikuyu. As a result, eco- tion in which parties led by Indo-Mauritians are greater in Mauritius than in Guyana nomic performance declined precipitously and Indo-Guyanese faced a coalition of par- Constraint on the executive in the 1980s and 1990s. The balance of ties supported by the non-Indian population, 1.0 power that sustained good policies in the led by Gaetan Duval in Mauritius and Forbes Mauritius 1970s did not endure. Burnham in Guyana. Yet, at independence, 0.8 politics and economics diverged. 0.6 The contrasting experience The Mauritian Labour Party won power Guyana of Mauritius and Guyana 0.4 initially and quickly abandoned its radical Mauritius and Guyana, in the 1960s, were policies--by the early 1970s, investment in 0.2 both poor societies dominated by the pro- the export processing zone had begun. The 0.0 duction and export of sugarcane. They had political hegemony of the Labour Party was 1970 1980 1990 2000 similar histories, factor endowments, social quickly contested by a strong socialist party, Source: Polity IV data set, downloaded from Inter- and political cleavages, and institutions. If the MMM (Mouvement Militant Mauricien) University Consortium for Political and Social Research. Variable described in Gurr (1997). anything, Guyana, although slightly poorer, led by Paul Berenger and Dev Virahsawmy. In had better prospects, because of its proxim- response, the Labour Party entered a coali- ity to the large U.S. market. Yet Mauritius tion with Duval and his PMSD (Parti Figure 6.6 GDP per capita is rising in Mauritius, not in Guyana has become one of the most dynamic and Mauricien Social Democrate) and the previ- successful (and equal) developing countries, ous opposition groups. The Labour Party GDP per capita (log) industrializing and maintaining competitive drew back from repressing the new political 9.5 democratic politics. Guyana slumped into forces, allowed the MMM to contest the 1976 Mauritius 9.0 dictatorship and poverty. election, and instead adopted social policies, The divergence between Mauritius and such as the provision of universal secondary 8.5 Guyana since independence is a fascinating education, to improve its popularity. It also Guyana example of economic and political diver- quickly dropped populist macroeconomic 8.0 gence in apparently similar societies (fig- policies and, in the late 1970s, implemented a 7.5 ures 6.5 and 6.6). serious stabilization program under the IMF. 1970 1980 1990 2000 What can explain this? Both countries The final test of Mauritian institutions was Source: World Bank (2005g). have similar histories. Mauritius was taken the election of an MMM government for the from the French and Guyana from the Dutch first time in 1982. Once in power, the MMM during the Napoleonic wars.21 In the nine- abandoned its more radical policies, and teenth century both developed sugarcane when the broad political consensus for good economies and, after the abolition of slavery institutions became clear, the export process- in the British Empire in 1834, imported large ing zone boomed. numbers of indentured laborers from India. The contrast with Guyana is stark. The Both have a similar population structure, first election on the eve of independence was with Indo-Guyanese and Indo-Mauritians won by Burnham and his People's National forming the majority of the population with Party in a coalition against Jagan's People's significant minorities of people of African, Progressive Party. Burnham maintained European, and Chinese descent. power by increasingly fraudulent means, After World War II, both colonies were finally changing the constitution in 1980 to moved by the British toward independence make himself executive president. He assassi- with early elections for democratic legislative nated opponents, most famously the radical assemblies dominated by pro-independence economist and political activist Walter Rod- political parties led by Seewoosagur Ram- ney in 1980. The economic policies of Burn- goolam in Mauritius and Cheddi Jagan in ham's regime were a disaster. He expropriated Guyana. Both groups used extensive socialist the sugar plantations, creating highly ineffi- rhetoric and proposed land reforms and cient state industries, and he aggressively fairly radical policies. Many of the political promoted his party members through struggles with British administrators over patronage, particularly in the civil service. The postindependence institutions, such as the implied or actual threat to property and per- form of the electoral system, were fought over son led to a huge diaspora of Indo-Guyanese similar issues. As independence arrived how- from the country, including most of the pro- ever, political forces re-formed into a situa- fessional and middle-class people. Only in the Equity, institutions, and the development process 117 1990s did a democratized Guyana begin to tee British companies. The authoritarian slowly recover from this legacy. But the ethnic tendencies of the colonial state were rein- divide endures, and the country continues to forced by British military intervention, pro- suffer from weak governance, a lack of politi- moted in 1953 by the United States, to cal transparency, and ethnic tensions that remove Jagan from power because of his hamper economic and social development. socialist tendencies. Guyanese politicians, What can explain such divergent outcomes unlike those in Mauritius, had far less abil- in such apparently similar circumstances? In ity to get what they wanted from the colo- Guyana, there were fewer constraints on the nial state. This meant that there were fewer use of power, and political conflict was indigenous checks on the exercise of power, more polarized, defined solely along ethnic and unfettered use of political power was lines. And although both countries started the norm. The best example here is the elec- independence as democracies, what the toral system. Britain imposed a propor- majority could do (or wanted to do) to the tional representation system on Guyana minority was limited in Mauritius, but not because it was afraid that the overrepresen- in Guyana. tation of large parties inherent in majoritar- In Mauritius, the British colonial state ian systems would allow Jagan to win an faced a powerful and homogeneous French absolute majority in the 1964 election (the planter class that did not leave the island People's Progressive Party won 42.6 percent after Mauritius was annexed to Britain in of the vote in the 1961 election). This sys- 1812. In the 1870s, when Britain was tem facilitated Burnham's rise to power. reducing the autonomy of colonial admin- Although the British tried to do the same istrations, it was forced to create a legisla- thing in Mauritius, political elites there held tive assembly. Although this was initially out and forced a compromise: a system with dominated by the planters, by the turn of relatively large electoral districts with the the twentieth century the first Indo-Mau- three politicians who got the most votes ritians were elected. This was a clear sign being elected and with the eight best"losers" that the greater political autonomy of the from the entire country being elected to par- island was allowing for a more open soci- liament. This system maintained elements ety with greater upward mobility of for- of the majoritarian institutions that Maurit- mer indentured laborers. The power of the ian leaders believed were essential to main- colonial state was checked, evident in the taining the country's governability. Politics fact that Mauritian independence leaders in Guyana became completely defined along were able in the 1960s to negotiate postin- ethnic lines. This occurred because the pre- dependence institutions closer to the ones vious evolution of the economy, and the they wanted. dominant power of colonial interests, left This juxtaposition of different local little room for the varied interests that interests and the weakening of the legacy of emerged in Mauritius. While Guyana has the colonial state gave rise to a more bal- not suffered outright social conflict, high anced distribution of political power in levels of polarization and weak conflict Mauritius. And from this situation more management institutions can be contribu- fluid interests emerged. Though ethnic tory factors to civil wars (box 6.3). identities were certainly important in poli- tics, so were different cleavages, as is clear Implications from the development of the MMM into a In Mauritius, property rights are secure and powerful political force and the coalition of the country has experienced open demo- Ramgoolam and Duval in the 1970s. Poli- cratic politics. There has been intensive tics became much less polarized than they investment in education and free access into might have been. profitable investment opportunities, illus- In Guyana, there was no indigenous trated most clearly by the export processing planter class to check the power of the colo- zone. In Guyana, the opposite was true in the nial state. After the departure of the Dutch, 1970s and 1980s. The puzzle is why institu- the plantations came to be owned by absen- tions have been so good in one case and so 118 WORLD DEVELOPMENT REPORT 2006 rural social disorder. The spillover from the B O X 6 . 3 Polarization, conflict, and growth conflicts of 1965 and 1966 was a redistribu- tion of power toward the rural sector, with Researchers have long recognized that sity and conflict, and through this channel, sustained, inclusive growth necessary for deep social divisions make it harder to economic growth (Esteban and Ray 1994). implement policies that benefit all. Getting By this measure, a country with three the political survival of the regime. a more precise measure of the nature and groups that comprise, respectively, 49 per- Yet the redistribution of power in extent of such divisions, however, has cent, 49 percent and 2 percent of the popu- Indonesia was not institutionalized, unlike proved problematic. For much of the lation will be more polarized than a coun- what occurred in the Republic of Korea, for 1990s, scholars used a measure known as terpart country where those same groups "ethno-linguistic fractionalization"--first comprise 33 percent, 33 percent, and 34 example. Moreover, it did not force the New compiled by Russian social scientists in the percent of the population.The polarization Order Regime to improve institutions out- 1960s--to show that economic growth measure is a far more robust predictor of side the rural and education sectors, was slower, controlling for other factors, in civil conflict than either measures of the societies where there was a low probability inequality of individual incomes or although the connection between promot- that two citizens drawn randomly from a fragmentation.This statistical association is ing economic development and social order population group were of the same ethnic illustrated by the fact that, by this measure, may well have helped the government to group. Africa's "growth tragedy"was, in 9 of the 10 most polarized societies in the sustain its relationship with the cukong part, blamed on its high level of "fractional- world have experienced major civil conflict ization"(Easterly and Levine 1997). in the past few decades, including Eritrea, entrepreneurs. As the constraints on eco- More recent work has sought to refine Guatemala, Nigeria, Sierra Leone, and Bosnia nomic policies of the New Order Regime measures of social diversity by focusing and Herzegovina (García-Montalvo and relaxed in the 1990s, it appears to have been instead on polarization, or the extent to Reynal-Querol forthcoming).This is only one more difficult to avoid a massive and debili- which a small number of influential groups influence on conflict, of course, and other dominate a society, thereby providing a work has emphasized the role of resource tating upsurge in corruption and rent-seek- more theoretically informed basis for dependence and state capacities (see World ing. Moreover, the collusive agreement that explaining the relationship between diver- Bank 2003h). the state forged with the Sino-Indonesian entrepreneurs appears to have been very fragile. It rested on shared expectations bad in the other, given such apparently sim- about the longevity of the relationship, ilar histories and circumstances. expectations that clearly deteriorated with But the two cases make sense in more Suharto's failing health and could not sur- detail. The colonial history of Mauritius vive the financial crisis in 1997.22 diverged from Guyana's in significant ways that allowed the development of a stronger Transitions to more equitable domestic political society. Mauritius resis- ted the colonial state more effectively and, institutions ultimately, generated a more egalitarian So far we have examined cases illustrating distribution of political power and a less the mechanisms that create good institu- polarized structure of political conflict. In tions and sustain prosperity. They involve Guyana, however, there was no powerful institutions that allow for greater equality of domestic interest group that had a vested opportunity, and behind such a set of insti- interest in opposing the colonial state or that tutions lies a relative balance of economic was able to block the state from expropriat- resources and political power. Such institu- ing land and other assets after independ- tions have emerged in some societies but not ence. The use of power was unconstrained, others. Although systems of institutions and politics were highly polarized along often tend to reinforce one another and per- ethnic lines. sist for long periods, they also change. Indonesia shows that growth is possible Countries with unequal distributions of even with underlying bad institutions when resources and political power become more elites can credibly make a contingent com- egalitarian and democratic, and previously mitment to improve institutions and when powerless people gain power and influence. they manage to forge mechanisms that indi- Although institutions are sometimes created rectly benefit from encouraging the invest- by colonialism or military conquest, they ment opportunities of others. The accelera- can often evolve through good decisions, tion of growth after 1966, and particularly virtuous paths, and the intrinsic dynamics the pro-poor aspect of growth, was clearly of the development process, as in Mauritius. driven by the threat of communism and It is also possible that even transitory condi- Equity, institutions, and the development process 119 tional solutions lead to permanent change, distribution of resources and power, and because growth unleashes transformations subsequent changes in institutions. These that induce beneficial changes in institu- changes included the collapse of feudalism tions. This message from modernization and serfdom and the move to a free labor theory23 is precisely what may have hap- market, the changes in land distribution, the pened in the Republic of Korea. commercialization of agriculture and the The biggest challenge is to understand development of interoceanic commerce.25 processes of change and to distill from them Yet, even after 1688, the political system lessons about how poorer societies can was at root oligarchic. Further changes undergo beneficial institutional transitions. were needed in the distribution of power This does not appear to have happened in toward greater political equality to sustain Argentina (box 6.2) or Guyana, but it did Britain's development path and eventually happen in Britain in the seventeenth, eigh- deliver a more egalitarian society. Even teenth, and nineteenth centuries and in Fin- though Britain was a constitutional regime, land, Sweden, Spain, and the Republic of it was a very limited democracy in 1800. Korea in the twentieth century. It also hap- Before the first reform act of 1832 set in pened in Mauritius. Here we briefly review motion political liberalizations that culmi- three such transitions: early modern Britain, nated in full democracy in 1918, fewer than Finland and Sweden in the early twentieth 10 percent of adult males could vote. The century, and China in the last 20 years. The reason for these changes seems to have been transitions and policy choices in Spain are the effect of early industrialization and discussed in focus 3 on Spain. urbanization on the ability of the disenfran- chised to contest the power of political Early modern Britain elites.26 British democratization in the nine- Around 1500 most European countries teenth century was the outcome of a series were highly hierarchical feudal societies of strategic concessions by political elites to ruled by absolute monarchs whose powers avoid social disorder.27 were endowed by God. The most prosper- While the political system of the eigh- ous places, such as the Italian city states of teenth century was consistent with individ- Venice, Genoa and Florence, had escaped ual initiative, invention, and the start of the feudalism and were ruled by republican industrial revolution in Britain, sustained governments strongly representing mercan- long-run growth called for broad invest- tile interests. The Netherlands also escaped ment, particularly in human capital. Such intense feudalism and was relatively pros- institutions had to wait for mass democ- perous, but it was part of the autocratic racy to begin to arrive after 1867.28 How- Habsburg Empire. Nevertheless, the differ- ever, the longer history of the Poor Laws ences in income between the most and the provide an example of how provisioning least prosperous places were relatively for adverse risks was also supportive of small. After 1500, this picture began to greater dynamism (box 6.4)--a theme we change rapidly. First the Netherlands and return to in chapter 7. then Britain became much more prosper- The types of political reforms in nineteenth- ous than the rest of Europe, and the century Britain led to economic institutions Mediterranean world went into decline. that clearly influenced the distribution of As North and Thomas (1973) argued, the income, most obviously the promotion of most plausible explanation for these changes education after 1867. But the same period is the emergence of constitutional govern- also saw extensive labor market reforms that ment in the Netherlands and Britain: diverg- strengthened the bargaining power of labor ing prosperity within the early modern period and led to the rise of the Labor Party. After was tied to the evolution of political institu- 1906, the Liberal government of Herbert tions.24 Institutions improved because of a Asquith also began to introduce the basics of change in the distribution of resources and a welfare state, further extended by the Labor political power. Indeed, there was a virtuous government after 1945. As Britain began to circle of changes in institutions, the broader adopt institutions that promoted prosperity, 120 WORLD DEVELOPMENT REPORT 2006 1867, which was the first reform that really B O X 6 . 4 Aiding equitable growth in early modern expanded voting rights to working people. Britain: the role of the Poor Laws When democracy enfranchises the relatively poor, they usually can use democracy to tilt Far from being a consequence of successful parish registers,which was instituted in economic institutions and the distribution of economic growth, recent historical research 1538.This placed the English population on income in society in their favor.30 on seventeenth- and eighteenth-century an entirely different basis, in terms of social Britain has found that widespread but security,from that of the rest of Europe. unique institutions of social security were in The comprehensive social security system Twentieth-century Finland existence for several centuries before the provided by the Poor Laws had a number of and Sweden31 industrial revolution. Indeed, scholars highly significant economic consequences.In increasingly argue that a previously under- combination with laws (dating from the thir- Finland and Sweden are popularly identi- estimated influence on Britain's industrial teenth century) granting complete alienability fied as prosperous countries with generous revolution, in fact, lies in its prior agricultural of land,it encouraged labor mobility and welfare states that, in some measure, are revolution.The principal comparator here is reduced the attachment to land holding as products of a small and ethnically homoge- with the immensely advanced Dutch rural the only form of security for peasants.Individ- and trading economy of the sixteenth and uals had a relative certainty of being provided nous population. But, a closer reading of seventeenth centuries. Many of the most for,wherever they moved to work in the econ- their economic histories shows that their important technical innovations in British omy,no matter what their property-owner- contemporary "virtuous circles"--with agriculture during this period, such as land ship status.Landlords and farmers could reap growth and equity mutually reinforcing-- drainage engineering, new crop types, and the economic gains to be had from increased rotations, were directly borrowed from the farm sizes,from enclosure,and from laying off are the outcome of a long and difficult Dutch.Yet it was the British agricultural and workers or changing their labor contracts to political struggle to establish institutions service economy that was increasingly out- more efficient weekly or day labor,without and enact policies that provide broad eco- pacing the Dutch as the seventeenth and provoking the same degree of peasant nomic opportunities and respond to the eighteenth centuries progressed.Why? protest as occurred on the continent.But Attention has recently been given to equally,employers in England had a strong inherently wrenching social transitions of one major institutional difference between incentive only to do this if it made economic positive (economic growth, structural the two countries--the nationwide system sense because,through the Poor Law,they change) and negative shocks (macroeco- of social security created in England by the would also have to reckon with their liability nomic crises, civil war). Poor Laws, which gradually evolved during to pay for the families of the laid-off workers. the course of the sixteenth century,culmi- What the Poor Law created in England Finland was part of Sweden in the Middle nating in the famous Elizabethan statutes of was a public system of acknowledgment of Ages, but following a war between Russia and 1598 and 1601.This was a Christian human- collective responsibility for the basic subsis- Sweden in 1808­09, it became part of the ist response,imbued with a new optimism tence of all, including for a strikingly non- about what government could and should moralistic approach to the support of single Russian empire. It experienced one of the last be able to achieve in the face of perceptions mothers and their illegitimate children.The European famines in 1867­68, an event that of increased poverty amid plenty in a time comparative evidence suggests a relative ushered in major demographic and eco- of population growth.The Poor Law was lack of correspondence in England--alone nomic changes as entire regions were devas- mandated by the central state but--most in all of Europe--between fluctuations in important for its practical effectiveness--its the price of food and the death rate, and tated. The Russian revolution of 1917 led to a implementation was entirely locally England--but not Ireland--was the first collapse of imperial authority in Finland, and devolved: it was funded by a local tax on nation in the world to cease to experience the country soon declared its independence. property in every parish, administered by famine-related mortality. But this immediately gave birth to a bloody local officials but also rigorously enforced by local magistrates.It went side by side with a civil war between "white guards" (bourgeois Sources: Szreter (2005) drawing on Slack (1990), relatively efficient nationwide population Wrigley (1998), Solar (1997), Solar (1995), King nationalists) and "red guards" (socialists loyal registration system, the Church of England's (1997), King (2000), Lees (1998). to Russia). More than 30,000 troops alone lost their lives. In the aftermath, however, many progres- sive reforms laid the foundation for the mod- it was still a highly unequal society, and ern Finnish economy and society. Land inequality almost certainly increased until the reform--a major cause of the civil war--was early or mid-nineteenth century (figure 6.7). enacted almost immediately. A law passed in Although precise measures of inequality dif- 1918 allowed sharecroppers to buy their land, fer depending on the sources, inequality and amendments in 1922 facilitated the sub- appears to have risen until the early and per- sidized expansion of small farms. Progressive haps mid-nineteenth century.29 After about income and wealth taxation were in place by 1870, there is wide consensus that inequality 1920, soon followed by expansions of fell substantially for the next century. women's rights (although universal suffrage The fall in inequality after 1870 is closely in parliamentary elections had been in place correlated with the Second Reform Act of since 1906) and commitments by the central Equity, institutions, and the development process 121 government (not just local municipalities) to Figure 6.7 Inequality in Britain began to fall around 1870 primary education. Gini coefficient From the late 1940s until the early 1990s 0.8 the economy expanded steadily, with per Lindert and Williamson (1982, 1983) capita incomes catching up with Great 0.6 Britain in the 1980s and Sweden in the 1990s (from roughly half a century earlier). 0.4 Williamson (1985) Bourguignon and Morrison (2002) This success was a product of Asian-style 0.2 "governed markets": collaboration between the state and private sector was harnessed to 0.0 rapidly industrialize an economy that, as 1759 1801 1823 1867 1871 1881 1890 1901 1910 1929 1950 1960 1970 1980 1992 late as the 1950s, generated 40 percent of its Sources: Lindert and Williamson (1982), Lindert and Williamson (1983), Williamson (1985), output from agriculture.32 A crucial coun- and Bourguignon and Morrisson (2002). terpart to Finland's activist industrial policy (based on high rates of capital accumula- table institutional arrangements be in tion and public saving, low interest rates on place. credit, and major investments in manufac- In Sweden, these prior arrangements turing infrastructure), however, was the were unusually favorable to upward mobil- construction of a welfare state to cushion ity by subordinate groups: a long history of citizens of all ages against the unsettling peasant autonomy, a correspondingly weak social changes wrought by such a rapid eco- aristocracy, and an emerging nation-state nomic transformation. able to secure support from farmers while Strong and credible political leadership also repudiating aristocratic claims on its was central to making this possible. In the powers. Sweden was also the first country to aftermath of World War II, President Urho have a central bank (in 1668) and among the Kekkoken famously asked his nation,"Do we first to grant basic property rights. As such, have the patience to prosper?" Thereafter, he "inclusion of the peasantry in the trans- set about negotiating the arrangements formation of the agrarian economy and ("social corporatism") among industrialists, institutional arrangements that sustained trade unions, and citizen groups that would egalitarianism were to become fundamental enable all to act as complements. The Finnish elements in the rise of the Swedish industrial model has its problems (high unemploy- market economy."33 This was an economy ment), but it shows how state, market, and increasingly grounded in broad political society can jointly generate the institutions, rights and social opportunities. policies, and spaces needed to generate equi- But history is not destiny. Equitable table development outcomes. development is as much a function of key Sweden is perhaps most closely associ- choices and decisions at pivotal historic ated with the welfare state today. Less well junctures. The Middle Ages, the industrial known is the timing and sequencing of revolution, and the tumultuous twentieth events putting it in place. Importantly, the century unleashed sweeping forces on Swedish welfare state was the product of, Swedish society. Some were leveling (rising not a precursor to, the country's transition agricultural productivity), others wrench- to modern economic growth. Indeed, it was ing (mass unemployment). Each attempt to designed in response to the very problems respond to these forces established the (old-age security, unemployment) gener- political contours for subsequent attempts. ated by such growth. But to make such Drawing on and extending the equitable growth possible, and to have in place institutional foundations during these piv- sociopolitical conditions that would enable otal historic junctures have been the unify- the articulation of and sustained support ing elements of Sweden's development for something like the welfare state (when strategy. Its achievements to date have been such a system existed only in rather embry- remarkable, even as twenty-first-century onic forms elsewhere in the capitalist realities present distinctive challenges to its world), it was vital that a prior set of equi- welfare state. 122 WORLD DEVELOPMENT REPORT 2006 The main implications of the Finnish and check on the discretionary use of power by Swedish cases for today's developing coun- the central government. China's experience tries are that economic growth and sociopo- also demonstrates that what is important for litical equity can be powerfully reinforcing, equitable development are credible checks and can be underpinned by institutional on the arbitrary use of power, assurance of transitions. These cases should not be seen as property rights and fair treatment for a blueprints for others to follow. Instead, they broad segment of society. The particular should be read as examples of how commit- form that institutions take to deliver these ments to equity in a given context help lay the functions can vary, especially during periods foundations for short- and long-term pros- of transition. perity by consolidating virtuous circles link- The key to China's equitable development ing institutions and incentives. was the combination of initial conditions and the economic reforms launched in 1978 China in the late twentieth century that unleashed entrepreneurial initiative and Economic development in China since 1978 legitimized the profit motive. China's eco- has been nothing short of spectacular. With nomic policies following the 1949 revolution the quadrupling of GDP per capita over the proved seriously flawed: they stifled incen- last 25 years, China has transformed itself tives for investment and innovation. But the from a poor centrally planned economy to social policies of the Mao Tse-Tung period a lower-middle-income emerging market leveled the distribution of assets in important economy. As a result, the number of people and durable ways. As a result, both land and living in poverty (under $1 per day) fell from human capital were equitably distributed on 634 million in 1981 to 212 million in 2001.34 the eve of reforms. With the adoption of the From the perspective of this chapter, what rural household responsibility system, peas- is interesting is that the world's largest coun- ants became the immediate beneficiaries of try has undergone profound economic reform. This helped to reinforce equity, while transformation without substantially chang- unleashing entrepreneurial initiative and ing the political institutional structure, that boosting productivity. remains dominated by the Chinese Commu- The economic reforms launched in nist Party. Yet institutional improvement did 1978 aimed at decentralizing economic take place in China along with economic decisions--to individual farm households, reform. And the large increase in nonstate enterprise managers, local governments-- investment and free entry into profitable so as to generate incentives for investment economic opportunities suggest that prop- and innovation. Importantly, the form erty rights are secure, despite the absence of a these policies took and the transitional Western-style judicial system. institutions that were created were While the particular institutional form is designed to preserve the political support different from other cases reviewed here, the for reforms, by compensating potential experience in China is broadly consistent losers. with the thesis of this chapter. The earlier The aftermath of the cultural revolution, discussion of equitable transitions in Britain and the recognition that China's economy and Scandinavian countries illustrated the had fallen behind--not least in relation to the argument that a successful economic system East Asian Tigers--led to a growing consen- depends on the political system to assign sus on the need for and urgency of change, and enforce property rights and contracts, and paved the way for the economic reforms and to protect the market from political initiated under Deng Xiaoping's leadership. encroachment. China's recent history sug- These reforms were inspired by the wide- gests that the starting point for reforms spread recognition of the failure of central does not necessarily have to be in political planning as an instrument for economic institutions. Changes in economic institu- organization,and reflected the need to deliver tions and in economic relations among lev- on economic growth for the legitimacy of the els of government can also establish credible new leadership. The political need for growth commitment to a reform path and act as a implied a new focus on liberating markets Equity, institutions, and the development process 123 and incentives. The sequencing of reforms which generated incentives that focused on and the transitional institutional arrange- collection to provide local public goods that ments that accompanied the economic attracted local investments. These changes decentralization, on the other hand, reflected provided for significant autonomy from the the premium the leadership placed on social central government and considerable inde- and political stability. pendent authority over their economies. The impetus for economic decentraliza- tion on the one hand, and the need for an The modern Chinese system includes a divi- sion of authority between the central and local integrated national market on the other, governments. The latter have primary control helped to shape a dynamic relationship over economic matters within their jurisdic- between the central government and local tions. Critically, there is an important degree governments that held them mutually of political durability built into the system.35 accountable and limited discretion on both sides. Over time, the result of these policies China's reforms are also replete with inno- was to create a stake in new economic institu- vative mechanisms for protecting potential tions for all the main actors, including the losers during transitional periods. This often local governments which served as a credible involved designing reforms that sustained check on the powers of the central govern- sources of income for incumbents, by ment in the economic domain. The reforms keeping important elements of pre-existing also fueled the emergence of strong economic pricing and payment mechanisms, while centers, such as Guangdong province and the providing incentives at the margin. "The Shanghai municipality. These centers now transitional institutions [were] not created wield considerable influence and bargaining solely for increasing the size of [the] pie, [but power relative to the central government and also] to reflect the distributional concerns of can serve as important countervailing forces. how the enlarged pie is divided and the polit- How did economic decentralization rein- ical concerns of how the interests of those in force private incentives? According to Walder power are served."36 and Oi (1999), "For almost 20 years, reform Dual pricing at the start of reforms is a in China has proceeded through the gradual prime example. The system obliged farmers reassignment of specific property rights from and enterprises to sell specified quantities to higher government agencies to lower govern- the state at "plan" prices, while allowing them ment agencies, or from government agencies to obtain market prices for any above-quota to enterprises, managers, families, or individ- production. This maintained the planning uals" (7). All of these reforms enhanced the system for those who benefited from it, while power of economic agents to make decisions creating incentives for efficient production. over economic activities in their respective Equally important, it allowed time for market domains, and boosted productivity through institutions to emerge, avoiding the institu- better incentives.Farmers retained their earn- tional vacuum that plagued many transition ings and therefore worked harder and economies when state institutions were dis- invested more. Township and village govern- mantled. Fiscal contracting guaranteed the ments had rights to the profits made by central government a certain level of rev- township and village enterprises (TVEs) and enues,37 but it generated incentives for local therefore adopted policies that promoted governments to collect more because the business. But because they had no revenue marginal retention rate was much higher. authority, they did not have the ability to bail Similarly, labor contracting allowed state out poorly performing TVEs, which made for workers to retain the guarantee of lifetime hard budget constraints and higher efficiency. employment while introducing greater flexi- Higher levels of local governments (coun- bility in labor policies for new contractual try and province) acquired control over local workers. These arrangements made reforms a enterprises and therefore also had a stake in win-win game, ensuring social stability and their performance. They were allowed to the support of those in power. retain more local revenues through fiscal con- But there is a danger in such a strategy of tracting and to have extrabudgetary funds, incrementalism: getting stuck in incomplete 124 WORLD DEVELOPMENT REPORT 2006 reforms if local governments and incum- Qian (2003) notes the following: bents acquire too much power and are able There is apparently a larger room than we to block further progress. The prevalence of thought for institutional innovation to interprovincial barriers to trade in the simultaneously address both the economic 1990s, with each province vying to boost and political concerns, that is, to make a profits for the enterprises it owned, is an reform efficiency improving and interest example. But there are some checks and bal- compatible for those in power (305). ances in the system that help maintain the But there are many challenges ahead, some direction and momentum of reforms. These of which will not be amenable to win-win include competition among local govern- solutions and therefore are likely to be polit- ments, hard budget constraints for local ically and socially more costly. Continued governments, the central government's reforms in the state enterprise and financial insistence on enforcing a unitary market, sectors, managing rural-urban migration, and a growing economy that reduces the and addressing increasing regional disparities economic influence of incumbents. (see focus 6 on regional inequality) are some The struggle for the right balance of these challenges. Macroeconomic policy between economic centralization and decen- and structural reforms will need to be under- tralization is constantly evident in many of pinned by further institutional improvement China's domains of intergovernmental rela- to ensure broader participation and account- tions. The 1994 tax reforms recentralized fis- ability so that the interests and desire of the cal revenues, in part to ensure greater people are better reflected in decision mak- regional equity in spending, and the central ing, and to further strengthen the govern- government continues to apply strict con- ment's capacity to lead market-oriented trols on deficit financing by local govern- reform while maintaining economic and ments. Constraints on labor mobility have social equity. eased considerably over time, helping to cre- ate a more unified labor market, despite con- cerns by some provincial governments that Conclusion this might aggravate problems of unemploy- A few simple principles go a long way ment for established urban residents. toward unifying different development There are also some more recent and experiences in the historic and the contem- more permanent institutional changes that porary worlds. There is little disagreement reconfirm the government's commitment to among scholars that basic institutions, such market-oriented reform. These include as security of property rights and equality mechanisms that strengthen accountability before the law, are keys to prosperity. These at the local level and empower local popula- institutions lie behind the capital, financial, tions. Local elections are the most important land, and labor markets that we saw in of these mechanisms but others include, for action in chapter 5. Because talent and ideas example, recent regulations to eliminate nui- are widely distributed in the population, a sance taxes on the rural population. China prosperous modern society requires the has also successfully used the external com- mass of people to have incentives--and a mitment device of WTO accession to signal state that can and will provide key com- its resolve to move ahead with market plementary inputs and public goods. It reforms and impose discipline on incum- therefore requires an underlying set of bents. For example, it is no longer possible institutions that generate the equality of for every province to have its own inefficient opportunity for individuals and assure the automobile factory erected behind trade bar- accountability of politicians to all. riers designed to provide local employment Why do some societies have such insti- and local taxes. More broadly, China's desire tutions and not others? A relatively egali- to carve for itself an important place in the tarian distribution of political power global order and to be recognized as a underpins the institutions that promote responsible global power places constraints prosperity. Institutions clearly have distrib- on the shape of its future policies. utional effects, and bad institutions often Equity, institutions, and the development process 125 arise because they benefit some group or onto a dynamic path toward a virtuous cir- elite. Good institutions arise when checks cle of equity and prosperity? The organiza- are placed on the power of elites and when tion of society is highly persistent, but we the balance of political power becomes more have seen many cases of transitions to bet- equal in society. Often, equality of political ter institutions. Sometimes, as in early power is supported by economic equality, modern Britain, economic changes lead to and this connection gives rise to the possi- changes in the distribution of power, which bility of both virtuous and vicious circles. promotes a more equitable society and bet- Growth certainly can occur in societies ter institutions. Contemporary China fol- in which these conditions do not apply. But lows a similar pattern albeit with a different the preponderance of evidence suggests that configuration of institutions. In other such growth is unsustainable. This perspec- times, as in the Republic of Korea and tive is consistent with historical narratives, Indonesia, regimes are forced, by external basic patterns in cross-country data, and or internal threats, to change the trajectory more careful causal empirical work on the of their society in ways that become institu- sources of prosperity. tionalized. In still other times, such as Mau- The crucial question for the promotion ritius and Botswana, leaders make good of development is this: how can poor soci- decisions that lead to reinforcing paths of eties improve their institutions and move better institutions and development. f o c u s 4 o n Indonesia Growth, equity, and poverty reduction in an East Asian giant I ndonesia presents an illuminating "politics in command" in 1959 and pro- poverty line until the 1990s and all still sub- example of the long-term interactions duced a ruinous inflation that brought sisting on less than $2 a day, grew at the of the three basic themes of this report much of the population to near starvation in same rate (or possibly slightly faster). The on equity and development: the mid-1960s. It was with just cause that distribution of household expenditures had Gunnar Myrdal pronounced in Asian been remarkably stable, with the overall · The importance of market-driven Drama, 1967, that "no economist holds out Gini coefficient staying within a narrow processes in determining the distribu- any hope for Indonesia." range between 0.31 and 0.36.3 Rural tion of opportunities and incomes. Indonesia's rapid, pro-poor growth for inequality had actually declined signifi- · The role of political processes, and the the 30 years after the fall of Sukarno aston- cantly since the 1970s, when access to land engagement of the poor in these ished the development profession and, allowed substantial benefits to be reaped processes, in determining the policy along with other countries in East and from the green revolution. By the mid- framework for market and asset accu- Southeast Asia, Indonesia became the object 1980s, the labor market had become the mulation. of intense analysis.1 In Indonesia, the weak primary determinant of income in rural · The overriding dominance of institu- starting conditions significantly influenced areas. tions in determining the long-run con- how the economic planners approached the But when the Asian financial crisis hit in ditions of governance for markets and task of linking growth to the poor. They 1997 and President Suharto was forced to politics to operate. designed a three-tiered strategy for pro- resign in the face of widespread rioting in poor growth, which connected sound 1998, the country was entirely unprepared in These complex interactions require long macroeconomic policy to market activities political or institutional terms to cope with periods of developmental evolution to that were facilitated by progressively lower the rapid changes needed in corporate and observe and identify. transaction costs. Those policies were linked public governance. The crisis sharply low- Indonesia has substantial variance to household decisions about labor supply, ered inequality, as urban real estate and across all three of these themes. There is agricultural production, and investment in financial markets collapsed. But the dra- enough independence in the variance for the nontradable economy. matic reduction in GDP--over 13 percent in each factor to sort out, if only roughly, what The extent to which the poor benefited 1998 alone--caused poverty rates to triple. is driving what. In chapter 6, the political from growth depended on the array of Only after 2002 did poverty rates return to dimension of the economic performance of assets they controlled: their labor, human the previous lows observed in 1996. By 2004 the Suharto regime was discussed. Here, we capital, social capital, and other forms of they still had not returned to the trend rate discuss the connections with policy capital, including access to credit.2 Appro- of decline disrupted in 1998. choices. priate government policies also influence Explaining these trends in per capita Because Indonesia has been so impor- those dimensions, especially in health and incomes and their distribution requires an tant to the development profession, it has education. The "road to pro-poor growth" understanding of how markets, politics, been studied for a long time. The Dutch started from desperately poor economic and institutions jointly shaped the rapid, exploited the Netherlands East Indies from conditions, weak institutions, and a decade pro-poor growth strategy, its subsequent the seventeenth century to early in the of political instability. It seemed that every- collapse, and current efforts to revive it. twentieth century. Then, under political thing needed to be done at once. The key Any such explanation is bound to be con- pressure at home, the Dutch experimented was to focus on restarting and then sustain- troversial, and there is no formal model with an "Ethical Policy" for the colony, and ing rapid economic growth, empowering behind the story about to be told.4 But the the poor benefited significantly. During the poor households to enter the market econ- story is plausible and anchored in the his- Great Depression, World War II, and the omy, and reducing the costs and risks of torical record. fight for Independence, the Indonesian doing so by investments to lower transac- The story begins with two concerns of economy deteriorated rapidly, and the poor tion costs. the emerging Suharto government in the suffered disproportionately. Java was the The strategy worked for three decades: late 1960s. The first was the misery and dis- original home of the "dual economy" ana- between 1967 and 1996, income per capita content of the rural masses, who had sup- lyzed by Boeke (1946) and formalized by increased by 5 percent a year. The incomes ported Sukarno's communist leanings and Lewis (1954). After declaring independence of the bottom quintile of the income distri- populist rhetoric. After a decade of active in 1945, President Sukarno eventually put bution, all individuals below the national discrimination against their livelihoods, Focus on Indonesia 127 rural households were near starvation and by putting down the riots and imprisoning national budget be balanced quarter by thus an obvious source of opposition unless the student leaders. Then it mounted a seri- quarter--a law Suharto basically imposed the new government could incorporate ous effort to make the economy more equi- on himself, but then touted to all con- them in its development plans. Second, the table. The result, also stimulated by the stituents as a rule the government had to hyperinflation of the mid-1960s, the total world food crisis in 1973­4, was a major shift live under. To build confidence among the disintegration of the market economy, and in priorities toward rural development and a Chinese business community, the govern- the political chaos meant the entire popu- specific push toward increasing domestic ment opened the capital account in 1970 lation was ready for a more stable life. A rice production. Behind this push were the when it unified the exchange rate. The flow strategy that promised stability and rural objectives of stabilization and equity. To of foreign exchange to and from Singapore recovery would win wide support (as it lose control of the rice economy was to lose and Hong Kong was a sensitive barometer would throughout densely settled East and control of what mattered to Indonesian of the investment climate. Southeast Asia). society. Thus the two constraints on the presi- This is the message that Suharto deliv- The restructuring of Indonesia's develop- dency, which Suharto felt personally and ered to his technocrats. This economic ment approach after 1974, especially the pre- used as motivation for his bureaucracy and team had engaged Suharto and other senior emptive devaluation of the rupiah in 1978, government (not the same thing in Indone- military officials in economic training exer- signaled the government's determination to sia), were the need for rural areas to partici- cises at the Military College. The tech- include the poor in the development process. pate in growth, and the need to keep the nocrats were handed the macroeconomic The stability of the Gini coefficient seen from investment climate highly favorable for portfolio and told to deliver on what the late 1960s to 2004 should not be taken as Suharto's business partners. The response to became known in Indonesia as the develop- the result of market-driven forces in the face both constraints was an economic package-- ment trilogy--growth, equity, and stability. of given technology, but as a conscious gov- low inflation, food price stability, an open To many in the political and military arena, ernment effort, led from the macroeconomic economy, and massive investments in rural stability meant repressive measures to stifle arena by the technocrats, to stimulate pro- infrastructure--that generated rapid pro- dissent, but to the technocrats it meant poor growth.6 This effort succeeded in spec- poor growth. But another part of the restraining inflation (which they did in tacular fashion until the mid-1990s, when investment climate, a part only for those spectacular fashion in just three years) and cronyism and the growing influence of favored business partners, involved special stabilizing the rice economy, which was still Suharto's children on economic decision licenses, trade protection, and lucrative a quarter of GDP and providing half the making caused the approach to unravel. access to domestic markets. This part average Indonesian's daily calories. The Part of the problem of post-Suharto unraveled the "open economy" part of the institutions built to provide this stability, in governments has been their need to dis- growth package. both macro terms and in the food econ- tance themselves from this record of repres- The Suharto legacy, despite the deep omy, became essential to the Suharto sion and cronyism, despite three decades of commitment to pro-poor growth, did not regime's success.5 pro-poor growth. This tension brought the build the groundwork for a political and Thirty years of rapid economic growth, failure of political and institutional devel- institutional framework that would ulti- with equally rapid rates of poverty reduc- opment during the Suharto era to the fore. mately support it. A deep tension developed tion, was politically popular (the elasticity Questions about causality remain, particu- between the institutional framework to of reduction of the headcount poverty larly whether rapid, pro-poor growth can keep the open economy functioning effi- index with respect to growth in per capita be implemented by authoritarian regimes. ciently and the political controls to keep the incomes was about 1.3 during the Suharto Indonesia's record, along with that of most cronies' businesses profitable. Without polit- era). Every five years, the polling results for of East and Southeast Asia, indicates that ical feedback about these very same political parliament were gleaned for signs of disap- they can. But is such growth sustainable? controls, the regime was blindsided by the pointment with the development program. And which is more important for managing ferocity of the opposition to its manage- Despite the heavy hand of Golkar, the pres- long-run, pro-poor growth: good econom- ment of the Asian financial crisis. The ident's party, real information was flowing ics or good institutions? depth of the crisis, both economic and from villages up to the center through these In Indonesia, there was no "chicken or political, reflected the vacuum of institu- elections. egg" problem. Something had to be done at tions in place to cope with an alternative Almost despite the intentions of the once in view of widespread destitution and political system. Suharto regime, political institutions were political chaos, and the sequencing was The climb out of the chaos of 1998 mir- taking root (people expected to vote) and clear. Rapid, pro-poor economic growth rors that from the 1965 era, but this time these institutions provided feedback to the was imposed by an authoritarian regime without order imposed from above. The policy approach of the government. There concerned about its survival. But this same eagerness and skill with which the Indone- were other feedback mechanisms as well, regime also imposed on itself commitment sian population has participated in the and the ones that threatened stability were mechanisms to make the growth process democratic process suggests that social and taken very seriously. After the 1974 riots in market friendly to rural households and to political order will now be far more sustain- Jakarta in reaction to the visibly widening Chinese capitalists--that is, both ends of able. The challenge now is to translate the income distribution, especially in urban the economic system. Inflation was brought same democratic process into rapid and areas, the government responded brutally under control by a law requiring the sustainable pro-poor economic growth. Leveling the economic and political playing fields III WHAT CAN BE DONE TO INCREASE EQUITY IN THE WORLD? Can this be done in ways that also spur long-term prosperity? We read in part I that there are large inequalities of opportunity between people within coun- P A R T tries and--even more--between people in different countries. These inequalities are perpetuated through interlocking economic, political, and sociocultural mechanisms, creating inequality traps. Individuals from different groups and countries face a highly uneven playing field, both in their capacities to acquire endowments and aspire to a better life, and in their opportunities to reap returns from those endowments through market and nonmarket processes. Because differences between countries often exceed within-country differences, it is of particular importance that national policies support, or are at least consistent with, the narrowing of international differences, notably through the growth process. We argued in part II that many inequalities not only violate peo- ple's concern for fairness, but actually have costs for the development process. The effects on development depend on specific forms of inequality and their interactions with market imperfections and insti- tutions. Unequal opportunities are associated with inefficiencies and wasted economic potential. Pronounced inequalities in the distribu- tion of power are often associated with weak economic institutions, undermining the investment and innovation that is central to long- run growth. Greater equity is thus not only intrinsically desirable but also is complementary to long-run growth and prosperity. For poorer and excluded groups, a focus on equity can bring a double benefit--a bigger pie and a greater share. But the scope for such a complementary relationship between equity and aggregate development is often not exploited. When exam- ining this, we suggest there are two kinds of pathology in policy 130 WORLD DEVELOPMENT REPORT 2006 design. First, there is the pathology associ- institutions (even though action to support ated with oligarchic dominance--institu- empowerment of the poor is now empha- tions and policies that further the interest of sized in the design of specific policies--see elites but not those of the whole society. Narayan 2002). In part III, we focus on a set This may take the form of extreme preda- of areas that do lie squarely in the arena of tion and high-level corruption, as in development analysis and practice--in poli- Mobutu's Zaire or Haiti under the Duva- cies affecting the sectors, markets, and in the liers. Or it may take the form of enmeshed global arena. This recognizes the influence alliances between economic and political of the political and sociocultural context, elites that favor rent-seeking, as in the but focuses rather on what an equity prism, Philippines under Marcos, in much of Latin based on the analysis of parts I and II, has to America in past decades, and in more subtle say about the policy design to break inequal- forms in many countries of the world. ity traps and support aggregate growth The Second, there is a more complex pathol- lesson from part II is that this implies paying ogy of policies pursued with the intent, or in attention to specific inequalities and their the name, of equity that have high efficiency interactions with markets, social structure, costs or perverse effects. Communist eco- and power. This involves both issues of tech- nomic policy was disastrous for efficiency, nical design and mechanisms that provide even while many communist societies did the political underpinnings for change, much in social provisioning. Directed notably through broader accountability, credit--in India, for example--was intended coalitions for change, or compensation of for the poor (and reached some of the poor), losers. And while an overarching message is but proved a high-cost strategy. Populist of the potential complementarity between macropolicy is always bad for growth, and greater equity and long-run prosperity, almost always bad for equity sooner or there will often be tradeoffs in specific areas later--witness Argentina during much of the and context. One cross-cutting area con- second half of the twentieth century. Per- cerns the need to raise taxes to finance desir- verse or growth-sapping effects of policies able public spending. The design of tax under this pathology can be caused by instruments is of great importance to mini- adverse consequences for incentives, unaf- mize adverse efficiency effects, while also fordable fiscal burdens, or the capture of the promoting equity where feasible. benefits, often by middle groups, which We organize the discussion of domestic "hoard opportunities" at a cost for other action into three areas. First is building and groups and the overall growth process. protecting people's human capacities-- What can be done? At a fundamental from the start of people's lives and through level, the analysis underscores the centrality adulthood and old age. Here we focus on of shifting to a state that is more account- equalizing from the bottom up--equalizing able, has checks on predatory behavior of up the opportunities of the least advantaged political and economic elites, is responsive in terms of skills, health, and risk manage- to all citizens--especially from middle and ment. There are certainly issues of equity poorer groups--and has effective conflict among more advantaged groups, but we management mechanisms. In part II, we give priority to the disadvantaged (in part sketched cases of transitions in this direc- for reasons of space). As seen in part II, tion from history and contemporary expe- there are major market imperfections in riences, and at the local level. The emphasis human capital formation and insurance in the development community on issues of that affect poor or lower-status groups governance and empowerment is entirely most, yet political action has also often been consistent with this perspective. biased against these groups. While such overall shifts are central to Second is ensuring equitable access to jus- development, the World Bank has neither tice and complementary assets. A fair and the mandate nor the comparative advantage accessible justice system is crucial for con- to discuss specifics of the design of political straining the power of the political and eco- Leveling the economic and political playing fields 131 nomic elite, avoiding discrimination, and nation-states is uneven--and has uneven protecting property rights and personal safety effects on different groups within countries. for all--with important implications for the There is substantial scope for making the willingness to invest and innovate.Inequitable playing field more even. But as in the domes- access to land and infrastructure--by wealth, tic arena, policy design involves both techni- location, or social group--is typical of devel- cal questions (such as the details of migra- oping societies and often enmeshed with tion arrangements and the application and political structures. Policy design can help design of patent legislation) and the political shifts to more equitable and often more effi- underpinnings of rules and institutions for cient patterns (chapter 8). global governance. We examine the potential Third is the domain of markets--finan- for change both in the key global markets-- cial, labor, and product--that have a power- for labor, products, ideas, and capital--and ful influence on the returns to people's in the potential scope for designing aid in endowments. As chapters 5 and 6 argued, ways that support (rather than undercut) markets are typically far from ideal, work- domestic development, and through more ing in noncompetitive and discriminatory effective and equitable management of the ways, whether because of intrinsic market global commons (chapter 10). imperfections, or because power structures The epilogue links the report's perspective have shaped them to serve the purposes of on equity to the thinking and agreements that those in power. In these areas, and notably have evolved in the development community in the case of finance, a primary concern is in the past decade--captured, for example, in equalizing down, by reducing protecting the Millennium Declaration (2000) and the privileges of incumbents. Closely related is Monterrey Consensus (2002)--as well as the the conduct of macroeconomic policy World Bank's own strategic pillars of an (chapter 9). enabling investment climate and promoting In the global arena, concern remains with empowerment. We argue that an approach to individuals--and the enormous, unjustified development that is deeply informed by differences in opportunity that people face equity is fundamental to the full integration of through the morally irrelevant fact of coun- these frameworks into an effective develop- try of birth. The global playing field between ment strategy. Human capacities 7 Expanding people's capabilities to lead ence of the powerful and the wealthy to be fuller lives, the aim of all development, able to shape public policies to benefit the rest c h a p t e r means investing in their education and of society. As we have seen, successful transi- health and in their ability to manage risks. tions are far more likely where the power of But as chapters 5 and 6 discussed, failures in the excluded to influence public action has markets and governments conspire to gen- been enhanced. erate large inequalities in people's opportu- There are strong complementarities among nities to build their capabilities. Children the different investments in people. Better from poorer families start out life with nourished children have higher cognitive greater disadvantages than their wealthier abilities. Well-educated parents, especially peers, attend lower-quality schools, have mothers, invest more in their children's less access to health services, and are not as education and health. More educated indi- protected from economic downturns and viduals are likely to be more resilient to family crises. By the time they are adults, shocks. Instruments to smooth consump- they are far less equipped to be productive tion will spur people to take on not only members of society. Economic, political, higher risk but also potentially higher and sociocultural inequalities fuel such dif- return activities and prevent them from dis- ferences in life chances, perpetuating them investing in themselves (lowering food across generations. intake, forgoing treatment) or in their chil- Public action can level the playing field dren (pulling them out of school) in times and broaden opportunities by addressing of shocks. And people with more human inequalities in access to quality education, capital and better risk management capabil- health care, and risk management. Well- ities can reduce the variability and increase designed policies will result in more equi- the level of their incomes. tably distributed opportunities to acquire The policies we consider in this chapter endowments and boost overall productiv- are particularly important in arresting the ity. As potentially talented and productive intergenerational transmission of inequali- individuals gain access to the services from ties. We begin with a review of the rationale which they may have been excluded for rea- and potential for early childhood develop- sons that have nothing to do with their ment programs. We next consider broader potential, societies make gains through education and health policies for expanding greater efficiency and greater social cohe- access to quality education and care, and sion in the long run. finally discuss transfer policies that help Still,there are challenges.Programs require manage risks and provide for efficient and resources, administrative capacity, and politi- equity-enhancing redistribution. cal support. This means paying attention to the design of tax systems, tailoring program Early childhood development: intervention to context,and above all building constituencies for change. We focus on level- a better start in life ing the playing field mainly through aug- By the time poorer children in many countries menting the capacities of those with the reach school age, they are at a significant dis- fewest opportunities, but we recognize that it advantage in cognitive and social ability. The may be necessary to attack the undue influ- Ecuadorian study cited in chapter 2 docu- 132 Human capacities 133 mented substantial differences at six years of children, regularly monitoring their growth, Figure 7.1 Children from better-off age, related to socioeconomic status and stimulating the development of their cogni- households have a big edge in cognitive abilities by age three parental education. Differences in childhood tive and social skills through more frequent cognitive abilities are indeed apparent as early and structured interactions with a caring Early vocabulary growth as 22 months of age. One study in the United adult, and improving the parenting skills of Cumulative vocabulary States shows that by age three the gaps in caretakers. The evidence suggests that these 1200 learning, measured by vocabulary, are already programs can be highly effective in address- High large among children from different social ing problems experienced later in schooling SES groups (figure 7.1).1 Cognitive learning is and adulthood. Middle affected by a child's socioeconomic status A recent study in the United States shows SES 800 through health (malnutrition, iron and that investments in the early years of life, micronutrient deficiency, parasite infections) before children reach the formal school sys- Low and the quality of the home environment, tem, give greater returns than later invest- SES including care-giving and cognitive stimula- ments (figure 7.2).7 Well-designed longi- tion.2 Scientific evidence on brain develop- tudinal studies--mainly from developed 0 12 16 20 24 28 32 36 ment supports this. Recent research findings countries--indicate that programs typically Age, months revamp earlier thinking that assumed that the register improvements for children in Source: Hart and Risley (1995). structure of the brain was genetically deter- health, cognitive ability, academic perform- Note: SES refers to socioeconomic status. mined at birth and point to the determining ance, and tenure within the school system influence of early experiences--from concep- and, later in life, higher incomes, higher tion to age six, and particularly the first three incidence of home ownership, lower propen- years--on the architecture of the brain and sity to be on welfare, and lower rates of capacities in adulthood.3 incarceration and arrest.8 This suggests a As a child ages, environmental effects strong productivity case for investing in appear to accumulate. Poor cognitive and early childhood development; the argu- social abilities are associated with weaker ments for public subsidies to disadvantaged future academic performance and lower families are compelling on both productiv- adult economic and social outcomes, ity and equity grounds. As Heckman argues, including poor health, antisocial behavior, early interventions in children from disadvan- and violence.4 These underachieving adults taged environments raise no efficiency-equity influence the cognitive abilities of the next trade-offs; they raise the productivity of indi- generation of children, creating an inter- viduals, the workforce and society at large, and generational cycle of poverty and unequal reduce lifetime inequality by helping to elimi- opportunities.5 Studies using internation- nate the factor of accident of birth.9 ally comparable student achievement tests Studies of ECD programs in developing confirm that socioeconomic background is countries also document strong benefits the overwhelming determinant of learning outcomes, with schools accounting for no more than 20 percent of the variation in test Figure 7.2 Early childhood interventions are good performance.6 investments Return per $ invested 8 Benefits of early interventions Preschool programs Early interventions can substantially en- 6 hance a child's life chances and loosen the Schooling intergenerational grip of poverty and in- Opportunity equality. In recent years, interest has ex- 4 cost of funds r panded in early childhood development Job training (ECD) in low- and middle-income devel- 2 oping countries, paralleling greater atten- tion in developed countries. Preschool School Post-school 0 Early childhood development programs 0 6 18 comprise a range of interventions that Age include providing nutritional supplements to Source: Carneiro and Heckman (2003). 134 WORLD DEVELOPMENT REPORT 2006 Figure 7.3 Catching up through early intervention ing school by 5.6 percentage points and led to higher completed schooling attainment Development quotient 110 and higher adult cognitive achievement test Children of normal Stimulation and nutritional supplement scores. height 105 Evidence is also mounting that interven- Stimulation tions in early childhood particularly benefit 100 Nutritional supplement poor and disadvantaged children and fami- lies.10 In Jamaica, nutritional supplementa- 95 tion and stimulation administered to under- Control group nourished children between the ages of 9 to 90 24 months--who are most likely to come from disadvantaged families--improved 85 Baseline 6 12 18 24 their mental development.11 Malnourished Months children who received a milk supplement Source: Grantham-McGregor and others (1991). developed more than those who did not (fig- Note: The Development Quotient is an index composed of ratings in four behavioral and cognitive development indica- tors: locomotor (large-muscle activities, running, and jumping), hand-eye coordination, hearing and speech, and per- ure 7.3). Children who benefited from stim- formance (shape recognition, block construction, and block patterns). "Months" refers to time after entry into the pro- ulation did even better, while the benefits of gram, generally at around 9 months old. supplements and stimulation were additive and allowed disadvantaged children exposed B O X 7 . 1 ECD programs are an essential ingredient for the to them to almost catch up with the develop- attainment of education for all ment trajectory of "normal" children over a period of 18 months. The results suggest that There is sufficient evidence from studies significantly for children from the higher ECD programs may be one of the most cost- throughout the world to make a case for caste, but fell a dramatic 46 percent for the effective avenues for reaching the Millen- placing early childhood education among lower caste and an astonishing 80 percent nium Development Goals for universal edu- the key interventions to achieve the educa- for the middle-caste students. In Colombia tion Millennium Development Goals the third-grade enrollment rates for cation and an important contributor to the (MDGs). children who participated in the PROMESA attainment of gender parity in primary com- Higher school enrollment. Colombia's program increased by 100 percent, reflect- pletion (box 7.1). They also help mothers ECD program PROMESA reports ing their lower dropout and repetition rates. participate in the labor force--poor women significantly higher enrollment rates in pri- In addition, 60 percent of the children who mary school for children participating in the participated in the ECD program attained who had access to free child care in the fave- program, compared with children not par- the fourth grade, compared with only 30 las of Rio de Janeiro increased their income ticipating. ECD programs in India (Haryana) percent of the comparison group. by as much as 20 percent--and improve the and Guatemala resulted in a significant Higher intelligence. ECD programs decline in enrollment age for girls. encourage young children to explore and academic performance of older children, as Less grade repetition. In Colombia's facilitate the social interaction that documented for a community nursery pro- PROMESA program, the Alagoas and Fort- promotes cognitive development. Children gram in rural Colombia.12 aleza PROAPE study of Northeast Brazil and who participated in Jamaica's First Home- the Argentina ECD study, children who par- Visiting Program, Colombia's Cali Project, ticipated in the programs repeated fewer Peru's Programa No Formal de Educación Designing ECD programs grades and progressed better through Inicial (PRONOEI),and the Turkish Early Interventions to improve young children's school than did nonparticipants in similar Enrichment Project in low-income areas of circumstances. Istanbul averaged higher scores on intellec- capacity to develop and learn can focus on Fewer dropouts. In India's Integrated tual aptitude tests than did nonparticipants. improving parents' teaching and child care Child Development Services program in Evidence from other studies, however, sug- skills, delivering services directly to chil- Dalmau, attendance of children ages six to gests that these effects dissipate over time. dren, or improving child care services in a eight in primary school increased by 16 per- cent for children who had participated in community. Programs may be established Sources: Chaturvedi and others (1987), Myers the program; dropout rates did not change (1995),Young (2002). in homes, day-care centers, or communi- ties. The evidence suggests that three design features are important for the full realiza- for all children, with cost-benefit analyses tion of benefits from ECD programs: start- showing returns of $2­5 for every $1 in- ing early, having strong parental involve- vested. For example, preliminary results ment, and focusing on child health for experimental nutritional interventions (especially nutrition) and cognitive and at 6 to 24 months of age in rural Guatemala social stimulation. The focus on health show that consuming a nutritional supple- leads to a virtuous cycle, because improved ment increased the probability of attend- health also helps increase cognitive and Human capacities 135 social abilities.13 Overly formal programs The second approach would target disad- can be too expensive for poor families, cul- vantaged families. This may be more cost- turally irrelevant, and insensitive to fami- effective in view of the evidence presented lies' needs.14 They thus run the risk of being earlier on larger gains from interventions for abandoned even when they demonstrate disadvantaged children. To bolster partici- high returns. pation, the program could be supplemented What then are the impediments to the by a cash-transfer scheme, with transfers widespread implementation of ECD pro- conditioned on various desirable behaviors, grams given that they are such good invest- including changes in the homecare environ- ments? Political economy constraints arise ment, as well as regular health center visits from the difficulty of making a case for for growth monitoring, immunizations, and spending resources on a program with the nutrition interventions.17 This would con- promise of (uncertain) benefits to come only centrate even more resources on the poor, years in the future. Such a case is often made but the political economy implications are by the immediate beneficiaries (parents of less clear. While targeted programs have a school-age children) or intermediate benefi- smaller constituency and thus would not ciaries (teachers), who organize themselves benefit from a broad coalition of support, a into powerful political forces. But the institu- national program, with transparent criteria tional setup for ECD program delivery-- for eligibility and good monitoring of "con- with funds in many instances channeled ditionality," could mobilize support not only to myriad small NGOs, community cen- from the direct beneficiaries but also from ters, or home-based caregivers--and the other stakeholders in society. absence of strong central responsibility It is possible to combine a universal pre- inhibit organized political pressure. The school approach with a conditional cash same institutional setup generates prob- transfer (CCT) program. This would yield lems of integration with other government the highest benefits in the participation of programs and of coordination across sev- the poor and the productivity gains for all, eral government departments.15 but it would also be more costly. The Thinking about the politics and the approach adopted in any country setting design of ECD from the start is thus impor- will have to emerge from considerations of tant. Getting information to parents, com- costs, benefits, and fiscal capacity--and munity leaders, and policymakers about the reflect the political economy. objectives and efficacy of ECD services can Basic education: expanding build public awareness and strengthen demand. Monitoring systems build support opportunities to learn by providing timely feedback on a range of Prominent in the Millennium Development intermediate outputs to policymakers and Goals, education is a great equalizer of program managers, while proper evaluations opportunities between rich and poor and provide more convincing evidence of impact between men and women. But the equaliz- and broader lessons from interventions. ing promise of education can be realized Integrating ECD programs into the broader only if children from different backgrounds development frameworks and involving par- have equal opportunities to benefit from ents, families, and community members quality education. In the previous section, enhance the sustainability of programs.16 we argued that children's ability to benefit There are two possible approaches to from school is strongly influenced by the scaling up ECD interventions. The first is to cognitive and social skills they acquire in expand publicly funded preschool pro- their early years. Evidence suggests that the grams to all children by making it a statu- gains from early interventions can dissipate tory right, as in several European countries. if disadvantaged children go on to low- This would have significant funding impli- quality primary schools.18 cations, but the benefit is potentially wide- Chapter 2 documented the large inequali- spread support from middle-class and poor ties in educational attainment within coun- families with children. tries by income, region, gender, and ethnicity. 136 WORLD DEVELOPMENT REPORT 2006 Chapter 5 presented the economic reasons the probability of their attendance. Even why credit-constrained households underin- uneducated parents will pull their children vest in education, making the efficiency case out of school if they perceive low quality.19 for subsidizing education for the poor. There There may be tradeoffs, however, if resources are other reasons for parents to choose a level devoted to upgrading quality benefit prima- of education for their children that may be rily the privileged who are already in school lower than what is optimal for the child and at the expense of reaching excluded groups for society. Educational attainment has vari- or areas--or if the rapid expansion of access ous societal benefits that are not fully cap- reduces the quality of instruction. While the tured by the individual. For example, it is long-run objective for school systems generally associated with enhanced democ- around the world is clear, priorities will vary racy and lower crime, while girls'schooling in by country, region, or group. particular has been shown to reduce fertility, empower women, and thereby contribute to Expanding access, particularly the welfare of children in the family. In addi- for excluded groups tion, education has intrinsic value, enabling Expanding access for all. More than 100 people to lead fuller lives as informed and million children of primary school age are active participants in society. out of school, either because they never The case for moving to equalizing access entered the system or because they dropped to education is therefore strong on both out before finishing.20 As a result, some 52 equity and efficiency grounds, especially for countries risk not reaching the goal of uni- basic education. Beyond basic education, versal primary completion.21 In most coun- there is an important efficiency rationale for tries, improving opportunities in education ensuring that the most talented and produc- means ensuring affordable access, especially tive people in society have access to higher for poor rural children and disadvantaged education. In today's globalized world, with groups. competition largely on the basis of skills and Higher public spending on the supply of ideas, countries need to cultivate latent talent, schools is one way to expand access. Analy- wherever it may reside. Motivated and tal- sis of the determinants of school enroll- ented children from poorer households ment in various countries suggests that deserve the opportunity to excel as much as proximity to schools is a major factor.22 A their wealthier peers. While we acknowledge careful evaluation of Indonesia's school the important equity dimension of policies construction program in the 1970s, the for tertiary education, the discussion here is largest such program on record, finds evi- devoted primarily to policies that expand dence of significant increases in both edu- access to and quality of basic education. cation and earnings.23 The program yields We argue that there is a case for public large positive returns, but it takes more than action to enhance equity in learning so that 30 years to do so because upfront construc- outcomes reflect not merely circumstances tion costs are high (more than 2 percent of of luck--parental endowments, sociocultural Indonesia's GDP in 1973), while the bene- environment, birth place, one dedicated fits are spread over a generation's lifetime. teacher--but genuine differences in prefer- But for every success story there are many ences, effort, and talent consistent with the others in which higher spending has not notion of equal opportunities. This requires translated into better access to infrastructure, expanding affordable access and upgrading inputs, and instruction for children. In many quality, with a particular focus on excluded cases, the resources are not used effectively-- groups, through various interventions that too much is spent on teacher salaries or increase both the demand for schooling and reducing class size and not enough is spent the capacity and incentives of the school sys- on instructional materials. tem to respond. Incidence studies suggest that the poor There are clear complementarities in this stand to benefit more from expansion when approach: quality improvements help only if mean levels of access to services are already children are in school, but they also influence reasonably high, now the case for primary Human capacities 137 schooling, even in many low-income coun- tries. But spending alone is clearly not B O X 7 . 2 School fees--an instrument of exclusion enough to get the children in school (and or accountability? even less effective in ensuring that they learn). In many countries, the main prob- There are two schools of thought about quality services from the schools,and point school fees.Some claim that school fees to studies that show even poor households' lem is not facilities but children dropping deter poor families from sending their kids willingness to pay for good quality services. out or not attending available schools.24 to school.Even nominally small amounts can Sympathetic to the arguments in favor Recent efforts to boost access thus focus on be a large share of poor households'income, of greater accountability, we argue for elimi- demand-side interventions: reducing the and these come on top of the forgone bene- nating user fees when the fiscal impact of fits of children contributing to family busi- forgone revenues can be managed without cost of schooling or providing incentives, ness or household chores.Schooling costs large efficiency costs or harmful spending even paying for attendance. often figure in parents'responses about con- cuts.The desirable voice and accountability In many countries, parents have to pay a straint to enrollment,and eliminating school aspects of school fees can be harnessed fees appears to have spurred a large equally or better through contributing lot, either for school fees or for other inputs, increase in enrollments in a number of labor for school improvements or working such as uniforms and textbooks. Eliminat- countries,including Kenya,Tanzania, on parent-teacher advisory committees. ing these costs can boost participation. Free Uganda,and Vietnam.Others see user fees Such in-kind fees are cheaper to the parent uniforms and textbooks provided by an as an important accountability tool,a mech- and engage the parent more fully in school anism for empowering parents to demand decision making. NGO program in Kenya (along with better classrooms) reduced dropout rates consid- erably: after five years, students in the pro- gram completed about 15 percent more tunity cost of schooling for poor families schooling. In addition many students from and represent one approach to addressing nearby schools transferred to program failures in credit markets and the imperfect schools to take advantage of the benefits. agency of parents. Many of the cash-for- The result was a 50 percent increase in class school-attendance programs are large, rep- size--an increase that does not appear to resenting significant commitments of public have deterred parents nor has it led to a resources. The biggest are Oportunidades measurable negative impact on test scores. (previously PROGRESA) in Mexico, the This is at least suggestive that a reallocation Bolsa Escola in Brazil, and the Food for Edu- of the education budget--larger class size cation Program in Bangladesh.26 with the savings used to pay for the inputs The budgets allocated to these programs under the program--could raise school are between just under 1 percent of total participation at no cost to quality.25 government current expenditure in Brazil Eliminating user fees for basic schools and more than 5 percent in Bangladesh. has also been shown to boost student These significant, but not prohibitive, sums enrollment, but quality may be compro- could be generated from savings on other mised if reliable alternative sources of expenditures, such as regressive subsidies financing are not available to schools (box for public services, including tertiary edu- 7.2). In both Tanzania and Uganda, elimi- cation. A question remains about how cost- nating school fees became an important effective the programs are in expanding political issue when the population could education: the answer depends on how suc- voice its discontent, helped by the demo- cessful they are in reaching households that cratic process, an active civil society, and (in would not have participated in the school Tanzania) the Poverty Reduction Strategy system without the transfers. Paper process. A careful evaluation of PROGRESA In some cases, there may be a need to go found an average increase in enrollment of beyond removing the direct financial costs 3.4 percent for all students in grades one of schooling to induce poor parents to enroll through eight, with the largest increase their children. This could be accomplished (14.8 percent) for girls who had completed by providing CCTs and free meals. CCT pro- grade six.27 Morley and Coady (2003) esti- grams make payments to poor families, typ- mate an internal rate of return (taking into ically mothers, on the condition that chil- account the cost of grants) for the program dren attend school regularly. The programs of 8 percent a year and report that the can be seen as compensating for the oppor- transfers are 10 times more cost-effective 138 WORLD DEVELOPMENT REPORT 2006 than building schools. But De Janvry and put forward proposals for reaching disabled Sadoulet (2004) find that most program children. In the two years since the fund was benefits are received by those who would set up, 6 percent of all schools in Uruguay have gone to school anyway. They suggest have been awarded grants to cover expenses calibrating transfers to increase program to adapt school materials, equipment, and efficiency--for example, through larger infrastructure and to train teachers in transfers to the eldest child, to children with appropriate pedagogical approaches. an indigenous father, or to children, espe- Improving gender equity in access to cially girls, living in villages without a sec- schooling often requires making special ondary school. provisions for girls, especially older girls.28 Specific grants for girls have been effective Reaching excluded groups. Schools with in Bangladesh and Mexico. Private latrines adequate supplies and well-trained and for girls are essential. Other structural motivated teachers, who are accountable for improvements including boundary walls, the learning they produce, are good for flexible or double sessions when sharing a everyone. But additional support may be facility with boys, and perhaps even gender- necessary to improve access for excluded specific schools may allay parents' concerns groups, such as disabled children, girls, and about girls' privacy and safety. It is impor- indigenous groups. tant for schools to undermine, not under- Including disabled children is possible at score, stereotypes and unequal treatment of relatively modest costs. In Uruguay, grants women--and to be wary of giving boys of up to $3,000 are awarded for schools that more resources, leadership, and attention. Female teachers are good role models for boys and girls, and even young women can be effective teachers with training, support, B O X 7 . 3 Desegregating Roma schools in Bulgaria: and a programmed curriculum. Govern- the Vidin model ments might consider setting national goals In Vidin, the Open Society Institute and the At the end of the first semester, atten- for hiring women and being flexible with Roma NGO known by the initials DROM dance was 100 percent, and first-term final- age and education requirements for female have been collaborating to integrate Roma grade averages were identical to those of teachers (while still providing adequate in- students into the mainstream school non-Roma pupils. Parents and teachers service training).29 system.Vidin is a town of 85,000 in north- were satisfied, especially with the absence west Bulgaria, and 6 percent of its popula- of reported incidents of anti-Roma To expand access for ethnic groups, teach- tion was identified as Roma in the 1992 cen- prejudice. Education authorities were ers or teacher aides from the target ethnic sus. In the 2000­01 school year, 460 Roma encouraged to scale up in other cities. In group are particularly helpful in their ability students, or half the school-age students, addition, 35 Roma parents of the bused chil- to connect with the students as powerful role were enrolled in the mainstream school sys- dren returned to school in adult education tem. Students are bused from the programs, and three teenagers who had models. Bilingual schools have also been settlement to school and back. And Roma dropped out in the third grade asked to join effective. In Mali, bilingual programs were monitors interact with parents and the the program, prompting teachers to work associated with large declines in dropout and school to encourage attendance. Low- extra hours with them. On the negative side, repetition, and rural students outscored income students also receive shoes and 24 pupils received failing grades in one or school lunches, with lunches given on the more subjects, and three left the program. urban children. In Mexico, geographic target- bus to reduce the stigma of receiving it at The success is attributable to three ing under PROGRESA (now Oportunidades) school. major factors. First, parents feel that their led to the relatively high participation of While preparing the program, DROM children are protected from prejudice went door-to-door in the Roma settlement because they are bused and monitored indigenous people (but not those in the most and sought the support of the schools, the throughout the day by adult Roma. Second, remote areas without schools).30 An innova- mayor, and the media.The project eventu- Roma monitors in the schools assure that tive approach to encourage the attendance of ally gained the support of all the stakehold- the children are not mistreated, encourage Roma children in Vidin, Bulgaria, appears to ers except the mayor, who nevertheless parental engagement and student partici- agreed not to block it. DROM invited the six pation in extracurricular activities, and help have paid off (box 7.3). mainstream schools in Vidin to present the the teachers ease cultural differences.Third, program, philosophy, and teachers on tele- the children are happy to be in schools Upgrading quality vision. Roma parents then selected a school where real learning takes place. Better quality for all. Expanding access to for their children.This marked the first time that their views had been solicited by the basic education is necessary but not enough; authorities. Source: Ringold, Orenstein, and Wilkens (2005). the quality of education matters for op- portunities. But even children in middle- Human capacities 139 income countries do a lot worse than the Figure 7.4 Boosting enrollments is not enough to average OECD kid on international tests of overcome the learning gap learning achievement, suggesting that much As a fraction of cohort of the learning in schools does not prepare Completed grade 9 but did poorly on tests children to be productive adults, let alone Dropped out before completing grade 9 for the rigors of competition they will face Dropped out before completing grade 5 in the global labor market.31 The quality Never enrolled 100 deficit is undoubtedly greater for children 90 from poorer families, because the better-off children can go to better public schools or 80 leave the public system and opt for private 70 schooling. 60 Based on the results of a standardized 50 international achievement test--the Third 40 International Mathematics and Science Study 30 (TIMSS)--Pritchett (2004a) estimates that 20 the overwhelming majority of children ages 10 15 to 19 lacks education (not completing 0 grade nine or performing poorly in the Colombia Indonesia Morocco Philippines Turkey TIMSS) in five middle-income countries Source: Reproduced from Pritchett (2004a). with data (figure 7.4).32 But the enrollment a. Based on TIMSS-R scores for eighth graders on mathematics in 1999. To calculate the fraction of students with scores below 400-- problem remains large only in Morocco. one standard deviation (100 points) below the OECD median of Indonesia and Turkey have difficulty retain- 500)--Pritchett uses the country mean and standard deviation and assumes a normal distribution. This assumes that scores are ing kids in secondary school; in Colombia, roughly constant over time so the 1999 test represents the cohort ages 15­19 in the survey year, and that eighth- and ninth-grade Morocco, and the Philippines, three of four competencies would be roughly similar. children who have completed grade nine have failed to learn enough. How can countries improve basic learning outcomes for all? We know broadly from a indicate that increased availability of text- large number of studies that have tried to books helps improve test scores, but only account for the "production" of schooling among the better-performing students, and outcomes that higher public spending does that performance-based prizes for teachers not always translate into better student learn- increased test scores initially, but the gains ing.33 A recent study analyzing the determi- dissipated later. What did work in raising nants of student performance on the test scores were merit scholarships for 13- TIMSS--using data for more than 260,000 to 15-year-old girls--with positive effects students from 6,000 schools in 39 countries-- also on learning for boys, who were ineligi- finds that education spending (spending per ble, and girls with low pretest scores, who student, class size, student-teacher ratio) at were unlikely to win the scholarships. The either the school or country level has no posi- scholarships were the most cost-effective of tive impact on student performance. Among all the interventions tested, achieving the factors at the school level, the only ones that same learning results at less than 20 percent have a significant impact on student perform- of the cost of textbook provision.35 ance are instructional material and teachers The results underscore the importance of with an adequate formal education.34 combining additional spending (of the right These results are confirmed by several kind) with interventions that strengthen careful microlevel studies. Since 1996, a incentives to teach and to learn.As the teacher group of researchers working with a Dutch incentive program shows, project design--in NGO, International Chirstelijk Steunfonds this case, the behavior rewarded--matters.36 Africa, has been involved in the design and evaluation of a series of randomized exper- Better quality for the most disadvantaged. iments to improve learning outcomes in the Many of the programs just discussed focus Busia district in rural Kenya. The results on improving performance at the school 140 WORLD DEVELOPMENT REPORT 2006 about half the cost of private secondary B O X 7 . 4 Remedying education: schools; vouchers could be renewed as long as the Balsakhi program in India students maintained satisfactory academic performance. An evaluation of this random- The Balsakhi program is a large remedial program has highly significant positive ized natural experiment (vouchers were education program now implemented in 20 results on student learning. On average, the awarded by lottery) found lower repetition Indian cities by an NGO--Pratham--in col- program increased learning by 0.15 laboration with the government. Pratham standard deviations in the first year and rates and higher test results among voucher hires young women from the community to 0.25 in the second year.The gains were winners.39 But targeted voucher schemes may teach basic literacy and numeracy skills to largest for children at the bottom of the dis- be politically difficult to implement--and the children who reach the third or fourth tribution, with those in the bottom third grade without having mastered them. Stu- gaining 0.20 deviations in the first year, and Colombia program was discontinued. dents are pulled out of regular classes for 0.32 in the second year (0.51 for math two hours of the school day for the reme- alone).The results were similar in the two Strengthening accountability dial education.The program is inexpensive: grade levels and in the two cities. At the Dismal learning outcomes in many coun- $5 per child per year. Easily replicable, it has margin, extending this program would be been scaled up rapidly since its inception in 12 to 16 times more effective than hiring tries are due to the combination of inade- Mumbai in 1994, now reaching tens of new teachers. quate resources and the low responsiveness thousands of students in the 20 cities. and accountability of school systems. A recent two-year randomized evalua- Efforts to improve school performance will tion in Mumbai and Vadodara finds that the Source: Banerjee and others (2004). therefore need to focus on strengthening accountability processes: achieving societal consensus on expanding education, dealing level. What about improving learning out- with capture by vested interests, and tackling comes for disadvantaged or poorly per- the weak incentives for service providers to forming students? The merit scholarship raise the quality of learning. program for 13- to 15-year-old girls in Achieving societal consensus on expand- rural Kenya mentioned earlier is one such ing education helps tackle the pathology of example. The Balsakhi program in India-- elite capture, whereby the wealthy oppose a large remedial education program--rep- increased spending in public education. His- resents another highly successful and cost- torically, expansion of voice in a country has effective approach to giving poorly led to wider access and quality improve- performing students a leg up (box 7.4). ments in basic education, notably in Europe Because children with the lowest ability and North America.43 Democratic transi- registered the largest gains in test scores, tions have spurred recent expansions in basic the program had an equalizing effect on education also in Brazil, Guatemala, and student achievement. Uganda.44 But these are long-term processes, Many countries group students together and it is essential to make progress now by similar abilities on efficiency grounds. toward meeting the urgent needs of millions However, recent findings in 18 to 26 coun- of children around the world. tries show that such tracking increases edu- Some progress can be made by counter- cation inequality, possibly by reinforcing ing the stranglehold of interest groups on the effects of family background, but it equity-enhancing reforms, such as when does not contribute to higher mean levels teachers unions block reforms that would of performance.37 strengthen the link between performance Another option to improve learning out- and accountability.45 Significant payoffs comes for disadvantaged children is to pro- can come from systemic reforms that vide school vouchers. There is significant strengthen accountability from clients controversy around the equity and efficiency directly to frontline providers.46 The most impacts of generalized voucher schemes (box crucial steps in any such reform are to 7.5). Targeted means-tested voucher pro- increase the schools' accountability for per- grams may be more promising.38 Results formance and to ensure the availability of from one such scheme in Colombia are relevant information to monitor their per- encouraging. The PACES program provided formance. Accountability for performance more than 125,000 students from poor also requires autonomy to manage results. neighborhoods with vouchers that covered This means delegating responsibility and Human capacities 141 B O X 7 . 5 School vouchers: efficient and equitable? School voucher programs increase the power of choice imply that weak public schools will lose equity effects of universal voucher programs. parents to choose schools for their children. Par- students and could be forced to close. Success- They could lead to increased racial and socioe- ents are given a voucher by the government, ful schools would have to be enlarged, or new-- conomic stratification of schools as parents seek which (at least in theory) can be applied to the and presumably more effective--schools would to improve the quality of their children's peers school of their choice, public or private.The have to be built. Such institutional change pres- (such as middle-class flight in Chile). Such strati- expectation is that competition among schools ents significant political, technical, and adminis- fication could occur if all parents were given and the availability of public resources to access trative hurdles.The hurdles are particularly vouchers but low-income families were in a less private schools would improve the overall effi- acute under a universal voucher program that favorable position to exercise choice because of ciency of the school system and student enables large student migration. lack of information, prohibitive transportation achievement. But research into the impacts of Solid evidence on productivity differences costs, or extra fees. Disadvantaged students vouchers has not produced definitive or gener- between public and private schools is also lack- would simply be more concentrated in low- alizable results--in large part because of ing. Again consider Chile, whose voucher pro- quality schools. Echoing similar concerns, a methodological challenges and the differences gram generated a large number of new secular recent study concludes that, in the United in the specific design and institutional context private schools that operated alongside more States,"a large-scale universal voucher program of various reforms. Design can vary according to established Catholic schools. An analysis of would not generate substantial gains in overall the size of the voucher, the pool of eligible stu- Chilean fourth-grade achievement data showed student achievement and ... it could well be dents, whether schools can charge more than that Catholic schools had higher achievement detrimental to many disadvantaged students" the value of the voucher, and regulations gov- than public schools in math and Spanish, while (Ladd 2002, 4). erning school choice (such as whether or not secular private schools had lower achievement. There are ways to make voucher programs religious schools are eligible). Institutional man- Another study found that unrestricted nation- more beneficial for disadvantaged students, but agement, bureaucratic control, governance of wide school choice in Chile resulted in middle- these may reduce political support for such pro- public schools, and oversight of eligible private class flight into private schools, but without grams. For instance, vouchers and school choice schools also vary and influence the results of achievement gains.42 can be limited to low-income families. Program programs.40 Evidence on peer effects that could influ- design can also be enhanced by providing Chile has more than 20 years of experience ence student achievement is equally inconclu- transportation to school, requiring that schools with large voucher programs.Yet detailed analy- sive. It is not clear whether peer effects are lin- do not charge extra tuition or fees on top of the sis on the effects of competition on school qual- ear, meaning that gains for students who move voucher, and requiring oversubscribed schools ity in Chile has not led to a consensus on to a higher-quality peer group are offset by to select students randomly. Irrespective of impact. In the United States, one study found losses for either their new or old classmates-- design specifics, a voucher program needs to be that competition improved achievement in the or nonlinear, meaning, for instance, that posi- embedded in a larger strategy of education city of Milwaukee, while another found no tive peer effects can disproportionately benefit reform that improves the overall institutional impact. Similar variance is found in the related students with low socioeconomic status. incentive environment for schools and gives literature on the impact of school choice.41 While impacts on efficiency are ambiguous, underperforming schools the instruments and Competition between schools and school there are reasons to be cautious about the resources to improve. power for decision making to the lowest local communities. As a result of greater feasible level consistent with incentives.47 parental involvement, Educo schools had Once the responsibilities of the school rapid enrollment increases without giving system are well defined, the resources and up quality, reduced absenteeism among decision-making powers of providers are teachers and students, and increased math consistent with their responsibilities, and and language scores. information is available to track perform- ance, various mechanisms become avail- able to pressure schools to deliver better Toward better health for all performance. School autonomy, commu- The large inequalities in health care use nity control, nongovernment providers, and health outcomes in many developing voucher programs, and public sector countries do not just reflect different pref- reforms can strengthen the ability of citi- erences or needs--they arise from con- zens, communities, and public organiza- straints on the ability of individuals to tions to hold schools accountable for deliv- achieve good health (chapter 2). Income is ering results.48 El Salvador's experience one important constraint, especially given with rebuilding much of its education sys- incomplete financial markets. Low-income tem following the destructive civil war of people around the world have worse health the 1980s is a good example of what can be and use fewer health services (chapter 2). accomplished through partnership with Ethnicity, race, and location also influence 142 WORLD DEVELOPMENT REPORT 2006 outcomes. Infant mortality rates among affordable care, and enhancing the account- blacks in South Africa are 5.5 times higher ability of providers. than those among whites; life expectancy among the rural Chinese is almost 6 years Expanding knowledge lower than among urban dwellers, while the Underinvestments in health by patients life expectancy gap between China's richest may reflect a lack of knowledge and agency and poorest provinces (Beijing and and incentive issues within the household, Guizhou) is 10 years.49 as well as a lack of these resources. Lack of These stark differences in outcomes and knowledge can keep people from seeking use reflect large group-based inequalities in care when they need it, even when price is access to information, facilities with rea- not an issue. As chapter 5 showed, when sonable standards of care and financial deworming medicine was offered free to protection from health risk. A lack of children in Kenya, the take-up rate was only knowledge about hygiene, nutrition, avail- 57 percent. Similarly, in Bolivia, many poor able services, and treatment options, par- babies are not delivered by a trained atten- ticularly among the uneducated, lowers dant even though mothers are eligible for demand for health services. Within the free care. In India, 60 percent of children household, some family members have less have not been fully immunized, although voice (women and children) and this can immunization is free; mothers cited igno- affect the level of resources used in their rance of the benefits of vaccination and not interest. Health clinics, especially in poor knowing the clinic locations as the major and remote areas, are often inaccessible, reasons for why their children had not been have high rates of absenteeism and low qual- immunized. ity and responsiveness to clients. Finally, ill- Lack of knowledge can also lead people ness is certainly a burden on poor people, to pay for inappropriate care. Unqualified or but catastrophic health shocks can also unethical providers can overprescribe treat- have disastrous consequences for the not so ments for patients who do not know what is poor, mainly through loss of income but in their best interest. For instance, instead of also through high out-of-pocket payments effective and inexpensive oral rehydration for health care. therapy, a poor child in Indonesia gets more These large group disparities in health than four (often useless) drugs per diarrhea outcomes are inequitable, because they attack.50 imply vastly different opportunities to lead Education is a natural way to address the productive lives. And because they often lack of patient knowledge. Elo and Preston arise from failures in markets and agency, (1996) estimate that one year of extra edu- reducing these disparities would have large cation nationally reduces mortality rates by payoffs in efficiency and productivity. We about 8 percent--half directly and half focus here on ways to level the playing field through the effects of additional earnings. for attaining good health by boosting peo- Female education is particularly powerful. ple's knowledge about basic health practices Better-educated mothers are associated with and services, expanding their access to better child-health practices, including hand washing, proper disposal of feces, antenatal care, delivery assistance by trained person- B O X 7 . 6 Working with mothers to treat malaria nel, immunization, and well-baby clinics. Community health agents also provide Malaria kills nearly 1 million children in chloroquine and information on how to cost-effective instruction in disease preven- Africa each year. Empowering mothers to administer the drug at a cost of $0.08 per tion and healthy behavior. By employing take actions to treat their children in the child treatment dose. By educating mothers, home can be highly effective in reducing Tigray provided rapid and effective these nonspecialized personnel, many coun- mortality.The Tigray region of Ethiopia treatment without forcing the child to relo- tries have increased knowledge among the trained"mother coordinators,"who were cate, which reduced under-five mortality by general public at low cost, as with Brazil's selected from among the community to 40 percent and alleviated the burden of Family Health Program and Ethiopia's educate other mothers on the symptoms of severe malaria cases on hospitals. fever and malaria. Mothers were provided Source: World Bank (2004k). "mother coordinators," supporting home- based malaria treatment (box 7.6). Com- Human capacities 143 munity health workers have also helped greater burden on rural dwellers through increase coverage of poor populations cost- additional travel time and hospice costs. effectively. City dwellers are within easier reach of Public information campaigns can im- health centers. In Burundi, 98 percent of the prove health knowledge by working through urban population was within one hour of a existing health clinics or by directly targeting health center, but only 65 percent of the the community. It is also possible to collabo- rural population was. Even within rural rate with the private sector in marketing areas, there is large variation. Only half of socially valuable products, such as insecticide- the poorest rural Nigerians were within an treated mosquito nets, water purification hour of a clinic, but 84 percent of the rich- methods, foods rich in vitamin A, and est were. soap--as with the Central American Hand- Even when health facilities are accessible, Washing Initiative in Costa Rica, El Sal- they vary hugely in quality. Some have med- vador, and Guatemala.51 Media campaigns icines and drugs in stock, are run by well- can also be effective. For instance, frequent trained and motivated staff, and are well broadcasts of AIDS messages in Thailand, maintained. But many are not. They are Uganda, and Brazil were a key element in the often dilapidated, rarely have medicines in campaign to reduce the spread of the dis- stock, and are run by poorly trained and ease. The Thai media campaign is credited rude medical staff, who frequently fail to with reducing the incidence of AIDS to a come to work. It is often precisely the peo- point at which the country is now able to ple who are materially disadvantaged who consider a fiscally viable treatment program also have to struggle with poor quality and for AIDS patients.52 But neither information nor free services may be enough to boost use among the less B O X 7 . 7 Poor people and ethnic minorities empowered or those without voice. Mater- receive lower-quality care nal and child health is often viewed as merit- ing additional intervention. Through condi- New studies from India,Indonesia,Mexico, Mexico,indigenous women receive prenatal tional transfers, Mexico's PROGRESA (now and Tanzania demonstrate that the poor sys- care from doctors who rank only in the tematically receive lower-quality care from twenty-fifth percentile in quality,while Oportunidades) program was designed to private and public providers.54 The situation is equally poor nonindigenous women receive encourage women to attend pre- and post- often worse for ethnic minorities.Evidence care ranking in the fortieth percentile.The natal clinical visits and bring their children from Mexico suggests that,even in poor rural wealthiest fifth fare much better,but even villages,there is a difference in the quality of among the wealthy,the indigenous receive for immunization and growth monitoring. care between wealthy and poor and between worse care than the nonindigenous,suggest- The program saw an 8 percent increase in indigenous and nonindigenous groups. ing that discriminatory practices or cultural clinic visits by pregnant women in their first Among the poorest fifth of the population in barriers may be at play (see figure below). trimester, which led to a 25 percent drop in Indigenous Mexicans receive lower-quality care, regardless of income the incidence of illness in newborns and a 16 percent increase in the annual growth rate of Doctor quality (percentile) children between one and three. An impor- 70 tant design feature of the program is trans- Nonindigenous 60 ferring funds to women. Although the pro- gram puts more demands on mothers' time, 50 Indigenous participants felt that the benefits were worth 40 it. Women also reported feeling more self- confident and having more control over 30 household resources and their time and 20 travel. Similar schemes are delivering mater- 10 nal and child care services in Brazil, Colom- bia, and Nicaragua.53 0 Poorest Second Average Fourth Wealthiest quintile quintile quintile quintile Expanding access Access to quality health facilities remains a Source: Barber, Bertozzi, and Gertler (2005). problem in many areas, often imposing a 144 WORLD DEVELOPMENT REPORT 2006 inaccessible health facilities. Ethnic minori- in poor areas may not be affordable for many ties often fare even worse in terms of the poor countries. But there are other quality of health care received (box 7.7). approaches to reducing the indirect costs An important obstacle to the provision of (for transport and time spent in transit) and equitable health services everywhere is the the medical isolation of poor communities. difficulty of enticing urban-educated doctors Roving extension clinics visit sparsely popu- to work in poor areas. Chile, Mexico, and lated areas in Afghanistan, Somalia, and Thailand have used financial and other Tunisia to provide care locally and offer incentives to encourage qualified staff to transportation to better-equipped facilities work in rural areas.55 In Indonesia, doctors when required. Bangladesh, Cuba, Gambia, had to complete compulsory service in health India, and Madagascar have trained commu- centers before they could obtain a lucrative nity health workers to scale up service deliv- civil service post. Compulsory service was for ery for a wide range of services, including five years, with shorter periods allowed for malaria prevention, immunizations, family work in remote provinces. This system planning, treatment of TB patients, home increased the number of doctors in health visits, and neonatal care. The results have centers by an average of 97 percent from 1985 often yielded a substantial increase in cover- to 1994, with gains of more than 200 percent age and measurable improvements in out- for the most remote provinces.56 comes at much lower unit costs. Through a Expanding rural health infrastructure village health worker program that moni- and providing incentives to doctors to work tored infants' weight and health for the first month of life, rural infant mortality in Maharasthra, India, was cut in half from 75.5 B O X 7 . 8 Better maternal health in Malaysia to 38.8 per 1,000 live births between 1995 and Sri Lanka and 1998.57 Other outreach programs focus on Despite huge improvements in health,sur- (in Malaysia) and transportation subsidies maternal health and safe delivery. By mak- vival,and fertility around the world in recent (in Sri Lanka) were provided for emergency decades,global maternal mortality has not visits to the hospital. In Malaysia, health pro- ing professional midwives and supervisory declined significantly.Two exceptions are Sri grams were part of integrated rural devel- nurse-midwives widely available in rural Lanka and Malaysia.In Sri Lanka the mater- opment efforts that included investment in areas, Malaysia and Sri Lanka dramatically nal mortality ratio--the number of maternal clinics, rural roads, and rural schools. Simi- reduced maternal mortality rates (box 7.8). deaths per 100,000 live births--dropped larly, in Sri Lanka, the government invested from 2,136 in 1930 to 24 in 1996.In Malaysia in free primary and secondary education, In Bolivia, expectant mothers with high it dropped from 1,085 in 1933 to just 19 in free health care, and food subsidies for all obstetric risk are transported to larger clin- 1997.What can account for this impressive districts.The concept was that basic health ics a few days before their due date; in Sri decline? Improving access for rural and dis- care acts in synergy with education and Lanka, they are picked up by radio- advantaged communities was an important other types of infrastructure. For example, part of the strategy in both countries. better roads make it easier to get to rural dispatched four-wheel-drive vehicles. Sri Lanka and Malaysia made health facilities and facilitate transportation competent, professional midwives and of obstetric emergencies. By addressing the Financing affordable care supervisory nurse-midwives widely multidimensionality of equity, these coun- For consumers, health care finance systems available in rural areas. Midwives assisted tries made significant health gains. deliveries in homes and small rural hospitals Dramatic improvements in maternal have two goals: affordable access to a basic and performed initial treatment in the mortality are thus possible. Just as impor- package, and financial protection in the event of complications.They were given a tant, the experiences of Malaysia and Sri event of catastrophic illness costs. The clas- steady supply of appropriate drugs and Lanka show that these can be attained with equipment and supported by improved only modest expenditures. Since the 1950s, sic case for government intervention (pub- communication, transportation, and back- public expenditures on health services have lic subsidies) is when the full benefit of a up services. Besides reducing financial and hovered between 1.4 and 1.8 percent of "treatment" accrues not just to the individ- geographic barriers, they also helped over- GDP in Malaysia and averaged 1.8 percent ual but also spills over to the community come cultural obstacles and allegiances to in Sri Lanka, with spending on maternal and traditional practices. Because midwives child health (MCH) services amounting to more broadly. Interventions to avoid the were available locally and were well less than 0.4 percent of GDP in both coun- spread of malaria fall into this category. A respected, they developed links with com- tries. Countries with similar income levels bed-net distribution program--involving munities and partnerships with traditional have significantly higher health the Red Cross and national ministries of birth attendants. expenditures and similar, if not higher, Malaysia and Sri Lanka pursued other maternal mortality ratios. health--increased use among the poorest complementary strategies.Transportation Source: Pathmanathan and others (2003). quintile from 3 percent to nearly 60 percent in a northern district of Ghana and from 18 Human capacities 145 percent to 82 percent in five rural Zambian events.61 If so, poor people may be better districts.58 Immunizations, vector control, served by having protection against these and interventions for tuberculosis, HIV/AIDS, low-risk, high-cost events through some and other communicable diseases are simi- type of pooling mechanism. It is no easy larly deserving. task, however, to cover catastrophic health But the case for government interven- risks in ways that reach the poor. tion goes beyond these well-accepted public Reducing out-of-pocket costs involves a health reasons: inequality in access to finan- combination of pooling health risks and pre- cial protection from health risk based on payment--through contributory insurance wealth, ethnicity, and location provides schemes, national health services that are another important rationale. Out-of-pocket funded out of general revenues, or a mix of payments are the dominant form of health the two. In all instances, reaching the poor care finance in lower-income countries. But requires some means of subsidizing their liquidity constraints and imperfect credit health care costs, so fiscal room and political markets often make out-of-pocket pay- commitment are crucial. In very low-income ments more difficult for the poor, reducing countries, community insurance schemes, their use rates, and health and productivity. sometimes supplemented through NGO or In Vietnam in 1998, before the establish- donor funding, can provide some protection ment of health insurance, 30 percent of to some people, but generally these services poor households' nonfood budget went to do not reach the poorest. medical costs, while only 15 percent of Contributory schemes--private or social-- spending for the richest fifth of the popula- operate best where the share of the formal tion was health related. In Cambodia, a sin- labor market is high and administrative gle hospital stay absorbed 88 percent of an capacity is strong. And because premiums average household's nonfood consumption and copayments can be unaffordably high, in 1997 and, for the poorest among them, purely contributory schemes generally bypass the cost was higher than the entire nonfood the poor. Private insurance is a significant budget. In the transition economies of part of health finance systems in Brazil, Europe and Central Asia, with the collapse Chile, Namibia, South Africa, the United of prepayment in the 1990s, out-of-pocket States, Uruguay, and Zimbabwe. But in all spending skyrocketed, accounting for as seven countries, private insurance is used by much as 80 percent of health resources in formal sector workers, leaving the ministries Georgia and Azerbaijan. In Armenia, 91 of health to provide public funds for pro- percent of patients reported having to make grams for the poor and underserved.62 some payment for service received.59 While Social insurance is characterized by health care use has plummeted in the compulsory coverage financed by employ- region, the collapse of prepayment espe- ment taxes. Benefits are often limited to con- cially hurts poor people. tributors, and providers are often from the The regressive nature of out-of-pocket public sector even when private providers payments is well understood, but there are are eligible. Social insurance has the appeal no easy answers, especially in low-income of generating a large risk-sharing pool and countries. Given the small formal sector can, in principle, reach the poor through and limited administrative capacity, these cross-subsidization. But, when the formal low-income countries have limited capacity sector is small this potential is limited, to mobilize resources to pay for essential because of the difficulties of enrolling a large health services and to establish large enough share of the population. This can enough risk pools. So, developing countries turn the system into a ticket to privileged face a difficult tradeoff between providing a access to health services for some, while basic package of health services and extend- leaving the bulk of the population under- ing financial protection.60 Some evidence served. For example, in Mexico, social secu- suggests that the poor are better able to rity health spending per person is five times cover low-cost, high-frequency health higher than what the Ministry of Health shocks than low-frequency, high-cost spends per person.63 And, the payroll tax 146 WORLD DEVELOPMENT REPORT 2006 required for social insurance introduces 1,000 births to 15) among the insured. But labor market distortions, especially in set- there are questions about the program's tings characterized by dual labor markets. sustainability in the face of mounting fiscal The challenges from both an equity and cost--reflecting the difficulty of systemic efficiency perspective are enormous, but a reforms that threaten the privileges of handful of mainly middle-income countries established interests, in this case, public have made important attempts to make hospitals and the prereform social security social insurance systems work. Colombia, for institution.64 example, has a cross-subsidization scheme Ministries of health in many developing for the poor, topped up by general revenues. countries operate essentially as national The scheme has delivered considerable ben- health services, with nationally owned health efits: higher coverage among the poor (48 sector inputs and funding from general tax percent, up from 9 percent, in 10 years); revenues. The systems they manage are often lower out-of-pocket costs for ambulatory inefficient and inequitable, reflecting severe care; large increases in physician-assisted resource and institutional capacity con- delivery (by 66 percent) and prenatal care straints but also a bias in favor of the wealthy among rural women (by 48 percent); and and influential. Services are meant to cover lower child mortality rates (from 44 per everyone, but high out-of-pocket payments keep many poor people from participating. Countries have tried various approaches to improve equity in access to health care pro- B O X 7 . 9 Mobilizing support for universal coverage vided by the national health system, such as in Thailand eliminating user fees for all, waiving fees, or giving vouchers to poor people. With the introduction of the universal cover- Years of corruption and political In 2001, Uganda abolished user fees for age scheme in 2002,almost the entire Thai inequity in the early 1990s, together with all. The result was a significant increase in population now has health coverage (box the intervening period of military rule fuel- figure 1).This was possible largely because ing social discontent, prepared the ground health care use, lower probability of sickness, the democratic transition of 1997 ushered in for democratic reforms and a liberal consti- and better anthropometric measures, partic- a period of increased voice and openness tution in 1997.Two provisions of the new ularly for the poor.65 But the elimination of and raised the political profile of poor peo- constitution were important for the ensuing ple's concerns.Technical preparation--with health sector reforms: the principle of user fees, if effective, can reduce the resources design details that had been under consid- equity in health care access; and the scope for the health sector, and thus its quality, eration and subject to experimentation for for civil society to propose national legisla- unless budgetary funding is topped up to some time--also helped to garner support tion affecting citizen rights and the role of make up for the shortfall. Uganda appears to for the reform, while prior investments in the state, if the measure had 50,000 signa- health care infrastructure, establishing a tures. In March 2000, nearly at the same have avoided a fall in quality, thanks to a health center in nearly every rural subdis- time that a feasibility study for the scheme large increase in the health budget that more trict, provided assurance of implementation was completed, a network of 11 NGOs sub- than compensated for the loss in revenues success. mitted to parliament a draft bill calling for from eliminating user charges. universal health care coverage. Between Thailand's increasing coverage 1999 and 2001, the press also captured the Introduced in 2002, Thailand's "30 baht" general public's interest and kept the issue or universal coverage scheme aims to guaran- Uninsured on the political agenda by highlighting the Private health insurance tee health care to every Thai citizen. It com- shortcomings of the current health system. Universal coverage scheme bines previously existing schemes targeted to This political foment attracted the Voluntary health card scheme the poor and uninsured, and allocates budg- Medical welfare scheme attention of the opposition Thai Rak Thai Social Security (TRT) party.TRT adopted the policy because etary resources to providers on a capitation Government/state enterprise it was broadly supported, administratively basis, with only a small copayment per visit and technically feasible, and consistent with 100% (30 baht). The Ministry of Public Health the party's ideology.TRT effectively turned the 1997 financial crisis into an opportunity remains a strategic manager and central fin- 75% by highlighting the health issues ancier, but the district offices make the deci- precipitated by the crisis. Following its land- 50% sions on choice of providers. The scheme has slide victory in 2001,TRT introduced its own universal coverage legislation, which passed markedly increased use and coverage, with 25% in November 2002. roughly three-quarters of the country bene- 0% fiting from the scheme and 95 percent of the 1999 2002 2003 Source: Pitayarangsarit (2004). population insured overall, all at a limited additional budgetary cost (box 7.9). Human capacities 147 But there is broad agreement that exist- burden on populations in poorer or ethnic ing capitation rates are too low and that the minority regions.68 system is underfunded. This provides lim- Many developing countries have a mixed ited incentives for private providers to par- system, with ministries of health, private ticipate and could lead to a financial insurance, social insurance, and targeted squeeze on public providers with adverse schemes coexisting to serve different seg- impacts on quality.66 Higher use has also ments of the population. These multitrack put a strain on human resources, with systems tend to fragment, increasing admin- increased workloads (and low pay) acceler- istrative costs, limiting pool sizes, and under- ating the number of physicians leaving the mining both equity and efficiency objectives. public system. Clearly supply-side measures Chile's two-track universal coverage system need to be considered in tandem with has caused severe segmentation, with the health finance reforms to expand access. healthy and wealthy in the private scheme, Still, the achievements have been consider- leaving the public scheme overburdened able, and the scheme has broad popular with the poor and ill. Chile is trying to over- support. Thailand implemented the reform come this by creating a "virtual pool," man- in large part thanks to the popular support dating a common basic benefits package, that democratic reforms made possible; instituting catastrophic insurance, allowing previous investments in sound design and portability of benefits between schemes, and health infrastructure also helped. initiating minimum quality and maximum Other countries reduce costs for the wait-time standards. poor through targeted programs funded from general revenues. Armenia's targeted Community-based health insurance (CBHI) fee-waiver system curbed plummeting use schemes have developed in some poor com- among the poor. But in many instances, munities outside the reach of national simple legislation of free or reduced-price health systems. Communities pool health services can be counterproductive without risks through voluntary contributions to a good funding and targeting. Targeted pay- local fund used when any member incurs a ments, through government vouchers and health shock. The schemes are reported to civil society partnerships with hospitals, can reduce out-of-pocket spending and in- help. Vouchers issued to poor patients, as by crease use by their members, but they gen- the MCH poverty alleviation fund in Yun- erally do not reach the poorest and nan Province in China, give providers a socially excluded groups or offer members greater assurance of payment. In Cambo- enough protection from financial risk. dia, a promising partnership has emerged Many are limited by their small risk pools, between government hospitals, Médecins exposing them to low-frequency but high- Sans Frontières (MSF) and a small local cost catastrophic events that can outstrip NGO, covering the hospital fees of those the community fund. Some communities considered indigent by the local NGO's address large health risks by increasing the social workers. Because the hospital is fully maximum benefit, as in Cameroon. But compensated, poor patients receive the they do so by limiting the number of fam- same care as those who can pay.67 ily's claims to one a year and by requiring Vietnam has introduced health cards for high premiums (which prohibit the poor the poor. More than 11 million of 14.3 mil- from participating).69 lion eligible people benefited from Viet- Insurance alone is not enough for equi- nam's program in its first year of implemen- table use. Inadequate knowledge of the tation in 2002. The program has already scheme's benefits and processes and even the significantly increased the flow of govern- paperwork for submitting claims to commu- ment health funding to the poor and to pre- nity insurance schemes can be a deterrent. dominantly poor areas of the country. The Hospitals often require payment on or funding per beneficiary, however, is consid- before discharge, but insurance claims are ered inadequate and the cost-sharing not settled until later, requiring patients to arrangements are likely to impose too large a pay up front. India's Self-Employed Women's 148 WORLD DEVELOPMENT REPORT 2006 Association (SEWA) has been seeking to network. NGOs are particularly helpful in remedy similar difficulties encountered in its serving remote areas and hard-to-reach pop- large and well-established CBHI scheme. ulations: the Bangladesh Rural Advancement SEWA is testing door-to-door visits for Committee (BRAC) trains community work- member education, reimbursement assur- ers to seek out the extremely poor in need of ance with selected hospitals, and reimburse- urgent medical care. In Jordan, half or more ment to members while still in hospital.70 of outpatient visits are to private providers.72 Many private providers offer excellent serv- Enhancing provider incentives ices. But some do not--and misdiagnose, misprescribe, or overprescribe treatment. In Addressing knowledge, access and afford- Mexico, even wealthy women receive worse ability constraints are important, but they care from private providers than from public may not be enough to raise health use and providers (Barber, Bertossi, and Gertler outcomes. Hours of operation, waiting time, 2005). Without unduly discouraging benefi- staff disposition, competence and integrity, cial private enterprise in health, governments and the cultural appropriateness of services need to ensure accreditation and appropriate are all important. Complaints of unprofes- regulation for nonpublic providers. sional treatment, abuse, and corruption abound worldwide. Public medical staff Social protection: managing risk who take authorized or unauthorized leave from public clinics undermine the credibil- and providing social assistance ity of the public health sector, drive up costs Social protection policies typically have for poor families, and induce the poor to use been thought of as a form of redistribution. private providers, including traditional heal- This certainly is important. But more recent ers. In Bangladesh, such absenteeism rates theoretical and empirical work also high- amount to 40 percent for physicians in lights a crucial opportunity-enhancing role larger clinics and 74 percent in smaller sub- for social protection.73 As chapter 5 showed, centers with a single physician. More gener- pervasive financial market failures in devel- ally, poor service delivery has to do with oping countries lead to widespread unin- weak management and incentives within the sured risks and credit constraints. Unequal public health system--ineffective technical capacity to manage risk means unequal and structural backup, lack of professional opportunities to engage in risky but high- career structures, and inadequate financial return activities. Families may deal with incentives all contribute. But the weak crises in ways that narrow future opportu- demand for service provider accountability nities, such as distress sales and forgoing and quality is also a problem.71 health care, schooling, or food intake. By If they are organized, poor citizens and helping poor people manage risks, social communities can have more voice and protection programs expand their opportu- greater power to influence health providers. nities and enhance overall efficiency. Governments can help support organization Even purely redistributive programs can by communities and enhance provider have important opportunity-enhancing im- accountability. It helps to have well-defined pacts. Take the example of social pension objectives for health service delivery with schemes in Brazil and South Africa. These transparent metrics for monitoring progress. schemes are pure transfers targeted to the This allows for community oversight of elderly, geared strictly to avoiding destitu- health workers and facilities, and when cou- tion, but they have important welfare pled with sufficient management autonomy impacts beyond that. They improve the for providers to reach the established objec- recipients' access to credit, thanks to the tives, can lead to improved provider incen- regularity of pension payments, and lead to tives and accountability. higher investments in the household's phys- There is also a need for governments to ical capital and in the human capital of its engage with nonpublic health care providers: children and elderly.74 in many countries, NGO and private But social protection systems do more providers make up a large part of the health than help individual households avoid des- Human capacities 149 titution and expand their opportunities-- Figure 7.5 Almost all countries spend more on social insurance than on social they can also help societies embark on assistance (percent of GDP) reforms that would have insurmountable % of GDP equity and political costs without them. 14 Reforms desirable for their beneficial im- Social insurance 12 pacts on efficiency and the government's spending Social assistance fiscal position--such as increasing utility 10 spending prices, eliminating general food subsidies, 8 introducing a defined contribution pension system, liberalizing trade--may not be 6 politically feasible unless policies are in 4 place to compensate losers. Importantly, permanent social protection can help 2 reduce the need for special compensatory 0 programs for each and every reform75--all Sub- Middle East Europe East Asia South Asia Latin OECD Saharan and and and the America the more important because such programs Africa* North Africa Central Pacific and the are difficult to start and stop and are not Asia Caribbean always very efficient. Source: Data on 74 countries taken from World Bank Public Expenditure reviews or other similar work. All of this confirms that there is a OECD data are from the OECD Social Expenditure database. dynamic efficiency rationale for social pro- Note:* The average for Africa is based on data for only two countries. OECD excludes those OECD mem- bers (such as Poland and Mexico) that are already accounted for in the regional averages. tection. But there are also important effi- ciency arguments against transfer policies. Design issues are of particular concern, poor. These include a variety of cash or because poorly designed programs can have in-kind programs targeted at the poor. large negative consequences on efficiency. These are complemented by labor mar- Taxes or contributions have distortionary ket regulations (for example, on hiring and costs, especially when they are not directly firing of workers) that are discussed in linked to benefits (see focus 5 for a discus- chapter 9. There is large variation in the sion of tax policies), while transfers can share of GDP spent on social protection, dampen work incentives, reduce private sav- with more-developed regions devoting con- ings, and weaken informal insurance mech- siderable sums (figure 7.5). Almost all anisms. Europe's experience in the second countries spend more on social insurance half of the 1900s suggests that well-designed than social assistance programs. social (and tax) policies can indeed be con- There is no consensus on the appropriate sistent with strong growth thanks to careful balance of interventions--even in countries attention to productivity impacts.76 that have sufficient resources and capacity to implement any combination desired. Some Program choices vary by country observers argue for the universality of social Social protection generally encompasses two insurance programs over the targeted nature classes of interventions: of social assistance programs that are based on political economy considerations. They · Contributory schemes (social insurance) argue that targeted programs are exclusion- in which the primary focus is on manag- ary, by definition, and divisive as a result.77 ing risks through smoothing an individ- But a significant group of OECD countries ual's income over time and in the face of (notably New Zealand, Australia, the United difficulties These programs often pool States, and the United Kingdom) have opted risks across large numbers of individuals for systems with heavier components of tar- and include old-age and disability pen- geted transfers and less generous or less uni- sions and health and unemployment versal programs.78 insurance. Many developing countries face con- · General tax funded transfers (social straints on the choice of systems because of assistance) in which the focus is on limited fiscal and administrative capacity. redistribution from the better off to the Many poor and even middle-income coun- 150 WORLD DEVELOPMENT REPORT 2006 Table 7.1 Examples of social protection programs Complementary Group served Social insurance Safety net Labor Market Regulation Working poor or unemployed Unemployment insurance Transfers Minimum wage laws Public works programs Job security regulations General subsidies to food, utilities, or housing Severance pay Nonworking young Universal child allowances Means-tested child allowances Child labor laws Maternity benefits Transfers linked to MCH programs School feeding Conditional cash transfers Nonworking elderly Contributory pensions Transfers Retirement age Social pensions Special groups Disability insurance for disabled Transfers Affirmative action for minorities tries lack the administrative sophistication Programs for the working poor and levels of urbanization and formal Most people, especially poor people, rely on employment needed to administer a social labor earnings for their livelihoods, many in insurance scheme, and high social security the informal sector, through subsistence taxes have segmented the labor market and farming, or as agricultural laborers for others. encouraged informality. Labor market risk can be reduced signifi- What then are the options for the many cantly by improving the functioning of labor developing countries that are far from able markets and by pursuing sound macroeco- to achieve universal social insurance sys- nomic policies (chapter 9). But even a well- tems? There is a large range of social assis- functioning labor market will not fully elimi- tance programs, each different in groups nate the risk of unemployment. Moreover, in served, administrative requirements, com- years with bad crops or low prices, earnings plementary benefits, incentive effects, and may not be enough to stave off poverty. political factors (table 7.1). A judicious A range of instruments can help address blending of these programs can usually the risk of inadequate incomes--for exam- result in a social protection system that cov- ple, unemployment insurance, needs-based ers the appropriate groups with feasible social assistance, or public works. Even instruments. The mix of programs selected food, utility, and housing price subsidies are and their specific characteristics will depend geared in part to solving the problems of on context--that is, the risks faced, the level inadequate labor incomes, although with of urbanization, the age structure, the size of notably poor targeting and sometimes large the formal sector, the administrative capac- distortionary costs. ity, and the complementary social policies Unemployment insurance, the obvious and sociocultural or political factors. instrument for mitigating the risk of job Next, we discuss programs for four key loss in the formal sector, will not work well groups: in countries with large informal sectors. Even so, schemes may be able to cover a use- · The working poor ful share of workers and take some burden · The nonworking young off programs more tailored to those in the · The nonworking elderly informal sector (chapter 9). For example, in · Special vulnerable groups 1998 in response to the East Asian financial crisis, Korea expanded its young unemploy- In many cases, the second two groups are part ment insurance program to smaller firms as of households that could benefit from pro- well as to temporary and daily workers.79 grams that target the working poor. So the Needs-based cash transfers, the classic more comprehensive the programs for the social assistance instrument, are common first group, the less the need for programs for in high-income countries. Such programs the latter two, and the smaller and more are potentially very efficient. Nontransfer focused they might be. costs can be low, usually 5 to 10 percent of Human capacities 151 total program costs. The programs need not pare customized contracts with the house- impose significant forgone earnings on par- hold to address the most important of these ticipants. And they give cash and, thus full barriers over a period of two years. consumer sovereignty, to the recipient. Bangladesh's program of income generation But these programs face two challenges. for the development of vulnerable groups First, they require a targeting mechanism. (IGVGD run by BRAC) gives in-kind assis- The classic mechanism in high-income coun- tance to destitute rural women for a period tries has been a verified means test. Because of 18 months. During this time, they are income in these settings is mostly formal, it is required to save some money and participate possible and not too costly to collect accurate in business training. At the end of the cycle, information on income and assets. Eastern women have the opportunity of "graduat- Europe also has successful experience with ing" into the regular microfinance program. means-tested programs, although verifying A few programs, as in Romania and Bulgaria, incomes and assets is more difficult and less add a public service requirement (thus blur- accurate there than in high-income coun- ring the line between the means-tested social tries. Latin America's proxy means tests assistance and public works programs).82 So, (relying on easily observable indicators of whether through traditional or more inno- income) have been shown to be fairly accu- vative mechanisms, the disincentive problem rate and low cost. Low-income countries with can also be mitigated. large shares of income from the informal sec- Public works programs that support the tor experience greater difficulties in setting working or unemployed poor have been used up targeting mechanism. Although the evi- in many countries (box 7.10). By offering dence is less clear-cut, community-based sys- employment for low wages, these programs tems have been shown to work well in some self-select the able-bodied poor, avoiding countries around the world, especially in both the means-testing and work disincen- fairly homogenous rural communities tives. In good programs, the work is in high- (Albania, Bangladesh, Ethiopia, Indonesia, return activities that create assets and serv- Uganda, and Uzbekistan) where elite capture ices. The self-targeting aspect is useful is not a major concern. So the targeting issue because informality is widespread in develop- could be surmounted.80 ing countries and incomes are hard to assess. The second challenge is perhaps bigger-- It is doubly useful as part of a countercyclical both for technical design and political sup- measure in fighting poverty during periods of port. Needs-based transfers inherently pres- crisis--workers leave the program when their ent a disincentive to work for those of regular source of livelihood picks up again working age because entry into the pro- after the crisis. Public works programs for gram (or the benefit level) depends on infrastructure are especially welcome in low- income. Traditional mechanisms to partly income countries, postconflict settings, and mitigate the work disincentives include sometimes post­natural disaster settings. keeping benefits substantially lower than Public works programs have some disad- minimum wage, as in Bulgaria or Romania, vantages too. The administrative capacity to or lower than the earning of low-skilled select and run the programs is significant. agricultural laborers, as in Kyrgyz Republic, Indeed the often-cited good programs are a or using a sliding withdrawal of benefits as minority of all the public works programs incomes rise, as in much of the industrial implemented around the world. Many have world, or an earned-income tax credit as in failed, often over the inability to line up and the United Kingdom and United States.81 deliver useful public works, to provide suffi- A newer wave of efforts takes a more active cient nonlabor inputs, or to set the wage right. approach to encouraging independence or Even when programs are well run, the net "graduation" from the need for assistance benefits transferred to participants are often than under the traditional mechanisms just a small share of total program costs. First, mentioned. Chile's Puente program uses management, materials, equipment, and extensive social work to diagnose each house- skilled labor requirements can run up to 40 hold's barriers to independence and to pre- to 60 percent of program costs. Second, 152 WORLD DEVELOPMENT REPORT 2006 B O X 7 . 1 0 Public works programs: key issues Public works programs have been tional options as community-based selection of same setting.There is a tradeoff between imme- demonstrated to work in some middle-income the neediest or a lottery may be implemented. diate income gains through employment of the countries (Chile, Argentina, and South Africa) Least desirable is rationing with entry poor, and gains to the poor from the quality and and low-income countries (Senegal, Kenya, determined by foremen or political figures. durability of the assets created. In a crisis situa- India, and Bangladesh)--and not to work in Women's participation can be enhanced through tion, in which current transfers to the poor have many others.This international experience nondiscriminatory wages,the provision of onsite high weight, a high labor intensity is desirable. offers several lessons in the design and imple- child care,and adequately private latrines. Illustrative average labor intensities range from mentation of public works programs. Employment guarantee. A workfare program 0.5 to 0.65 percent in low-income countries and Wage rate. The key to self-targeting is setting that guarantees employment can reduce the are somewhat lower (0.4) in middle-income the wage rate low enough--no higher than the longer-term risk the poor face.While highly countries, although labor intensity often varies market wage for unskilled manual labor in agri- desirable, guarantees have not been a feature of significantly by subprojects. culture or the informal sector during a normal most public workfare schemes. One exception is Administration and implementation. Admin- year.While determining the precise level of the the Employment Guarantee Scheme in Maha- istering and implementing an effective scheme wage rate may not be easy,it is better to start rasthra, India, which guarantees unskilled man- is hard--requiring the selection and manage- with a wage rate that is too low--if there is no ual work within the district within 15 days of ment of a plethora of small projects over a wide demand at the offered wage rate,it can be registering for employment with the scheme. geographic area and many administrative enti- raised.Setting a low wage rate level does more While this does not necessarily mean locally ties. Ideally, public works schemes require a than ensure that the workfare scheme will be accessible employment, the scheme comes clos- menu of works well-integrated into the local well self-targeted.It also maintains the incentive est to offering a guarantee of any kind. India planning process yet elastic in size and timing. to take up regular work when it becomes avail- recently announced its intention to extend the This can be difficult in low-capacity settings able,and it helps ensure that the program can guarantee by providing 100 days of because of the forward planning and reach as many of those in need as possible. employment on rural public works projects at a interagency coordination needed. In high- Conditions of eligibility. Rationing should be minimum wage.The scheme is not far enough capacity settings, fitting many small labor- avoided; ideally the only requirement should be into implementation to draw lessons. Murgai intensive projects into the sophisticated and the willingness to work at the offered wage.If and Ravallion (2005) simulate some possible often capital-intensive infrastructure plans of rationing is unavoidable (for example,if the outcomes for a range of design parameters: the large- and middle-income cities can be difficult. demand for employment at the wage set targeting could be good and impacts of poverty Moreover, ensuring that the workfare program is exceeds the available budget),explicit secondary large, but the costs could also be substantial--1 poverty focused is not easy because of conflict- criteria should be used--the program may tar- to 2 percent of GDP for the 100-day scheme. ing pressures from alternative target groups, get poor areas,work may be offered only in sea- Labor intensity. The labor intensity--that is, such as the skilled unemployed. sons of greatest need,the length of employment the share of the wage bill in total costs--should Sources: Subbarao (2003) and Murgai and Ravallion of any individual may be limited,or such addi- be higher than normal for similar projects in the (2005). workers have to forgo some income to par- Programs aimed at children can be uni- ticipate: in the absence of the program, they versal or means-tested, free-standing or usually would have been able to pick up linked to the use of health and education some part-time work or engage in low-return services. In both Eastern and Western self-employment activities. In Argentina's Europe, the traditional approach to income Trabajar, forgone earnings were half of gross support for children is through child earnings; in Maharashtra's Employment allowances, independent from but comple- Guarantee scheme, 53 percent; and in mented by extensive public education and Bolivia's ESF, 60 percent.83 Theoretically, for- health care. Most Western European pro- gone earnings can be minimized by allowing grams are universal, although a few are flexible working hours or part-time work, means-tested (Italy and Spain). A higher but this can complicate the supervision of fraction of Eastern European programs and the public works and the workers. those in other middle-income countries are means-tested (Bulgaria, Belarus, the Czech Programs for the nonworking young Republic, the Kyrgyz Republic, Poland, Earlier, we focused on interventions geared to Romania, the Russian Federation, Serbia overcoming the disadvantaged family circum- and Montenegro, the Slovak Republic, stances of young children through a variety of Argentina, Chile). In Africa, Latin America, services that improve their cognitive and social and Asia, there is a long and extensive his- skills and prepare them for learning in school. tory of school feeding programs and mater- Here we focus on ways of augmenting the nal and child health programs that distrib- family's income to alleviate poverty among ute food (or occasionally food stamps). children and improve their chances in life. Many of these programs rely on existing Human capacities 153 service delivery mechanisms to make their Table 7.2 Targeting performance of conditional transfer schemesa administration feasible or cheaper. Quintile PRAF RPS PROGRESA SUF FFE A new wave of CCT recognizes that (Honduras) (Nicaragua) (now Oportunidades) (Chile) (Bangladesh) (Mexico) imperfect markets can lead to underinvest- ment in human capital (chapter 5) and 1 43 55 40 67 -- explicitly seeks to enhance the opportunity- 2 80 81 62 89 48 generating potential of income support 3 94 94 81 97 -- through links to the use of services. CCT 4 98 99 93 100 -- programs are now being implemented in 5 100 100 100 100 100 about two dozen countries, mainly in Latin Source: Morley and Coady (2003), table 5-3. America--but they are being discussed by Note: PRAF = Programa de Asignación Familiar; RPS = Red de Protección Social; SUF = Subsido Unitario Familiar; many other countries and in all regions. FFE = Food For Education; -- = not available. a. Cumulative share (percent) of benefit captured, by income quintile. These programs transfer income in cash or in kind to poor households with children. They grant benefits only if children comply In settings with low access to health and with standards for attendance in school or education services, this tension means that participation in a health care program. In the conditional transfer programs may not be CCT programs with good data, the targeting appropriate vehicles for social assistance. outcomes have been quite good at generally The conditions would keep the program reasonable administrative costs. All five pro- from serving the poorest. The opposite may grams reviewed by Morley and Coady (2003) be true as well: when the use of services is distribute far more than a proportional share already satisfactory, it may not be worth to the bottom quintiles (table 7.2). On aver- using administrative resources to verify age, the share of program benefits going to compliance with service use conditions. the bottom 40 percent of the population is an impressive 81 percent. The evidence on Programs for the nonworking elderly poverty impact is more limited, but PRO- Most countries have public pensions pro- GRESA (now Oportunidades) had a power- grams for the elderly. Two arguments pro- ful effect: program communities experienced vide a rationale for governments to mandate declines of 17.4 percent in the incidence of a pension system to provide for old-age poverty compared with the control group.84 security: imperfect financial markets limit The conditioning of benefits on use of the scope for redistribution over one's life, health and education services serves the and human "failures" to see far enough into dual objectives of avoiding severe depriva- the future may lead to undersaving for old tion and enhancing opportunities for age. The need for old-age security will grow. human development. But there is a tension The population of 60 year olds, about 10 between these goals. A simulation of the percent of the world population today, is results that might be expected from the fed- projected to reach about 21 percent by 2050. eral Bolsa Escola program in Brazil shows Within this group, the fraction of people only a small reduction (1 percentage point) over the age of 80, about 12 percent today, is in the poverty index because of the (simu- expected to reach 19 percent by 2050.86 lated) loss of labor income of children who Contributory pension programs have drop out of the labor force to attend school. not solved the problem of old-age security. Mexico's PROGRESA (now Oportunidades) Coverage is low--only 20 percent of the had impressive poverty impacts but global workforce. Even in pension systems increased primary enrollment rates by only with extensive coverage, the lifetime poor about 1 percentage point because they were cannot contribute enough to have a pension already above 90 percent. Cambodia's pro- at old age that would keep them out of gram, which focuses on grades seven poverty. Elderly women who have not through nine, may well help with the transi- worked outside the home are particularly tion to secondary school, but it misses some vulnerable. Moreover, in some countries, of the poorest households because so many such as in Kenya, Uganda, Sri Lanka, and have dropped out by then.85 Zambia, poorly governed schemes gave 154 WORLD DEVELOPMENT REPORT 2006 lower-income workers returns less than stantial. Kakwani and Subbarao (2005) sim- bank deposits and the alternatives of invest- ulate various options for 15 African coun- ing in land, tools, or a vehicle.87 tries, and conclude that the best--taking into Options for assisting the elderly poor account poverty impact, fiscal cost, and include the following: broadening pension incentive effects--is to keep the benefit low systems to include more people, adding a (about one-third of the poverty threshold), redistributive element as part of an existing the eligible age limit at 65 or older, and to contributory pension scheme, or covering target only the elderly poor, thus sacrificing them through a separate "social pension" the administrative simplicity and political financed by general revenue. A fourth advantage of universalism. There is enough option is a general needs-based social assis- variation across countries to warrant country- tance program. specific efforts to determine benefit and eli- Broadening the coverage of contributory gibility levels and targeting methods rather pensions has been attempted, generally with than relying on rules of thumb. little success. In the Republic of Korea, man- How should we think about the balance dating the expansion of coverage to farmers, between social pensions for the elderly and fishermen, and self-employed was met with other programs, such as those targeting massive protests; in the end, the government families with children? Are the elderly poor had to subsidize in full or in part the contribu- more deserving than other poor? Brazil tions of almost two-thirds of the target popu- spends 1 percent of GDP to transfer $70 a lation. Adding a redistributive element is month to 5.3 million elderly poor and only common, but as pension reforms strengthen 0.15 percent of GDP to transfer $6 to $19 the link between contributions and benefits per month to 5 million families to support for efficiency reasons, that redistributive ele- school attendance through the Bolsa Escola ment is becoming smaller. program.90 When considering whether this Social pensions provide transfers to the the right balance, one can argue generally elderly without requiring prior contributions that young families with children, who have or withdrawing from the labor force.88 They their entire lives ahead of them, should have can be universal, as in Botswana, Mauritius, higher priority. Indeed some argue for shift- Namibia, or Bolivia. Or they can be means- ing public spending away from pensions tested, as in South Africa, Senegal, India, and toward families with children in Brazil Bangladesh, a number of Latin American and others suggest that a focus on unem- countries, Australia, Italy, and New Zealand. ployment may be more appropriate to Many of them complement contributory sys- reduce poverty in South Africa.91 tems that cover higher-income groups. When There may be important political econ- the transfers are means-tested, the programs omy reasons why programs for the elderly are really a special case of needs-based cash garner such political support. There is direct transfers limited to the elderly. The targeting evidence from attitude surveys, across soci- challenges discussed earlier and the potential eties and age groups, that concerns about old solutions are similar. Labor disincentives are age poverty are strong and widely shared-- lessened, however, because societies expect perhaps because most people expect to be old lower work efforts from the elderly.89 one day (but not necessarily unemployed, or Evidence from various countries imple- a single parent, or disabled) and also because menting large social pension schemes indi- old age is more easily verifiable and less sub- cates that the costs are 1 to 2 percent of GDP, ject to moral hazard, for example, when com- not negligible for low-income developing pared with unemployment insurance.92 countries. Schwartz (2003) simulates the costs in six African countries of providing Programs for special social pensions, limiting the benefit to 40 vulnerable groups percent of GDP per capita and eligibility to Some groups are vulnerable regardless of those age 75 and above. The costs would age--the disabled, HIV infected, ethnic range from 0.2 percent of GDP in Kenya to minorities, certain castes, internally dis- 0.7 percent of GDP in Ghana, still not insub- placed households, refugees, and orphans Human capacities 155 (box 7.11).93 One of the key issues in provid- ing transfers for these groups is whether to B O X 7 . 1 1 Africa's orphans and public action set up specific programs or to include them Conflict and the HIV/AIDS pandemic are interventions should first try to strengthen in a more general program. There is no uni- generating a major humanitarian crisis for grassroots responses to orphan care,and turn versal answer to this, and a complex set of families in Sub-Saharan Africa.There are as to supplementary interventions only when issues must be diagnosed in each case. One is many as 43 million orphaned children in the the extended family is no longer sufficient or region today, 10 percent of whom have lost capable.When no other living arrangement is targeting. Not all orphans, widows, or dis- both parents. Orphans make up more than possible,experience and research show that abled are poor, so universal programs will 15 percent of all children in 11 countries, orphanages must be the"last resort."Recog- include some non-poor. A second issue and the numbers are rising . nizing the scope for exploitation of vulnera- relates to the special needs of the groups.Will The death of an earning family member ble children under all arrangements,appro- is most likely to drive a family into penury priate checks and balances must be in place, income support alone be sufficient, and if because of the costs of funeral, the loss of including oversight by NGOs or community- not (as is usually the case) does it make sense regular income, and the risk of losing one's based organizations. to link the income support to other pro- property. Erosion of human capital is When access to basic education and grams for the group? For example, when another major risk: microstudies and analy- health services is generally low, waiving sis of household surveys suggest that, rela- school fees and uniform obligations would large groups of internally displaced people or tive to other children in the household, fos- help increase enrollment rates of all refugees emerge suddenly, their needs for tered children are underenrolled in schools, children including orphans, as in Uganda. housing, food, and health care may strain work longer hours doing household chores, When average access to services is high, but and have lower immunization coverage-- the difference in access between the poor local availability. In such cases in-kind provi- and the disadvantage is stronger for and the non-poor, and between orphans sion to the group is usually the first response. fostered girls than for fostered boys. Psycho- and non-orphan children, is large, cash Only after the groups become long-standing logical risks are also high because the death transfers conditional on children attending or somewhat smaller does the question of of a parent often leaves the child in a state school seem appropriate. Innovative of trauma, lacking nurturance and programs along these lines are just begin- whether to switch to a needs-based cash guidance, and impeding socialization. ning (as in Swaziland). assistance or workfare program arise. Special The main coping strategy in Africa is fos- Sources: Subbarao and Coury (2004); USAID, programs for groups viewed positively or as tering by the extended family.When possible, UNAIDS, and UNICEF (2004). deserving, such as veterans or the disabled, may have adequate political support, but if the group is excluded, as ethnic minorities or tion through impacts on innovation, pro- the HIV positive are in many cases, such pro- ductivity, and social cohesion. But there are grams may not garner sufficient support. big challenges to equitable provisioning-- While standard transfers may protect getting the relevant issues on the policy these groups, a broader set of policies can agenda, fighting political capture of institu- help expand their opportunities and facili- tions so that they do not only serve the tate their integration into society. Some powerful and the influential, and managing countries have used affirmative action (see efficiency-equity tradeoffs, especially in the chapter 8). Others have used regulations short term. There are also good prospects and awareness campaigns that sanction for incremental change through advocacy harmful local practices to help prevent dis- to point out long-run benefits even when crimination. Policy responses include creat- there are short-run costs, through sound ing a framework to hear advocacy groups program and tax design to minimize effi- and mainstreaming such concerns into gov- ciency costs and build accountability struc- ernment practice, often building on infor- tures, and through political coalitions that mal or private arrangements, such as those can thwart elite holdups. of faith-based organizations. The power of greater equity in human capacities to unhinge inequality traps is Summary tremendous--through directly contribut- Equity in the acquisition of human capaci- ing to leveling the economic, political, and ties--through early childhood develop- sociocultural playing fields. But achieving ment, formal education, health services, greater equity in human capacity is not and social protection--is at the core of a enough to break the inequality trap. It strategy to equalize the opportunities for needs to be complemented with fairness in people to lead productive, fulfilling lives. the returns to those capacities and in the Broad provisioning of these services is also access to complementary assets, topics dis- good for development and poverty reduc- cussed in the next chapter. Justice, land, and infrastructure 8 It takes more than building human capacities inaccessible, because they are incompatible to broaden people's opportunities. People with local norms and customs and they are c h a p t e r also need complementary assets, access to the physically or economically inaccessible, or marketplace, and security of person and because people lack the knowledge or capac- property. This chapter starts with a descrip- ity to navigate the system. Third, elite tion of justice systems, showing how critical capture and the inaccessibility of the legal they are in ensuring a level playing field and system may mean that policies relating to fair returns. It then turns to policies for crime and personal security are inequitable expanding access to the complementary assets and perpetuate crime-related inequality traps. of land and infrastructure. Promoting fair- ness in markets is addressed in chapter 9. Combating elite capture and discrimination Building equitable justice systems Political and economic elite interests often Society's rules, and the institutions that coincide at the expense of a disempowered establish, maintain, and transform them, majority. When power is in the hands of a govern market and nonmarket interactions. narrow elite, the rights of most citizens are They determine people's endowments, their unstable. A century of banking in Mexico, rights and obligations, and their ability to outlined in chapter 6, illustrates how deals generate fair returns. Reflecting and pro- between the political and economic elite led ducing the distribution of power among to the establishment of banking monopo- groups, good institutions (so necessary for lies and laws that maintained a system of prosperity) emerge only when the distribu- rent-sharing between banks and govern- tion of political power and enforceable ments.1 Another striking example of elite rights is equitable. capture comes from the transition economies Legal institutions play a key role in the dis- and the rise of oligarchs who manipulated tribution of power and rights. They also politicians and shaped institutions to get underpin the forms and functions of other rich.2 Legal systems that cater to narrow institutions that deliver public services and interests also tend to discriminate against regulate market practices. Justice systems can other groups through inequitable laws and provide a vehicle to mediate conflict, resolve practices. disputes, and sustain social order. But Ensuring equality before the law and inequitable justice systems may perpetuate securing both personal and property rights inequality traps by maintaining or reproduc- for a broad section of the community give ing elite interests and discriminatory prac- individuals the incentive and the opportu- tices. Equitable justice systems are thus cru- nity to take part in economic and political cial to sustained equitable development. life. This requires an independent and Building more equitable justice systems accountable judiciary and laws and prac- runs into three main challenges--often tices that protect citizen's rights in a nondis- interrelated and reinforcing. First, legal criminatory way. institutions may be open to capture by elite interests or may discriminate against certain Enhancing judicial independence and groups. Second, these institutions are often accountability. In many countries, a rule of 156 Justice, land, and infrastructure 157 law system--administered by multiple arms accountable. In Colombia public informa- of government--constrains political power.3 tion centers in major courts disseminate In this system, an independent judiciary acts information and help people use the court. as a safeguard against abuses of state and In Venezuela information is provided to the nonstate power. Because judges are also open public through an Internet-based judicial to elite capture and corruption, accountabil- portal for the Supreme Tribunal.11 ity mechanisms are a key aspect of legitimate Strengthening the relationship among judicial independence.4 civil society, the media, and the courts has In many developing countries, shifts also improved public awareness and scrutiny toward an accountable and independent of the judicial system. Bad judges have judiciary require a change in culture and resigned because of high-pressure media institutional practice. Ethiopia established an campaigns, such as the recent media independent judiciary for the first time in scrutiny in the Philippines.12 The media can 1995.5 In Vietnam "telephone justice" was also disseminate information, such as the common, with party elites habitually contact- "My Rights" television show in Armenia ing judges to direct decisions.6 Changing (box 8.1). Similar shows have been devel- ingrained institutional practices in both oped in other parts of Eastern Europe. In countries has been a slow process. Poor con- Georgia, an NGO disseminating informa- ditions of judicial service in many countries tion about the courts increased public satis- can increase corruption.7 For example, low faction with the courts. remuneration for magistrates in Kenya made The existence of an independent and them open to alternative funding for their accountable judiciary is not enough to pro- services; Kenya removed almost one-third of tect citizens against abuses of state power. judicial staff for corruption in 2004.8 Adequate laws and institutional mecha- Promoting judicial independence with- nisms are also needed. In Thailand, for out establishing accountability mecha- example, separate administrative courts nisms can further entrench elite interests. were established for the first time in 2001 to Institutional safeguards, transparency, and protect citizens against arbitrary uses of the existence of a civic constituency are key state power. The courts aim to ensure that to both accountability mechanisms and state authorities act in accordance with state judicial independence. Institutional safe- laws and regulations. They also aim to guards include providing for security of enhance citizen participation in public pol- tenure and improving conditions of serv- icy formulation and oversight. In the first ice for judges; rigorous and transparent three years, the courts processed almost appointment and disciplinary processes; transparent mechanisms of case allocation and case management; transparent and B O X 8 . 1 Increasing legal literacy and public awareness: open hearings; appeal rights and the publi- "My Rights" on Armenian public television cation of judicial decisions; and public information about the courts.9 Many Many people in Armenia have no understand- The show airs once a week on Armenia's countries have enshrined judicial inde- ing of the legal system or the rights afforded state television channel. After only five or six pendence in the constitution or state them under the law.And distrust of the courts shows,"My Rights"became the number one laws.10 Bolivia has established open com- is widespread.In a recent public awareness show in Armenia.There have been numer- campaign,the government funded a televi- ous reports of viewers requesting legal doc- petitions for judgeships and ethical stan- sion show to provide citizens with examples, uments and decisions from notaries, judges, dards for judges. Courts in the Philippines advice,and information on their legal rights. and other legal officials based on what they have a performance management system "My Rights"uses mock trials to depict learned from the show. And when the real-life disputes in Armenian courts.The tel- power went out in one village a few for judicial and nonjudicial personnel. evision judge is a deputy minister of justice, minutes before"My Rights"was going on Public information campaigns can en- and the parties are often those in the real the air, the people in the town marched on hance the independence and accountability dispute.The topics--such as rental and prop- the mayor's office and accused the local erty disputes,customs issues,and family law officials of intentionally cutting the power of the courts, increasing public confidence in matters--are timely and of broad interest.A so that people could not watch the show! and commitment to the system, and enhanc- live studio audience of judges,lawyers,legal ing people's capacity to demand better gov- officials,and others discusses the trials on air. Source: Decker and others (2005). ernance and hold those in positions of power 158 WORLD DEVELOPMENT REPORT 2006 17,000 cases, most concerning corruption tage may mean, however, that legal equality is or other unlawful acts by public officials. not enough. Some countries have passed laws Many of the cases made front-page news in that discriminate in favor of certain groups, Thailand because of their social impact. creating affirmative action programs on the basis of race, ethnicity, and gender or for peo- Combating discriminatory norms and prac- ple with disabilities. An assessment of two of tices. Laws that reinforce exclusionary prac- the most widely implemented affirmative tices in norm-based institutions perpetuate action programs, in India and the United unequal power relations. Some laws may States, suggests mixed impacts (box 8.2). discriminate against particular groups, such The mere existence of "equitable laws" as laws affecting indigenous people or the for affirmative action does not guarantee laws in apartheid South Africa. The absence their equitable implementation or enforce- of laws can also reinforce unequal power ment. For example, in Peru and Honduras, relations as for domestic violence, often rele- gender discrimination in judicial decisions gated to the nonlegal private realm. and treatment by police and judges discour- In many countries, antidiscrimination age women from using the system to resolve and equal opportunity laws have reduced dis- disputes.13 Such disadvantaged groups are criminatory practices. Historical disadvan- more likely to experience the law-and-order side of the law than the protection of their rights (as discussed below under crime and B O X 8 . 2 Affirmative action in India and the United States personal security). The affirmative action program in India is minorities in education and employment Making justice accessible based primarily on caste and gender and (Deshpande 2005). that in the United States primarily on race. The programs in both countries have People's legal rights remain theoretical if the Before independence in India, the British become centerpieces of political battles institutions charged with enforcing them are government introduced affirmative action over race and caste.Critics argue that they inaccessible. Accessibility depends on how to address discrimination against tend to benefit the upper echelon of minor- compatible laws are with the norms and "untouchable" castes (now known as Dal- ity groups, and they are difficult to end.In its) and "tribals" (now known as Adivasis). India, the programs are said to apply to sub- understandings that shape people's lives. After independence in 1947 the policy of castes that have not traditionally faced dis- Legal institutions need to be physically and reserving 22.5 percent of seats in educa- crimination (Sowell 2004).They may also economically accessible and people need to tion institutions, government jobs and reinforce negative stereotypes by placing have the knowledge and capacity to claim electoral seats was written into the consti- minorities in positions they are not qualified tution. Since 1991, a further 27 percent for (Coate and Loury 1993).Despite these their rights. quota has been introduced for other low weaknesses, India's program has provided castes (called Other Backward Castes), but formal sector employment and higher edu- Addressing the compatibility of state and with no constitutional guarantee. And cation for many Dalit and Adivasi families, customary justice systems. Forms of cus- since 1993, 33 percent of the seats in local freeing them from subservient roles.With governments have been reserved for the reservations in local government, tomary or nonstate law operate in a women, Dalits, and Adivasis (Deshpande elected women leaders make decisions in majority of countries.14 Yet they are often 2005). line with women's needs (Chattopadhyay neglected in justice sector reform policies. In the United States, slavery was perva- and Duflo 2004).Low-caste representatives Engaging with customary systems is an sive for more than two centuries, and not in state assemblies increase the allocation of until 1866 were blacks granted citizenship quota-based jobs to low-caste constituents important part of equitable reform strate- rights.The system that replaced slavery was (Pande 2003).And Dalit representatives in gies for two main reasons. First, customary only marginally better, with several features village government improve the targeting of law is often a fundamental part of a com- similar to the Indian caste system: segrega- benefits to Dalits (Besley and others 2004). munity's identity and belief system; thus, a tion, denial of education, restrictions to low- In the United States, disparities between paid, menial jobs, social and economic dis- blacks and whites continue to be significant lack of recognition can be intrinsically dis- crimination, negative stereotyping, and on all economic indicators, and there is evi- criminatory and serve to exclude communi- violence.The Civil Rights Act of 1964 and dence of discriminatory gaps in earnings. ties from the wider state system. Second, a subsequent legislation, Supreme Court rul- But affirmative action in jobs has increased ings, and executive orders in the 1970s intro- black employment and enrollment in failure to engage with customary systems duced affirmative action into the political, higher education (Holzer and Neumark may leave inequitable and inefficient prac- judicial, administrative, and economic 2000, Bowen and Bok 1998). But the U.S. tices at the local level unchecked. spheres of American society.Starting with program's quasi-voluntary element means Where state and nonstate systems have the label"equal opportunity,"selection pro- that litigation can dilute the program, and cedures incorporate compensatory correc- black representation in government bodies developed in tandem, they often comple- tion to ensure adequate representation of continues to be very low. ment each other and reinforce socially accepted codes and rules. But in communi- Justice, land, and infrastructure 159 ties where the state systems lack legitimacy lack capacity, be inaccessible, or dramati- and political reach, customary systems cally increase transaction costs.20 In rural often act independently from the state legal Tanzania, a perception that state institutions system, which may be rejected, ignored, or can not supply law and order has led to the not understood. Real difficulties arise when emergence of "new" forms of organized vil- local customary systems are at odds with lage defense groups called sungusungu. the rights and responsibilities articulated in While technically illegal, the sungusungu are state law. often informally supported by the state, In many developing countries, custom- given their success in reducing crime.21 ary systems are the dominant form of regu- Ignoring or trying to stamp out custom- lation and dispute resolution. In Sierra ary practices can also have serious negative Leone, about 85 percent of the population implications. Top-down reform can under- fell under customary law as of 2003.15 Cus- mine informal institutions without provid- tomary tenure, discussed below, affects 90 ing viable alternatives, and the vacuum can percent of land transactions in Mozam- lead to power grabbing, lawlessness, or even bique and Ghana.16 Customary justice violent conflict. When neither formal nor depends on local traditions, as well as the informal mechanisms are functioning, political history of a country or region. human rights abuses and serious conflict Ethiopia officially recognizes more than 100 are more likely. For example, a study in distinct "nations or peoples" and more than rural Columbia found the incidence of vigi- 75 languages. lantism,"mob justice," or lynching to be five Customary systems can be incompatible and a half times greater in communities in with economic, social, and civil rights. which informal mechanisms are no longer Many forms of customary law are seen to functioning effectively and the state pres- discriminate against marginal groups. In ence remains limited.22 much of Sub-Saharan Africa, for example, A failure to engage with customary customary systems systematically deny systems may mean that discriminatory women's rights to land, assets, or opportu- practices go unchallenged. While state law nities.17 Customary practices are also seen officially protects women's rights in many as archaic and rigid--not amenable to countries, local norms and power structures modernization, efficient market relations, continue to make it almost impossible for or broader development goals. They are women to claim these rights. often seen as overly localized and complex, Considered attention to customary sys- making more generalized reform initiatives tems in broader institutional reform is fairly difficult. They can lack legitimacy at the new. But many governments, such as South local level. For example, many systems in Africa, have begun working toward inte- Sub-Saharan Africa have been substantially grating customary institutions into wider distorted by colonial rule, which often used state frameworks (box 8.3).23 Many coun- local chiefs to maintain control and estab- tries have attempted to integrate customary lished more authoritarian and ethnic-based land systems into formal land law systems structures than previously existed.18 (box 8.7). Local NGOs and community However, it is wrong to presume that all groups have also helped empower marginal customary law discriminates against mar- groups to challenge discriminatory norms ginalized groups--or that western law does at the local level. not. For example, in the AmaHlubi commu- nity of KwaZulu Natal Province in South Establishing adequate and open legal insti- Africa, women and men are considered tutions. Even when formal systems do equal, with both entitled to own property.19 exist, they often lack adequate infrastruc- Furthermore, there are often good reasons ture or are so institutionally weak that citi- for people to choose to use customary sys- zens cannot claim their rights. Formal insti- tems. The state systems may lack legitimacy tutions may exist only in large cities, and or be seen as mechanisms of control used by even then excessive delays, unfair proce- oppressive regimes. Or the state systems may dures, or unreasonable costs may leave 160 WORLD DEVELOPMENT REPORT 2006 child-support case could amount to as B O X 8 . 3 State frameworks and customary institutions much as 2,000 lempiras (US$106.00), or in South Africa almost two years of alimony. Adding to the costs are requirements that parties be repre- The coexistence of various official state laws Many celebrated the constitutional and sented by lawyers. For example, most Latin in South Africa began as early as the 1830s administrative recognition of customary American countries do not permit self- when chiefs in Cape Colony were granted law, but there clearly are difficulties. authority to enforce indigenous law (sub- Customary practices have been criticized as representation, effectively denying access ject to review by a colonial official).24 At the incompatible with rights in the constitution based on economic status. Legal aid can end of the apartheid era there were approx- and the new South African Bill of Rights.25 increase people's access to basic legal services imately 800 officially recognized traditional Of 800 traditional leaders recognized by communities and traditional leaders, 12,000 the state in South Africa, only one is female. and the courts (box 8.4). So can community headmen, and 12 kings. In an attempt to deal with this, the state mediation centers, lay judges, and mobile Since 1994, South Africa has worked issued a regulation in early 2005 that courts. The mobile courts introduced in toward bringing traditional systems into the female participation must be at 30 percent remote areas of Brazil in 1999 have been state framework.Traditional institutions and by the end of the year, but there is no con- laws are all officially recognized in the 1996 sensus on how this might be achieved. Rec- replicated in the Philippines and Mexico. In constitution.After a long political process, ognizing the difficult task of effectively Guatemala, 24 mediation centers have been the national Traditional Leadership and Gov- integrating the different systems, the South created, employing mediators fluent in ernance Framework Act was promulgated in African model aims at"progressive align- Spanish and local Mayan languages.27 2004, setting out the roles and responsibili- ment"with the constitution. ties of different levels of traditional leaders In some situations, social movements and institutions, and their relationships to Source: Adapted from Chirayath and others provide the support for people to use the the different levels of government. (2005). courts and claim their formal rights, as with the landless peasant movements in Brazil and Mexico. In Argentina, too, unemployed factory workers have occupied closed fac- B O X 8 . 4 The impact of legal aid in Ecuador tory sites and pursued their rights through the courts and the legislative process. In As in much of the rest of the world, attained better legal and economic results other cases, civil society organizations have Ecuador's poor face numerous barriers in than nonclients,raising their chances of using the legal system.Women considering obtaining a child-support award by 20 assisted groups in claiming their rights--as claims against their former spouses may percent and their chances of receiving a child- in the "right to health" cases discussed in face an added obstacle: physical violence. support payment by 10 percent. chapter 10. As part of a larger judicial reform effort, Receiving assistance from the legal aid Civil unrest and conflict may further three local NGOs--Centro Ecuatoriano para la clinics also had intergenerational impacts. Promoción y Acción de la Mujer,Corporación Child-support payments increased the prob- weaken legal institutions. In Sierra Leone, a Mujer a Mujer,and Fundación María Guare-- ability of the child attending school (by 4.8 decade of civil war left the justice system in provide legal information and representation percent) as did the lower incidence of vio- shambles: courthouses were destroyed, and as well as psychological counseling and refer- lence.Anecdotal evidence also suggests that rals to shelters.A survey in 2002 revealed that the payments, a small but important source judges, lawyers, and police officers were women's use of legal aid clinics reduced the of family income, were used to pay for food. killed or forced to flee. During the conflict probability of severe physical violence after in Liberia, more than three-quarters of the separation by 17 percent.Legal aid clients also Source: World Bank (2003g). population left their homes.28 In Bosnia, 2.3 million people--more than half the coun- try's population--fled their homes during and immediately after the war. To prevent them inaccessible to much of the commu- the return of minorities, many property nity.26 Institutions can also be inaccessible records were destroyed or tampered with. if people do not know their rights and can- Reestablishing legitimate legal institu- not navigate the systems charged with pro- tions is crucial to restoring such people's tecting them. personal and property rights and enhancing A large array of information campaigns confidence in newly established governance has informed citizens about their rights structures. In postwar Bosnia, the Dayton (discussed above). But even if people know Agreement established the Commission for their rights, they may have limited capacity Real Property Claims of Displaced Persons to navigate the system. Access to legal serv- and Refugees, which collected claims for ices is often restricted or costly. In Hon- 318,780 properties. As of June 2003, it had duras, legal fees to obtain a monthly issued about 290,000 final decisions on alimony of 100 lempiras (US$5.30) in a property titles.29 Justice, land, and infrastructure 161 Improving crime and personal security policies--breaking B O X 8 . 5 Bogota, Colombia: civic culture program crime-related inequality traps Unlike most Colombian cities,Bogota--a city enhancing neighborhood watch programs; The cycle of inequality, crime, victimization, previously considered unsafe and violent-- and revitalizing urban public spaces.Employ- and discrimination exemplifies the processes has seen a huge reduction in crime since the ment and educational programs were intro- early 1990s and a substantial increase in citi- duced to support populations most at risk. by which inequality traps, outlined in chapter zen perception of safety. No longer one of the most dangerous 2, are perpetuated. Marginal groups are not The city's administration targeted civic cities in the western hemisphere, Bogota has only more likely to move into criminal culture and education,urban planning and seen remarkable results.The homicide rate safety,and the regeneration of public spaces. fell from 80 per 100,000 inhabitants in 1993 behavior, they are also more likely to be vic- Individual and community behavior were to 22 in 2004, with homicides related to tims of crime. Furthermore, discriminatory changed by establishing a citizen disarma- intoxication falling dramatically.By 2001, practices in the justice sector mean that mar- ment program;restricting alcohol consump- 6,500 weapons had been turned in and gun ginal groups are more likely to experience the tion and use of fireworks;increasing the confiscations fell from 6,000 in 1995 to 1,600 number of social service centers;enhancing in 2003.Arrests for homicide, assault, and car law-and-order side of the legal system--black awareness through media campaigns and theft rose by 500 percent between 1994 and men in the United States are incarcerated on educational programs;preventing domestic 2003 (with no increase in police personnel). drug charges at a rate 13.4 times that of white violence and child abuse;strengthening the men, bearing little relation to differences in capacity of the police and the judiciary to Sources: Llorente and Rivas (2005),World Bank offenses30--and are less likely to have access deal with crime,violence,and victimization; (2003a). to institutions charged with protecting them. At the same time, given their role in shaping mented in 42 schools in Soweto, South Africa, these processes, legal institutions are also in 2000, in areas known for high levels of places for change--that is, vehicles for chal- crime, unemployment, and poverty.36 The lenging inequality traps. program--established in partnership with Breaking the cycle of inequality, crime, and the department of education, community violence. Traditional approaches to reduc- organizations, and local police--creates safer ing crime and violence based on increasing schools through the active participation of mechanisms of control and harsher sanc- students, teachers, parents, school adminis- tions have failed to reduce crime. By con- trators, and the local community in different trast, promoting protective strategies and training modules. Both teacher and student minimizing the risk of crime have more attendance at school increased by some 70 success at lower cost.31 percent, acts of violence and aggression fell by To target the many risk factors of in- 67 percent, and the pass rate increased by an creased crime, crime prevention programs average of 78 percent. often require support from the judicial Alternative ways of dealing with young services, social services, health, education, offenders have also been effective in break- media, police, local government, civil soci- ing the cycle of crime. Interventions include ety organizations, and the private sector diversion programs, restorative justice, alter- (box 8.5). Local governments and police native sentencing, and reintegration proj- services often coordinate such programs.32 ects. Diversion programs aim to move Many more effective interventions tar- young offenders into welfare-based pro- get children and adolescents, who are seen grams, as with attempts in Africa to keep as particularly at risk of falling into crimi- street children out of prison. Restorative jus- nal behavior.33 Preventative interventions tice programs, such as community confer- include family support and parenting skills encing, mediate between offenders and those programs, early childhood development affected by the crime, helping to reintegrate programs, special needs programs, after- young offenders into their communities. school care, antibullying programs, life Noncustodial sentencing, such as commu- skills and cultural programs, and commu- nity service orders, is used in different parts nity participation programs.34 of Africa today to promote the reintegration School-based interventions have targeted and rehabilitation of offenders.37 youth crime and have kept young people in schools in many countries.35 Tilsa Thuto is a Increasing personal safety. Appropriate and school crime prevention program imple- accessible police and support services for all 162 WORLD DEVELOPMENT REPORT 2006 are crucial. Violence against women, a huge Building on chapters 5 and 6, we argue here problem in many parts of the world, is exac- that there are strong equity and efficiency erbated by underreporting, inadequate sup- reasons for addressing inequalities in land port systems for victims, discriminatory distribution--both rural and urban--and practices within justice sector institutions, then discuss the experience with land reform and the lack of adequate sanctions for perpe- and options for broadening access to land: trators. Many governments have attempted providing security of tenure, improving the to address the problem by introducing more functioning of land markets, and imple- severe sentences for perpetrators, establish- menting cost-effective land redistribution. ing remedial programs for offenders, and running gender-sensitive training programs Equity and efficiency reasons for police and the judiciary. to address inequalities More recently, some countries, includ- in land distribution ing Argentina, Brazil, Colombia, Peru, and Inequalities in landownership in dozens of Uruguay, have set up women's police stations. countries can be traced to interventions over Other countries have set up police cells for the past 500 years to establish and support women in regular police stations. These serv- large farms at the expense of indigenous peo- ices have shown mixed results.38 Women's ples and the local peasantry. This historical police stations have increased reporting of discrimination against certain groups--or abuse and the likelihood that women will more generally a lack of legitimacy for the receive medical and social services. But critics prevailing pattern of landownership--offers argue that services encourage regular police a rationale for equity-enhancing reforms. to abdicate responsibility for crimes against Additional motivation comes from the fact women and that women officers have not that the landless are among the poorest in necessarily demonstrated better attitudes developing countries.41 toward victims of violence. Where stations Access to land can give the poor more are working fairly well, their efforts are often voice in the political arena and can lead to undermined by other parts of the justice sys- higher investments in children's education, tem, as prosecution rates remain unchanged. arresting the intergenerational transmission The notion that the physical environment of poverty. Galasso and Ravallion (2005), in can increase personal safety has been an inte- their study of the Food for Education pro- gral part of many recent crime prevention gram in Bangladesh, find that villages with strategies,39 and it has been applied to city- more unequal distribution of land were planning, public transport systems, parks and worse at targeting the poor. This is consis- recreational spaces, low-income housing, and tent with the view that land inequality is downtown areas where people feel most vul- associated with less power for the poor in nerable to violence and crime.40 village decision making. Land inequality has also been found to impair the ability of Toward greater equity communities to engage in socially optimal in access to land collective action, resulting in the underpro- Land is a key asset for poor people. Owning visioning of public goods. It also contributes it provides a means of livelihood to many, to social tensions that can lead to consider- facilitates access to credit markets, has an able upheaval, as in Southern Africa.42 insurance value, determines influence in Inequalities in landownership can weigh local politics, permits participation in social particularly heavily on women. Land rights networks, and influences intrahousehold (and control of other assets) often reside dynamics. That is why inequality in the own- with the head of household, which has ership of land has such far-reaching conse- implications for intrafamily bargaining quences for the distribution of well-being power and control of resources. Women and the organization of society for genera- with secure land rights (including inheri- tions to come. Yet landownership in many tance on the death of a husband) are more countries is highly unequal, substantially likely to engage in independent economic more so than income or consumption. activity, a result that has positive economic Justice, land, and infrastructure 163 and equity implications for the household. Figure 8.1 Unequal initial land distributions go together with slower economic growth Inheritance rights that disadvantage women Average GDP per capita growth, 1960­2000, % are of particular concern in Africa, where 8 they are often based on customary institu- Taiwan, China tions that conflict with constitutional Rep. of Korea norms and international conventions on 6 women's rights. In fact, insecure inheritance China Thailand rights pose an additional burden on widows Vietnam Japan who lose their husbands, often through 4 Malaysia Indonesia HIV/AIDS.43 Dominican Rep. Sri Lanka Egypt There are strong efficiency reasons to Brazil India 2 Paraguay Colombia address inequalities in land distribution. Mexico Guatemala Costa Rica Pervasive imperfections in land and finan- Argentina Kenya South Africa Peru Honduras cial markets in developing countries reduce El Salvador 0 investment in land and keep countries from R.B. de Venezuela Nicaragua efficient land allocations (chapter 5). These effects--together with lower human capital ­2 investment, reduced social cohesion, and 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 distorted political power--are consistent Initial land distribution (Gini coefficient, inverted scale) with a positive association between more Source: World Bank (2003i). unequal land distribution and lower GDP Note: Land distribution is measured using the Gini coefficient. growth (figure 8.1).44 fers. And the fact that both tenants and land- Experience with land reform lords have rights to the same plot of land The discussion here implies that redistrib- severely undermines investment incentives.48 uting land could enhance equity and effi- In Latin America, where the potential for ciency. This is likely to be true, but there are land reform should have been highest given significant hurdles in practice. For instance, the high inequality of landownership, the specter of land redistribution can also reforms have generally been "incomplete." worsen efficiency, because farmers are Beneficiaries have often lacked the tools to reluctant to invest in land that they might become competitive and, as a result, the lose. Or political imperatives can override impact on poverty has been disappointing.49 sound program design. Successful land In Kenya and Zimbabwe, postindependence reforms--such as in Japan, the Republic of reforms were quite effective but short lived Korea, and Taiwan, China--are rare and for political reasons.50 In South Africa, the often associated with exceptional events, government's land redistribution program such as war or political upheaval. Indeed, in the late 1990s fell way short of its targets the history of land reforms is littered with but recently gathered steam (box 8.6). partial successes and failures. Clearly, both the politics of land reform and In India, abolishing the land rights of its implementation are complex. rent-collecting intermediaries45 has been Why the rather disappointing results highly successful, whereas the implementa- from attempts at land reform? First, given tion of landownership ceilings and laws to that the motivation for land reform is often protect tenants was, with few exceptions, to address political grievances, efficiency half-hearted. The absence of political leader- and poverty reduction tend to be secondary. ship has been identified as the "prime reason Guided by short-term political objectives, for the poor implementation of land reforms bureaucrats often targeted high-productiv- in India."46 Still, where tenant protection was ity areas rather than high-potential areas, implemented seriously--primarily in West resulting in costly land acquisition and lim- Bengal--it helped improve productivity.47 ited scope for sustained productivity But restrictions on subleasing land by benefi- impacts. Central administration of the pro- ciaries (or their children) tend to reduce the grams also often meant that a large portion scope for productivity-enhancing land trans- of land reform budgets was spent on the 164 WORLD DEVELOPMENT REPORT 2006 assistance. Such advantages can be countered B O X 8 . 6 Land reform in South Africa: picking up steam if small farmers coordinate their efforts through cooperatives.51 If policymakers do To redress apartheid-era asset inequality, by individuals as well as groups.Approval not properly account for all these conditions South Africa embarked on land reform in authority is now delegated from the minister 1994 with a program that rested on redistri- to the provincial directors of land affairs.As a in land reform schemes, efficiency can suffer. bution, restitution, and tenure.Targets for result,redistribution has significantly Third, many traditional land reform redistribution were ambitious: the govern- increased.For the first time since 1994,land efforts failed to provide beneficiaries with ment aimed to transfer 24 million hectares delivery is now constrained only by the secure long-term rights backed by a well- of agricultural land (30 percent of the total) budget for it. to about 3 million people between 1994 But some big challenges remain.Pressure functioning and equitable legal system. and 1999. Under the program, self-selected is growing from civil society on government Affordable channels to adjudicate land groups use grants to purchase land from to meet the revised target of redistributing 30 access and ownership claims must be open willing sellers and to invest in the land's percent of agricultural land by 2014.Restitu- development. But by February 2005, only tion settlements can be complex when rural to everyone. Without such channels, disad- about 3.5 million hectares had been redis- claims target highly productive,capital-inten- vantaged groups cannot take full advantage tributed to 168,000 households. Restitution sive farms and the claimants refuse,as is their of tenure security, land market, and distrib- proceeded at a snail's pace--only 41 of right,to accept financial compensation, utive reforms. Even with full property rights, 79,000 claims were settled between 1995 instead of the physical restoration of the and 1999. And progress on tenure in the for- claimed land.The agricultural impact of the underdeveloped credit and insurance mar- mer"homelands"was equally slow. redistribution scheme has been stunted by kets limit the use of land for collateral. After this sluggish start, some key an inappropriate emphasis on collective Fourth, the full productivity benefits of changes accelerated the restitution and farming and a lack of beneficiary power in land reform cannot be realized without redistribution programs.The Restitution Act decision making.The land market continues was amended to allow for negotiated settle- to be biased against family farming through complementary inputs and training; put- ments, speeding the process considerably; costly restrictions on subdividing agricultural ting land in the hands of inexperienced previously all claims had to be settled in land and a regressive land tax dating from farmers without the needed support often court.By March 2005, more than 58,000 1939.A new land tax based on the value of led to high rates of desertion.52 More gener- claims were settled, and all claims are sched- unimproved agricultural land could provide uled to be resolved by March 2008. incentives for large farms to sell unused or ally, a broader rural development strategy The redistribution program was underused parcels.New legislation that trans- is required to complement land reform improved in 2001,making it more flexible fers communal lands from state to commu- because rural households get their liveli- and decentralized.The grants for land nity ownership is now in place,but it still hoods from several different sources. This purchase and farm development now follow needs to be implemented. a sliding scale,depending on the contribu- Sources: World Bank (2003i), van den Brink, de has implications for the design of land tion by the beneficiaries,and can be obtained Klerk, and Binswanger (1996). reform (for example, determining viable farm size) and highlights the importance of investments that can facilitate off-farm wages and salaries of civil servants rather employment, such as education. than used to benefit the poor. The prospect of gaining access to valuable real estate, Broadening access by improving instead of having to put in sweat equity to the security of tenure develop a piece of land, undermined the self- The benefits of secure tenure for rural targeting properties of reform programs, households are well known: higher produc- often politicizing beneficiary selection. tivity, greater access to credit, higher propen- Second, the relationship between farm sity to invest in physical assets (figure 8.2) size and productivity depends on the type of and the education of children, and time and crop, quality of land, degree of mechaniza- effort saved in securing land rights.53 Fur- tion, and such associated factors as market- ther benefits arise from removing the dis- ing and credit. For most crops, under normal cretionary power of bureaucrats to decide availability of mechanical services, produc- on the allocation of land (improved local tion is neutral to farm size. But when governance was mentioned as a benefit of management requirements are substantial property rights reforms introduced after (labor-intensive crops, erratic weather con- 1992 in Mexico).54 ditions, frequent pest incidence) family These benefits are observed also in urban farms--as opposed to larger, wage-labor contexts. Capitalizing on a natural experi- farms--can be more efficient because of ment that allocated land titles to some advantages in supervising labor. By contrast, squatters but not others in a poor suburban large farms often have better access to input area of Buenos Aires, Galiani and Schar- and output markets, financing, and technical grodsky (2004) found significant effects of Justice, land, and infrastructure 165 titling on housing investment, household Figure 8.2 Title to land increases investment and access to credit size, and school achievement. The quality of Relative increase in investment Relative increase in access to credit houses in titled parcels was higher. Titled (untitled land = 100) (untitled land = 100) households had fewer members (even 250 500 though their houses were larger), and they seemed to invest more in their children's 200 400 education. In India, unclear land titles com- Titled bined with unreliable courts were found to Titled 150 300 land land limit the supply of land and discourage investments. Southern states tend to have 100 200 higher tenure security, which increases the Untitled share of modern retailers. Evidence from a land 50 100 massive urban squatter titling program in Untitled Peru suggests that titling resulted in more land 0 0 work done outside the home and substitu- Brazil Thailand Honduras Thailand Honduras tion of adult for child labor.55 1996 1988 1996 1988 1996 Formal land titling is one way to pro- Source: Feder (2002). vide for secure tenure, but titling takes time and can be expensive. Thailand, the first country with a national program, mortality and unclear regulation could completed the program this year, 20 years undermine a woman's livelihoods in case of after its inception. One solution is to allow her husband's death.58 alternatives to conventional private land Despite potentially large benefits from titles, especially in urban areas.56 In titling, there are challenges in urban and Trinidad and Tobago, a 1998 law author- rural contexts. In urban areas, access to ized three incremental levels of statutory credit may not increase if banks are unwill- security, each requiring additional docu- ing to accept titled shanties in marginal mentation and commitment from the set- areas as collateral. And where squatters' tler and the government. In one year, an land is valuable, titling programs can be estimated 80 percent of informal settlers subverted by powerful interests who use the on state land had applied for the lowest opportunity to relocate squatters to mar- level.57 Because many of these instruments ginal areas--for example, in Phnom Penh, do not require prior physical planning, Cambodia. This does not reflect a problem infrastructure servicing, and surveying of with titling per se, but suggests that when settlements, they can offer widespread the urban poor lack voice and governance is coverage at lower costs. The limitations on weak, titling programs can backfire.59 One transfer associated with many of these way to protect squatters from predatory instruments also check the tendency of urban developers would be to grant them some informal dwellers to capitalize land group land rights as a first step toward indi- subsidies immediately through land sales. vidual titles. 60 Several countries have taken steps to Some studies indicate that formal land require joint titling of land in the names of titles in several African countries did not husband and wife, bolstering women's bring the expected benefits in higher effective right to land, particularly during incomes and investment. This may reflect their husbands' absences. Vietnam has tar- weaknesses in the institutions responsible gets for the joint titling of land as part of the for registration and recordkeeping and for Vietnam Development Goals, incorporated the adjudication of rights and resolution of in its Poverty Reduction Strategy. Attention conflicts. In some cases, it appears that to women's land rights is particularly indigenous tenure was already sufficiently important when women are the main culti- secure.61 It may thus be more appropriate vators, when out-migration is high, when and more cost-effective to strengthen the control of productive activities is differenti- security of tenure through institutions that ated by gender, or when high levels of adult combine legality with social legitimacy. This 166 WORLD DEVELOPMENT REPORT 2006 much to equalize land access. In practice, B O X 8 . 7 Clarifying how customary rights fit however, land sales/purchases are generally with formal systems not an avenue to expand access by the poor and may actually reduce it. High transac- Customary land tenure is created, just starting down the road to communal tion costs, undeveloped credit markets, and maintained, and protected by norm-based land reform, having recently passed legisla- high prices for land, reflecting its collateral customary systems at the local level. Rights tion that will transfer state-owned land to to land, whether communal or individual, communities and create democratic, trans- value and any government subsidies to are generally based on family lineage or parent, and secure property rights regimes crops, lead to thin sales markets that keep membership in a particular cultural group- in these areas. poor farmers out altogether. This suggests ing. Exchanges through sales or rentals are Mexico made a hybrid transition from limited to members of the community. Cus- collective land--known as the ejido that land sales markets will not contribute tomary systems are dominant in most sector--toward more individual landhold- to greater equity in landholdings, especially African countries and in indigenous areas of ings. Ejidos are rural communities modeled in settings characterized by long-standing many Latin American and Asian countries. after a mixture of soviet-style collectives discrimination against specific groups, Having evolved over long periods in and precolonial indigenous social response to local conditions, they are often structures. Reforms in 1992 strengthened unless the government relieves the savings quite flexible. Problems arise when transfers the self-governance of ejidos, allowing them constraints of the poor through subsidies to outsiders become widespread or internal to choose a property rights regime. Each (as we will see in the next section).62 land dispute resolution mechanisms ejido could choose whether land would be Distress sales of land by the poor can become inadequate. held under communal or individual owner- There have been many efforts to make ship and issue property rights certificates occur in risky environments where small the transition from collective or customary accordingly. By 2001 the program had landowners do not have access to insurance. systems to more individual landholdings.But issued property certificates to more than 3 Thus, they are unable to smooth consump- the transition,if not properly managed,can million households and given secure land tion through mechanisms other than land end in disaster,such as in Kenya.Because the rights to more than 1 million households elimination of lineage rights and the legaliza- that previously had no formal recognition sales, such as safety nets.63 In a comparison of tion of land sales were not accepted by rural of occupancy rights (World Bank 2001d). land transactions in Indian and Bangladeshi populations,conflicts over land,sometimes Clarifying how customary rights--in villages during 1960­80, Cain (1981) found violent,ensued between those claiming land rural and urban areas--relate to the formal that poor farmers who had access to safety under customary norms and those seeking system of property rights protected to enforce the new rules. through modern law is important for mil- net programs used the land market to Botswana has had more success. Since lions of people. It is also important for augment their landholdings and undertook 1970, the authorities have gradually expanding the scope for outside productivity-enhancing investment. Distress strengthened individual rights, starting with investment, particularly in urban areas. the right to exclude other people's animals Experience with managing the intersection sales to obtain food and medicine predomi- and to fence arable lands. Common law resi- between the two systems suggests the nated when safety nets were absent. dential leases for commercially valuable importance of effective dispute resolution While government interventions to im- land have been introduced, as have laws mechanisms and a transparent and well- pose restrictions on the transferability of allowing the allocation of land to all adult defined trajectory for transition, with the citizens, whether male or female, married or extension of secure landownership rights to land can undermine investment incentives single (Adams 2000 and Toulmin and Quan an entire group as an effective and low-cost and depress off-farm activity, they can play 2000 in World Bank 2003i). South Africa is first step (World Bank 2003i). a role, especially during periods of transi- tion. In many Commonwealth of Indepen- dent States (CIS) countries the unrestricted approach is particularly pertinent where transferability of land led to a concentra- customary tenure practices predominate. tion of landholdings in the hands of a small Recognizing customary rights and institu- number of farm bosses, as poorer rural tions in the law helps protect large popula- households were enticed to sell their land in tions that are governed by them and builds conditions of uncertainty and incomplete a bridge to the formal system (box 8.7). markets and information.64 Initially limit- Clearly, the complexities of engaging with ing the transferability of land to lease trans- customary justice systems outlined earlier actions rather than outright sales would in the chapter need to be considered--and have been better. when formalizing customary rights, care A gradual transition may be preferable in should be taken not to simply codify exist- cases in which an equitable distribution of ing inequities, particularly for women. land has been the primary instrument of social protection, as in China and Vietnam. Broadening access by improving the func- Governments in both countries rightly per- tioning of land markets. Land markets, ceive the tensions in active land sales mar- both in sales and rentals, can in theory do kets, which could lead to efficiency-enhancing Justice, land, and infrastructure 167 consolidation but also run the risk of markets, off-farm employment opportuni- increasing the number of landless poor. In ties, and equitable contract enforcement China, the government is considering mov- mechanisms--are likely to be preferable. ing on several fronts, including developing Well-functioning rental markets can be a safety nets and rural finance and eliminat- rung in the ownership ladder, but they proba- ing residency-based restrictions (hukou) on bly are not in circumstances of extreme labor mobility. inequality in landownership and power. In While land sales markets have ambiguous these instances, options for directly redistrib- impacts on equity, the equity case for broad- utive policies need to be exploited. ening access to land rentals appears more clear-cut.When farmers do not have access to Options for cost-effective land credit that would enable them to purchase redistribution to broaden access land outright, rental markets are an impor- Improving tenure security and promoting tant avenue for enhancing productivity and land rental markets are good for both equity by facilitating low-cost transfers of equity and efficiency. Analysis and experi- land to more productive producers (chapter ence indicate that land redistribution is not 5). Rental markets also enable landholders nearly as straightforward. It can be costly in with low agricultural skills (or no desire to program resources and reduced productiv- farm) to seek employment in the nonfarm ity, and it can be an instrument of political sector while still earning a return on their patronage. Substantial personnel and finan- land.65 Evidence from Sudan suggests that cial resources are necessary to assess and land rental markets do transfer land to purchase (or expropriate) land, select bene- smaller producers. And in Colombia, rental ficiaries, and supply training and credit. markets have been more effective than gov- When does land redistribution make ernment-sponsored land reforms in bringing sense? In some countries, redistribution land to productive and poor producers.66 could be a necessary political step to If land rental markets have so much address historical inequities and stave off potential to improve equity and efficiency, violence. In others, it could simply be a tool why is there such a large variation in the to shift underused land to more productive incidence of rentals across countries? One uses while enhancing equity. In countries reason is a lack of tenure security--or where state landownership is high, land trust that the security will last. Without it, redistribution could involve limited budg- landlords are unwilling to rent out their etary costs if bundled into a one-time trans- land for fear that they will not be able to fer of state land to private ownership. reclaim it. Other reasons include current Conversely, in countries with strong tradi- or past government interventions to tions of tenure security, just the threat of restrict tenancy, the availability of reliable redistribution could undermine investment. conflict resolution mechanisms, and im- The feasibility of land redistribution also perfections in information.67 While con- depends on the instrument. Expropriation is cern about exploitation in sharecropping likely to be the most disruptive. Divesting arrangements may be justified,68 tenant state lands and recuperating illegal settle- protection and rent ceilings can backfire. ments may be two cost-effective alternatives. Such restrictions on land rentals often push For example, the mayor of Brasilia (Brazil) transactions into informality or lock poor identified lands with uncertain titles and farmers into less efficient and less equitable negotiated the surrender of part of those wage-labor arrangements. Estimates indi- lands. In exchange, official titles were granted cate that new tenancy legislation in India to the remaining areas. Expropriating with was associated with the eviction of more compensation and assisting land purchases than 100 million tenants, causing the rural and rentals--for example, through commu- poor to lose access to about 30 percent of nity-driven land reform--are also feasible the total operated area.69 Interventions to alternatives. Subsidizing land purchases can enhance the bargaining power of the be costly, however, because land is often over- poor--including better access to financial priced relative to its income generation 168 WORLD DEVELOPMENT REPORT 2006 potential from productive use (reflecting its uting land does little. Beneficiaries must speculative, insurance, and status value). be provided with a package of assistance Also, subsidies are difficult to justify if the to ensure self-sufficiency and maximize current pattern of landownership is not con- productivity. The right package will vary sidered legitimate.70 by country but could include training and Market- or community-driven land re- credit. Technical assistance, such as help forms are a potential option. The reforms elaborating farm plans and crop budgets tend to be decentralized and transparent, or instruction on new technologies, can allowing community members to obtain be a success factor for subsistence farmers resources for land access. They can be flexi- and those who lack commercial farming ble, allowing for land rental or purchase expertise. Credit can allow beneficiaries according to the willing-buyer-willing- to make productivity-enhancing invest- seller principle. Community-driven land ments, for example in irrigation, fencing, reforms often give beneficiaries full property tools, or draft animals. rights and involve coordination between · Beneficiary selection and targeting. When local government and NGOs to provide beneficiary selection is politicized, redis- access to training, technology, and credit. A tributed land will not always go to the community-driven approach has been tried most needy and capable farmers. The in several countries, including Brazil, solution is to have transparent rules that Columbia, Guatemala, Honduras, India, allow communities to understand exactly Malawi, and South Africa. But the programs how and why each beneficiary was cho- are relatively new, so rigorous impact evalu- sen. Self-targeting--where potential ben- ations are not yet available. eficiaries seek out land for sale at low cost A land tax, possibly combined with an and then apply for grants and/or loans-- output tax, can be an important comple- can also be effective. ment. It can generate revenues to purchase · Tenure security. Those who gain access to land to redistribute or encourage redistrib- redistributed land should be given clear ution by disproportionately taxing large ownership rights. In some instances, it landholders or owners of unused or under- may be enough to have less than full used land, both rural and urban (box 8.8). ownership (such as a certificate of con- Regardless of the instrument, common trol or long-term lease) to reduce un- lessons can be drawn from previous attempts certainty, encourage investment, and at land redistribution. promote the benefits discussed above. · Complementary investments--training and credit. Evidence from Latin America71 Providing infrastructure and Africa indicates that simply redistrib- equitably Infrastructure in most developing countries B O X 8 . 8 Land and output tax combinations is characterized by low and unequal provi- sion--about 2 people of every 10 in the Taxes on land can be an effective, nondistor- One way to limit evasion by large land- developing world were without access to tionary tool for collecting local revenue and holders is to use a mix of land taxes and a safe water in 2000, 5 of 10 lived without facilitating land redistribution.They can also value-added tax (VAT). A VAT can have much encourage productive land usage by taxing lower rates of evasion and facilitate accu- adequate sanitation, and 9 of 10 lived with- underused land at higher rates.This can be rate reporting of cultivation levels. Knowl- out their wastewater being treated72--with attractive when large unproductive plots of edge of true cultivation levels would then many families suffering from inadequate land (often held for speculative reasons) cre- limit the scope for overreporting the degree access especially in rural areas. ate artificially high land prices and limit land of land use to evade higher tax rates for access for poor farmers.But administering a underused land. In the absence of insurance Economic opportunities are strongly tax on land requires data on the size, value, markets, a mix of VAT and land taxes can shaped by access to infrastructure. Much ownership status, productive capacity, and also reduce the risk facing smallholders infrastructure is traditionally government output of each plot.Because it is hard for the because tax burdens would be correlated provided and so is driven by the political government to measure the actual degree with output fluctuations. of land use, especially for large landholders, process. Financing constraints and technical Sources: Assunção and Moreira (2001),World there is a strong incentive for tax evasion. Bank (2003i). design challenges are very real but perhaps easier to overcome. When more equal voice Justice, land, and infrastructure 169 or the political interests of the governing Investments in basic water and energy regime make for more broadly accountable infrastructure can improve gender equity. policies, infrastructure is provided in ways Around the world, the burden of gathering that are supportive of the economic interests and transporting fuelwood and water tra- of poorer groups--for example, in East ditionally falls on women and girls. In Asia's intensification of irrigation and trans- Ghana, Tanzania, and Zambia women port (see focus 4 on Indonesia). In more account for two-thirds of all household unequal societies, those without influence time devoted to water and fuel collection, receive less and lower-quality access to pub- while children--mostly girls--account for lic services--this often means the poor. This between 5 and 28 percent of time spent on inequitable access also applies to remote these activities. In rural Morocco, having regions and excluded groups, and some- wells or piped water increases the probabil- times it has a gender dimension. Even worse, ity that both girls and boys will enroll in some infrastructure services (utilities espe- school, with larger impacts for girls, who cially) often become instruments of patron- are responsible for collecting water. Studies age and riddled with problems of inefficient in Pakistan show that poor access to fire- provision and corrupt practices. wood and water in rural areas means that As in the case for land, more equal access women work longer hours and have less to infrastructure would be good for equity time for income-generating activities, with and will often be good for growth. This impacts on the intrahousehold balance of requires addressing difficult financing issues, power. Women and children are also more constraints that limit the poor's ability to subject to health risks from indoor air pol- access infrastructure, and major accountabil- lution, given the disproportionate amount ity issues through institutional designs that of time spent inside the home. Electricity support more equitable response to needs. in the home can reduce the need to burn polluting fuels for light and cooking. And More equitable access improvements in electricity and gas distri- to infrastructure is good bution can eliminate time spent collecting for growth and equity traditional fuels.75 There is solid evidence that infrastructure Improving rural transport infrastruc- investments broaden opportunities for peo- ture can reduce transactions costs, expand ple and communities by integrating them access to markets, and improve rural into regional and national systems of pro- incomes. It is estimated that nearly two- duction and commerce, and by improving thirds of African farmers are effectively their access to public services. Location insulated from national and world markets strongly influences household market partic- because of poor market access.76 In con- ipation in Vietnam.And households with the trast, substantial investments in Indone- same characteristics and endowments yield sian roads over the last three decades have different returns in different geographic set- allowed poor households to successfully tings in parts of rural China.73 Leipziger and enter the market economy.77 And many of others (2003), based on a sample of 73 coun- the roads were built as labor intensive pub- tries, find that a 10 percent improvement in a lic works, making jobs available to country's infrastructure index is associated unskilled labor. Similarly, investments in with a 5 percent reduction in child mortality, rural infrastructure (roads, bridges, cul- a 3.5 percent reduction in infant mortality, verts, and marketplaces) in Bangladesh and a 7.8 percent reduction in maternal have deepened the vibrancy of the rural mortality, controlling for incomes and the economy for both agriculture and non- availability of health services. Microevidence agriculture. Investing in rural roads is an from rural India lends support to these example of how expanding access to infra- cross-country findings: the prevalence and structure can benefit equity and efficiency duration of diarrhea among children under in the long run, especially in areas with five are significantly lower for families with large numbers of poor people and agro- piped water.74 climatic potential.78 170 WORLD DEVELOPMENT REPORT 2006 B O X 8 . 9 Lagging infrastructure in Africa Infrastructure development in Africa is abysmal, scattered populations make economies of lic provision and guarantees to help foster pri- lagging behind the rest of the world in terms of scale difficult and require higher investments. vate participation. Prudent oversight, regulation, quantity, quality, cost, and equality of access. Widespread subsidies that go to the relatively and contract design can also ensure that public Only 16 percent of roads are paved, the average wealthy (the poor generally do not have con- and private financing are equitably and waiting time for a telephone connection is three nections to networked utilities) undermine efficiently used. and half years, transport costs are the highest of governments'ability to expand access. Increasing cross-border and regional coop- any region, and fewer than one in five Africans · Bad policies and poor accountability. Licens- eration is one way to make African has access to electricity.What can explain this ing, competition barriers, and corruption also infrastructure more affordable. Streamlined bor- tremendous underdevelopment? impede affordable infrastructure provision. der crossings and improved road and rail links would reduce transport costs.Trade in power · Difficult geography and complex history. Dis- Despite the difficult geographic and struc- and water resources could significantly cut costs tance from major markets, the Sahara Desert, tural factors, there are opportunities to improve as well. For example, it is estimated that South a shortage of natural ports, and vast tracts of Africa's infrastructure. One necessary step is to Africa could save $80 million a year in operating landlocked areas all increase transport costs. boost investment, especially in rehabilitation costs by exchanging electricity with its neigh- Infrastructure development during colonial and maintenance. Higher public investment will bors (Masters, Sparrow, and Bowen 1999). Seek- times focused on building transportation be needed. Private participation can help ing innovative ways to broaden access is also from resource sites to a port. And the finance some investments and increase needed. Mozambique has tested a promising postcolonial division of Africa into many efficiency, but it is unlikely to solve Africa's infra- approach: the government set up utility compa- small states drives up transport and energy structure problem. A sound institutional and nies using diesel generators in rural areas and costs, with cumbersome border crossings, lit- policy environment is required to attract fresh then sold them to private investors below cost tle regional cooperation on water and power investment and use it effectively. for continuing commercial operation. Grants projects, and incompatible rail systems, Macroeconomic stability, freedom to repatri- from government, NGOs, or donors for commu- among other factors. ate capital, competitive taxes, contract enforce- nity-driven infrastructure projects are another · Financing constraints. Lack of investment has ment, low corruption, and adherence to trans- possibility. Regardless of the approach, commu- led to a deterioration in infrastructure, espe- parent rules are all important to private nity and user involvement in infrastructure con- cially road transport. For instance, in nine East investors, especially given the long payback struction, maintenance, and management is one African countries, maintenance spending periods of many infrastructure investments. In of the most effective ways to expand access in could cover only 20 percent of current contexts in which policies are sensible but for- rural areas. networks. Lack of disposable income means eign private investment is hard to attract, low demand for infrastructure, and small and foreign aid can provide both financing for pub- Source: World Bank (2000a). Is privatization the answer? ities are large--are often inefficient and What accounts for the failure of infrastruc- become instruments of patronage. ture services to serve poor people, especially The 1990s were characterized by a massive in Africa (box 8.9)? Beyond the important policy redirection toward private participa- role played by historical and geographic con- tion in infrastructure--reflecting the disap- texts, there are major financing constraints pointment with ineffective state-operated and governance challenges. In most develop- utilities, the promise of private funding, and ing countries, the public sector is fiscally the greater flexibility offered by technological strapped--public investment in infrastruc- change and regulatory innovation.80 But the ture in Latin America dropped from 3 per- privatization wave bypassed many develop- cent of GDP in 1980 to less than 1 percent in ing countries--Sub-Saharan Africa received 200179--and public spending requires taxes, only 3 percent of total private infrastructure which can exert a drag on efficiency and can investment in developing countries between mean forgone investments in other areas. 1995 and 200081--and even where private Local financial markets are generally not suf- capital became the dominant source of ficiently developed to intermediate private investment (as in Latin America in the mid- savings into long-term, risky infrastructure 1990s when private investment was 2.5 per- investments (and, in any case, private savings cent of GDP), the results for equity were are often not large). Foreign private capital is mixed. There were many cases of privatiza- interested generally in large markets and even tion in which access for the poor improved, then only when risks (including policy and especially when competition reduced politi- exchange rate risks) are acceptable. State- cal capture, but evidence suggests that private owned infrastructure companies in many operators also focused on wealthier segments countries--especially when political inequal- of the population (box 8.10). Justice, land, and infrastructure 171 B O X 8 . 1 0 The distributional impact of infrastructure privatization in Latin America: a mixed bag Private participation in infrastructure increased Despite the increases in access, there are Chile, the liberalization of the telecommunica- dramatically in Latin America during the late two reasons why privatization may have had tions market in 1994 reduced call prices by 1990s.It went from $21 billion in 1995 to a peak of adverse effects on the poor through higher more than 50 percent. In Argentina, thanks to $80 billion in 1998,dropping back to $20 billion tariffs and connection costs. First, privatization the entry of 21 new operators in the generation by 2002 (World Bank 2004f).The distributional can reduce the scope for cross-regional subsi- sector, residential electricity customers enjoyed impact of private investment depends on how dies. One study (Campos and others 2003) a 40 percent drop in tariffs in the five years after efficiency gains are allocated between public and showed that the fiscal cost of utilities privatization (1992­97) (World Bank 2002b). private interests.In the best cases,privatization increased a few years after privatization.This Ultimately, price changes depend on initial con- can solve patronage problems and lead to greater was the result of "cream-skimming," as ditions, quality improvements, and regulatory efficiency and equity.In worse cases,efficiency observed in Argentina. In some of the and institutional frameworks that determine gains can be shared between government and provinces of Argentina, the water concessions profits. private operators,or go primarily to the private were for the large cities only, leaving the Episodes of privatization can be opportuni- sector and lead to the consolidation of private responsibility for the small cities and rural ties to strengthen accountability.They can gen- monopoly power (as in Mexican telecommunica- areas to the governments. Because the big erate public discussion about the current state tions).The outcome depends on the market and cities were cross-subsidizing the other regions of service delivery, the options for reform, the accountability structure,including the effective- under public provision, privatization reduced terms of the contract, and the tradeoffs under ness of regulation.Evidence from Latin America this source of funding and increased the net consideration. Such occasions can be powerful shows that privatizations fall into each of these fiscal costs once the transaction payoffs from in overcoming collective action problems and categories,yielding mixed results for affordable privatization had disappeared. mobilizing consumers to express their interests. access by the poor. Second, connection costs and tariffs were But there is also the danger that, in the absence Research from Argentina, Bolivia, Mexico, adjusted to cost-recovery levels following priva- of the voice of consumers, the process of privati- and Nicaragua shows that utility privatization tization, leading in many instances to higher zation may be captured by narrow interests with increased access and enhanced service quality prices. In the early 1990s, public utilities in political connections and better information. for poor consumers in some cases (McKenzie developing countries subsidized an average of Indeed, that might be one reason why the pub- and Mookherjee 2003). In Chile, access to power 20 percent of gas and 70 percent of water costs lic perception of privatization in Latin America is services increased greatly for low-income (World Bank 1994). So when subsidies were cut, so negative.82 There is evidence that privatiza- groups during the first 10 years of private opera- services often became too expensive for poor tion has been associated with increased power tion (Estache, Gómez-Lobo, and Leipziger 2001). consumers. For the water concession in Buenos for conglomerates and their foreign partners-- In Colombia, private utilities have connected Aires, the initial connection charge was set so and with higher profits in noncompetitive sec- more of the poorest consumers than their pub- high that many users could not afford it tors. Accusations of corruption during the priva- lic counterparts (World Bank (2001a)). Other (Estache, Foster, and Wodon 2001), which was tization process, concentrated gains by a few research shows that child mortality caused by an issue at the center of one of the first major actors (whether made legally or illegally) con- waterborne diseases fell by 5 to 9 percent in the adjustments to the contract (Ugaz and Price trasted with worker layoffs, and unrealistic cus- 30 Argentine locales where water services were 2003).The telecommunications sector in tomer expectations regarding service levels privatized, with the strongest benefit--a more Argentina also saw price increases following (driven by politicians overselling the promise of than 25 percent decline in mortality--occurring privatization, largely to rebalance local and long privatization) are also probably to blame for pri- in the poorest neighborhoods (Galiani, Gertler, distance charges. But price increases are not the vatization's negative public image (De Ferranti and Schargrodsky 2002). norm--competition can drive them down. In and others 2004). In the end, experience suggests that pri- surprising. Given the low initial coverage in vatization alone is not the answer. Whether many of these countries, the expansion infrastructure services are provided by pri- favored wealthier households. This does not vate operators or public utilities seems less mean, however, that expanding access when important for equity and efficiency than overall levels of service provision are low is specific measures to improve access for the bad for equity. On the contrary--better to poor, the structure of incentives facing expand access in this case than to focus on providers, and provider accountability to upgrading quality, which would benefit only the general public. the few who already have access. To expand access to the poor, policymak- Expanding access and making ers can set service obligations or create services affordable incentives for providers. One way is to spec- Whether expanding general access benefits ify universal service obligations, which is the poor depends on initial levels of cover- common in the telecommunications sec- age. In many African countries, overall access tor.83 While this is a worthy social objective, rates improved over the last decade, but the it may not be practical in the short run when bottom 40 percent of the population regis- starting from low access rates. That is why tered no gains at all (figure 8.3). This is not service obligations should include details on 172 WORLD DEVELOPMENT REPORT 2006 Figure 8.3 Poor families did not benefit from an expansion of access in Africa Access to electricity for 1st and 2nd quintile (average) Access to electricity for 4th and 5th quintile (average) 2nd period 2nd period 100% 100% Nigeria Côte d'Ivoire 45° Ghana Cameroon 45° Senegal 75% 75% Zimbabwe Namibia Zambia Benin 50% 50% Mali Madagascar Tanzania 25% 25% Rwanda Kenya Niger Malawi Nigeria Uganda Burkina Madagascar Faso 0% 0% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% 1st period 1st period Source: Diallo and Wodon (2005). Note: First and last observation dates vary for each country. The first observation is in the early to mid-1990s and the last in the late 1990s or early 2000s. The average time between observa- tions is seven years. time frames and ways to finance the obliga- A complement to connection subsidies tion when customers are unable to pay. are consumption subsidies, either through Defining connection targets is another way means-tested transfers financed out of gen- to promote access. Targets are easy to moni- eral tax revenues or through lifeline tariffs. tor and can be enforced by financial penal- Subsidized lifeline tariffs require a transfer ties. Of course, connection targets can be from those with high levels of consumption met only if customers are able and willing to those with low levels.85 When considering to take up the service--and this depends on lifeline subsidies, care must be taken to set a their ability to overcome impediments, threshold that is high enough to garner including title requirements and income political support, yet low enough that the and liquidity constraints (given the lumpi- poor are the primary beneficiaries. For ness of connection charges). instance, evidence from Honduras suggests In many countries, new connections are that their electricity subsidy is too high-- subsidized to meet access objectives and 83.5 percent of residential customers benefit keep providers solvent. New connections from the subsidy (those consuming under can be subsidized from charges to existing 300 kWh monthly). Means-tested vouchers users, particularly if the group of existing for purchasing services are another subsidy users is much larger and wealthier than option. They are similar to means-tested tar- potential new users. The water and sanita- iff subsidies with added flexibility for the tion concessionaire in Buenos Aires adopted user to select a service provider.86 this type of cross-subsidy after renegotiat- Given the liquidity constraints of the ing an initial contract that charged onerous poor and the possible seasonality of use and connection fees to the poor. Government income, introducing flexibility in payment financing for connection subsidies is also an is likely to help expand access. Increasing option, as is offering credit to consumers the frequency of billing is one such option. for connection purchases. In Colombia, the Prepayment devices, which facilitate budg- law requires that connection charges for eting for low-income households, are poor customers be spread over at least three another. On the downside, prepayment years.84 could lead to frequent "self-disconnection." Justice, land, and infrastructure 173 Utilities could also allow customers to Figure 8.4 Poorer households have lower-quality water and pay more in Niger choose from a menu of tariffs with different Percent of quintile Average price CFA franc combinations of fixed (standing) and vari- using each source per cubic meter able charges. Allowing lower fixed charges Water sources in exchange for slightly higher variable ones Piped water Neighbors, wells, could benefit smaller consumers.87 Fountains or or rivers Enabling consumers to make certain vendors quality-price tradeoffs by encouraging 100 89% lower-quality services is also likely to be Average 600 price beneficial. This can be done by allowing 77% 75 lower standards of formal provisioning in 62% 61% certain poor areas or by encouraging a 400 50% vibrant network of informal providers that 50 43% can either operate independently or through 33% subcontracting arrangements with the for- 30% 200 25 mal provider. 20% Water service provides an example. A 9% 7% 7% 9% 3% 3% study using data from 47 countries shows 0 0 that informal providers such as point- 1 2 3 4 5 source vendors (kiosks) and mobile distrib- Wealth quintile utors (such as tanker trucks and carters) Source: Bardasi and Wodon (2004). systematically charge more than networked providers, both public and private.88 Micro- economic evidence supports this. In Niger, B O X 8 . 1 1 The pro-poor agenda for urban water in Senegal for example, wealthier households are more likely to use networked rather than infor- In 1995, the government of Senegal have a connection at all or share a connection mal providers and pay less per unit con- launched sweeping reforms in the urban with several other families,which bumps sumed (figure 8.4). But informal providers water sector.The bankrupt public sector them into a higher consumption block. utility was dissolved. A new state asset- Connection subsidies have benefited can offer a valuable service, because many holding company was created to manage the poor, but those who could benefit most poor users cannot afford connection the sector. And a private operator was con- are likely to be ineligible because they lack charges or monthly lump-sum bills or live tracted to run the system based on an inter- title to their land and an established house. in areas inaccessible to utilities for legal or national competitive bidding process.The The construction of public standposts has reform had positive outcomes for the poor, expanded access but does not necessarily technical reasons. Recognizing that private thanks to strong government commitment, provide the lowest-cost water.Tariffs on connections for all households may not be a connection subsidies in low-income neigh- water sold to licensed standpost vendors feasible goal in the near term, governments borhoods, and well-designed operator are considerably higher than the subsidized and utilities can work with informal incentives. But tariff inequities and poor tar- social tariff and vendors also charge an geting of subsidies remain. overhead fee. Analysis of one NGO-run providers. For instance, kiosk services could Subsidies targeted at the poor take three standpost showed that users were paying be improved by subsidizing kiosk connec- forms:consumption subsidies,connection 350 percent more than the social tariff rate. tions, increasing competition among kiosks, subsidies,and construction of standposts in Given these shortcomings, it would make and introducing performance measures and areas lacking private connections.In Senegal, more sense to direct consumption subsidies consumption subsidies are delivered through away from private connections and into quality standards.89 In Senegal, one study an increasing block tariff with a low"social tar- water provided at standposts or by other argues for directing subsidies away from iff"for household consumption under 10 m3 informal providers who serve the poorest. private connections toward water provided per month.The problem with consumption subsidies is that many poor families do not Source: Brocklehurst and Janssens (2004). at standposts or by other informal providers (box 8.11). High tariffs for the consumer reflect the pricing decisions of the utilities concerned Moreover, many governments view utilities and the taxation decisions of local and cen- and telecommunications as cash cows, tral governments. Avoiding exclusivity in imposing indirect consumption taxes that contracts and liberalizing entry, including tend to be regressive where connectivity to through the participation of independent the formal system is high. In Argentina, private providers or communities in non- utilities generate about 1 percent of tax rev- network services, can help reduce costs. enue; in addition to the income tax, there is 174 WORLD DEVELOPMENT REPORT 2006 a 21 percent VAT plus municipal and provin- regulation is another way to strengthen cial taxes. So indirect taxes can be as high as accountability and reduce political capture 55 percent in some municipalities. Reducing and corruption. Regulators have a key role such taxes would reduce tariffs.90 in ensuring that the public interest is being Naturally, benefits can be lower and costs served. This includes safeguarding the value higher for investments in poor, remote of public assets, upholding the sectoral areas that are short on economic potential. norms relating to health and safety, provid- This analysis is not blind to those consider- ing information about the performance of ations, but also it recognizes the argument the service provider, and enforcing compli- that there can be long-run benefits from ance with contractual obligations. greater inclusion of groups that are margin- If effective, regulation will have an alized because of location or poverty (see important impact on efficiency and equity. focus 6 on regional inequality). Evidence comes from a study of the energy, telecommunications, and water sectors in Strengthening governance, voice, Argentina that separated the benefits of and accountability privatization from those of effective reg- Infrastructure provision suffers from severe ulation. The study found that effective problems of corruption and lack of account- regulation yielded operational gains more ability. Because infrastructure investments than one-third higher than the gains from are typically large and lumpy, and often privatization alone and equivalent to 0.35 exhibit increasing returns to scale or net- percent of GDP, or 16 percent of the average work externalities, they are less amenable to expenditure on utility services. Gains for competition in financing and provision and the lowest quintiles were proportionately generate significant scope for corruption higher. Another study of 1,000 concessions and patronage. Politicians bribe public util- in Latin America found that even a moder- ity officials and pursue political goals by ately well-functioning regulator can temper transferring resources to politically influen- opportunistic renegotiation of contracts. It tial groups, rather than encouraging utili- concluded that the probability of renegotia- ties to expand service and cut costs. tion goes from 17 percent in a setting in One possible solution is to subject utili- which a regulatory body exists to 60 percent ties to performance pressures and reduce in settings it does not.92 politicians' willingness or ability to use them Positive impacts of regulation are condi- for political purposes.91 The prudent use of tioned on the ability to insulate regulators somewhat from pressures coming from politicians and providers. Measures to strengthen the independence of the regula- B O X 8 . 1 2 Addressing accountability and transparency in tor are paramount, and this may require a telecommunications in Brazil and Peru separate agency with reliable and ring- fenced funding and staffing. When assets Brazil's National Telecommunications Regula- sets prices,ensures a competitive market,and tory Agency has a Web site that provides monitors compliance with concession con- are decentralized, the regulatory agency can information on service price comparisons, tracts and quality standards.The agency sets be at the level of the central or regional gov- laws,and operator compliance.Its Advisory norms through a transparent process.Regula- ernment. In short, regulators should be Council (with civil society representatives) tory proposals must be supported by assess- assesses the agency's annual reports and ments of welfare benefits and best practices, subject to substantive and procedural publishes the findings in the official gazette published in the official gazette,and undergo requirements that ensure integrity, inde- and on the Web.And an ombudsperson eval- a 30-day consultation period.Some proposals pendence, transparency, and accountability uates the agency's performance every two also are subject to public hearings.In (box 8.12). years.In 2000,it became the world's first addition,the agency has multiple dispute res- telecommunications regulator to receive ISO- olution mechanisms.Independent commit- In situations in which local provision is 9001 certification,an international standard tees,supported by experts,resolve disputes more susceptible to capture by local elites, for meeting customers'technical needs. among service providers and an internal tri- the central government can influence local Peru has made similar progress in bunal handles consumer complaints not sat- outcomes by using fiscal incentives to nudge improving regulation by increasing isfactorily managed by phone companies. transparency.The Supervisory Authority for local governments toward broader access Private Investment in Telecommunications Source: World Bank (2004l). and by reducing costs for the poor through contingent intergovernmental transfers. This Justice, land, and infrastructure 175 requires setting performance targets, elicit- justice systems and legal institutions, ing competition among local governments, embedded as they are in the political and and benchmarking to monitor performance. socioeconomic structure of societies, can be It also requires sufficient policy autonomy at hijacked by special interests. the local level to meet the specified targets. Broadening access to land can enhance Monitoring the performance of providers people's opportunities to engage in produc- requires reliable information and perform- tive activities. The distribution of land rights, ance benchmarks. This is more easily done especially ownership rights, is skewed in when there is a management contract or a many countries, and challenging this pattern concession agreement with clear service obli- is difficult. Past land reform efforts show the gations or when there are performance con- need for a broader menu of policies that go tracts with similar features for public utilities. beyond redistribution through expropria- Community involvement can help monitor tion and include improvements to tenure compliance. A national regulator can bench- security and the functioning of rental mar- mark local government performance when kets. There is also scope for redistribution infrastructure assets and policy decisions are through channels other than expropriation. decentralized and provide useful information More equitable access to infrastructure for intergovernmental fiscal transfers. also has equity and efficiency benefits. Broadening access to infrastructure brings Summary people closer to markets and services and to Justice systems can do much to level the the power and water they need for produc- playing field in the political, economic, and tive activities and daily existence, expanding sociocultural domains, especially when their economic opportunities. Expanding societies press for equitable laws and for affordable access for poor people and poor transparency and accountability in their areas requires tackling difficult financing implementation. Legal institutions can issues, designing subsidies effectively, work- uphold the political rights of citizens and ing with informal providers, as well as curb the capture of the state by the elite. making providers more accountable and They can equalize economic opportunities strengthening the voice of beneficiaries. The by protecting property rights for all and challenges of expanding access to justice, ensuring nondiscrimination in the market. land, and infrastructure and rooting out They can force change in the social domain corruption and elite capture remain signifi- by challenging inequitable practices. But cant for many developing countries. f o c u s 5 o n taxation Raising revenues for equitable sion of services during 1950­80. In Chile compact, in much the same way as resource policies and the Republic of Korea, too, the emer- revenues, by making governments less The publicly-provided, equity-enhancing pro- gence of representative institutions (and beholden to civic interests.4 Some evidence grams outlined in this report, from early higher incomes and administrative capac- suggests that higher levels of aid are associ- childhood development interventions to water ity) led to higher taxation and spending. ated with lower revenue collection, espe- supply, have to be financed. The resources to For similar reasons, high inequality in cially among poorly governed countries.5 fund them must generally be raised through the distribution of political power and Donors should thus consider ways of sup- taxation. In fact, a key ingredient for a well- wealth may be prejudicial to the tax effort. porting accountable institutions in recipient functioning public sector is a societal under- The low tax revenues in most of Central countries--both for spending and taxation standing that the quality of public services America may reflect the low solidarity of (see chapter 10 for discussion of aid). depends on everyone paying their share of the the elite with middle- and lower-income While institutional transparency and tax burden. Where this perception fails, the groups: the small, wealthiest segment of the accountability and linking good public social compact breaks down, and tax avoid- population is unwilling to pay more in taxes services to the taxes that fund them are ance and evasion become widespread. This to provide public services, because the elite probably the first-order determinants of leads to a vicious circle of free-riding and tax can procure many private substitutes for successful revenue-raising, technical aspects rate increases, with adverse consequences for publicly-provided services, ranging from of public finance are important to reduce the public finances,the quality of service deliv- public safety to education and roads.2 efficiency costs. Lindert (2004) argues that ery, and social cohesion. Resource rents can relieve the fiscal con- among industrial countries, high social It follows that the same institutions straint on spending and in principle pro- benefit/high tax societies--most notably that influence the quality and breadth of vide resources for equitable provision, Scandinavia--have paid particular atten- service delivery also affect the overall tax though they raise a host of governance tion to tax design to reduce adverse incen- effort. Revenues, like spending, increase challenges. The ability of resource-rich tive effects for labor effort and capital with a country's level of income, but the states to rely on "unearned" revenues can investment to sustain growth. Tax design is quality of institutions--notably voice and undermine the accountability embedded in an immense area. From the perspective of accountability--also matters, even when the social compact underpinning sound equity, the primary contribution of taxa- controlling for income1 (see figure S5.1). public finance.3 If not properly addressed, tion is in providing the resources to fund Voice and accountability can strengthen the the result may be wasted natural resources, equity-enhancing spending. For this, the tax effort, as the services provided become a corrupt state institutions, and poorer principal criteria are minimizing efficiency reflection of the desires of the broader elec- prospects for long-run growth and equity. costs, administrative feasibility, and politi- torate rather than of a privileged few. Lin- A few recent efforts to harness resource cal supportability. For specific tax instru- dert (2004) argues that the expansion of rents for broad-based development in ments, there can also be potential for voice in twentieth-century Europe was the countries with poor institutions aim to positive direct effects on equity. Here we sug- driving force behind fashioning the social introduce greater transparency and gest seven basic principles for mobilizing tax compact that delivered high and equitable accountability (see box on next page). revenues in ways that minimize efficiency growth alongside extensive public provi- Foreign aid can also weaken the social costs, while not undermining equity.6 Fiscal effort increases with income and the quality of institutions 1. Tax bases should be as broad as possible. A broad-based consumption tax, for Tax revenue as a percent of GDP Tax revenue as a percent of GDP example, will still discourage labor sup- 45 45 ply on the margin, but choices between tradable and nontradable goods and 40 40 services will not be distorted, if all are 35 35 taxed at the same rate. A few items (such as gasoline, tobacco products, and alco- 30 30 hol) may be chosen for higher tax rates, because of their negative spillover 25 25 effects or because the demand for these 20 20 products is relatively unresponsive to taxation. As a result, at any given tax 15 15 rate, efficiency costs will be relatively low and revenues relatively high. 10 10 Income tax bases should also be broad, 5 5 treating all incomes, from every source, y = 0.0515x + 0.2049 y = 5E-06x + 0.1848 as uniformly as possible. R2 = 0.2799 R2 = 0.2227 0 0 2. Tax rates should be as low as possible (as ­2 ­1 0 1 2 3 0 10,000 20,000 30,000 40,000 50,000 long as they raise sufficient revenue to Rule of Law GDP per capita (US$ current) finance the appropriate expenditures of Source: Authors' calculations based on Kaufmann, Kraay, and Mastruzzi (2005). government). Of course, the broader the Focus on taxation 177 base, the lower the rate needed to gener- low in developing countries. But in the estates, and inheritances are consistent ate a given revenue level. Lower rates light of the second point, higher rev- with this report's notion that predeter- lower the efficiency costs. The general enues should be sought first by closing mined circumstances should not affect a rule is that the distorting effect of taxes loopholes and enforcing greater compli- person's life chances.8 The efficiency argu- increases proportionally to the square of ance, and only later through higher mar- ments and the evidence are mixed: parents the tax rate, so halving the tax rate ginal rates. Income taxes need to apply to may work more or less to avoid inheritance implies a fourfold increase in efficiency. persons and to corporations. To keep tax taxes, and so may save more or less. From an efficiency perspective, it is bet- avoidance in check, the top marginal rate Although inheritance taxes may be diffi- ter to impose a single rate on a broad of the personal income tax should be cult to collect and are likely to represent base of taxpayers, rather than dividing fairly close to the rate of the corporate only a modest reduction in wealth concen- that base into segments and imposing income tax, which means that the rate is tration, they may help prevent "extreme different rates on each one. This needs not likely to be all that high. concentrations of wealth from being to be balanced against the distributional 5. Use property taxes more. Property taxes passed from generation to generation."9 In argument for graduated rate schedules. account for only a small share of taxes in addition, a design that restricts transfers of 3. Keep indirect taxes from being regressive. developing countries. Their coverage is control rights on corporations can be good With a few key exemptions, value-added typically not comprehensive, and assess- for both equity and efficiency.10 taxes (VAT) can be made less regressive. ments and collection rates are low. 7. Avoid implicit taxes. In many instances, Bird and Miller (1989) show in Jamaica Although nominal rates are also low, the most important taxes affecting the that exempting just five specific items from governments usually find rate increases poor are not formal ones levied through VAT halves the burden on the poorest 40 in this very visible tax difficult to sell the tax code, but implicit taxes, including percent of the population. Reducing politically. Simply raising the tax rate bribes11 and inflation. Other implicit taxes regressive excise taxes (as well as import usually would burden only the few actu- to be avoided include many instances of duties), on food or kerosene is also desir- ally paying taxes. Higher nominal rates "regulation as taxation" such as quasi- able. To make up for lost revenue from any are likely to be acceptable only with bet- taxes imposed through controls on of these measures,there are often good rea- ter tax administration, such as more trade, prices, credit, foreign exchange, or sons for higher taxes on private transport. comprehensive coverage, better and capital markets.12 Export taxes are generally best avoided, more frequently evaluated assessments, both on efficiency and on equity grounds. and enforced penalties for late payment.7 4. Raise personal income tax collections. 6. Consider inheritance taxes. Because heirs Collection from personal income taxes is have not earned the wealth, taxing gifts, Managing resource rents transparently and equitably High overall standards of transparency and have legislated savings to deflect pressures to tries to report and reconcile payments and rev- accountability are essential if the revenues spend revenues quickly and unproductively. enues.Some companies have taken the initiative from extractive industries are to be used well. Revenue management arrangements can also of publishing payments to government in some However, as a second best solution in weak serve distributional objectives.In Chad,the Oil Rev- of the countries in which they operate--for exam- institutions of accountability, many countries, enue Management Law assigns a share of revenues ple,Shell in Nigeria and British Petroleum in Azer- developed and developing, do not pool the to a"future generation fund"and specifies alloca- baijan.The"Publish What You Pay"coalition advo- revenues from extractive industries with other tions for poverty reduction.Such earmarked alloca- cates more systematic disclosure of companies' resources in a unified planning and budget tions may be anathema to financial managers,but annual reports and for home-country legislation process. Instead, they are channeled to a dedi- they communicate and underline the government's to make such declarations mandatory.Equally cated fund, with special arrangements to commitment to prudent and redistributive spend- important are improvements in government earmark the revenues for specific purposes; ing.Nigeria's experience in the Niger Delta during reporting arrangements to ensure transparency define reporting and disclosure requirements; the 1980s and 1990s highlights the resentment and in the application of revenues generated by large and establish oversight bodies to ensure that political instability that can result when local com- projects,such as the Chad-Cameroon pipeline the arrangements are properly implemented. munities see no demonstrable benefits from the and the Nam Theun 2 hydropower project in the One common objective of such revenue extractive industries in their midst.The democratic Lao People's Democratic Republic. management arrangements is to save part of government has responded by creating a Niger Revenue management arrangements are the revenue stream.The savings may be used for Delta Development Commission to fund local likely to be more successful when they are the short-term budgetary stabilization, so that development,with statutory contributions from the product of a broad consultative process and the expenditures are protected from fluctuations in federal government and the oil companies. rationale is widely understood.Timor-Leste has prices and output.They may also be used to High standards of transparency and account- facilitated broad civil society involvement in the build up financial assets, which can generate ability are essential if the revenues from extractive design of the revenue management arrangements revenues over an extended period, in some industries are to be used for development for its offshore oil and gas industry.Draft legisla- cases constituting a perpetual fund, so that purposes.To reduce the risk of diversion of tion on the industry's commercial and tax regime future generations can benefit from the revenues,the Extractive Industries Transparency and legislation on a proposed petroleum fund, revenues generated from the depletion of Initiative (EITI),championed by the United King- have been published and subjected to numerous resources. Azerbaijan, Chad, and Kazakhstan dom,calls on governments and extractive indus- public consultations. Markets and the macroeconomy 9 Achieving more equal access to markets is There are two broad categories of fundamental to greater equity within soci- pathology that make the playing field eties as well as to moving countries onto uneven (see table 9.1). The first pathology c h a p t e r dynamic growth paths, thus enhancing arises when the influence of powerful global equity. And both equity and growth political and economic elites is bad for are best served by prudent macropolicy equity and typically bad for growth-- (allowing for its countercyclical role). This whether this takes the form of outright chapter is organized around the three mar- predation by political elites or excessive kets for capital, labor, and goods (land was influence of economic elites in the shaping covered in chapter 8) and the macroecon- of policies and institutions, as under "oli- omy, exploring in each domain the poten- garchic capitalism." As we read in chapter tial and options for leveling the economic 6, Mexico's financial system through much playing field and strengthening voice and of the country's history provides an exam- accountability. ple of elite capture--a protected, relational, incumbent-oriented financial system. The second pathology arises when policy How markets relate to equity efforts to control or manage markets are Issues of design of market-related reforms directed, at least notionally, to improve and macroeconomic policy are often allo- equity, but with high costs for efficiency, cated to ministries of finance, macro- and and are often captured by middle groups trade economists, financial specialists, and (or indeed elites) in ways that harm the the like. By contrast, policies for equity, poor. This had its extreme manifestation in including those for managing the conse- communist economic policy, but it is also quences of market conditions and macro- prevalent in societies in which markets play conditions, are typically considered the a large role. Another example is when pro- domain of the providers of schools, health tection for formal sector workers, while centers, rural roads, safety nets, and justice bringing valued benefits to some, slows systems. This division of labor is profoundly processes of restructuring and job creation incorrect. The first set of policy domains is for other workers. Both pathologies, but as important for equity as the second. especially the first, reflect Adam Smith's The main issue is access. The playing field concern that the influential may shape mar- is typically far from level in the workings of kets to serve the interests of incumbents. As markets. Barriers are intrinsically inequitable he said, "People of the same trade seldom when they privilege insiders'access to capital, meet together, even for merriment and good jobs, and favored product markets. But diversion, but the conversation ends in a they are also bad for the innovation and conspiracy against the public, or in some investment that lie at the heart of modern contrivance to raise prices."1 economic growth. That is why leveling the The main purpose of this chapter is not playing field has the potential to be both to diagnose from where such pathologies more equitable and more efficient. It is also came but to explore possibilities for change why broadening access typically requires that are feasible within the prevailing politi- more economic competition and more polit- cal, sociocultural, and economic context. ical accountability. Casual observation suggests that change is 178 Markets and the macroeconomy 179 Table 9.1 Two pathologies in the interaction between equity and growth Domain Policy capture by powerful elites Ill-designed attempts at equity with large inefficiencies Financial markets Protected, relational, incumbent-oriented financial system in Directed subsidized credit in India and elsewhere, with Mexico for much of its history dismal repayment largely from better-off farmers Labor markets Repressive labor market conditions in the predemocratic Excessive protection of formal sector insiders in the middle Republic of Korea of the distribution--India, South Africa Product markets Clove and timber monopolies in Indonesia Protection for inefficient agricultural food production (Philippines) and industry (Morocco) before trade liberalization Macroeconomic management Regressive resolution of macroeconomic crises in Latin Populist macroeconomic policies (Peru under García) that America and Indonesia fuel future (regressive) crises possible. The Mexican financial system has Second, while greater equity can be com- been reformed after the 1995 Tequila Crisis. plementary to long-run prosperity, the sec- Moroccan industry was (partially) dispro- ond pathology vividly shows the potential tected. And many countries no longer pur- for inefficient choices in the name of equity. sue populist macropolicy, especially after Tradeoffs between equity and efficiency they experienced its ill effects. exist. And even when there are aggregate Reducing barriers to market access will gains, protected incumbents will be losers, often bring initial benefits, or redistribu- at least in the short to medium term (in tions, not to the poorest but to middle economists' jargon, changes will often not groups. There may even be temporary rises be Pareto-improving). Whether societies in inequalities in parts of the income distri- choose to compensate losers is a matter of bution, for example when there are increases social welfare (especially if they are poor) in returns to skills. This is desirable for effi- and political economy (especially if they are ciency and consistent with equity if institu- not poor). tions allow households and individuals to We now turn to the three markets for respond to the new incentives, and there are capital, labor, and goods and the macro- safety nets to manage those who are hurt. It economy, exploring in each domain the is undesirable, however, if it creates new potential and options for broadening access possibilities for middle groups to "hoard and strengthening accountability. Box 9.1 opportunities" at the cost of future growth illustrates some of the interactions among and gains for the poor.2 equity, inequality, and growth in China. Design choices will depend on the mar- ket and local context, including the political Achieving equity and efficiency context, but two cross-cutting issues are worth highlighting. First, there is often an in financial markets apparent paradox: when systems are shaped The performance of enterprises drives eco- to favor those with influence and connec- nomic growth. An innovative and dynamic tion, economic liberalization should be enterprise sector requires low barriers to good for equity; however, that is not always entry, effective guarantees for property the case. Liberalization can also be captured rights, and access to finance. We focus on by the powerful, perpetuating inequitable the latter here. Unequal access to finance is and inefficient economic structures--and associated with reduced productive oppor- risking political and social backlash to mar- tunities and reflects unequal influence. ket-oriented reforms. This is why liberaliza- Financial market liberalization can in- tion needs to be designed in ways that crease access, but it can also be captured. promote genuine competition and effective Sound technical design and strengthened accountability structures, whether in the accountability can help expand access form of regulation, transparency, or other while reducing both the risk of capture forms of societal control, and sequenced and disincentives to broader lending, thus properly. enhancing opportunities. 180 WORLD DEVELOPMENT REPORT 2006 tion rates), and that financial institutions B O X 9 . 1 Markets and development: demand collateral, which (poorer) borrow- policy, equity, and social welfare in China ers typically lack. Financial institutions respond that they China looms large in any attempt to inter- By contrast,where investment has been cannot provide services profitably for tech- pret development, especially the role of linked to connections and corruption,it is nical and economic reasons. Poorer groups equity in development processes. Hasn't it clearly inequitable,in the sense of lacking moved from a highly equitable form of fair process and equality of opportunity to have small savings, and seek small loans and communism to extensive use of domestic all potential investors.In the long term,intro- insurance (life, health, crop), which are and international markets? And didn't this ducing fairer and more transparent process hard to provide. Smaller clients borrow fre- lead to both rising income inequality and will be important to sustained growth. the most extraordinary pace and scale of There were periods in which policy- quently and repay in small installments, reduction in poverty and expansion in related shifts (such as selective opening,the making serving their needs very costly. And social welfare in history? This looks, at first pricing of foodgrains,tighter controls on the underserved are new and not experi- glance, like a brute fact refutation of a cen- internal migration,and access to urban jobs) enced in business, making them poor credit tral message of this report: that equity can were associated with biases either against lay the basis for prosperous development. inner provinces of China or against rural risks. But such reasons form only part of the An account along these lines misreads areas.These were factors behind the rise in story. The microcredit movement and large change in China in important ways: many of inequality in outcomes and stagnating banks, such as Bank Rakyat Indonesia and the changes were equity-enhancing in the income poverty between the late 1980s and ICICI Bank in India, show that it is possible sense of leading to expansion of opportuni- early 1990s.This was probably inequitable in ties of the bulk of the population (chapter 6 terms of rising inequality of opportunity.For to provide financial services profitably to discussed the institutional underpinnings of these cases there may have been some poorer customers and small firms. Access is these changes). Consider some of the major tradeoff,but few observers argue that such also unequal in areas of finance in which shifts in Chinese policy that the literature policy-induced biases were essential to Chi- enforcement is not as much of a concern-- interprets as having driven growth and nese growth,in contrast to the overall insti- income poverty: the institutional shift to the tutional change and opening. such as deposit-taking. household responsibility system allowing Moreover, even using the much Inequalities in access are also, in part, a peasants to produce for themselves (1979 narrower lens of income inequality, the peri- product of unequal influence. Incumbents and early 1980s), the expansion of township ods when inequality fell (notably the early who benefit from restricted patterns of and village enterprises (TVEs) and the mas- 1980s and the mid-1990s) actually had the sive indirect effects of opening to interna- highest growth rates, not the lowest. And finance may lobby to limit access to finance, tional trade (whole period), the opening to the provinces where rural inequality rose or erect other barriers to protect the rents of inward foreign direct investment (especially the least had the highest growth rates. established firms. Barriers to entrepreneurial in the 1990s), and the huge internal migra- There are rising concerns in China over tion flows. All these led to major expansions the adverse consequences for development activity are indeed generally more onerous in in opportunity (and were major sources of of growing inequality,including in some areas poorer, more corrupt, and more unequal growth) for large segments of the popula- of social provisioning (in health,for example), countries.3 Weak property rights are part of tion. Rural reform quickly expanded oppor- and concentrations of wealth through con- the problem. But weak property rights can be tunities for most peasants.TVEs were nections.But there is no evidence that these broadly dispersed.While the effects of inter- brought benefits in income growth,the issue the outcome of political economy forces-- national opening were concentrated of concern here,and most observers (and the economic elites have an interest in the selec- initially in coastal areas, they have Chinese government) would see this as an tive protection of property rights, because broadened in scope, both through the indi- area in which policy could be improved. they stand to gain more when security of rect effects of migration and the relocation Sources: Ravallion and Chen (2004),World Bank of industries inland. (1997b). contracts and property depends on their position, connections, and wealth.4 We are primarily concerned here with the first pathology mentioned earlier, Unequal access to finance namely the influence of economic elites on is associated with unequal the shaping of financial systems. In many productive opportunities countries, a small number of wealthy fami- and reflects unequal influence lies or groups exert extensive control over As discussed in chapter 5, the access to the corporate sector, notably through con- financial services and their cost are un- trol pyramids in which cross-shareholdings equally distributed, especially in developing lead to dominant control rights in extensive countries. Many firms and households parts of the corporate sector, often substan- complain that the right financial services tially in excess of the share of capital owned. are not provided, that procedures for open- These wealthy families are typically linked ing an account or getting a loan are too to political elites through economic deals, cumbersome and costly (with high rejec- family connections, and shared social and Markets and the macroeconomy 181 Table 9.2 Financial policy and institutions are often captured by the few: case study evidence Country Evidence Brazil Public financial institutions in Brazil appear to have served larger firms more than private banks have (Kumar 2005). Chile Following liberalization in the late 1970s, many privatizations of state-owned banks went to groups of insiders (Larrain 1989). Czech Republic Mass privatization in the Czech Republic delayed the establishment of a securities and exchange commission, facilitating tunneling (stealing assets by channeling to another firm owned by insiders) (Cull, Matesova, and Shirley 2002). Indonesia Market attributes large financial value for political connections, suggesting politics rather than economics determined access or rents (Fisman 2001b). France, pre-1985 Banks, protected and dependent on government support, lend to less productive firms (Bertrand, Schoar, and Thesmar 2004). Korea, Rep. of The opening up of new segments of financial services provision was dominated by insiders. Increasing openness primarily expanded and strengthened the politically most connected firms (Haggard, Lim, and Kim 2003, Siegel 2003). Malaysia The imposition of capital controls in September 1998 primarily benefited firms with ties to Prime Minister Mahathir (Johnson and Mitton 2003). Mexico late 1800s There was capture of the financial sector in Mexico in the late 1800s blocking entry in emerging industries (Haber, Noel, and Razo 2003). Mexico early 1990s Lending to connected interests in the early 1990s was prevalent (20 percent of commercial loans) and took place on better terms than arms' length lending (annual interest rates were 4 percentage points lower). Related loans were 33 percent more likely to default and had lower recovery rates (30 percent less) than unrelated ones (La Porta, López-de-Silanes, and Zamarripa 2002). Pakistan Insider activities have significant economic costs. Politically connected firms borrowed twice as much from government banks and had 50 percent higher default rates between 1996 and 2002, with economywide costs of rent-seeking estimated to be 0.3 percent to 1.9 percent of GDP per year. Brokers trading on their own behalf earned annual rates of return 50­90 percentage points higher than those earned by outside investors. Hence, price manipulation by intermediaries helps keep equity markets marginal with few outsiders investing and little capital raised (Khwaja and Mian 2004, 2004b). Russian Federation Russia's free-for-all banking entry, combined with its choice of a universal banking system, gave great discretion to insiders to conduct asset stripping through the loan-for-shares scheme. The weak political accountability could not stop the capture of state resources or protected rents (Perotti 2002, Black, Kraakman, and Tassarova 2000). Thailand Connected lending was large before the 1997 crisis and firms with connections to banks and politicians had greater access to long- term debt (Wiwattanakantang, Kali, and Charumilind forthcoming). United States, early 1800s New bank licenses went largely to insiders in New York state (Haber 2004). Ghana, Kenya, Tanzania, Firms that have an owner of Asian or European descent have a 0.34 higher probability of obtaining credit from suppliers Zambia, and Zimbabwe (Fisman 2003). cultural capital. Examples include the Mex- More compelling evidence on the links ican banking system, until the reforms of between unequal power and financial sector the second half of the 1990s, and the con- distortions comes from case study material, centrated wealth and close connections from the historical experience of now- between economic and political elites in developed societies, and from contemporary East Asia (figure 2.8).5 developing countries.7 Table 9.2 provides a Concentrated corporate control and selective list of results from recent studies of wealth should be a concern if it leads to developing and transition countries. These biases in access toward the influential and, case studies illustrate that unequal wealth even more, if it is associated with reduced and influence and low political accountabil- innovation and dynamism. Reduced inno- ity can be bad for entry and bad for the vation can occur through direct restrictions broad protection of property rights--and so on opportunity and the indirect effects of can hurt the efficiency, growth, and the weaker property rights. Cross-country evi- health of the financial system. dence suggests that there is a relationship. Such adverse long-term effects can be Countries with more self-made billionaires magnified through crises, further dampen- tend to grow faster, whereas those with ing growth and reducing equity. Connected more hereditary billionaires grow more lending lowers asset quality and makes slowly, suggesting costs of dynastic family financial systems more vulnerable. And control over economies. Societies with well-connected interests do disproportion- greater family control over the corporate ately well in crises, through looting or sector also grow more slowly.6 securing greater protection and bailouts, as 182 WORLD DEVELOPMENT REPORT 2006 discussed in the section on macroeconomic part at accumulating control over other management.8 firms. In Mexico, this was associated with a major consumer credit boom. The liberalization paradox: In the Republic of Korea, chaebols (fam- Rapid and premature liberalization ily-run conglomerates) came to dominate can also be captured nonbank financial institutions. This caused A seemingly obvious implication of the serious conflicts of interest and "produced pathology sketched above is that a more numerous incidents of illegal and unfair open and liberalized financial system activities, where funds from affiliated finan- should be good for access, innovation, and cial institutions were exploited for the bene- growth. Yet overly rapid liberalization can fit of chaebol's ailing subsidiaries."10 And in bring new perils. Table 9.2 includes exam- the particularly dramatic case of Russia, the ples of liberalization and privatization of free-for-all liberalization was a source of financial systems leading to highly concen- both rapid concentration of assets and trated benefits. Rapid privatizations of increased financial vulnerabilities (box 9.2). state-owned banks often meant that banks Rapid or premature liberalization in a went to powerful insiders or corporate context of low political accountability can groups, as in Chile in the 1970s, Mexico in increase financial fragility, and the risk of the 1980s, and the Russian Federation in the opportunistic default.11 Reckless lending 1990s.9 In Chile and Mexico, the largest strategies in Chile and Mexico created banks were sold to a small number of extreme vulnerability for the financial sys- wealthy families in dubious auctions, with tem, which collapsed when there were foreigners stopped from bidding. The buy- shocks to interest and exchange rates. A ers were allowed to fund the purchases with greater percentage of large loans defaulted loans from the banks themselves, leading to and subsequent losses on large loans were extremely poor incentives for solvency. In larger than losses on smaller loans; losses both countries, the owners used the banks were particularly large on loans to parties to grant themselves large loans, aimed in connected with the owners, who escaped significant sanctions. In both countries, the banking system had to be bailed out at enormous public cost, while much of the B O X 9 . 2 Too much and too little regulation: lent capital probably disappeared in capital Russia before and after the transition flight, as in Russia. These cases suggest that rash liberalization with limited scrutiny can Within a couple of years of liberalization,the laws that granted banks an extraordinary number of banks in Russia had risen from freedom to operate and dispose of other result in concentrated control of the bank- four to around 3,000.One could argue that people's money.Russia endorsed the"univer- ing system, with owners putting up limited this was prime evidence that no elite was sal bank"model,for example,hardly a struc- amounts of their own capital, and weak or blocking entry.But such rapid entry in a reg- ture suited to a legal and regulatory vacuum corrupt supervision and public guarantees ulatory power vacuum precluded any (although there is debate as to whether this chance of regulatory oversight.It compro- was a key factor in itself).Bank lobbyists also to depositors. In all these cases the rise in mised the public perception of what a bank ensured that banks were exonerated from low-quality liabilities (and the associated is and how it operates,undermining the very the new commercial bankruptcy code (the moral hazard) became a major factor in the foundation required for the development of bankruptcy code established before the 1998 subsequent financial crises. the domestic banking sector.In practice, crisis vaguely stated that banks would be many of these"banks"were not banks but subject to a specific bankruptcy legislation, In countries with greater accountability, private fund management entities used to which was not even tabled before 1998). financial liberalizations went a different channel capital flight.Those raising deposits The universal banking structure and way. In France, before the 1985 financial from the general public lent the cash to lack of bankruptcy system contributed to insiders,gambled it irresponsibly,or simply the severity of the financial crisis of August reforms, government subsidies and limits shipped it abroad,leaving the banks as 1998, resulting in massive losses to deposi- on competition led banks to support less empty shells full of liabilities. tors, foreign investors, and cost to the state productive firms and provide poor-quality Banks could get away with such behavior budget (as many liabilities were transferred loans. After 1985, the loan allocations not just because rapid entry overwhelmed to the state-owned Sberbank). the (rather unprepared) regulators,but also improved and employment increased.12 because the banking lobby further promoted Source: Claessens and Perotti (2005). Although the reforms exposed some prob- lematic lending patterns, there was no Markets and the macroeconomy 183 financial crisis or capture by the few. The do with scale, which is often too small. Recent system was less concentrated to begin with, experiences like those of ICICI bank in India and the reform process received more pub- show that the high transaction costs for small lic scrutiny. volumes and the large cost of expanding Premature or ill-designed liberalization reach can be overcome. One option is the can also lead to reform backlash, if the ben- innovative use of existing networks. Postal efits are perceived to be concentrated in a systems, with their broad coverage, can be few powerful groups while the losses are used to deliver new services by many private broadly socialized. There is less specific evi- financial services providers. Many technolog- dence on this for the financial system, but it ical solutions now exist for small-scale bank- forms part of a broader pattern of reaction ing, from mobile banking to broadening the against liberalizing processes. Witness the range of delivery points--through kiosks, dramatic fall in support for privatization in small branches, and joint ventures with non- Latin America between the mid-1990s and banks. Simpler banking products, like the early 2000s (as documented by the Latino- "Mzansi" account in South Africa, and pre- barómetro surveys). Such a backlash is paid cards for small transactions can lower likely to be particularly sharp when associ- costs. Handheld computers have been used ated with gains for particular groups-- for quick approval of microfinance loans. "economically dominant minorities" in the Reverse factoring (lending on the basis of interpretation of a series of case studies by receivables from a creditworthy institution) Chua (2004)--that can heighten the sense using an Internet platform has allowed of horizontal inequities for other groups. It Nacional Financiera (NAFIN) in Mexico to can undercut support for the very reforms extend trade finance. There has also been that are critical for equity and growth. This much innovation in the market for interna- is why policy designs need to consider both tional remittances, which many banks have technical and political economy concerns. entered. Some of these innovations need regula- Increasing access to financial services: tory changes--for example, customer iden- Technical design, accountability, tification, anti-money-laundering rules and and competition other rules can hinder access to a bank If both financial systems and financial liber- account, as when individuals do not have a alizations are often captured, what does this fixed address or formal job. Better regula- imply for the design of reform? The answer is tory approaches for consumers can involve complex and to some degree specific to the adopting "truth in lending" requirements initial financial and legal institutions and for small borrowers and educating people political context of a country. But we can on the risks of (new) financial services. outline some general principles. Options to However, a general lesson is to be wary of expand access entail moving financial insti- regulation in weak environments: all too tutions closer to the country's "access possi- often regulation ostensibly designed to pro- bilities frontier." This will not necessarily tect savers and borrowers is ineffective in imply finance for all: for all the success of protection but still hinders access. microcredit for the poor, the major benefici- Are there shortcuts to enhancing access, aries of greater access will be small and especially when overall institutional improve- medium entrepreneurs from the middle ments will take time? Too often there is class. But this is good for the broad-based emphasis on the more complicated and growth that will benefit all groups. This sophisticated aspects of financial systems, involves both issues of technical design and while, some of the basics--broadening access developing the political and social account- to financial services, including deposit-taking abilities that will support and sustain change. institutions--can be more important from an equity viewpoint. Information sharing can Technical design issues. For financial institu- help improve competition in banking sys- tions, expanding the client base has much to tems and can be encouraged more quickly in 184 WORLD DEVELOPMENT REPORT 2006 some segments, including allowing nonbank can increase final costs, by encouraging the financial institutions access to existing net- formation of institutions that are too small works (such as payments systems). There can and that are forced to raise prices to recover also be some scope for specific government fixed costs. Co-sharing costs and risks with interventions. But government interventions the private sector is a key market test. Start- to broaden access through directed credit up subsidies and other support can foster have typically been unsuccessful, causing inef- exploration of alternative business models, ficient distortions with few access benefits-- phasing out support over time. Maintaining the second type of pathology discussed in a segmented system makes sense until the this chapter. Many governments, especially microfinance sector matures, with stronger in the 1960s and 1970s, used various forms microfinance institutions coming into the of subsidized directed credit, typically core financial system as they evolve. through state banks, to try to channel finance to poor farmers and small enter- Accountability and competition. Technical prises. Directed credit undermines institu- design is important, but the core of a reli- tional development because banks have no able reform is building political and regula- reason to develop credit analysis skills, as tory accountability. Public scrutiny has a plentiful examples of defunct development key role, given the risks of capturing reform banks show. By one account, default rates process and institutions. Potential actors to ranged from 40 to 95 percent throughout help oversee the process include associa- the developing world.13 tions of small firms, consumer groups, Moreover, subsidies for housing, lending NGOs, media, and labor unions. But given for small and medium enterprises, and agri- the technical and complex nature of finan- cultural finance are often captured by the cial sector functioning, societal accounta- well connected. Some schemes do reach the bility is likely to be most effective if groups poor: India's social banking program did so, with an interest in a more open financial but at a high cost.14 Such schemes then system are empowered, engaging independ- become, at best, an inefficient means of ent nongovernmental technical bodies with support for the poor, fostering unsustain- the capacity to analyze financial sector con- able models of financial sector develop- ditions. The shadow regulatory commis- ment. For example, India's Integrated Rural sions established in almost all regions, and Development Program provided loans to such research centers as the recently formed socially excluded groups (certain castes and Center for Financial Stability in Argentina, tribes, and women) with high levels of sub- can be sources of education and avenues for sidy (25 to 50 percent of the loan volume to interest groups to express their voice. It will such weak sectors). By 2000, loan recovery remain important to design these mecha- was only 31 percent, and there was little evi- nisms with care to avoid the creation of veto dence of repeat borrowing. powers to reform (which can lead to Microfinance clearly has a role in ex- counter-reform capture!) panding access. It is best viewed as a com- It is possible to promote reforms that plement, not a substitute, for more equi- build more reliable and inclusive financial table financial reform and core financial systems in a context of unequal influence. system development. In most countries, Formal regulatory structures can comple- microcredit and similar microfinance insti- ment societal accountability. The develop- tutions reach less than 2 percent of the pop- ment of the stock markets in Poland and the ulation. Only in a few countries is access Czech Republic show what regulation and really extensive--Bangladesh, Indonesia, disclosure can do. At the transition from and Sri Lanka stand out with coverage communism in 1989, these two countries ratios in the order of 8 percent or more.15 were quite similar in economic structure and Subsidies are often used to encourage the history. But the design of financial reforms setup of microfinance institutions, but they was very different, driven primarily by differ- need to be designed carefully because they ences in philosophy toward markets.16 Markets and the macroeconomy 185 The Czech Republic went for a radical latory capacity has been eroded by techno- Figure 9.1 Poland's stock market voucher-based privatization of state-owned logical change. Given that segmentation started slowly but then surpassed the Czech Republic's assets, convinced of the power of the mar- often resulted in capture by local elites, the ket to organize itself: with property rights erosion of barriers has likely improved access US$ millions, end of year 25,000 transferred to the private sector, it was as often as not. Yet there is room for smaller, expected that private actors would effi- locally managed intermediaries to promote 20,000 ciently contract with one another. Poland access. Such locally focused intermediaries pursued a more gradual approach, based on need explicit disclosure and accountability 15,000 case-by-case privatization and a measured requirements to local users (as opposed to Czech Rep. institutional development effort to build local politicians), which has been the tradi- 10,000 regulatory and supervisory capacity. Com- tion in cooperative or mutual banks, to limit Poland pany and securities laws in the two coun- the undue political influence of the few. 5,000 tries reflected these differences in approach, Opening the financial sector to competi- 0 with much greater requirements in Poland tion from foreign financial institutions can 1991 1992 1993 1994 1995 1996 1997 1998 than in the Czech Republic for disclosure to also spur financial broadening. Foreign Source: Glaeser, Johnson, and Shleifer (2001). the public, more protection of minority bank entry can help by improving efficiency shareholders, and more power for the inde- and stability, reducing protected profits, pendent regulator. and forcing (local) financial institutions to The results were quite different. The focus more on providing financial services stock market in the Czech Republic started to all. Financing obstacles are perceived to bigger but was quickly dominated by cor- be much lower by borrowers in countries porate insiders, who captured "58 percent with high levels of foreign bank penetra- of the values of companies over and above tion, with evidence that even small enter- their legitimate shareholding, compared prises benefit. But note that allowing the with an insignificant 1 percent in the entry of foreign banks is not synonymous United States."17 There was widespread with capital account liberalization. Rapidly "tunneling," a form of asset stripping by opening the capital account before ade- insiders through transfers to other institu- quate domestic regulatory and supervisory tions they controlled. The Polish stock mar- structures are in place can be dangerous, ket, by contrast, started more slowly, but especially in a world of large, and often then overtook the Czech market (figure 9.1) herdlike, international capital flows, cou- Public scandals led to the regulator effec- pled with politically connected lending of tively pursuing violations, using the greater poor quality. This increased the vulnerabil- legal protections, and laying the basis for ity of Indonesia, the Republic of Korea, and more broad-based property rights, greater Thailand in the East Asian crisis. confidence, and openness. By the late 1990s, Finally there is the potential for external there were already several initial public commitment. The relative success of Cen- offerings in the market. tral European countries in strengthening Segmentation provides another example accountability has been attributed to the of the need for appropriate accountability constraint on abuse induced by the need to mechanisms. Financial sector regulation in prepare for accession to the European many countries, including developed ones, Union. In Slovakia, after a decade of influ- enforced segmentation for long periods-- ence-peddling and slow reform in the both on a geographic basis and by type of financial sector, the pendulum swung financial services, as among commercial toward reform only as the date of possible banking, investment banking, and insurance. EU accession approached.19 The Italian experience with dispersed local banking suggests that mutual and coopera- Achieving equity and efficiency tive banks performed an important function in supporting local activities, which was in labor markets much better than state-owned banks or For most of the world's people, economic banks dominated by politicians.18 But regu- opportunities are primarily determined, or 186 WORLD DEVELOPMENT REPORT 2006 at least mediated, by the labor market--in failures: to protect workers and endow them formal and informal work. The wages and with rights and "voice" in the employment employment conditions in the labor market relationship, to empower unions to repre- affect the quality of life of workers and their sent workers in negotiations with employ- families, sometimes in ways that may seem ers, to ensure compliance with labor laws harsh or unfair. The functioning of the and regulations, and to provide insurance labor market has a profound effect on against income shocks. Public intervention equity--across workers, in patterns of can improve market outcomes and lead to access to work, and between workers and significant equity gains: more equal oppor- employers. Government intervention to tunities for workers, better working condi- achieve greater equity is frequent in labor tions, and less discrimination. It can also markets, but often with costs in terms of effi- lead to large gains in efficiency: for example, ciency--exemplifying the second pathology. by allowing full use of the labor of discrimi- While this is an area in which genuine trade- nated groups, by increasing labor mobility, offs exist between protection of weaker work- or by better managing income risk.20 ers (which is good for equity) and flexibility The problem is that poorly designed or (which is good for growth), elite capture and inappropriate government intervention can gross inefficiencies can be addressed through also make things worse, with results that are better design and broader accountability. bad for equity and efficiency. For example, excessive protection of formal sector insid- Equity and efficiency reasons ers can lead to"rationing" jobs in the formal to intervene in the labor market sector, pushing surplus labor into either 21 Labor markets are different from other mar- informal employment (as in India) or kets. Unlike the markets for many com- unemployment (as in South Africa). 22 modities, labor markets generally are not The problem is particularly acute in competitive. They may be characterized by developing countries, because labor market uneven market power (between employers regulations and standards typically apply and workers), by imperfect mobility of only to formal sector workers, leaving the workers, by insufficient information, or by majority of the workforce uncovered.23 Pro- discrimination. These imperfections gener- tecting workers through legislation and reg- ate rents in the employment relationship, ulation that is enforced only in the formal which both sides can try to capture. This sector, without other measures to improve can lead to unfair and inefficient outcomes working conditions in informal employ- when the bargaining position of the work- ment,can reinforce the segmentation between ers is weak. For example, employers may formal and informal employment in ways underpay workers who are not mobile, that are inherently unfair. In Colombia, force workers to work in hazardous condi- workers are legally entitled to severance pay- tions, or discriminate against vulnerable ments for dismissals deemed unjust, but groups. Private markets, left to themselves, these entitlements are not enforced in the also do a poor job of protecting workers informal sector, which employs more than against the risk of unemployment. In the half the workforce. Not only do Colombian absence of perfect access to financial mar- informal sector workers not benefit from the kets, or complete insurance markets, work- legislation, but arguably they are harmed by ers may not be able to smooth consumption it, because the resulting higher cost of labor in response to labor income shocks. If they in the formal sector limits formal employ- cannot gain access to financial markets, ment opportunities for "outsiders" (mainly they may also be prevented from moving women and youth).24 from bad jobs to good. In reality, the distinction between formal and informal employment is often blurred. All governments, irrespective of income, Some authors argue that the informal econ- intervene heavily in the labor market. Gov- omy functions partly as an unregulated ernments typically intervene to correct these entrepreneurial sector, often voluntarily Markets and the macroeconomy 187 entered even at the expense of lower unemployment low. South Africa stands in Figure 9.2 Patterns of employment and income.25 It is clear that the informal sector sharp contrast, with a small informal unemployment vary widely across African countries is heterogeneous, and includes both those sector--absorbing only about 19 percent of who choose to work there and those who the total workforce in 2002, much lower Employment by sector for selected African countries work there out of necessity. Those in the top than the share of nonagricultural employ- Percentage of total labor force strata--microentrepreneurs who hire oth- ment in other African countries--and high ers and many of the self-employed--do rel- unemployment (42 percent in 2003).29 Part Unemployed Self-employment atively well in average earnings. Those at the of the story lies in much larger wage differ- (including agriculture) bottom--intermittent casual laborers and ences between formal and informal sector Private wage job Public wage job industrial outworkers--do not. Women work in South Africa than in the other 100 tend to be underrepresented in the top cases. But it also appears to be caused by the strata and overrepresented in the bottom.26 unusually small size of the informal sector They also often earn less than men within (compared with Latin America, for exam- 75 each strata--although some of these differ- ple). Some suggest that the legacy of ences may reflect voluntary choices for apartheid that inhibited the development of more flexible, part-time work. In a recent traditions of small-scale entrepreneurial 50 study, the International Labour Office activity, and labor regulations that are (ILO) argued that the formal and informal enforced for firms of all sizes (depending on 25 sectors are part of a continuum of working the industry and region), may explain the conditions, earnings, and rights.27 A signifi- lack of entrepreneurs and small firms in cant share of formal sector employees had South Africa. 0 some of the (poor) working conditions In Ethiopia, on the other hand, the major- Ghana Ethiopia South associated with informality, while a fraction ity of the urban unemployed are well edu- (urban) Africa of informal sector workers enjoyed condi- cated and from middle-class households.30 Source: Kingdon, Sandefur, and Teal (2005). Note: Ghanaian data are for 1998/99 and public tions more typically associated with formal They also tend to be young, have never held wage employment includes government and sector jobs. The challenge for governments paid work, and have a median duration of state enterprise workers. South African data are for 2003 (Labor Force Survey). Ethiopian data are is to shift more jobs along this continuum unemployment of nearly four years. Indeed, for urban areas in 1997 (Labour Force Survey) and because of definitional issues may not be toward better working conditions and about half of young unemployed males are fully comparable. higher wages, and to do so in ways that do searching for public sector jobs, which pay on not come at the expense of efficiency. average a 125 percent premium over self- Indeed, poorly designed or inappropri- employed work. ate government intervention can also be inefficient and bad for long-term growth. Addressing links with unequal power Recent research on India, for example, sug- Government intervention in the labor mar- gests that starting from a common legal ket is often a reflection of the underlying dis- framework (the Industries Disputes Act of tribution of political agency. Governments 1947), the states that amended the legisla- may (and often do) intervene in the labor tion in the direction of reinforcing security market in pursuit of goals other than rights of workers and other prolabor meas- addressing market failure. They may inter- ures had lower output and productivity vene to buy off the support of certain groups growth in formal manufacturing than those (for example, urban formal sector workers) that did not change it or that made labor or to suppress social dissent under an regulations more flexible.28 Relatively pro- authoritarian regime or to serve the interests tective legislation may have reduced oppor- of those with greater political influence. Oli- tunities for workers--especially the major- garchic capitalist societies can be associated ity without a formal sector job. either with labor repression or with union- A look at some African labor markets ized and (relatively) advantaged formal sec- illustrates the impact of government poli- tor workers who share in the rents. cies (figure 9.2). Many countries--includ- Interventions aimed at shifting aggregate ing Ghana, Uganda, and Tanzania--have welfare toward politically powerful middle large self-employment sectors, which absorb groups, often in the name of equity, at the increases in the labor supply and help keep expense of others (an illustration of our 188 WORLD DEVELOPMENT REPORT 2006 second pathology) are inherently bad for introduction of extensive social transfers equity and usually bad for efficiency. Politi- (including pensions and unemployment cally influential energy sector and teacher insurance), and the implementation of pro- unions in Mexico, for example, have pro- gressive income taxation. The result was a tected their employment and wage entitle- shift from a regulated state, in which pro- ments by blocking reforms that would lead tection for workers came mainly through to, respectively, energy sector reform and permanent jobs and controlled housing higher-quality and more equitable school- rentals, to a liberal economy with flexible ing. Public sector workers in France have markets, and more extensive public provi- used their political force, with the aid of mas- sioning of services (see focus 3 on Spain). sive strikes, to curtail attempts to bring their nonwage benefits and other entitlements in Better design: Can labor market line with those of the private sector. institutions be designed to be Stronger civil and political rights and pro-growth and pro-equity? broader mechanisms for voice can reduce The challenge for governments is to design the likelihood that the government's labor interventions that balance equity and effi- policy agenda will be hijacked by politically ciency goals in ways that are within a coun- powerful groups. There is a strong associa- try's institutional capacity. History suggests tion between democracy and the level of that this is a complex task, and there are real wages, both across countries and within tradeoffs that need to be assessed. Different societies that have experienced a political societies are likely to make different choices. transition, such as the Republic of Korea, Scandinavia and the United States have and Taiwan, China.31 Stronger respect for very different sets of labor market institu- civic rights in Latin America has also been tions, yet they share a good track record of associated with greater formalization of solid growth and high employment-to- employment and a higher wage share.32 In population ratios (figure 9.3). The Nordic Spain, the transition to democracy in the countries have mandated generous benefits mid-1970s led to demands for greater and protection for workers, financed by a equity that were associated with the legal- high tax effort. But they also have a highly ization of free trade unions,33 the rapid coordinated and centralized approach to wage-setting and policymaking, which allowed all parties to internalize the conse- Figure 9.3 Different labor market institutional setups quences of their actions, with the union can yield equally good productivity growth paths: Scandinavia versus the United States movement historically an advocate for openness and competition. The United Labor productivity (GDP per hour worked, US$) States leaves the setting of wages and work 60 conditions, including benefits, much more Norway to discretion and employer-worker negotia- 50 tion. This fits well within its tradition of United States decentralized bargaining, which gives free- 40 dom to individual firms to bargain with their workers in response to their varying 30 economic and financial conditions. It leads to greater wage inequality and more work- 20 Denmark ers without health and other forms of Sweden Finland insurance. But it is consistent with lower 10 taxes and high levels of flexibility.34 The Nordic countries and the United States 0 1970 1975 1980 1985 1990 1995 2000 opted for different labor market models (in Source: Underlying series for OECD (2005). line with their history, legal tradition, and Note: Measures used are GDP volumes, in U.S. dollars, at constant societal preferences), but all succeeded in prices, constant purchasing power parity (PPPs) prices with a base year of 2000 and total hours worked for total employment. delivering to their workforces a large pool Markets and the macroeconomy 189 of job opportunities, productivity growth, effective system of industrial relations. and rising incomes over the long term. Unions act as agents for labor, coordinating the demands of workers and organizing What doesn't work? There are also many them into a single entity whose collective ways of getting labor market institutions bargaining power matches that of the "wrong." And when countries get it wrong, employer. Trade unions can help provide a one segment of the labor market (typically positive work environment by reducing public and formal sector workers who rep- labor turnover and by promoting worker resent the middle and high end of the usage training and higher productivity. Unions distribution) benefits from extra protection have also been found to reduce inequality at the expense of others. Outcomes are and wage discrimination in countries as highly unequal, and the costs to efficiency diverse as Ghana, the Republic of Korea, and growth are usually severe. The experi- Mexico, and Spain.36 Unions also can have ences of India, South Africa, and Colombia an important noneconomic role. They have cited earlier are vivid examples. been a force for progressive political and Governments also get it wrong if they social change in many countries (Poland, intervene extensively in the labor market the Republic of Korea, and South Africa). when product markets are not competitive. But the involvement of unions in wage- A typical example is the unionization of setting can also have significant negative public sector workers. In Mexico, before the economic effects. Evidence from industrial reforms of the 1990s, workers in public util- societies suggests that union involvement ities and in the public oil sector secured reduces the employment of young and high wages by capturing a share of the rents older workers ("outsiders") and benefits generated in these monopolistic sectors. But prime-age males and females.37 Unions their gain came at a cost for employment often act as monopolists, improving wages and competitiveness in Mexico's private and work conditions for their members at sector. Mexico's experience is not unique: it the expense of consumers and nonunion applied equally to state enterprise workers labor. For example, recent studies of manu- in Turkey until the 1990s and to public sec- facturing wages in Africa show substantial tor workers in India and many other coun- union wage premiums (30 to 40 percent in tries. some countries).38 Things can also go greatly wrong when Formal trade unions are most effective at governments mandate protection with no improving conditions for workers without attention to incentives. In much of Europe, huge efficiency costs when product markets governments implemented generous unem- are competitive, so that unions cannot raise ployment benefits with little connection to wages for their members by capturing rents workers' actual job search behavior. The at the expense of other parts of society; result was an increase in the duration of when collective bargaining arrangements unemployment and the emergence of long- and institutions have enough flexibility to term unemployment, with its destructive accommodate different demand and supply impact on human capital, loss of employa- conditions for different types of workers; bility, weakened ties to economic and social and when unions operate in a context that life, and for many, high degrees of poverty and social exclusion.35 allows them to internalize and absorb the cost of their actions. On the other hand, What works? The key to avoiding these pit- when unions are co-opted by political elites falls is achieving a balance between protec- or by the state, their actions can have signif- tion and flexibility. Design specifics matter icant costs for efficiency. a lot, as does the underlying structural con- An illustration of the potentially highly text. Collective organization of workers is positive role of unions in improving working one of the main channels for securing bet- conditions while supporting productivity ter and more equitable working conditions. growth comes from a study of worker-firm Free trade unions are the cornerstone of any relationships in high-value export crops in 190 WORLD DEVELOPMENT REPORT 2006 worker associations in India, South Africa, B O X 9 . 3 Organizing in the informal economy and Thailand suggest that organizing infor- mal workers decreases the workers' invisi- Developing countries have trade unions · Registered as a trade union, the Self- bility to policymakers and legislators, helps and large informal economies, two Employed Women's Association (SEWA) phenomena commonly thought to be in India is both an organization of poor them gain access to information, gives them incompatible. But recent work by Women in self-employed women workers and a voice and self-identity, and in some cases Informal Employment: Globalizing and movement combining elements of the helps to provide them with a range of social Organizing (WIEGO) has uncovered a sur- labor, cooperative, and women's move- protection services (box 9.3). prising amount of organizing in the infor- ments. It offers a broad range of services mal economy. Formal trade unions that to its nearly 700,000 members, including Providing income security is another extend their coverage to informal workers banking, health care, child care, area in which the structural context and and trade unions of informal workers are insurance, legal aid, housing assistance, design specifics, which pay attention to two organizational forms that have and capacity building (www.sewa.org). emerged. Organizing can also be done by incentives and reward desirable behaviors, · StreetNet International, launched in 2002 cooperatives, savings-and-credit groups, in South Africa, has 15 affiliates (unions, are critical to policy outcomes (box 9.4). producer groups, and neighborhood and cooperatives, or associations) in Asia, This is also true of minimum wage policies trade associations. Africa, and Latin America that organize for which the key to avoiding large effi- Organizing in the informal economy street vendors, informal market vendors, differs from organizing in the formal econ- ciency costs is to get the level right and to and hawkers. As of early 2004, these affili- omy along several dimensions. Collective ates represented 128,000 members allow for enough flexibility across types of bargaining can take many forms. Bargain- (UNRISD Gender Policy Report). workers to accommodate different demand ing partners are not just employers but can · HomeNet Thailand is a network that and supply elasticities for their labor.40 also include municipal authorities, police, helps organize informal home-based wholesalers, and other interest groups. Design specifics and the broader struc- subcontracted and own-account workers Activities of informal workers' trade unions tural context are equally critical to the suc- (mainly women). It drew attention to the can also extend beyond collective bargain- plight of these workers following the cess of legislation on other work standards ing and include a range of services, such as financial crisis in 1998. (health and safety) or protection for specific savings, credit, social security, and advocacy. Because members do not work in vulnerable groups (such as child laborers, Sources: United Nations Research Institute for a standard workplace or for a single Social Development (UNRISD) (2005);Women ethnic minorities, or the disabled). There is employer, membership in trade unions can in Informal Employment Globalizing and Orga- an international consensus that core labor take unusual forms. nizing (2005). standards--freedom from forced and child labor, freedom from discrimination at work, freedom of association, and the right to northeastern Brazil. Union activity among collective bargaining--have such intrinsic landless agricultural laborers in this case was value that they should always be pursued. an important factor behind improvements But even for these core standards there are in work practices that led to higher quality questions about how to achieve them most (critical for export crops), higher productiv- effectively and with minimum cost.41 ity, and better working conditions for land- An example of government interven- less workers. To effect this change, however, tion to protect workers from abuse comes the union had to shift from defending the from Cambodia's successful experience with interests of its traditional base of support implementing core labor standards in the (small farmers) to representing the interests garment industry. Starting in 1999 Cambodia of a larger group of landless laborers. Success could earn a higher quota for exports to the was also facilitated by the fact that, on the United States by demonstrating improve- employer side, the union was negotiating ments in working conditions. A monitoring with large firms from southeastern Brazil. system--developed and implemented by the These southeastern firms had experience in ILO, with support from the U.S. Department collective bargaining, in contrast to the of Labor, the Government of Cambodia, and more traditional large farmers of the north- the Garment Manufacturers Association of east, which were accustomed to more Cambodia--has virtually eliminated the repressive and conflictive labor relations.39 worst labor abuses, such as child labor and Collective organization of workers can sexual harassment. A recent survey showed also secure greater bargaining power and enforcement of core labor standards in the thus better working conditions for informal garment sector has boosted Cambodian economy workers. Studies of informal exports to Europe and North America.42 But Markets and the macroeconomy 191 B O X 9 . 4 Employment protection legislation Left to itself,the labor market does a poor job of babwe (Fallon and Lucas 1993).Overall,the net associated with unemployment? Some EPL may protecting workers against a sharp loss in income effect of job security legislation on employment be efficient, reducing excessive volatility in associated with unemployment.As a result,most is ambiguous (Bertola 1990; OECD 1999; Bertola, turnover. But too strong EPL--as is typical of societies have developed ways to cope with the Blau,and Kahn 2001; Kugler 2004). many formal sectors in the developing world-- threat of job loss.Often this involves some com- What is clear is that EPL changes the nature slows the pace of creative destruction central to bination of informal support mechanisms,private of unemployment. Lower job destruction innovation and growth, with disproportionate savings,and obligations on employers.When reduces the incidence of unemployment. But adverse effects on those without"good"jobs.Yet these mechanisms break down--as they do lower job creation increases the duration of reducing EPL needs to be complemented by when the shocks are large,sudden,protracted,or unemployment and can lead to the emergence greater worker security that is not linked to spe- affect an entire community--the government of long-term unemployment. cific jobs, both on social welfare and political needs to step in.Government intervention typi- Not surprisingly, EPL appears to have a dif- economy grounds. cally involves one or several of the following ferent impact on different groups of workers. In The design of the optimal solution depends instruments:job security regulations,mandated both Colombia and Spain the reduction of dis- on the institutional and administrative capacity severance pay,unemployment insurance,or missal costs and job security provisions was of government and on the structural characteris- mandatory self-insurance mechanisms. associated with moderate increases in the tics of the labor market (Blanchard 2004).Coun- Job security legislation is typically aimed at employment of young men and women (Kugler tries with significant administrative capacity and protecting jobs and preventing job destruction. 2004; Kugler, Jimeno, and Hernanz 2003). For medium to high incomes can implement unem- Most evidence suggests that it is quite effective Chile, Montenegro and Pagés 2004 find that job ployment insurance systems with incentives for at doing so.Across countries,more stringent security regulations reduce the employment job search (declining benefits with duration and employment protection legislation (EPL) appears rate of youth and the unskilled to the benefit of provision of benefits conditional on acceptance strongly associated with more stable older and more skilled workers. A study across of acceptable job offer).Middle-income employment.But EPL reduces job destruction at the countries of the Organisation for Economic countries reluctant to implement a full-blown a significant cost,as the expectation of high sep- Co-operation and Development arrives at a sim- unemployment insurance system can support aration costs makes firms more reluctant to ilar conclusion: consistent with the story that self-insurance mechanisms,such as mandatory expand employment,and makes it less EPL protects"insiders,"stricter EPL increases the savings accounts (but because of the limits to profitable to start new ventures or create new employment of adult men and reduces that of self-insurance,these are not as effective).Low- firms.So,employment protection also reduces young workers and women (OECD 1999). income countries can opt for public works job creation. For example,researchers found that Given the complex effects of EPL, how can schemes,which if effectively designed are self- strict new job-security laws enacted in the 1980s governments best intervene to help protect targeting and can be implemented even when reduced employment in many industries in Zim- workers against temporary drops in income levels of informality are high (chapter 7). whether the system will survive the end of the reforms may be an insurmountable bar- U.S. quota incentives remains to be seen (see rier. chapter 10). Several countries have implemented substantial labor market reforms more or How to reform a "bad" set less successfully: Ireland, the Republic of of labor market institutions Korea, the Netherlands, New Zealand, and Reforming labor market institutions is the Slovak Republic among OECD coun- technically and politically difficult. It is tries; Chile and Colombia among develop- technically difficult because reforms need ing countries (see box 9.5 for Colombia and to be coordinated across a variety of labor the Slovak Republic). China is in the midst market institutions, and often also with of a large labor market transition, and the reforms outside the labor market. It is Balkans are struggling through dramatic politically difficult because there usually labor market reforms. are vested interests in maintaining the sta- Experience suggests that effective change tus quo. Moreover, the short-term costs of involves a combination of factors: designing reform can be large and unevenly distrib- and implementing a consistent and com- uted. Take reforms to reduce employment prehensive policy package; tackling vested protection: those currently protected see interests; broadening societal accountabil- themselves as having much more to lose ity, including increasing the voice of poorer from reform than to gain from such a groups; and, in some cases, compensating reduction. And if they are also politically losers. Macroeconomic and financial shocks influential--represented by unions and can facilitate change, although not always a with political voice--their power to block positive one. Reforming institutions in the 192 WORLD DEVELOPMENT REPORT 2006 B O X 9 . 5 Two cases of labor market reform: one comprehensive, one partial Comprehensive reform in the Slovak and jobs through higher labor flexibility and overhaul of personal income taxes, as well as Republic mobility, and strengthen state administration in reform of the education system. In 2000 unemployment in the Slovak Republic labor and social policy. Partial labor market reform in Colombia reached 19 percent of the labor force--the high- The new strategy represented a marked In 1990 Colombia introduced a labor market est in the OECD at that time.The main factor was change in philosophy in labor and social policy reform that substantially reduced the costs of the substantial job reallocation generated by the in the Slovak Republic: from a system that mixed dismissing workers.The reform reduced sever- transition to a market economy,compounded by ingredients of insurance and redistribution ance payments, widened the definition of"just" low labor mobility because of skill and regional toward one that separates social insurance from dismissals, extended the use of temporary con- mismatches.But the impact of the transition equity objectives; and from a tradition of entitle- tracts, and speeded up the process of mass dis- shock on the labor market was worsened by an ments based on subjective or"moral"norms to missals.The joint effects of these reforms were inadequate set of institutions:high rates of taxa- one that guarantees a certain living standard to to reduce the costs associated with firing work- tion of labor and overly generous unemployment all citizens irrespective of the reason they may ers in firms covered by the legislation. But the benefit and social assistance systems,which dis- have for being poor, but that rewards individual reforms did not affect informal sector firms, couraged job search and encouraged informality. initiative and motivation. which did not comply with the legislation. Reforming these institutions in the midst of The key ingredients in pushing the reform An analysis of the effects of the reforms sug- high unemployment was extremely difficult, through were a reformist government with a gests that they did increase the dynamism of particularly for a reformist government with a strong popular mandate; strong leadership and the Colombian labor market by increasing exit small majority in parliament. But in early 2003, technical competency from the Ministry of rates into and out of unemployment (greater bolstered by its reelection, the reformist Slovak Labor and Social Affairs; accession into the Euro- churning).There was an increase in worker government undertook a comprehensive and pean Union as a disciplining device; and wide- turnover for formal sector worker, greatest ambitious reform of social and labor market pol- spread public perception, built on analysis and among young workers, more educated workers, icy.The government's multipronged strategy dissemination of this analysis, that institutional and workers employed in larger firms.The combined measures to reduce the taxation of reforms were needed. Moreover, labor market reforms may have also contributed to increasing labor, increase the incentives to work through reform was carried out not in isolation but as compliance with labor legislation by reducing reform of unemployment insurance and social part of a broader policy package to make the the costs of formality. assistance, invest in the skills of labor and Slovak economy more competitive in light of EU employability, improve the matching of workers accession.This package included a substantial Source: Kugler (2004). midst of widespread job loss and high depth and competitiveness of other markets unemployment (as in the Republic of Korea (including product and financial markets) following the 1998 financial crisis) is partic- are critical. ularly difficult, even though it may be easier at such times to achieve societal consensus Tackling vested interests. Reforms are often for reform. held hostage by politically more powerful groups. For example, policies to reduce Designing a consistent and coherent policy employment protection, allow for submini- package. One of the strongest lessons from mum wages, or streamline and improve pub- country experience is that piecemeal reform lic sector employment typically encounter does not work (tinkering at the margin usu- sharp resistance from unions. Building broad ally has perverse distributional effects). societal consensus for reform is often the Moreover, reforms need to cover a range of only way to tackle these vested interests. As a labor market policies and to be linked with first step, this may require documenting the reforms in social protection systems. high costs of bad labor market policies Reform is more effective and more equi- through good data collection, analysis, and table when different labor market instru- dissemination (as in the Slovak Republic). ments are coordinated: measures to reduce insider power and increase flexibility by Broadening social accountability. Building lowering the restrictions and costs of firing societal consensus in support of labor market can be linked to setting up of unemploy- reform may require specific measures to ment insurance mechanisms and eliminat- empower the groups of so-called outsiders or ing dual status contracts. Reforms in other disenfranchised workers who bear the costs markets and the public sector are often key of nonreform.It helps to have political parties to the success of labor market reform. The and societal organizations with broad bases Markets and the macroeconomy 193 of representation and support. When this is measures to improve the business climate. not the case, it may be necessary to look for Product market and trade reforms have ways to open up institutions and give greater great potential to bring expansion in voice in bargaining (at all levels) to represen- opportunity, but there can be costs in the tatives of disenfranchised groups. This is short to medium term, and these can hit easier when there are democratic local gov- particular groups, from relatively powerful ernments and strong autonomous associa- protected incumbents to middle and poorer tions--independent private business associa- groups. The costs are associated with how tions, worker associations that represent the markets and investment processes work: interests of specific groups, and so on. The labor is typically not fully mobile, new skills independent private sector is also a natural take time to acquire, and new investments ally when it comes to reforming public sector are often lumpy and can take time, espe- employment and wage practices. cially when firms face imperfect credit mar- kets (see earlier section) and an uncertain Compensating losers. The short-term costs investment environment. of reforms can be high for certain groups of The functioning of product markets is workers: unemployment insurance and social embedded in political and social structures. assistance reform in the Slovak Republic dis- Elite capture ranges from the apparent and proportionately hurt Roma workers and egregious--as in the granting of the Indone- those living in high unemployment regions. sian clove monopoly to a son of President So it may be necessary to compensate the los- Suharto (a monopoly since disbanded)--to ers. It is best to do this in ways that address the less transparent shaping of trade policy the obstacles that losers face in reentering the to protect the profits of the influential. It is labor market (support for education or train- also true that policies with (genuine or ing) or that facilitate labor mobility and rhetorical) equitable purpose can lead to reward work incentives (transport vouchers outcomes that are bad for growth and mixed for workers moving from social assistance to for equity. This is evident in the characteris- work). Such compensatory measures have tically high levels of protection for relatively been introduced as part of the Slovak Repub- labor-intensive manufacturing and for food lic's labor market reform package. production (such as maize in Mexico, rice in the Republic of Korea, and the infamous Product markets and trade reform agricultural subsidies in the European Product markets are intimately related to Union, Japan, and the United States). While equity, with two-way patterns of causation: poorer groups sometimes gain, it is more product markets shape the distribution of common that middle and elite groups are economic opportunities, and inequalities in the main beneficiaries, while food con- influence shape the functioning of product sumers lose out. markets. Both the design of external trade While policies that reduce the power of policy and the workings of internal product incumbents in product markets will typi- markets reflect patterns of influence. Re- cally be good for efficiency and equity, a moving barriers and excessive regulation version of the "liberalization paradox" dis- needs to be complemented by measures to cussed earlier may often apply. Groups and expand skills, infrastructure, and safety nets individuals with economic capacity and to achieve genuine access and help losers. political influence are best positioned to Market broadening and deepening are take advantage of market opening. Under central to the expansion of opportunity: some conditions this can lead to market directly for firms and the self-employed, backlash. Chua (2004) documents cases of indirectly for workers. How equitable this "market-dominant minorities" who benefit expansion of opportunity is depends on from free market reforms, including trade interactions among external trade opening, liberalization. Traditionally dominant eth- domestic markets, patterns of infrastruc- nic minorities, such as the Chinese in ture, labor markets, safety nets, and other Southeast Asia, the Lebanese in West 194 WORLD DEVELOPMENT REPORT 2006 Africa, and whites in Latin America and Cereal protection in Morocco offers an South Africa, seem to be the primary bene- illustration. In a simulation analysis of ficiaries of the marketization of their removal of wheat tariffs, Ravallion (2004b) economies. Such outcomes can fuel deep- finds that, contrary to expectations, rural seated resentments and lead to violence. families would tend to lose while urban These political economy and reform back- ones would gain. Although the results pre- lash considerations are additional reasons dict that there would be more gainers than for integrating attention to equity into the losers among the rural poor, aggregate design of product market reforms and losses outweigh aggregate gains. Further- trade liberalization. more, expected effects would be enor- mously varied, with significant horizontal Trade liberalization inequalities: households with the same Trade liberalization changes relative prices incomes were predicted to experience in an economy, causing shifts in output, widely differing outcomes, depending on wages, and employment. Analyses of trade their specific structure of production and liberalization are primarily about out- consumption. Using a similar simulation comes, providing only indirect evidence on analysis, China's accession to the World opportunities. They show that trade open- Trade Organization (WTO) was found to ness is positively associated with growth have a small aggregate poverty-reducing and, on average, there are no strong corre- effect, but this masked considerable varia- lations with income distribution. Morley tion in impacts across households in rural (2001), using data from Latin America, versus urban areas and across different found slightly negative effects of trade lib- regions.46 eralization on income distribution, while While aggregate effects of trade reform Behrman, Birdsall, and Székely (2003) on poverty and equity are not always found positive influences of trade liberal- clear--whether diverse impacts translate ization on wage inequality. Another study into inequalities in opportunities depends using panel data for 41 countries found on how new activities open up, and whether that trade openness is associated with labor can move into them--we do know increases in inequality, after controlling for that there will be winners and losers. Out- a set of other structural and policy influ- comes depend on the ability and willing- ences.43 ness of governments to mitigate losses to These average effects mask a great deal of particularly hard-hit sectors, possibly by diversity in impacts across groups, espe- redistributing some of the gains accruing to cially over the short to medium term. The winners. impact of trade-induced price changes depends not only on average pass-through Domestic product markets and equity but also on exactly which prices change and Lack of competition among traders, remote how producers and consumers respond.44 geography, poor infrastructure, and high For example, the effects of removing pro- transport costs can all prevent the transmis- tection for agriculture will depend on sion of border price changes to intended whether agricultural prices subsequently reform beneficiaries. Addressing such prob- rise or fall and whether the poor are net lems can improve the impact of trade producers or consumers of disprotected reforms on equity. products. Normally, it is assumed that trade The case of public or private marketing liberalization in agriculture will benefit agencies for export crops is a typical exam- poor small-scale farmers and be good for ple. Small farmers in many countries tradi- equity. After all, "developing countries have tionally have had no option but to sell to a traditionally taxed the agricultural sector marketing agency at prices substantially while developed countries have protected lower than the free on board (f.o.b.) export it."45 But the impacts must be analyzed case price. Legitimate transport and marketing by case at the microlevel. costs account for some of the price differ- Markets and the macroeconomy 195 ence, but monopsonistic profits often do as Figure 9.4 It's better for household welfare to be close to economic opportunities well. Marketing agencies can thus prevent trade-induced price changes from reaching farmers at all.47 A 1998 study found that the Changes in household welfare Vietnamese rice marketing system was > 5 percent controlled by a small number of state enter- 4­5 percent prises. These enterprises limited the trans- 2­4 percent 0­2 percent mission of border price changes to farmers and pushed up transaction costs.48 A more extreme example was when marketing boards became instruments for extraction of surplus from agricultural exporters, such as for cocoa farmers in the post-independ- ence period in Ghana. Malawi has faced similar issues: cartels by companies buying tea, sugar, and tobacco have forced down the returns to farmers.49 Abolishing marketing boards does not guarantee efficient marketing, however, they may play a useful role when markets Source: Nicita (2004). are thin, or a tradition of trading has not Note: Welfare changes were calculated from the effects of trade liberalization­related price changes that affected developed, as in the raw cashew export both the purchasing power and incomes of households. market in Mozambique. Although the state trading company was privatized in the late border price changes for both exports and 1980s, there was insufficient competition imports means that benefits are not evenly among private marketers when raw cashew distributed. In other words, ease of access to export restrictions were lifted in the early international markets matters. Unfortu- 1990s. Indeed, raw cashews had to move nately, those who could benefit most from through three tiers of intermediaries with favorable price changes--the poor in remote near monopsony power before reaching rural areas--are those least likely to be world markets. As a result, the trading mar- affected by them. gin from the farm to the factory was 50 per- Many of the factors responsible for trans- cent and the expected liberalization price mitting trade-related price changes are also increases never reached farmers.50 important to the functioning of domestic Trade reforms in Mexico show how infra- product markets. For instance, competition structure and transportation costs can shape among traders, infrastructure quality, and opportunities through their impact on price transportation costs all influence how prof- transmission. Mexico's trade liberalization in its are allocated across a product's life cycle the 1980s and entry into North American or value chain. And the percentage of a Free Trade Agreement (NAFTA) in 1994 good's final price that goes to the primary appear to have led to wage increases in states producer, intermediary producer, distribu- bordering the United States relative to the rest tor, and retailer can vary tremendously. of the country.51 A different study on Mexico The cashmere sector in Mongolia shows found that tariff reductions translate into how product market reforms could be both domestic price reductions less and less as dis- equity- and efficiency-enhancing. If properly tance from the main port of entry increases. developed, cashmere could be a pillar of This effect can be substantial (figure 9.4). Mongolia's successful transition from a com- Studies of Rwanda and Indonesia have also mand to a market economy. It is the country's documented the isolation of remote house- single largest employer and a principal source holds from border price changes.52 of livelihood for the poor. It provided jobs for Even when trade liberalization is intended more than 16 percent of the workforce and to be pro-poor, incomplete transmission of accounted for more than 6.3 percent of GDP 196 WORLD DEVELOPMENT REPORT 2006 during 1993­2002. But unsatisfactory public prompt payment, and information about sector policies have meant that the industry prices and price trends that allows them to has not lived up to its potential. optimize their sales decisions. The e- One significant bottleneck is in market- Choupal system continues to grow rapidly, ing and distribution. Mongolia's major cash- reaching more than 3.1 million farmers by mere market is in Ulaanbataar, 600­1,000 late 2004.54 The initiative illustrates how km from most regional production centers. improvements in technology and communi- Herders generally have to sell to traders at cations infrastructure can be good for both the farmgate or at informal provincial mar- equity and efficiency in product markets. ketplaces at discounts of 10 to 45 percent In addition to better marketing channels from prices in Ulaanbataar. With little and new technology, there are other ways to knowledge of market demand, individual improve product market competition that herders can incur costs traveling to markets can be good for equity. Measures that facili- with no certainty of a sale. Policies that tate the entry of new firms often mean that encourage regional market centers and small and medium enterprises benefit at the herder cooperatives, as well as infrastructure expense of large, politically connected improvements, could reduce marketing incumbents. Product market competition costs and increase herder's margins.53 can also drive consumer prices down and Soybean farming in India offers another make goods more affordable for the poor. illustration of how product marketing Of course, measures to improve competi- channels can improve equity. Ninety per- tion benefit efficiency and growth as well, cent of the soybean crop is sold by small improving the welfare of the poor. farmers to traders, who act as purchasing Licensing restrictions--even when de- agents for buyers at a local, government- signed in the name of equity--are one way mandated marketplace, called a mandi. to hamper competition. India reserves the Farmers have only general information production of more than 600 manufactured about price trends and no choice but to products, including apparel and textiles, to accept prices offered to them by traders or small companies. This licensing regime the auction price on the day they bring their could cost the country jobs by preventing goods to the mandi. As a result, traders can small producers from growing and compet- exploit farmers and buyers using practices ing with larger manufacturers in, for exam- that create systemwide inefficiencies. ple, China. High regulatory, administrative, Under the e-Choupal Initiative, ITC, one and fiscal burdens can also harm product of India's leading private companies, placed markets by keeping firms in the informal computers with Internet access in rural sector. Informal firms face a number of con- farming villages. Each computer--placed in straints, including limited access to financ- a farmer's home and serving about 10 ing, which tend to leave them significantly villages--becomes a social gathering place less productive than their formal sector for the exchange of information and an counterparts. For example, informal Turkish e-commerce hub. Farmers can use the com- brake manufacturers achieve only 22 percent puters to check prices, learn about farming of U.S. productivity, while their formal sector techniques, purchase inputs, and sell their competitors achieve 89 percent. Affordable soybean crops at the previous day's market access to titled land and reliable infrastruc- price. Farmers then have to transport their ture (chapter 8) can also enhance firm and crop to an ITC processing center, where it is product market competitiveness.55 electronically weighed and the farmer is As discussed, improving transportation immediately paid. Farmers selling to ITC and logistical infrastructure can reduce the through an e-Choupal receive, on average, cost of moving goods. Better transportation 2.5 percent more for their crops, and ITC links with other regions can also provide saves an additional 2.5 percent on procure- insurance against regional price fluctuations. ment costs by cutting traders out of the loop. For example, if there is a drought or food Farmers also benefit from accurate weighing, shortage in one area, efficient regional con- Markets and the macroeconomy 197 nections would allow consumers to import impact of trade opening on poverty was felt reasonably priced food from other parts of the most. In states with more flexible labor the country. Finally, better transport and laws, movements of labor across sectors logistics systems reduce inventory costs by eased the shock of relative price changes.59 making the timing of delivery more reliable, While greater mobility is desirable, the again benefiting producers and consumers.56 design of measures that increase flexibility needs to be balanced with the levels of Interactions between product worker protection that are appropriate for and labor markets the institutional setting (see the earlier dis- Changes in product markets, whether cussion on labor markets). induced by internal developments or exter- nal trade-related changes, can have power- Safety nets and opportunity ful influences on the opportunities facing Safety nets complement product market workers. Standard trade theory predicts deepening and are often an essential ele- that countries should export products that ment of a strategy to ensure that market use relatively abundant factors intensively. expansion leads to more equal opportuni- Labor-abundant countries that open up ties. General questions of the design of should see relative gains in unskilled wages, safety nets were discussed in chapter 7; here as indeed occurred among the East Asian we highlight the links with product market tigers in the 1960s and 1970s.57 change. As discussed above, trade opening The Latin American experience stands in creates winners and losers. How this affects sharp contrast. Many countries, including equity depends partly on how governments Argentina, Chile, Colombia, Costa Rica, Mex- can offer support to the losers. ico, and Uruguay, saw wider wage differen- Rodrik (1998) finds that openness is tials with increasing trade openness during associated with higher government spend- the late 1980s and 1990s. Some argue that this ing. The argument is that open economies was due to the massive insertion of low- are more subject to external shocks and income Asian countries into global markets. spend more on social insurance to mitigate Others interpret the evidence as supporting external risk. In more advanced economies generalized skill-biased technical change, in with the capacity to manage social welfare which trade opening facilitated processes of systems, exposure to external risk is strongly restructuring, including the destruction of correlated with spending on social security jobs in inefficient industries, and rising and welfare. In less-developed economies, demand and relative wages for skilled work- governments rely on a broader set of tools, ers.58 Whatever the reason, the question is such as public employment, to reduce risk. whether this was a source of rising inequality The specific design of safety nets can in opportunity. Over the short to medium expand opportunities to those who suffer term, this was almost certainly the case, adverse effects. For instance, trade adjust- because unskilled workers cannot increase ment assistance programs in the United skills quickly. Over the longer term, rising States extended unemployment benefits, wage differentials provide incentives for training,and relocation subsidies to displaced investment in education, if education systems workers. While the United States was offering provide equal opportunities (chapter 7). the programs in response to the NAFTA, the Effects of economic restructuring on Mexican government established Procampo, a workers also depend on the extent of labor cash transfer program for grain farmers to mobility. One study from India shows that ease the pain of NAFTA-induced competition the effects of trade liberalization in the early from the United States. It was designed to 1990s on poverty varied by state, depending provide consumption support to compensate on the flexibility of labor laws. In states with for price declines and to allow farmers to less flexible laws, where liberalization did not diversify into other activities.While the size of produce any measurable effect on the alloca- the transfers was hurt by the 1995 Tequila tion of labor across sectors, the adverse Crisis, there is evidence of gains to farmers 198 WORLD DEVELOPMENT REPORT 2006 and of the use of proceeds for investment brings risks of greater capture. The ideal purposes.60 balance is a combination of gradual but com- While the ideal policy mix may be one that mitted liberalization with extensive engage- combines reduced barriers and extensive ment in the complementary measures that safety nets, in practice, this is not always feasi- broaden opportunities for all: education, ble. Many countries phase liberalization to infrastructure, competition, and safety nets. seek to ensure that processes of job creation Societal debate and information can ensure precede or accompany job destruction--this that governments remain accountable to all has been a central feature of the East Asian groups,not just those with access and connec- experience (see discussion of China in chap- tions. Of particular importance for external ter 6). This carries risks of slowing restructur- opening is the role of external commitments. ing and extending protection beyond periods Entry into international agreements, such as justified by equity concerns because of cap- the WTO, the European Union, or NAFTA, ture by influential beneficiaries. can effectively lock politicians into trade reforms. When trade regulations are bound Credibility, political supportability, by international agreements, reform commit- and the design of product ments are more credible and less susceptible market reform to capture by domestic special interests While technocrats can design trade and (asymmetries in power among the interna- other product market reforms that appear tional parties to such agreements remain, as to be good for growth and equity, the we will read in chapter 10). expected gains will never materialize if there is not enough political support. Macroeconomic management Because of the nature of trade policy--a and equity concentrated set of winners from trade bar- riers versus a diffuse set of winners from Macroeconomic instability is both a liberalization (consumers in general)--it is cause and consequence of inequity easy for vested interests to capture policy. Macroeconomic stability is a public good and Steel tariffs in the United States and agricul- might be expected to equally affect all. There tural subsidies in the United States, Japan, is a well-established association between and Europe are obvious examples. macroeconomic stability and long-term Even after trade liberalization laws have growth, and growth typically brings expan- been passed, they are still not immune to sion in opportunities to everyone. But the capture. If economic actors do not believe fact that stability is a public good does not that reforms are credible--that is, that mean that the incidence of benefits is equal. politicians will recant at the behest of vested As discussed in chapter 4, the distribution of interests--the anticipated adjustments will income gains from economic growth is typ- never take place. Cashews in Mozambique ically as unequal as the initial income distri- again provide an apt example. In the early butions. Moreover, macroeconomic insta- 1990s, the Mozambican government (work- bility, whether in the form of volatility or ing with the World Bank) implemented a high inflation, can have differential and new pricing regime that liberalized the potentially inequitable effects, because the export of raw cashews. But there was no pattern of power and wealth can influence credible political commitment to the new the distribution of losses--and different pricing regime, so neither cashew farmers groups have differential capacities to man- nor cashew processors adjusted to the new age the consequent shocks. price signals. Efficiency gains from the real- As in many other areas, there are two- location of resources never materialized.61 way patterns of causation between macro- While this section has emphasized the het- economic conditions and equity. Unequal erogeneity of effects of product market patterns of power and associated institu- changes, the policy message is not necessarily tional structures are at the center of one of detailed fine-tuning of reforms. That causative influences from inequity to insta- Markets and the macroeconomy 199 bility and in regressive effects of crises. By Figure 9.5 Weaker institutions are associated with emphasizing these links, we are not arguing macroeconomic volatility and crises against the large body of literature on eco- Standard deviation of GDP growth nomic causes of crises. Depending on the 20 type of crisis, this literature sees the causes as fiscal imbalances, herdlike movements of 15 investors behind exchange rate crises, and interactions among external liabilities, exchange rates, and financial-corporate 10 conditions, especially under "crony capital- ism."62 Some of the processes in this litera- ture complement the diagnosis here; others 5 are manifestations of underlying distribu- tional and institutional conditions. 0 Figure 9.5 shows the bivariate correla- 0 2 4 6 8 tion between macroeconomic volatility and Constraints on the executive index a measure of "constraints on the executive" Source: Authors' calculations, using World Bank statistics and the branch of government, which would be Polity IV database for constraints on the executive index. Note: A higher value for the constraints on the executive index expected to be closely linked to restraints on denotes greater accountability. elite power. Weaker constraints are associ- ated with greater volatility (and a higher propensity for macroeconomic crises). (1999a) argues in a cross-country empirical The correlation says nothing about cau- analysis that the effects of external shocks in sation. But there is evidence supporting the the 1970s were significantly worse for sub- view that "weak and unequal" institutions sequent growth in societies in which latent have a causative influence on economic distributional conflicts (proxied by income instability. A tradition of work interprets inequality or ethnolinguistic fragmenta- instability as a consequence of distributional tion) were more severe and conflict- struggles that are ineffectively managed by management mechanisms (proxied by institutions.63 As discussed in chapter 6, the institutional strength and indicators of seminal work by Bates (1981) on Ghana democracy) were weaker. interprets exchange rate overvaluation and High inflation and macroeconomic internal pricing policies as mechanisms for crises can be particularly harmful to the governments to severely tax cocoa farmers poor, who are least equipped to manage in the early postindependence period to adverse shocks. For the impacts on distribu- provide resources to buy off urban groups.A tional outcomes, household survey evidence combination of predatory governments and does not display systematic disequalizing or weak or absent balancing institutions cre- equalizing biases across countries: the Mexi- ated the preconditions for fights over rents can 1994­95 crisis was slightly equalizing and systematic political instability until the (although strongly poverty-increasing); the early 1980s. Analyses of hyperinflation, in 2001 Argentine crisis was disequalizing. settings as diverse as Bolivia and Israel, There is some evidence that high inflation is interpret macroeconomic instability as a worse for poorer groups, for example, in the consequence of failures to manage societal Philippines65 and Brazil.66 conflicts.64 Mechanisms for crisis resolution tend to be inequitable as a result of unequal influ- Macroeconomic instability can ence. Many of the results are not fully interact with unequal influence in reflected in household income and spending the fallout from crises surveys. The reason is that the big action Crises, whatever the causes, are systemati- usually takes place elsewhere, notably in cally bad for growth, more so in the pres- changes in capital income and fiscal posi- ence of distributional struggles. Rodrik tions that the surveys typically fail to capture. 200 WORLD DEVELOPMENT REPORT 2006 Figure 9.6 Labor shares fall during crises and don't fully recover afterward Major crises lead to large financial losses, typically financed by both explicit and Mexico Peru Labor share Labor share implicit fiscal outlays. Case study evidence 50 50 indicates that these are highly regressive, through gainers and losers from capital 45 Crisis year 45 Crisis year flights, transfers from those outside to 40 40 within the financial system, and the pat- terns of bailout among financial sector par- 35 35 ticipants. 30 30 The fiscal costs of crises are large (table 25 25 9.3). For example, the post­Tequila Crisis Mexican bailout is estimated at $112 bil- 20 20 lion, with a large additional amount spent 15 15 trying to prevent crises through liquidity support, sovereign bond swaps, and the 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 financing of large investors who withdraw Source: Authors' calculations, based on national accounts. Note: Crisis years are defined as years in which at least two out of three of the following occur: a 25 percent (or money from projects.69 Halac and Schmuk- higher) nominal devaluation, negative growth, and 50 percent (or higher) rate of inflation. ler (2003) use the $23 billion decline in the central bank's reserves between February and December 1994 as a proxy, calculating a There is evidence that crises lead to reduc- total fiscal and quasi-fiscal cost of the crisis tions in measured labor share (strongly influ- of $135 billion. This represents about one- enced by formal sector earnings and quarter of Mexico's GDP in 2000 and some employment). Diwan (2001) finds that four times the $33 billion in capital receipts labor shares systematically fall during crises from privatization during the 1990s. and don't fully recover afterward, a cross- What is the pattern of gainers and losers? country result illustrated for Mexico and Some wealthy individuals undoubtedly lose Peru in figure 9.6.67 The flip side of this pat- their shirts. But there are strong tendencies tern is that the shares of corporate and for the poor to lose, sometimes to lose a lot. financial sector capital income rise relative First, the wealthy with information and to wages. There are also significant interac- access to international banking systems get tions with structural variables. In particu- their money out first. And they may actually lar, closed trade, capital controls, and fiscal experience capital gains when domestic asset deficits are associated with higher labor prices tumble and the exchange rate goes Table 9.3 Fiscal costs of selected shares in normal times, but with larger falls against the currency. In Argentina, the ratio banking crises in labor shares when crises occur. Crises are of foreign assets to domestic GDP rose from Country Fiscal cost mechanisms for the resolution of distribu- about a quarter to more than 90 percent and episode (percent of GDP) tional conflicts that are not tackled during between 2001 and early 2002, because of a Argentina, 1980­82 55.1 good economic times. Labor is relatively combination of capital flight and currency Brazil, 1994­96 13.2 immobile and so typically bears a higher depreciation (figure 9.7). proportion of the cost. Pre-crisis labor Second, the recipients of fiscal bailouts Chile, 1981­83 41.2 shares may, in some cases, have been too are those within the financial system-- Ecuador 1996­ 13.0 high for competitiveness and stability, but depositors, creditors, and equity owners, México, 1994­ 19.3 the point is that crises are a high-cost form who are systematically better off than those Venezuela, 1994­97 22.0 of conflict resolution. And the interaction outside. (There are of course small middle- Korea, Rep. of, 1997­ 26.5 between shocks and weak conflict resolu- income depositors but, as noted below, it is Indonesia, 1997­ 50.0 tion mechanisms is associated with weaker possible to protect them without providing United States, 1981­91 3.2 long-run growth.68 blanket protection for all.) Case study evi- Source: Honohan and Klingebiel (2000). In addition to any effects through the dence finds biases toward wealthy and more Note: Costs refer to both fiscal and quasi-fiscal outlays and the present value of the future distribution of labor and capital income, influential individuals and groups within stream of costs. Banking crises in Ecuador, important mechanisms work through the financial systems. Owners of large deposits Mexico, the Republic of Korea, and Indonesia were ongoing at the time of the study. financial sector and associated fiscal action. enjoyed the greatest compensation (and Markets and the macroeconomy 201 sometimes capital gains) in crises in crises, this is contingent on initial struc- Argentina, Ecuador, and Uruguay, often tures, patterns of influence, and policy through getting their money out of the specifics. For example, the Russian crisis, country, while small depositors suffered while undoubtedly costly in social terms, capital losses. In addition, there is evidence may have led to a surprisingly positive shift that large borrowers with close connections to more equitable structures of resource to banks were especially favored in crises in management (box 9.6). Chile, Ecuador, and Mexico.70 Policy directions need to take account Crisis costs are paid for by some combi- nation of higher taxes and lower spending. of policy design and accountability Who pays depends on the marginal pattern structures of taxation and spending. As a first approxi- Macroeconomic instability is thus both mation on the tax side, many developing- product and cause of underlying inequali- country tax systems are roughly propor- ties and associated weak institutions. The tional (everyone pays the same proportion costs are large to equity and growth. What of their income, primarily through indirect can be done? As in other areas, it helps to taxation). On the spending side, work on answer this question in terms of the com- Latin America and Asia in the 1990s finds that marginal spending was generally pro- gressive, as the expansion of social and infrastructure programs "crowded in" B O X 9 . 6 Did the Russian 1998 crisis have equitable poorer groups.71 Thus, the forgone spend- consequences? ing hurt poorer groups the most. The net effect is a regressive workout financed The Russian crisis was at first glance typical of The crisis triggered major changes in largely by regressive fiscal adjustment. crises of the 1990s--driven by interactions economic relationships.The strategy of between private capital movements and "devalue and default"led to large relative While case study evidence indicates a domestic institutional structures that encour- price movements and cut Russia off from strong pattern of regressive consequences of aged moral hazard,and with large adverse international capital markets.The cutoff, effects for welfare.The social costs were combined with the authorities'recognition severe,with a fall in GDP of 5 percent in 1998. of the unpopularity of hyperinflation, finally Between 1996 and 1998 household per capita forced hard budget constraints on the sys- Figure 9.7 In Argentina, the wealthy had a way out expenditures fell 25 percent,expenditure tem, which had powerful ripple effects in during the crisis poverty rose from 22 to 33 percent and gov- inducing the demise of the nonpayments ernment transfers fell by 18 percent,albeit system, making economic transactions Net private foreign assets (US$ billions) with better targeting (Lokshin and Ravallion more transparent and laying the basis for a Net private foreign assets (percent of GDP) 2000).There was also major capital flight,with recovery in taxes. Real exchange rate depre- many of the rich getting their assets out fast, ciation made many firms competitive again, 94.4 leaving the rest of the society to share the and this fed through into employment. Fur- 110.0 costs.This fact alone is a sign of great inequity: thermore, the big Moscow banks were billion 107.3 the rich had more opportunity to protect their allowed to fail (with total costs, largely = $12.9 assets by shifting money out of the country. incurred before the meltdown, a relatively flight This (individually rational) behavior imposed low 2 percent of GDP). And the default 102.2 Capital costs on less wealthy groups. meant that external holders of Russian But the transition appears to have had paper took an immediate loss, effectively 97.2 additional effects that were, at least to some allowing a degree of international burden- 95.4 degree, more equitable. Russia before the sharing.While there were undoubtedly rep- 94.4 crisis was in a particularly inefficient and utational costs, there may have been an inequitable equilibrium, in which firms did advantage in taking this upfront, rather 28.6 not pay their energy or tax bills, and the than after protracted negotiations. Overall, 24.4 22.4 energy sector didn't pay its taxes. Firms while a serious analysis of impacts on equal- 20.0 21.0 were not allowed to go under for fear of ity of opportunity is not feasible, the effec- employment effects, but this was a highly tive shift in regime from a system in which ineffective safety net. Subsidies were esti- influence played a dominant role in mated at 15 to 20 percent of GDP in the resource allocation to one of hard budget three years before the crisis, fueling corrup- constraints and greater transparency was Dec. Mar. Jun. Sep. Dec. Mar. tion and delaying enterprise restructuring. probably good for efficiency and equity. 2000 2001 2001 2001 2001 2002 There was extensive asset-stripping at the Source: Ministry of the Economy, Argentina. cost of the broader society. Source: Pinto and others (forthcoming). Note: The sharp increase between December 2001 and March 2002 was because of the exchange rate devaluation. 202 WORLD DEVELOPMENT REPORT 2006 plementary role of specific policy design tutions should also improve the credibility and the deepening of accountability struc- of countercyclical fiscal policies during tures and societal mechanisms to manage downturns.73 This strategy would, in par- conflict. The Israeli hyperinflation provides ticular, provide the macroeconomic foun- an illustration. Its resolution involved both dation for broad-based, self-expanding a full set of financial and macroeconomic safety nets. policies and an intensive process of societal Finally, there is a case for different forms interaction to manage underlying conflicts of accountability. Over the long term, the between organized labor, the corporate sec- most effective approach is to move to new tor, and other interest groups.72 fiscal and social contracts built on deeper There is an extensive body of literature accountability structures--to a better polit- on design specifics. Thus, we conclude with ical equilibrium.74 There is then a need for some comments on the principles of macro- an appropriate mix of stronger regulatory economic management that emerge from a accountability shielded from short-run focus on equity. Some of the principles are political pressures from all sides--more fairly familiar, especially the need to build independent central banks and stronger stronger regulatory and supervisory struc- financial sector supervision--and greater tures for the financial system and compre- transparency and debate about the overall hensive insurance mechanisms while out of design of macropolicy and the incidence of crisis. Once a crisis hits, it is particularly dif- workouts. There are important interactions ficult to design and implement such meas- with external actors and rules for crisis ures and politically difficult to implement management that will be taken up in chap- more equitable outcomes. By contrast ex ter 10. ante insurance design--whether for deposi- In sum, we have explored policies that, tors, bankruptcy, or unemployment--is by leveling the playing field in the markets more likely to be broad based and, if already for capital, labor, and goods and by manag- in place, reduces the case for ex post deals ing the macroeconomy, can lead to greater tailored to the influential. equity and prosperity. Financial markets Less obvious is a heightened emphasis are typically biased toward incumbents, on fiscal prudence. In public debates, reflecting the historical political influence adopting a less stringent macroeconomic of the powerful. Yet rapid and ill-designed stance is often portrayed as a distribution- liberalizations can lead to further concen- ally progressive approach, whether in good tration of influence. Greater societal con- times or bad. While there will always be trols are needed as well as a more measured specific judgments about the distribu- tackling of barriers--especially to small tional impacts of a range of fiscal and and medium firms--backed by regulatory monetary policy options, the analysis here structures and more information to reduce suggests that taking a "superprudent" posi- the power of connections. tion over the course of the cycle provides Labor market outcomes may reflect the greater hope for supporting a more equal weak bargaining position of workers, but development pattern. On one level, this labor policies often lead to patterns of job sharply reinforces the common prescrip- protection that create economic rigidities tion to break procyclical policy positions. and help those in good jobs, to the detri- Macroeconomic restraint in good times ment of those in the informal economy. will facilitate automatic stabilizers and a Support for unions and security for workers sensible easing of policies to be applied in are important objectives, but designs need a disciplined fashion when adverse shocks to be adapted to economic conditions in occur. Thus, the priority is to build fiscal ways that reach poorer, informal workers rules and institutions that help overcome and minimize impediments to economic the political pressures to deplete potential restructuring. surpluses in good times, as well as infor- Both the design of external trade policy mational asymmetry problems. These insi- and the workings of internal product mar- Markets and the macroeconomy 203 kets reflect patterns of influence. Remov- financial crises are particularly pernicious, ing biases and ensuring access to all need because the powerful can benefit or be to be complemented by measures to expand bailed out at the expense of the rest of soci- skills, infrastructure, and safety nets to ety. Prudent macroeconomic management, achieve genuine access and to manage losses backed by strong countercyclical policy and (especially horizontal inequities). Impru- independence in policy design is an ally, dent macroeconomic policy is typically not a foe, of greater equity. We now turn to inequitable: high inflation hurts those least policies that can help level the global play- capable of managing its consequences, and ing field. f o c u s 6 o n regional inequality The role of public policy in addressing spatial inequalities The persistence of regional disparities within countries is a major policy concern confronting many governments in rich and poor countries alike. Clarity on the causal factors of weak regional performance and careful consideration of potential tradeoffs are needed to guide policy choice over regional interventions. T he average income in Brazil's north- that have weaker fiscal capacity, such as in grated with the national economy. But east is less than half the national Argentina's experience with decentralizing changing demand patterns or resource average. Poverty rates are far higher reforms in education.5 In poor regions where exhaustion became sources of decline, even than the national average in India's densely regional elites have particularly concentrated though political influence may have per- populated states of Bihar, Uttar Pradesh, and power, decentralization may also deepen sisted. For such "rustbelt" regions, there is a Orissa, and the regional income gap appears both intra- and inter-regional inequalities.6 case for public support for movement of to be widening. In 1990, children in the Trends in inter-regional inequality have people and resources out of declining northwest region of Nigeria were four times varied considerably across countries. The industries, backed by social safety nets for less likely to receive any immunizations and United States has experienced convergence the affected workforce. 50 percent more likely to die by age five than and lower interregional income disparities. High poverty density, high or low market those near the capital in the southwest; by Indonesia shows convergence of provincial access. These regions are most often consid- 1999 they were five times less likely to receive incomes since the 1970s. Brazil has seen ered for targeted interventions: poverty is any immunizations and 85 percent more divergence over many decades, but recently concentrated in them, population density is likely to die before age five. Chronic regional has shown convergence. Evidence on India relatively high, and the lack of market inte- underperformance can give rise to many also suggests divergence. China's pattern of gration is due to history rather than geogra- concerns and threaten national unity--lost growth has reduced gaps in the 1970s and phy. Possible culprits include weak gover- economic potential, unfairness in regional 1980s, which widened in the 1990s. And in nance, poor institutional capacity and opportunities, potential instability, loss of Mexico a long-run trend of slow convergence human capital, a history of sociocultural social cohesion, and adverse social conse- in incomes shifted to one of slow divergence conflict and domination, a poor investment quences, including higher crime and disease. after an opening that started in the late 1980s. climate, and security problems. Such The geographic and historical factors regions are often home to socially, racially, underlying interregional inequality are Characteristics of lagging regions and ethnically disadvantaged groups. complex and overlapping. Weak resource The reasons for regions to lag varies, and we Where such groups are dispersed or patron- endowments and distance from markets present a simple taxonomy. client relationships dominate, the challenge can constrain development in lagging Low poverty density, low market access. of fostering organization, agency, and polit- regions. In many cases, economic differ- These regions are sparsely populated, ical influence is especially great.7 ences are linked with long-standing, remote, and face particular geographic chal- unequal relations of power between advan- lenges. Distance and poor resource endow- Regional development policies taged and lagging regions, and institutional ment--often with weak social indicators, and tradeoffs weaknesses within the latter.1 When actors generally poor infrastructure, and weak Regional development policies involve in advantaged regions control the assets, regional voice--place these regions at the interventions to facilitate inward invest- decision-making and policy formation periphery of national economic activity and ment, enhance income opportunities and processes, and the terms of the policy opportunity. Supporting development of well-being in lagging regions, help house- debates on which lagging regions depend, these regions may be desirable on poverty holds move to opportunities elsewhere, and regional "catch up" is much more difficult.2 grounds, but it is likely to be expensive. shift interregional power relations. Policies When historically disadvantaged ethnic, Low poverty density, high market access. are context specific and involve tradeoffs. If racial, and social groups are concentrated in These regions typically have been booming lagging regional performance reflects geo- particular regions, group-based inequities at one point in history, and were well inte- graphic disadvantages or an absence of become reflected in regional inequalities. This is the case in parts of Latin America, Market access (population density, transport costs) where indigenous groups are both poorer and concentrated in poorer regions,3 and in Low High Vietnam and in India where tribal groups · Chile's "zonas extremas" (adivasis) are spatially concentrated.4 · N.E. China's "rustbelt" region · Russian North · Developed country "coal towns" In the absence of redistributive fiscal Poverty density Low (state-sponsored settlements) (France, U.K., U.S.) (poor or disadvantaged · Northern Canada transfers, recent reforms in many countries people per square toward greater decentralization may aggra- kilometer) · India's "Hindu Belt" poor and · Thailand's northeast vate regional disparities. The positive effects High populous states · Mexico's southern states · Italy's southern Mezzogiorno of decentralization may be lost in regions Focus on regional inequality 205 agglomeration and scale economies, public to sell to lagging regions. This is one factor about the adverse impact on indigenous interventions may be particularly expen- that has slowed development of the rela- population groups and settlers. sive. But when public policy is designed to tively poor Mezzogiorno region of southern Enhancing agency correct market failures (such as underde- Italy, despite large investments in national Where intergroup inequalities in agency veloped insurance or credit markets), north-south infrastructure that has reduced underlie regional disadvantage, national address specific social or historical factors transport costs.9 and regional policies addressing discrimi- handicapping regional performance, or Facilitating labor mobility nation, racism, and citizenship deficits can capture externalities intrinsic to national Facilitating voluntary labor movement to be important instruments for dealing with welfare (cultural, environmental, security), higher opportunity areas is another strat- spatial inequality. Enhancing voice and par- there may be few or no efficiency tradeoffs. egy. In contrast to fiscal incentives and pub- ticipation of excluded groups is also impor- Fiscal incentives lic investments that focus on bringing jobs tant for national peace and cohesion. While A popular approach involves fiscal incen- to poor areas, this strategy focuses on ethnic discrimination and regional disad- tives to induce industry to locate and invest bringing poor people to areas with more vantage do not necessarily lead to conflict, in lagging regions: tax advantages, insurance potential. Relocation assistance can include researchers and truth and reconciliation or risk-sharing arrangements, direct subsi- transport, housing, training, resettlement commissions alike have identified them as dies, or indirect subsidies through provision allowances, and portable safety nets. Exam- contributing factors.10 In Aceh, Indonesia, of low-cost public services. But evaluations ples included incentives in Russia for fami- oil rents have been transferred back to the of fiscal incentives generally indicate that lies to relocate from their northern settle- region since 1976, yet regional conflict and they can be costly and ineffective. Brazil's ments--developed at huge state expense for demands for autonomy have increased efforts to develop the manufacturing center resource extraction and security purposes rather than abated.11 This suggests that of Manaus in the north have been a success during the Cold War--and incentives to transfers alone are not sufficient to address by some measures, but costs per job created support movement of labor out of declin- regionally concentrated grievances--they are high.8 Interregional"fiscal wars"can also ing industries, such as the moribund coal must be accompanied by meaningful politi- occur as regions compete to attract busi- sectors in Western Europe and the former cal participation and dialogue. nesses. If uncoordinated or unconstrained, Soviet Union since the 1960s. While the Conclusion these can have adverse consequences for programs have helped ease the impact of local tax bases and public services in com- unemployment, there are questions about The specific nature of the constraints to peting jurisdictions. Compared to the alter- cost effectiveness and long-term impact. regional growth and investment perform- natives listed below, this tends to be a high- There is also a long history of efforts to ance in lagging regions needs to be identi- distortion strategy. direct settlement of remote regions or fied and prioritized. Policies that provide encourage migration to frontier lands. fiscal incentives to investors are likely to fail Public investment Early settlers to the Americas, including the if the main factors that adversely influence Targeted public investment, particularly in west and midwestern regions of the United regional investment climate--quality of core infrastructure, is another policy States, were beneficiaries of legal land local institutions, skilled labor availability, response aimed at reducing geographic dis- grants to clear and use new land. More proximity to key markets, functioning capi- incentives to firm location, whether for recent programs include Indonesia's trans- tal and land markets, security risks--still existing or new firms. China has followed migration program that shifted Javanese to pose binding constraints. this strategy, first in the coastal special eco- sparsely populated outer islands in the Public investment in infrastructure that nomic zones, and now in western regions 1970s and 1980s, or early Ethiopian reset- reduces transport costs for both people and (see box below). tlement programs to fertile areas in the goods has often proved an effective strategy Investment in regional infrastructure south and southwest regions of the country. for integration. And, as with other policies, links may enhance productivity of existing However, these and other resettlement pro- well designed technical solutions are more firms and attract new firms. But, it also grams have been criticized for their coercive likely to be implemented if those living in allows more efficient firms in richer regions or ethnic dimensions, raising questions poorer regions are empowered. Development of lagging regions in China Unprecedented economic growth and poverty spent some 1,000 billion yuan (US$120 attracted concern. China's northeast currently reduction in China have been accompanied by billion) in the past five years, focusing on suffers from slow growth and high unemploy- significant increases in regional disparities since infrastructure, education, health, and the envi- ment in declining industries, along with many the economic reform in the late 1970s.The ronment. A variety of investment incentives severely distressed towns and cities.The govern- socioeconomic costs of a sustained divergence and low interest loans aimed to attract ment started the"Revitalize Northeast"strategy in income between leading and lagging regions domestic and foreign firms to areas in which in 2003.This involves new initiatives, including has become a major concern of the government. the western region has some comparative strengthening the investment climate, develop- In 1999, the government initiated the "Go advantage, such as energy, agriculture, and ing greater flexibility in factor markets, using West" strategy to develop the lagging western agroprocessing. public funds to support rather than postpone region. Through targeted public investments The relative decline of the historically adjustment, and mitigating social costs through and fiscal subsidies, the central government advantaged northeastern region has also improved and portable safety nets. Achieving greater global equity 10 We read in chapter 2 that there are huge making rules that benefit themselves at the inequities in the world. Even better-off citi- cost of the weak, poor, and voiceless. There c h a p t e r zens in most of the developing world face is some truth on all sides of the debate. In worse opportunities than the poor in rich terms of trends, we saw in chapter 2 that the countries. The fact that country of birth is a picture is mixed: convergence in health and key determinant of people's opportunities (probably) education for many, conver- runs counter to our view of equity--that is, gence in incomes for some, but divergence that people should enjoy the same opportu- in incomes and health for others. In terms nities regardless of their background, of causes, just as some of the major sources including where they are born. of convergence have been associated with Greater global equity is desirable for globalization of markets and knowledge-- itself to all those who find equity intrinsi- the East Asian tigers, China, India making cally valuable. The international human use of global markets, the spread of the rights regime testifies to the shared belief green revolution and health-related tech- that all should have equal rights and be nology--so unequal rules and unequal spared extreme deprivation. Some even influence profoundly shape opportunity. argue that there is a powerful moral case for Domestic action is clearly central to rich countries to take action, because of the reducing inequities. Developing countries huge disparities and (arguably) because hold the keys to their prosperity; global they partly created and perpetuate global action cannot substitute for equitable and inequities.1 Greater equity is also desirable efficient domestic policies and institutions. because it would likely be beneficial to But global conditions powerfully affect the global prosperity in the long run. Greater scope for and impact of domestic policies. equity in access to health and health reme- Global action--by governments, people, dies, especially for transmittable diseases, and organizations in developed countries would reduce global health inequalities and and by international institutions--can deter- be beneficial to poor and rich countries mine whether the globalization process alike. Greater equity in access to and control brings about greater equity, peace, and pros- over natural resources and the global com- perity, or fuels tensions and conflicts that mons may lead to more sustainable use. will lead to backlash and violence. Some argue that greater equity could also Current disparities are products of inter- lead to greater international stability: fragile actions between two factors: the endowments and failed states pose a threat to local and of different countries, and the rules shaping global stability.2 the options for deploying these endowments What can be done to reduce the huge on domestic and global markets. Endow- inequities we experience today? The debate ments are greatly unequal due to history and about what causes global inequities and geography--although some of the history how to address them is highly contentious. and aspects of geography are a product of Some see globalization--greater global unequal development patterns. Infrastruc- integration--as a source of equalization, ture underdevelopment in Africa, for exam- others a source of widening inequalities, ple, is partly a legacy of colonial political and with richer countries and corporations economic patterns. Institutional weaknesses 206 Achieving greater global equity 207 of poorer societies--now part of their present inequities in the use of natural endowment--also reflect historical pat- resources. Then we look at whether aid-- terns, as discussed in chapter 6. Differences the traditional response to global in endowments are often exacerbated by the inequity--can be used effectively to acceler- inequitable functioning of markets. As in ate domestic efforts to build endowments. the domestic realm, market imperfections The current state of international relations can be either a product of policy (as in bar- may cause some to wonder whether any riers to labor mobility or agricultural pro- change is possible. So we close the chapter tection) or of intrinsic market failures (as in by examining factors that have facilitated weak protection of global commons and transitions to more equitable policies and lack of incentives for knowledge creation). institutions in the past. We conclude that Achieving greater global equity thus change may be difficult but not impossible.3 requires global policies that improve endowments and address market imperfec- Making global markets work tions and more representative global insitu- tions. We first discuss the global markets for more equitably labor, goods, ideas, and capital--all func- Global markets have many faces: Filipino tioning within the context of international nurses, Sri Lankan domestic workers, Polish law (box 10.1). For each market, we high- care providers, Indian engineers, Ugandan light existing inequities and their impact, coffee growers, Bangladeshi women working discuss the processes that lead to such in garment factories, Moroccan craftsmen, inequities, and explore some options for employers of migrants, and the consumers of change. We next turn to rectifying past and developing-country products in Australia, B O X 1 0 . 1 International law, globalization, and equity Globalization takes place (mostly) in the context Rule-setting processes. International laws are greater equity. In general, the ability of states of international law, which governs relations formed through complex negotiating processes. to pursue and enforce rights under among states, and other international legal sub- The degree to which these processes are international law depends on appropriate jects, such as international organizations. More perceived to be equitable affects their adoption adjudication processes or complaint equitable development, application, monitoring, and implementation--so processes matter mechanisms and their effectiveness. A number and enforcement of international law is essen- greatly. Generally, a state remains free to decide of international courts and other adjudicative tial to make globalization more equitable. whether to become a party to a convention or bodies often have voluntary jurisdiction, but The meaning of equity in international law. Equity covenant. And a state's satisfaction with the there is a trend toward judicialization and com- considerations inform the development of interna- process leading to the adoption of a convention pulsory jurisdiction. For example, dispute set- tional law,confirming that greater global equity is a may facilitate signing and subsequent adoption. tlement arrangements established under the shared value.The principle of equity has accompa- For example, the Universal Declaration of 1982 U.N. Convention on the Law of the Sea nied the development of international law over the Human Rights, seen by many as the basis of sub- and the 1994 World Trade Organization centuries (chapter 4).Equity in international law sequent human rights instruments, was Dispute Settlement Understanding mark a sig- encompasses notions of corrective justice and dis- adopted by the U.N. General Assembly, where all nificant move toward compulsory jurisdiction tributive justice--that the strict application of the countries are represented and have one vote. and binding decision making. law should be tempered by considerations of While only a declaration, and not intended to The ability of citizens and other nonstate equity or fairness to achieve a just result,and that bind states at the time it was adopted, the actors to pursue their rights and seek redress international law should promote a more even dis- process leading to its adoption was perceived to under international law depends on whether tribution of resources among states.Equitable prin- be equitable.The body of standards set by the their state has become a party to the ciples have been applied to many areas of interna- ILO is another example of rules set through an instruments that allow the use of compliance tional law,from the sharing of scientific benefits, international process that is broadly consulta- mechanism. For example, for citizens to make a technology,and natural resources to laws govern- tive, encompassing not just governments but complaint against their state under the Interna- ing the sea,international waterways,outer space, unions and private sector representatives. On tional Covenant of Civil and Political Rights, the and carbon emissions.As highlighted in chapter 4, the other hand, the rule-setting processes of the state must have signed and ratified the First the most pertinent example of the application of World Trade Organization (and its predecessor, Optional Protocol, which allows a complaint to principles of equity in international law is the inter- the General Agreement on Tariffs and Trade) are be heard by the Human Rights Committee national human rights regime.In today's perceived by some as inequitable, and this is established by the covenant. As the discussion international law,equity has not only an interstate partly responsible for the current stalemate. indicates and in parallel to what happens on the dimension;it also has an intergenerational dimen- Application and enforcement mechanisms. domestic arena, rules often block access, even sion,in the preservation of the environment and The processes that interpret, apply, and enforce before expenses, knowledge, and capacity limit other global commons,as we will see below. international laws are crucial to realizing effective recourse. 208 WORLD DEVELOPMENT REPORT 2006 the European countries, Japan, the United people's opportunities (of course, migra- States, and the richer middle-income coun- tion raises complex issues that are politi- tries. Global markets create valuable eco- cally and socially difficult to tackle in nomic opportunities for millions of people, sending and receiving countries). who develop ideas, raise capital, and sell their Benefits also vary greatly depending on products and their labor. country context. The fast-growing develop- But unequal endowments and unfair ing countries, including China and India processes mean that opportunities and rules that are home to half the world's poorest are not the same for all. Inequities exist in people, stand to benefit significantly from the functioning of these markets. Unskilled more equitable global markets. Leveling the workers from poor countries, who could global playing field can help them sustain earn higher returns in rich countries, face fast growth, while equitable domestic poli- great hurdles in migrating. Developing- cies help ensure that this growth is shared. country producers face obstacles in selling Countries with more limited endowments, agricultural products, manufactured items, such as many African countries, that are left and services in developed countries. Foreign behind in the global economy, stand to ben- investors often get better deals in debt crises. efit less in the short to medium run from In most cases, more equitable rules more equitable global markets. would bring benefits to both developed and developing countries, but the extent of ben- Greater international labor mobility efits varies by market. Barriers are massively Returns to capital, and to some extent greater in the market for labor--the factor skilled labor, tend to equalize across coun- of production that the poor own in relative tries, but returns to unskilled labor, owned abundance--than in the markets for goods by poor people and in abundant supply in and capital, and factor price equalization poor countries, generally do not converge. clearly does not work through trade alone. Wage differentials across countries for jobs So removing barriers to migration could requiring similar skills are large, and sub- have a significant impact on expanding stantially larger than the wage gap between the United States and migrant-sending countries in the late nineteenth century (fig- Figure 10.1 Wage differentials are substantially ure 10.1). Developed countries severely limit larger today than at the end of the nineteenth century Ratios of purchasing power parity adjusted wages of in-migration of unskilled and semi-skilled the United States and its migration partners in 1870 workers, which contributes to the lack of and pairs of countries in the 1990s equalization in returns to unskilled labor. USA/Ireland Greater migration of unskilled labor 1870 would tend to equalize returns, with win- USA/Norway ners and losers, but with potentially benefi- 1870 USA/Sweden cial effects on efficiency. History teaches us 1870 that migration has, at various times, allevi- USA/Italy ated human suffering and promoted cul- 1870 tural and technological exchanges. The mass Spain/Morocco 1990s migration from Europe to the Americas in USA/Guatemala the nineteenth and early twentieth centuries 1990s enabled 60 million people to escape poverty UK/Kenya 1990s and persecution, creating some of today's Italy/Ethiopia wealthiest societies (although Native Ameri- 1990s cans faced enormous losses in the process).4 NLD/Indonesia Economic analyses indicate that gains 1990s Japan/Vietnam from expanding migration could be very 1990s significant. Hamilton and Whalley (1984) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 use a highly simplified economic model of Ratio of wages in PPP the world to suggest that the benefits from Source: Pritchett (2003). reallocation of labor could be huge (on the Achieving greater global equity 209 order of doubling GDP). This, of course, not support the view that migration leads depends on the specific assumptions used unequivocally to higher inequality in send- and ignores a host of adjustment issues, but ing countries. it does serve to illustrate that the gains In receiving countries, migration relieves could be large and probably much larger labor shortages in labor-intensive sectors, than the gains from the, by comparison, such as health care, hotels and restaurants, already greatly liberalized trade in goods. and construction. As developed-country Indeed, using an approach similar to that populations age and their levels of educa- of analyses of trade impacts, Walmsley tion and training rise, these shortages are and Winters (2003) estimated that increas- likely to become more severe. Demographic ing temporary migration into industrial trends are another powerful force behind countries by 3 percent of host countries' migration. Current population projections current skilled and unskilled work force-- imply that the labor forces of Europe and equivalent to permitting an extra 8 million Japan will decline over the next century, and skilled and 8.4 million unskilled workers to that the ratio of people of working age to be employed at any time, roughly a dou- people of retirement age (the support ratio) bling of current net migration into high- will grow to levels that would make current income countries--would generate an esti- pension and social transfer schemes unvi- mated increase in world welfare of more able. Meanwhile, the population of the than $150 billion a year. This increase North Africa countries south of Europe is would be shared fairly equally between growing rapidly. developing- and developed-country citi- Despite its large benefits, migration is zens. Much of the gain would come from fiercely opposed in receiving countries. the migration of unskilled workers. Coun- Migration involves complex issues of national try studies confirm that migration could and individual identity exacerbated by con- have a significant impact. Annabi and oth- cerns over security. Cultural and social ers (forthcoming) found that a 50 percent integration appears more difficult in some increase in the flow of remittances to countries than it was earlier thought. Bangladesh would reduce the incidence of Moreover, unskilled workers experience $1 per day income poverty by 0.8 percent in wage erosion and unemployment. For the short run and by 4 percent by 2020.5 industrial workers, however, this is no dif- Doesn't migration raise income inequal- ferent than if goods produced in countries ity in sending countries? As a high-risk, with lower labor costs displace domestic high-return activity, migration is more production. likely to be undertaken first by members of In sending countries, there are concerns wealthier, less credit-constrained, better- about the human and social costs of migra- educated households. Successful migrants tion, for instance, on how migration of later provide information and assistance to nurses and doctors hinders progress toward potential migrants through social networks, the Millennium Development Goals (MDGs) thus lowering risks and costs and making it and migration of women creates major possible for members of households in deficits in child rearing, family support, lower parts of the income distribution to and care for the elderly.10 Licensing restric- migrate.6 In the first stages of the migration tions (as for doctors) often force skilled process, remittances sent to wealthier migrants to work in lower-skilled jobs in households can increase inequality, if they host countries--the "brain waste," and are higher than forgone income.7 As migra- higher returns to education, do not appear tion expands, remittances begin to arrive to to spur human capital accumulation or less well-off households and income distri- "brain gain."11 bution improves.8 Remittances also have Going against the political tide--with indirect effects through greater spending, the partial exceptions of some currents in risk diversification, and easing of credit the United States, Canada and Spain--we constraints, which are generally inequality- argue that greater migration would be good reducing.9 On balance, the evidence does for both equity and efficiency. But what are 210 WORLD DEVELOPMENT REPORT 2006 women.15 Two possible areas for action are B O X 1 0 . 2 Making migrant worker schemes more to better regulate recruitment agencies to development friendly ensure greater respect for workers' rights and to enter agreements that regulate Attention to the design of temporary migrant could help reduce exploitation of potential migrant flows and conditions with key des- worker schemes and complementary policies migrants by local recruitment agencies and could make them more development ensure that temporary migrants do not tination countries, as the Philippines has friendly.Temporary migration schemes usu- overstay their visas,reducing resistance in done. Sending countries should also help ally allow workers into a country from several receiving countries.Saving schemes would migrants use remittances properly, invest weeks to up to three to five years. encourage migrants to send remittances Recent research for the United Kingdom home,increase incentives to return,and back home, and reintegrate upon return. identified two main policy interventions: facilitate the start of productive activities on It is unclear whether an international centralized recruitment with government return.Good examples are the Canada-Mex- organization in which poor countries have screening in sending countries,and manda- ico program for agricultural workers and the an equal seat at the table could help make tory saving schemes,possibly coupled with agreement between France and Sri Lanka credit schemes in home countries.Central- on sharing information about migrants. progress toward freer migration. Bhagwati ized recruitment and government screening Sources: Barber (2003); Schiff (2005). (2003) argued that a new World Migration Organization--or even a stronger Interna- tional Organization for Migration in the the prospects for greater migration in the U.N. system--might help increase the current political climate? Multilateral nego- developmental impact of migration by pro- tiations in the World Trade Organization tecting migrants' rights, providing a forum (WTO) offer a framework to address to set rules on migration, and monitoring migration under Mode IV of the General and enforcing compliance. But migrant- Agreement in Trade and Services (GATS), receiving developed countries resist propos- part of the treaty establishing the WTO.12 als to give up even some control over immi- But progress toward greater liberalization of gration policies, which they view as part of temporary migration under GATS Mode IV the domestic policy agenda. is unlikely in the near future, given that contentious issues on agricultural and mer- Freer and fairer trade chandise trade are dominating negotiations Inequities in the trade arena are well on the Doha Round. known: rich countries protect their markets In this context, progress is more likely to with tariff and nontariff barriers on the come from bilateral and regional negotia- goods that poor countries produce more tions. Receiving countries could bilaterally advantageously (such as agricultural pro- expand temporary migration (box 10.2 dis- duce and textiles). They provide handsome cusses some features of "development- subsidies to their farmers, subsidize their friendly" temporary migration schemes). exports, and discourage value-added pro- These countries could also extend greater cessing in developing countries. Reducing protection to migrants. One way to do this such protection and subsidies would have a could be to ratify the 1990 U.N. Convention beneficial impact on world trade, growth, on the Rights of All Migrant Workers and and poverty reduction. Their Families. If a significant number of host countries were to ratify the conven- Potential benefits from liberalization. Sev- tion, none would risk being considered a eral recent studies have estimated the poten- haven for undocumented migrants, and tial impact of various trade liberalization fears about ratification leading to greater measures, including those being considered inflows might be allayed.13 Facilitating during the Doha Round of negotiations remittance flows is another action with under the WTO. Estimates vary, depending potentially high payoffs, and governments on the reforms considered (various packages should work together with the private sec- of partial reforms up to full liberalization) tor and NGOs to achieve this.14 and on whether dynamic productivity gains Sending countries should take action to are taken into account. At the lower end of reduce the likelihood that their migrants the range, Hertel and Winters (forthcoming) become victims of exploitation, with a estimated that the measures being discussed focus on combating trafficking of girls and in the Doha Round would have a modest Achieving greater global equity 211 impact on world prices, welfare gains, and prices.16 But net food-producing countries, poverty, with the number of people living and farmers within them, would benefit. below $2 a day declining by 9 million in There is, indeed, some evidence that rising 2015 over a baseline estimate of around 2 agricultural world prices were partly respon- billion. According to this study, even full lib- sible for the fact that rural incomes in eralization would not bring huge gains, as it China grew more rapidly than urban would help lift 80 million people out of $2 a incomes in 2004. day poverty. At the higher end of the range, The phasing out of the Multi-Fiber Agree- Cline (2004) estimated that full trade liber- ment, which set quotas on exports of textiles alization would lift up to 440 million people from developing countries, also has heteroge- out of $2 a day poverty by 2015. neous effects. Chinese textile exports have Whatever the size of the overall impact, made significant gains in markets not pro- researchers agree that it would be heteroge- tected by tariffs--for instance, their share of neous across countries and regions. In both Australian and Japanese markets, where there partial and full reform scenarios, the gains were no quota restrictions, is 70 percent. would accrue mostly to large countries Their share of the U.S. baby clothes segment, already significantly integrated in global where quotas were removed in 2002, jumped markets, such as Brazil, China, India, and from 11 to 55 percent in two years. Exports Indonesia. Parts of many Sub-Saharan coun- from Cambodia and Nepal are reported to tries and remote areas in Asia and elsewhere have declined significantly. The impact of are simply not connected to global markets, these shifts on global income inequality is not and farmers eke out a living on subsistence clear and it depends on the relative position agriculture, far from roads, markets, technol- of garment workers and of those benefiting ogy, and information. Many countries are from indirect effects in the global distribu- unable to make full use of improved market tion. Changes in the existing tariff structure, access because of significant supply-side and whereby producers from the poorest coun- institutional constraints. Detailed studies on tries have duty-free access to markets in the Cambodia, Ethiopia, Madagascar, and Zam- United States and Europe while others face a bia showed that the potential impact of the 16 percent tariff on average, would also have trade reforms likely to be included in the an unclear impact on inequality.17 Con- Doha Round would be small for such coun- versely, renewed protectionism in developed tries. Some countries would even lose in the countries is likely to have negative effects. short run: Bangladesh and Mozambique, for Currently, no global assistance program instance, would experience a decline in exists to compensate losers from trade lib- incomes, as existing preferences are eroded eralization. However, international assis- and the prices of key food imports rise. Sim- tance to help meet adjustment costs is an ilarly, Bourguignon, Levin, and Rosenblatt important focus, along with addressing (2004b) found that countries in the bottom supply-side constraints, of current efforts two deciles of the international distribution by a range of donors, recipients, and inter- of income would benefit more from a dou- national organizations, including the World bling of aid over current levels than from full Bank, to increase aid for trade in the context trade reform. The estimated impact of trade of the WTO Doha round. liberalization varies greatly within countries as well (chapter 9). Setting trade rules. Where do the rules that Specific liberalization measures would govern trade come from, and what are the also have differential impacts. Anderson chances of changes? Trade rules, including and Martin (2004) found that the removal the most egregiously inequitable, are part of of OECD agricultural subsidies would hurt complex multilateral, regional, and bilateral net food-importing least developed coun- agreements. As mentioned in box 10.1, there tries, such as those in the Middle East and are significant concerns about the fairness of North Africa, and countries that now enjoy WTO decision-making processes, and these special preferences, such as the Philippines, processes are partly responsible for the cur- because of the consequent increase in rent stalemate in negotiations. 212 WORLD DEVELOPMENT REPORT 2006 But the reality of WTO negotiations is in rich countries, who often stand to lose complex. In the WTO, each country has one from the protection of vested commercial vote, and the practice of decision making by interests. Consider, for example, cotton sub- consensus means that each country can sidies (see box 10.3) and international car- veto decisions (although the practice of tels.19 Poor countries are in an even weaker "single undertaking," or voting on all mat- position when negotiating bilaterally with ters together, in practice weakens veto stronger trading partners than they are power). Countries choose to sign on to the when negotiating multilaterally. Paradoxi- WTO following not only extensive external cally, in light of the intense antiglobalization negotiations but also domestic decision- protests, multilateral negotiations in the making processes. So this is not a prima context of the WTO hold the greatest prom- facie example of unfair rule-setting. In ise to reduce inequities that harm poor practice, however, poor countries find it dif- countries. Although even an ambitious ficult to follow negotiations, to understand Doha Round would bring limited benefits, it the implications of proposals to them, and remains an important goal to pursue to develop alternative proposals--we saw in because failure would further undermine chapter 3 that even their capacity to be pres- confidence in multilateral negotiations. ent in Geneva is limited. The WTO has another advantage: it pro- So, in the end, the rules may at times be vides for a mechanism to adjudicate dis- unfair not because the formal processes are putes. This is important, as seen earlier, to unfair but because of the underlying power ensure that international law is applied and imbalance between rich countries with enforced. The WTO dispute settlement strong commercial interests and poor coun- mechanism provides a forum for poor coun- tries with weak capacity.18 The balance is tries to bring complaints and possibly win even tilted against taxpayers and consumers them. Unfortunately, winning a case does B O X 1 0 . 3 Cotton subsidies are huge--and tenacious The International Cotton Advisory Committee implied an 8 percent reduction in rural per tunity Act provides an opening, but under estimated that,in 2001/02,direct production capita income in the short run and a 6 to 7 per- rather restrictive conditions: apparel from 14 assistance by the eight countries that provided cent reduction in the long run, with the African countries gets duty-free and quota-free subsidies (United States,China,the European incidence of poverty among cotton growers ris- access to U.S. markets, but only if made from Union,and to a much smaller extent Turkey, ing in the short run from 37 percent to 59 per- U.S. fabric, yarn, and thread. So to take Egypt,Mexico,Brazil,Cote d'Ivoire,in that order) cent (Minot and Daniels 2002). advantage of this provision, countries need to was around $5.8 billion.Direct assistance to U.S. Estimates of the impact of subsidy removal establish an effective input visa system to cotton producers reached $3.3 billion,China's sup- on cotton prices are in the range of 8 to 12 per- ensure compliance with rules of origin (Baffes port totaled $1.2 billion (although some question cent. Increases of this magnitude would not 2004), which seems exceedingly complex. this estimate),and the European Union's support hurt consumers--the price of raw cotton is a Within the WTO, poor cotton-producing was $979 million (for Greece and Spain) (Interna- small component of the price of textiles and West African countries took the unusual step of tional Cotton Advisory Committee 2003).The garments. Full subsidy removal and the conse- issuing a joint statement calling for full subsidy main impact of U.S.and European subsidies is to quent rise in prices would help African removal and for cotton to be treated separately. make cotton produced in the United States and countries, although the distribution of in-coun- But the July 2004 Framework Agreement of the Europe competitive and depress world prices.It is try benefits would depend on domestic reforms. Doha Development Agenda does not include estimated that in 2001/02 prices would have been A recent study of the impact of subsidy removal separate treatment of cotton, stating only that 71 percent higher without subsidies. on three cotton-producing provinces of Zambia, cotton will receive"adequate priority"in agricul- Subsidies benefit large rich farmers in the for instance, indicates that the direct impact of tural negotiations. Subsidy removal is politically United States and not-so-rich but relatively well- the subsequent cotton price increase would be unlikely. off farmers in Europe, and harm poor, small small: about 1 percent of income on average. In the current climate, a second-best option farmers in Africa. Cotton is a crucial commodity Greater gains would require farmers switching would be to implement well-designed decou- for a number of poor African and Central Asian from subsistence crops to cotton, which in turn pled support, in which subsidies do not depend countries, contributing up to 40 percent of mer- requires complementary domestic reforms in on production and thus do not encourage over- chandise exports and 5 to 10 percent of GDP. extension services and robust growth of production and consequent"dumping,"as is the Most growers are smallholders, so the impact of demand for cotton exports (Balat and Porto case with the current schemes. Existing mecha- cotton prices on poverty is significant. A study forthcoming). nisms would need to be reformed, because they on Benin found that a 40 percent reduction in Benefits to African countries would increase still depend on acreage and thus create incen- farmgate cotton prices--equivalent to the price if they were to expand their clothing production tives for overproduction. Less overproduction decline from December 2000 to May 2002-- and exports.The U.S. African Growth and Oppor- may help lift prices a bit. Achieving greater global equity 213 not automatically bring redress: the loser in The reach of fair trade initiatives, while the case may not necessarily change its action. growing, remains small. In Switzerland, The existing mechanisms to enforce decisions where consumer support is strong, fair rely on voluntary compensation of the loser trade bananas still represented only 25 per- and, when this is not satisfactory, the possibil- cent of overall banana purchases and con- ity of retaliatory action (such as suspension of sumer spending on all fair trade products tariff and other concessions) on the part of was a mere $10 per person in 2002 (Swiss the winner. Clearly, poor countries' retalia- agricultural subsidies amounted to roughly tion against powerful trading partners is $750 per person in the same year). Fair unlikely to provide much of an incentive for trade coffee accounts for, at most, 3 percent rich countries to comply with unfavorable of world sales, and only about 20 percent of rulings, because of their typically smaller vol- the capacity of certified fair trade producers ume of trade with a developed-country is absorbed by the fair trade circuit.21 defendant. Even so, developing countries Another example of organizations act- have in recent years brought forward, and ing directly to establish more equitable won, an increasing number of cases. trade relations is the growing number of initiatives for corporate social responsibil- The fair and ethical trade movements. ity and ethical trade. Companies that join Interestingly, some NGOs and civil society an ethical trade organization, such as the organizations in both developed and devel- Ethical Trading Initiative in the United oping countries have acted directly to estab- Kingdom or the Fair Labor Association in lish more equitable trade relations. One the United States, pledge to respect a code such example is "fair trade." Fair trade ini- of conduct in return for favorable consid- tiatives, led by consumer groups, NGOs, eration by consumers and investors who trade unions, and other civil society organi- care about equitable development.22 Codes zations, aim to control the supply chain of conduct generally cover fair labor from production to market to improve the practices (usually those set out in ILO con- well-being of developing-country produc- ventions), environmental standards, and ers by ensuring a stable price for their com- monitoring mechanisms--and apply not modities, linking them more directly with just to a firm's direct production facilities markets in rich countries, and strengthen- but also to those of all its suppliers along ing their organizations. The approach is the supply chain. working: sales of fair trade bananas, cocoa, Are consumers in rich countries willing coffee, brown sugar, tea, and a few other to pay a bit more to ensure that the goods products have seen phenomenal growth in they buy are produced in fair and safe con- recent years and now represent a significant ditions? Proponents of codes of conduct share of exports for some countries (for believe they are. Researchers found that instance, 11 percent of Ecuadorian bananas almost 90 percent of Americans said they and 20 percent of Ghanaian coffee are now would pay at least an extra $1 on a $20 item sold through fair trade). if they could be sure it had not been pro- The few impact studies that exist show duced by exploited workers.23 Skeptics that fair trade initiatives have indeed made a point to the fact that prices dominate the difference to producers, not only through the decisions of the major corporate buyers. premiums paid over world prices but also Codes of conduct inspired by ethical thanks to the services and assistance pro- considerations might have a positive impact vided to farmers by producer cooperatives on equity, but are they applied? Impact supported by fair trade organizations. When studies conducted by the Ethical Trading inequities arise from unequal access to mar- Initiative found mixed evidence. Consumers kets and lack of information, credit, and may not be willing to pay higher prices in risk-mitigation mechanisms, strengthening exchange for an uncertain (and often producer associations can lead to more equi- unmonitored) positive impact. Consumer table outcomes, even without paying a pre- pressure may thus not be enough (box 10.4). mium, in the context of existing trade rules.20 So, these initiatives, while important, are no 214 WORLD DEVELOPMENT REPORT 2006 position and can charge higher prices. B O X 1 0 . 4 Will improved working conditions Extending patent protection to developing in Cambodia's textile industry survive countries can thus increase total profits by the end of the quota system? allowing companies to earn them in poor countries--and changes the distribution of As mentioned in chapter 9, the 1999 bilat- there are reports of union leaders being R&D financing, with a greater share borne eral trade agreement between Cambodia fired,lack of adherence to minimum and by poorer countries. But protection of IPR and the United States included a provision overtime pay rules,and repressed demon- whereby Cambodia's clothing exports strations.Employers are allegedly using the must be balanced by the concern that it would increase each year if labor standards threat of tough competition from China to restricts access to new technologies. Patents improved.The ILO was mandated to prepare cut salaries and benefits.But the employers restrict access to innovations by making a report twice a year based on factory visits are being watched--an independent union them more expensive and more difficult to and interviews with workers and unions movement has grown in the industry and and to make it widely available. ILO monitoring is increasingly sophisticated. copy. There is great concern in developing The provision helped bring about a grad- Monitors are now using hand-held comput- countries on the availability of various ual improvement in working conditions in ers to transmit findings from their factory innovations, including patented seeds and clothing factories,but this progress is under visits,allowing timely reporting.If working drugs. Antiretroviral drugs to fight AIDS threat with the end of the quota system.The conditions deteriorate,activists,researchers, government agreed to continue ILO inspec- unions,and,most important of all,consumers are a case in point (box 10.5). tions until 2008,but employers can no longer will know.Whether their pressure will be We look in more detail at pharmaceutical count on increases in exports to the United enough to ensure adherence to labor stan- patents as an illustration of the broader States if they uphold labor standards.Some dards is an open question. issues. Chaudhuri, Goldberg, and Jia (2004) are aware that labor standards compliance is Sources: International Confederation of Free their only real competitive advantage,but Trade Unions (2005),Washington Post (2004). estimate that the gains to the Indian econ- omy from not following international patent protection standards were around $450 mil- substitute for more equitable trade rules lion, of which $400 million were a gain to under the WTO and other arrangements. consumers and the rest profits of domestic producers. Profit losses to foreign producers Intellectual property rights were only around $53 million a year. This and the global market for ideas study illustrates the important point that the Protection of intellectual property rights profits pharmaceutical companies could gain (IPR) is another area in which market failure in poor countries are not very large. Lanjouw and power structures shape unequal pro- and Jack (2004) estimate that extending cesses and outcomes; the interests of a few patent protection to developing countries to powerful actors impose costs on the general 20 years would be equivalent, for firm prof- public, particularly the poor. The require- its, to extending patents in developed coun- ment set forth in the Trade-Related Aspects of tries by two weeks. Intellectual Property Rights agreement A solution exists that would lead to more (TRIPS)24--that all member countries offer equitable provision without undermining 20-year patent protection--is perceived by efficiency: wherever rich country markets many to be grossly inequitable. Because already support the cost of research, poor patent protection was adopted in OECD countries could be allowed to produce or countries before the 1990s, the main result of import cheaper generic substitutes, at no this requirement is to strengthen patent pro- significant cost to either rich countries or tection in poor countries that become WTO the firms that carry out research (see focus 7 members. Countries adopting patent protec- on drug access at the end of this chapter). tion today are doing so at levels of GDP As with all international law, the existing between $500 and $8,000 per capita, while IPR protection rules are the result of com- OECD countries did so when their GDP per plex negotiations. TRIPS--which was basi- capita was around $20,000 in 1995 prices.25 cally written by industry lawyers26--is part Patents stem from a legitimate desire to of the agreement establishing the WTO, a provide incentives for the generation of multifaceted deal that included the Multi- knowledge and cover the cost of developing Fiber Agreement and other provisions that new knowledge. A drug or other patented developing countries deemed beneficial to innovation cannot be copied while a patent them. Many bilateral free trade agreements is in force, so developers enjoy a monopoly (such as recent agreements between the Achieving greater global equity 215 B O X 1 0 . 5 Expanding access to antiretroviral drugs in South Africa In response to the rising AIDS crisis, the govern- from about 4,000 rand a month to 1,000 rand a The Constitutional Court declared that the ment of South Africa in 1997 amended the Med- month. South African Constitution required the South icines and Related Substances Control Act of Other legal cases (not involving TRIPS) African government to devise and implement 1965 in an attempt to ensure the supply of more helped expand access to antiretroviral drugs. In within its available resources a comprehensive affordable drugs to all South Africans.The 2002, a group of complainants, including TAC, and coordinated program to realize amendment encouraged pharmacists to substi- brought a case against GlaxoSmithKline and progressively the rights of pregnant women and tute costly patented drugs with cheaper generic Boehringer Ingelheim at the South African Com- their newborn children to have access to health equivalents, allowed for the importation of petition Commission. In its October 2004 ruling, services to combat mother-to-child transmission cheaper drugs available on the market the commission found that the two firms had of HIV.The Court found the state policy of elsewhere (parallel imports), and introduced a engaged in excessive pricing of patented anti- restricting the availability of antiretroviral drugs compulsory licensing system allowing competi- retrovirals and refused to allow generic produc- and related services for preventing mother-to- tors to produce patented drugs. tion of the drugs in return for royalty payments, child transmission of HIV to a few pilot test sites The Pharmaceutical Manufacturers Associ- actions that the commission ruled were in viola- unreasonable,and ordered the government to ation and 39 drug companies challenged the tion of the South Africa Competition Act.To rectify the situation by taking reasonable steps government's legislation in the Pretoria High keep the case from moving to a higher tribunal, to facilitate the availability and use of antiretrovi- Court on several grounds, including that it the firms came to a settlement agreement that ral drugs in all public health facilities. violated South Africa's obligations under included licensing generic production. In 1999,TAC had also been part of a success- TRIPS.The Treatment Action Campaign (TAC) TAC also attempted to compel the national ful constitutional challenge relating to discrimi- and a labor union, COSATU, supported the gov- and provincial governments to provide nation of South African Airways cabin ernment defense in the case, asserting that the antiretroviral drugs to all pregnant women to attendants with HIV.The judgment reinforced legislation was valid in that it constituted the prevent the transmission of HIV from mothers to the right to equality for people with HIV.These government's positive duty to fulfill the right their children; the impact of the existing govern- legal challenges had important indirect impacts, to health. Arguably as a result of public pres- ment policy was to make the drug Nevirapine setting groundbreaking precedents, increasing sure and attention, the Pharmaceutical Manu- unavailable in public health facilities other than judicial awareness of human rights obligations, facturers Association and the drug companies the 10 or so pilot sites.The government and heightening public awareness of rights. withdrew their case. An indirect result was to appealed to the Constitutional Court after TAC Sources: Decker and others (2005), South Africa bring down the price of antiretroviral medicine secured a successful decision. Competition Commission (2003). United States and Chile, Jordan, Morocco, at least some of the agencies responsible Singapore, Vietnam, and others) include (such as WIPO and developed-country even stronger IPR protection rules than patent offices) are perceived as biased. TRIPS, such as granting patent extensions Inequitable as TRIPS may be, it still provides on pharmaceuticals and specific types of an internationally agreed standard subject protection on clinical trial data submitted to intense scrutiny and study, which does to obtain marketing approval. Signatories make it harder for rich countries to get more to these agreements agreed on these rules favorable deals in bilateral agreements. generally in exchange for preferential access An additional advantage of negotiating to U.S. markets for their products. sessions under the WTO is that they pro- But it is hard to argue that the parties to vide focal events for mobilizing public these various bilateral and multilateral opinion. An example of how positive results agreements were on a level playing field. can be achieved within the WTO process is Poor countries are in a weaker bargaining the Declaration on the TRIPS Agreement position overall. For example, the preferen- and Public Health adopted at Doha in 2001, tial access they gain through bilateral trade which affirms the primacy of public health agreements is eroded whenever the United concerns over IPR protection. Three subse- States reduces remaining tariffs and quotas quent U.S. bilateral agreements include side in bilateral or multilateral negotiations, letters on public health that affirm the sig- while IPR protection does not weaken over natories' understanding that IPR protection time.27 Moreover, the issues involved in IPR does not affect their ability to "protect pub- protection are complex and require skills lic health by promoting medicines for all."28 and capacity that rich countries can better When negotiations are shifted away from afford--often with input from pharmaceu- the spotlight, as drug companies managed tical firms. Some capacity-building efforts to do with drug licensing under the July for developing countries are under way, but 2004 Doha Development Agenda Frame- 216 WORLD DEVELOPMENT REPORT 2006 work Agreement, monitoring progress and including those assessed under the Reports campaigning become more difficult. So on the Observance of Standards and Codes multilateral negotiations within the WTO, (ROSC), international accounting stan- which are held under the spotlight, proba- dards, and the Core 25 Principles for Bank- bly hold the most promise in terms of ing Supervision--are also costly for devel- adopting more equitable rules. oping countries and may not be appropriate to their level of development. Financial market liberalization Capital flows to developing countries have Rules-setting in global financial markets. grown tremendously in the 1990s, bringing Some of the key rules governing global both advantages and challenges. Short-term financial markets are developed by institu- capital flows are at times accused of con- tions to which developing countries do not tributing to financial instability while not belong. The Financial Stability Forum, enhancing growth in countries with imma- established in 1999 to promote global ture financial systems. Most countries that financial stability, brings together senior received high volumes of short-term capital representatives of central banks, supervi- inflows in the 1990s--Argentina, Brazil, sory authorities and treasury departments Indonesia, Korea, Mexico, Russia, Thailand, of nine OECD countries, international and Turkey--have been hit by financial financial institutions, international regula- crises, triggered or deepened by the flight of tory and supervisory groupings, com- foreign short-term capital. mittees of central bank experts, and the Domestic factors play a key role in finan- European Central Bank. The only emerging cial instability, but global rules also play a market economies that are members are role. For instance, debt workout mecha- Hong Kong (China) and Singapore. nisms follow informal processes; the IMF's The Basel Committee on Banking Super- proposal for a Sovereign Debt Workout vision, which developed the Basel II Capital Mechanism was not adopted. The result is Accord, comprises representatives of the that deals tend to benefit international central banks and banking supervision lenders at the expense of domestic investors authorities of Belgium, Canada, France, and taxpayers.29 Germany, Italy, Japan, Luxembourg, the In contrast to short-term capital flows, Netherlands, Spain, Sweden, Switzerland, foreign direct investment (FDI) is generally the United Kingdom, and the United States. regarded as having a positive impact on Its main interlocutor in the development of receiving countries, but it goes to only a few the Accord was the Institute for Interna- countries. In 2002, 84 percent of FDI to tional Finance, a Washington-based consul- developing counties went to 12 mostly tative group of major international banks. middle-income countries (including China Neither the Financial Stability Forum nor and India), with the other 150-odd develop- the Basel Committee can legitimately repre- ing countries receiving almost nothing. sent the interests of developing countries.32 Only 5.3 percent of FDI went to Sub-Saharan Various other standards, often developed by Africa.30 Domestic factors play a key role semiprivate agencies (such as the Interna- also in determining the location of FDI, but tional Accounting Standards Board), are again global rules contribute to inequitable based on practices in the United States and outcomes. The Basel II Capital Accord, that European Union. Greater participation and sets capital adequacy standards for banks, voice in rule-setting bodies would help may overestimate the risk of bank lending to ensure that outcomes are more favorable to developing countries (in part because it developing countries. ignores the benefits of diversifying portfo- lios across countries), thus raising the cost Rectifying past and present inequities and reducing access to external capital, in in the use of natural resources addition to increasing the procyclicality of The use of natural resources is another major loans and possibly contributing to increased arena in which market failures and unequal volatility.31 Emerging global standards-- power conjure to create major inequities. Achieving greater global equity 217 This is greatly skewed in favor of devel- It allows industrial countries to purchase oped countries and impacts are grossly emission reduction "credits" generated inequitable. Without major technological from activities that reduce greenhouse gas innovations several key resources, such as emissions in developing countries and to oil, could be exhausted before the world's apply these credits against their obligations poor get a chance to attain standards of under the Protocol. It thus assists industrial living comparable to those of today's countries in meeting their commitments developed-country citizens. Moreover, under the Kyoto Protocol more cost effec- global warming threatens to destroy the tively and promotes sustainable develop- livelihoods of people living in low-lying ment in developing countries, through coastal areas, small islands, and semiarid supporting greater investments in cleaner, regions. Yet the people potentially affected more efficient technologies as well as by these changes (tomorrow's citizens and forestry projects. many of today's poor) have virtually no Fairness in processes is also an issue. In voice in setting rules. negotiating the Kyoto Protocol, as in most The international community has taken global treaty negotiations, industrial nations some steps to manage natural resources in a had greater power at the negotiating table. more equitable way. Some international An imbalance of technical expertise, a lack of legal instruments, such as the Convention adequate public support for the issues, and on the Law of the Sea of 1982, reflect the problems forming coalitions because of concept of distributive justice discussed diverse interests have attenuated the bargain- earlier by taking an approach whereby the ing power for many developing countries. seabed and ocean floor, beyond national The United States, the single largest emit- jurisdiction, are classified as global com- ter of greenhouse gases, has announced that mons and subject to a system of equitable it is not becoming a party to the Kyoto Pro- sharing of the economic benefits derived tocol, significantly reducing the protocol's from activities in these areas. efficacy. With the protocol having come into Key steps toward redressing inequities effect in February 2005, the United States in the use of global resources are the 1992 will be a mere observer at the Meetings of the U.N. Framework Convention on Climate Parties to the Kyoto Protocol, but because of Change and the 1997 Kyoto Protocol. The the size of its emissions, the other parties will protocol is structured to reflect the prin- not want to ignore U.S. concerns.33 ciple of "common but differentiated Equitable access to information is an responsibilities" between developed and important ingredient for more equitable developing countries. It recognizes that use of global resources. The UN/ECE industrial nations have emitted the major- Convention on Access to Information, Pub- ity of greenhouse gases in the atmosphere, lic Participation in Decision-making and causing the majority of the harm, and Access to Justice in Environmental Matters places greater demands on them. It sets (Aarhus Convention) deals with public par- binding quantified commitments for ticipation in environmental management industrial countries to reduce their green- and access to information on environmen- house gas emissions by 2008­12, with the tal issues. The Convention, adopted in 1998 understanding that the agreement would and in force among 35 parties since 2001, include emission reduction efforts by grants citizens the right to impose obliga- developing nations some time after 2012. tions on public authorities and parties to One important aspect of the Kyoto Pro- international environmental conventions, tocol is the unique set of provisions that including information disclosure, access to allow industrial nations to meet their com- information, public participation in envi- mitments through actions not only within ronmental decision making, and access to their borders but also outside. One of these justice. A Convention Compliance Com- provisions, the Clean Development Mecha- mittee has been established, to which citi- nism, helps address the perceived inequality zens and NGOs can bring allegations of of obligations and the costs of compliance. noncompliance. 218 WORLD DEVELOPMENT REPORT 2006 Providing development assistance sively shifting design and management to help build endowments from donors to countries. The United King- dom's Commission for Africa (2005) rec- In shaping global inequities, rules and ommended a major shift away from ex ante processes interact with unequal endow- conditionality toward a new partnership in ments. Even if all the reforms suggested in which African countries continue to work the previous sections were implemented, to improve governance and accountability, many poor countries would still not be able and donors deliver more, cheaper, more to participate in global markets because of predictable aid. High levels of aid reduce their limited endowments of skills, capital, the need for domestic tax efforts, which infrastructure, knowledge, and ideas. Action have historically helped strengthen overall to build endowments is primarily domestic, accountability of governments and citizen through private and public investments in demand for quality services, so particular infrastructure and other areas. Can domes- attention should be paid to revenue col- tic action be supported by aid? lection.34 The preparation of poverty Better development assistance reduction strategies is a key, if imperfect, instrument to shift to country-led processes From an equity perspective, the main roles with greater participation and monitoring of aid are to help countries build the of how public resources are spent. endowments of those who are resource- Fragile states pose a special challenge. poor, generally through no fault of their Stabilization and peacekeeping need to be own, and avoid extreme deprivation (which complemented with efforts to build state justifies to some extent the use of aid to institutions and legitimacy. The sequencing support current consumption). The focus of interventions matters--there is some evi- on building endowments implies that both dence that ring-fenced, long-term invest- the level of aid and its effectiveness matter. ment in human capital development and Enhancing aid effectiveness. If the goal is to working with NGOs and the private sector equalize opportunities for the poor, aid can be useful first steps. Technical assistance effectiveness is crucial. Aid that sustains appears more effective after reforms take off corruption or marginal projects, or is used and can help lay the basis for capital invest- to increase the resources at the disposal of ment and service delivery interventions.35 the rich, does not help. Aid effectiveness When domestic political processes are hinges crucially on aid delivery modalities manifestly inequitable and corrupt, donors and on the fairness and transparency of can try to support moves toward a more equi- domestic political processes. Birdsall (2004) table revenue collection and allocation; decen- cites seven "deadly sins": impatience with tralization to lower levels of government, institution building, failure to exit, failure which can challenge central control; and the to evaluate, pretending that participation strengthening of community-based organiza- equals ownership, failure to collaborate, tions, the media, and domestic entrepreneur- stingy and unreliable financing, and under- ship, which can help create a middle class with funding of regional and global programs-- a voice and a stake in better governance. in addition to tying aid to the use of con- sultants and firms from the donor country Improving the allocation of aid. The distri- and allocating it according to political pri- bution of aid matters as well. A lively debate orities. Existing aid planning and delivery has taken place in recent years on aid alloca- practices are rooted in political and incen- tion criteria. Burnside and Dollar (2000) and tive constraints that the donors face, so Collier and Dollar (2001, 2002) found that change is difficult and slow. But some cur- aid was more effective in reducing poverty if rent directions are promising: emphasizing it was allocated to countries that followed results (including through tracking indica- good policies and had good institutions.They tors of intermediate actions and final out- calculated that reallocating actual aid pro- comes related to the MDGs), moving away vided in 1996 across countries to maximize from ex ante conditionality, and progres- poverty reduction according to their formula Achieving greater global equity 219 would have led to directing aid to roughly 20 aid than predicted by their policy and institu- instead of the 60 countries considered, and tional strength, mostly because of dispropor- lifted twice as many people out of poverty.36 tionately low flows from bilateral donors, Their findings have been questioned by while others ("aid darlings") received more.38 Hansen and Tarp (2001) and others, who argued that their analysis does not take Increasing aid levels. Conditional on effec- country conditions into account and is not tiveness and distribution, levels of aid do robust to different specifications. If aid effec- matter. Aid levels fell between 1990 and 2001 tiveness varies across countries not because both as a share of rich countries' gross of policies but as the result of different coun- national income (GNI) and in nominal try circumstances, such as climate, a different terms. Calls for more aid to help countries aid allocation rule would maximize the achieve the MDGs have resonated loudly in poverty impact of foreign aid.37 Cogneau recent international gatherings. At the 2002 and Naudet (2004) suggested an alternative International Conference on Financing for rule for aid allocation and showed that gains Development in Monterrey, rich countries in poverty reduction similar to those found committed to increasing their aid flows sig- by Collier and Dollar could be obtained if aid nificantly. Net aid flows indeed increased sig- was directed to countries that have greater nificantly in 2002­04 in nominal and real structural disadvantages (geographic, histor- terms, reaching $78 billion.39 Three major ical, or economic, as discussed in chapter 3). factors were behind these increases: continu- The resulting allocation would spread the ing growth in bilateral grants (but with a risk of poverty more evenly across the large share going to technical cooperation, world's population, while reducing global debt forgiveness, emergency and disaster poverty almost as much as the allocation relief, and administrative costs); the provision proposed by Collier and Dollar. of reconstruction aid to Afghanistan and Iraq In sum, an equity perspective suggests by the United States (in 2004, $0.9 billion to that an approach that does not take a coun- Afghanistan and $2.9 billion to Iraq); and the try's circumstances into account is likely to depreciation of the U.S. dollar. While there ignore important information about need. was a small increase in new development But an approach that ignores aid effective- assistance to Sub-Saharan Africa in 2003, ness does not lead to expanded opportuni- even after accounting for debt relief and ties. To contribute toward an equalization of emergency assistance, Highly Indebted Poor opportunities across the world's individuals, Countries (HIPC) received less in real terms aid should be targeted where the probability in 2004 than the year before. On the positive is greatest that it effectively reaches those side, the International Development Associa- with the most limited opportunities--the tion, the soft-lending arm of the World Bank, poorest of the poor, in opportunity terms. recently received a replenishment for 2006­8, That clearly depends on the poverty and which is at least 25 percent higher than the deprivation levels in each country and on its previous one and represents the largest fund- government's ability and political commit- ing increase in two decades. ment to deliver the aid where and how it is These recent increases notwithstanding, intended. But more research is needed to aid flows remain small not just in relation to fully understand the causal mechanisms. need but also in comparison to domestic In practice, recent research showed that human development and safety net programs many donors indeed seem to rely on both that aim to equalize opportunities and ensure good policies and poor initial conditions. A against deprivation. Such programs generally study of 40 donor agencies by Dollar and account for more than 10 percent of GDP in Levin (2004) found that aid was positively donor countries. Official development assis- correlated with a measure of good policies tance (ODA), by contrast, was only 0.25 per- and with per capita GDP, and the agencies cent of donor countries' GNI in 2003. Only that focused the most on good policies also Denmark, Luxembourg, the Netherlands, directed their aid to poor countries. However, Norway, and Sweden meet the U.N. target of some fragile states ("aid orphans") receive less providing ODA equal to or greater than 0.7 220 WORLD DEVELOPMENT REPORT 2006 Table 10.1 ODA as a share of GNI, 2002, 2003, and simulation for 2006 ODA as % ODA as % ODA as % of GNI Net ODA 2003 Net ODA 2004 of GNI of GNI Simulation Country ($ millions) ($ millions) 2003 2004 2006 Austria 505 691 0.20 0.24 0.33 Belgium 1,853 1,452 0.60 0.41 0.64 Denmark 1,748 2,025 0.84 0.84 0.83 Finland 558 655 0.35 0.35 0.41 France 7,253 8,475 0.41 0.42 0.47 Germany 6,784 7,497 0.28 0.28 0.33 Greece 362 464 0.21 0.23 0.33 Ireland 504 586 0.39 0.39 0.61 Italy 2,433 2,484 0.17 0.15 0.33 Luxembourg 194 241 0.81 0.85 0.87 Netherlands 3,981 4,235 0.80 0.74 0.80 Portugal 320 1,028 0.22 0.63 0.33 Spain 1,961 2,547 0.23 0.26 0.33 Sweden 2,400 2,704 0.79 0.77 1.00 United Kingdom 6,282 7,836 0.34 0.36 0.42 EU members, total 37,139 42,920 0.35 0.36 0.44 Australia 1,219 1,465 0.25 0.25 0.26 Canada 2,031 2,537 0.24 0.26 0.27 Japan 8,880 8,859 0.20 0.19 0.22 New Zealand 165 210 0.23 0.23 0.26 Norway 2,042 2,200 0.92 0.87 1.00 Switzerland 1,299 1,379 0.39 0.37 0.38 United States 16,254 18,999 0.15 0.16 0.19 DAC members, total 69,029 78,569 0.25 0.25 0.30 Source: OECD-DAC (2004). Note: DAC = Development Assistance Committee; EU = European Union; GNI = gross national income; ODA = official development assistance. Figure 10.2 More subsidies than aid percent of GNI. Many countries are not on track to meet their Monterrey commitments Aid and agricultural subsidies relative to GDP in OECD-DAC countries (table 10.1). Percent of GDP, 2002 Aid also is low in comparison with other 1.6 uses of public resources. Agricultural subsi- Agricultural subsidies dies, for instance, were almost five times Aid larger than aid in 2002. Japan, the European 1.2 Union, and the United States had subsidies equal to 1.4, 1.3, and 0.9 percent of GDP and 0.8 aid of 0.23, 0.35, and 0.13 percent respectively (figure 10.2). Rich countries should deliver on their Monterrey commitments; this alone 0.4 would add around $18 billion to develop- ment assistance by 2006. To make further 0 progress toward the 0.7 percent goal, coun- Japan European United All tries could establish intermediate targets for Union States OECD-DAC 2010. But again, higher aid that is poorly countries spent, supports corrupt regimes, or under- Sources: OECD-DAC (2004) and OECD (2003). mines domestic accountability can hinder, rather than support, greater equity. Achieving greater global equity 221 Additional debt relief. Aid should not be untary contributions. The IFF would make undermined by debt payments. Multilateral future aid available for immediate use (front- debt, the largest share of debt for the HIPC, load aid) and possibly reduce volatility. It is is the result of loans received in the 1980s, an option for some donors, such as France and new loans, while generally on more and the United Kingdom, given their concessional terms, continue to add to the accounting and legislative frameworks, but debt burden. Supporters of debt relief argue not for others, who would not be able to that debt payments divert scarce resources make long-term commitments or consider from health and education and other pro- them off-budget. Even when feasible, the IFF poor spending. would move aid off-budget in the short term, There has been progress in the last decade. but it would expand financing for develop- In 1995, debt relief was not on the agenda of ment only if it increased overall aid levels international organizations, partly because of rather than simply shift future aid forward. financing issues and partly because of con- Proposals involving global tax instruments cerns about creating a moral hazard (if debts have also been advanced, including a "Tobin" are forgiven, governments of borrowing coun- tax on short-term capital movements; taxes tries may think they are really not expected to related to pollution, such as a global carbon repay). Over the following five years, thanks to tax, an international aviation fuel tax, and a a strong grassroots mobilization in rich coun- maritime pollution tax; taxes on arms sales; tries, effective research on the impact of debt and surcharges on multinational profits and and committed leadership in some rich coun- on value-added or income taxes. These pro- tries and the World Bank, the HIPC Initiative posals would need to be assessed on the basis was launched and then expanded.As of March of the revenues they could generate, their effi- 2005, 27 countries had received debt relief ciency, collectability, feasibility, and not least expected to amount to about $54 billion over their impact on equity. time, up from $34.5 billion at the end of 2000. Voluntary contributions from individuals, The ratio of debt service to exports for HIPC corporations,private foundations,and NGOs-- has declined roughly by half, to 15 percent. another source of development assistance Poverty-reducing expenditures in the 27 coun- alongside public aid--are increasing. But tries that receive HIPC assistance are estimated effectiveness is an issue for private assistance to have increased from 6.4 percent of GDP in too. As seen for the December 2004 Asian 1999 to 7.9 percent of GDP in 2003. tsunami, private charity can be mobilized Even so, many countries continue to bear faster than public resources. But private con- an unsustainable debt burden, and more tributions are influenced by press coverage needs to be done. The agreements reached in more than actual need; contributors were October 2004 to extend the HIPC Initiative much less generous for the Iranian earth- and in June 2005 to grant 100 percent debt quake that hit in February 2005, which was cancellation of the debt owed to the African virtually ignored in the news. Moreover, lack Development Bank, IMF, and World Bank to of coordination, fragmentation, and infra- 18 countries are important steps.40 This and structure bottlenecks--such as bad roads and any further debt relief should truly be addi- a lack of electricity and telecommunications, tional rather than substitute fresh aid. Fur- which cannot generally be alleviated through ther debt relief should also be accompanied private charity--can hinder its effectiveness. by careful consideration of debt sustainability Moreover, alignment with recipient country issues, including increasing grants for very strategies needs to be ensured. low-income countries, to avoid the buildup of unsustainable debt in the future. Transitions to greater equity Equity-enhancing changes in global policies Innovative mechanisms to fund development and institutions come about through action by assistance. Several innovative mechanisms governments and coalitions of governments-- to expand development assistance are under often within international fora, informed discussion, including the International leadership and grassroots mobilization, Financing Facility (IFF),global taxes,and vol- analysis and policy research to inform alter- 222 WORLD DEVELOPMENT REPORT 2006 natives, and networks that disseminate those emerged to try to influence the global agenda. alternatives. This section looks at some exam- An example is the launching of the Enhanced ples illustrating the change processes; it does HIPC Initiative in 2000. The original HIPC not attempt to be comprehensive or to assess Initiative benefited some countries, but the weight of individual factors. progress was slow and there were several Examples include developed-country gov- problems. By 1999 these were largely recog- ernments that take initiative unilaterally-- nized, but an expanded initiative needed to such as the countries that have already garner support in creditor countries and in reached the target of 0.7 percent of GNI for the World Bank and IMF governing commit- developing assistance or that cancelled a large tees, because it required additional funding. portion of the debts owed to them by the The Jubilee 2000 campaign, which combined poorest countries--as well as governments awareness of the pernicious effects of exces- acting jointly to form coalitions for change. sive debt with a call to debt forgiveness The latter are becoming more frequent in inspired by the Christian Jubilee idea, mobi- trade negotiations, in which a group of large lized hundreds of thousands of people in developing countries (including Brazil,China, countries such as Germany, Italy, the United and India) is spearheading proposals for States, and United Kingdom. The govern- greater trade liberalization. ments of these countries took notice and A way to spur equity-enhancing policy finally agreed to various actions, expanding changes by developed countries is to accom- the HIPC Initiative and canceling bilateral pany calls for change with tracking mecha- debt. Other examples of pressure by civil nisms. The eighth MDG relates to greater society organizations leading to changes in provision of aid and debt relief and more rules are the campaigns to reform World equitable trade policies. Progress toward this Bank policies on indigenous peoples, resettle- goal has been reviewed in September 2005 as ment, and other safeguards. part of the Millennium Summit+5. In a second set of cases, international Another exercise to monitor rich coun- rules already exist on paper, and social try policies, conducted by the Center for movements bring them into effect by mak- Global Development and Foreign Policy ing them visible and insisting that they be magazine, is the Commitment to Develop- implemented. In many cases, this process ment Index. The index examines more indi- happens at the country level, but it involves cators than the eighth MDG, including an interaction with global rule and policy environment, security, investment, and changes. The ethical trade initiatives dis- technology (Center for Global Develop- cussed earlier are citizen mobilizations to ment 2004). While there are questions enforce global and local laws. Similarly, about the methodology, particularly on efforts by indigenous movements, NGOs, and aggregating scores in various areas, the other activists ensured that ILO Covenant index exposes how some countries do better 169 on indigenous peoples was recognized in some areas than in others--Norway, for as having legal weight (in practice) in vari- instance, does well on aid but poorly on ous countries. Experience shows that citizen trade; Switzerland scores poorly on trade mobilization is most effective when it but does better on environment; the United builds broad-based coalitions for change States scores poorly on environment but across countries and groups. has, with Canada, the most favorable But citizen mobilization also poses risks. migration policies--and how all countries Civil society movements may partly counter have considerable opportunities to improve unequal formal channels, but they are their policies. highly imperfect mechanisms of aggregat- ing voice, and their accountability is often Citizen mobilization. Citizen mobilization, unclear. In recent years, there have been combining both grassroots and middle-class instances of NGO campaigns that have led interest groups across countries, has grown in to perverse outcomes, such as donors with- recent years. In some cases, an international drawing from infrastructure and resettle- social movement, network, or alliance has ment projects only to see governments Achieving greater global equity 223 move ahead anyway without international transition countries in the world economy. monitoring of social and environmental Moreover, small and low-income countries consequences. have a limited role in their decision-making processes. Developed-country governments Analysis and research. Socioeconomic analy- have a majority of the votes on the boards sis and policy research also contribute to of the IMF and World Bank, and two execu- making particular domains of inequity tive directors represent more than 40 objects of public debate and action. Global African countries. analysis of gender discrimination and miss- Several options to enhance voice in the ing girls and women (box 2.9) has fostered IMF and World Bank have been explored, public action to redress gender inequities. Ex but limited progress has been made. In ante analysis and policy research are also vital April 2005, the ministers of the intergov- ingredients for informing the design of policy ernmental Group of Twenty-Four urged proposals. A vast body of recent research, that a new quota formula be developed including serious impact evaluations, has (voting rights depend on quotas), which focused on efficient and effective ways to would give greater weight to measures of achieve the MDGs. The more research is con- gross domestic product measured in pur- ducted by and with developing-country chasing power parity terms. They also sug- researchers, the more likely it is that its results gested that, in order to strengthen the voice will inform policymaking. of small and low-income countries, basic Some of these key elements have been votes should be increased to restore their missing in failed attempts at change. Analysis original share of total voting power.41 Mak- and policy research is carried out and techni- ing progress on enhancing the voice and cal solutions are proposed; the political will to participation of developing countries in the implement them is missing, however, because decision-making processes of the World political leaders do not think the issue is Bank and IMF is of fundamental impor- important or coalitions are not formed that tance to increase the legitimacy of interna- ensure sufficient support. In other cases, tional financial institutions and enhance grassroots mobilization is strong, but it lacks their effectiveness in fostering greater global well-developed, implementable proposals for equity. The 13th General Review of IMF reform. Indeed, some NGO campaigns have Quotas provides an important opportunity led to perverse outcomes, as when interna- to make progress on issues of quotas, voice, tional organizations have withdrawn support and participation. for projects under international criticism only to see governments proceed without Summary international monitoring of social and envi- In sum, global actions can play a key role in ronmental safeguards. redressing inequitable rules and helping equalize endowments. The rules that govern International organizations. International markets for labor, goods, ideas, capital, and financial institutions can help bring about the use of natural resources need to become global equity-enhancing action through more equitable. Domestic action to build setting agendas and providing a focal point the endowments of the poor can be sup- for international negotiations. Their dis- ported through aid, but not if aid is poorly pute settlement and enforcement mecha- spent, supports corrupt regimes, or under- nisms help ensure that their policies are mines domestic accountability. Changes implemented. But the governance struc- will require, above all, greater accounta- tures of the World Bank and IMF have not bility at the global level, with greater repre- evolved in line with the increased size and sentation of poor people's interests in role of emerging market, developing, and rule-setting bodies. f o c u s 7 o n drug access Balancing access to medicines for the world's poor with incentives for pharmaceutical innovation What's the best way to expand access to drugs in developing countries, while preserving incentives for pharmaceutical research? A possible solution entails recognizing that medicine markets are far from uniform and that both the nature of diseases and the income of countries matter for access and incentives. S ome diseases, such as malaria, mainly curiosity (similar to what happens with global drug sales in each disease class (see affect poor countries, but they have open-source software). Leads that figure below). received little R&D investment, and emerge could then feed into any of the Along the horizontal axis of the figure are few treatments are available. Much atten- other schemes for the next stages of disease classes, listed with those concentrated tion has been devoted in recent years to cre- development and clinical testing.4 in poor countries toward the left, and those ating the right incentives and structuring with worldwide incidence toward the right. Providing patent protection in poor financing to increase R&D investment in Along the vertical axis are countries ordered countries for drugs primarily for their mar- drugs for diseases that affect poor coun- by per capita income. The white area shows kets would not by itself provide sufficient tries, for which commercial potential does the "generic region" that would be created by not provide enough stimulus.1 Policy initia- incentives, because their purchasing power the policy. Within the generic region, firms is very low. But, even a small increase in tives include the following: would be able to manufacture and trade in market-based research incentives could be a generic products without any political or pro- · Increasing research through public sec- useful part of a larger strategy to address cedural complexity arising from the patent tor institutions--for example, programs the treatment of diseases specific to the system. The generic region would be recalcu- coordinated by the U.S. National Insti- developing world. lated each year to accommodate changes in tute of Allergy and Infectious Diseases, Other diseases have global incidence income and the evolution of markets. the World Health Organization's Special and worldwide markets, and they are an Because diseases to the left are more Programme for Research and Training important cause of death and disability concentrated in developing countries, the 2 in Tropical Diseases, and the nonprofit among the poor. In the high-mortality percent of global markets cutoff is reached Drugs for Neglected Diseases Initiative regions of the world, cardiovascular disease at lower levels of real GDP per capita. It founded by Medécins Sans Frontiérès. is estimated to cause a greater share of the may seem counterintuitive to propose dif- · Establishing public-private partnerships, total disease burden than malaria and other ferentiating in this way, but it is precisely such as the Medicines for Malaria Ven- tropical diseases combined.5 for diseases that are concentrated in devel- ture and the Malaria Vaccine Initiative, Although many people in poor coun- oping countries that some incentive for the International AIDS Vaccine Initia- tries suffer from global diseases, they are an product development may need to come tive, and the Global Alliance for Tuber- insignificant part of the commercial mar- from sales in the developing world. culosis Drug Development. ket. Estimates suggest that currently almost half of the world's people live in countries · Designing a purchase commitment for that together represent less than 2 percent The proposed generic region new vaccines ("AdvancedMarkets").Spon- of global spending on drugs for cardiovas- sored by the Bill and Melinda Gates cular disease.6 Because of the great asym- Foundation, the groundwork has been Rest of the world metries in markets, many of the poor could (no change) laid to create markets by having donors be allowed generic access to important $5,000 commit, in advance, to paying part of classes of drugs without damaging research the cost at a guaranteed price for a new, incentives. The foreign filing license approach as yet undiscovered, vaccine. This would described below is a feasible way to attain Countries, give firms an incentive to invest in this ordered by area.2 (A similar initiative has been pro- this outcome. real GDP posed for agricultural research relevant per capita to developing countries.3) Legally binding commitments not Generic region · Developing an open-source approach to to enforce patent rights early-stage tropical diseases research. The proposal considered here7 would have The idea is to harness the expertise and inventors in developed countries make resources of academic scientists, stu- legally binding commitments to their own 0 dents, public sector researchers, and governments not to enforce patent rights in Concentrated Global in LDCs others who may be happy to spend some certain pharmaceutical markets. These Disease classes of their time doing research on tropical markets would be defined as those together diseases either for altruism or scientific representing the bottom, say, 2 percent of Source: Lanjouw (2004). Focus on drug access 225 The poorest countries falling below the that relate to the policy--about where to this policy. They would continue to take dashed line would be allowed generics on enforce patent rights--would arise only steps to comply with TRIPS and any bilat- all pharmaceuticals. Countries higher up, after products have reached the market. To eral treaty obligations in accord with their such as India, would have a mixed situa- ensure compliance, the patent holder would current plans. The countries in the generic tion. They would be in the TRIPS envi- lose the right to enforce the domestic patent region could be treated as one country from ronment for diseases concentrated in the on the same product if the holder were to the viewpoint of patents. Production could developing world, while in the generic break the commitment and begin an be based in any one country and drugs region for more global diseases. For mar- enforcement action in one of the pro- could be exported to all other countries in kets in the gray area above the curved line, scribed markets. that group, without any costs associated the policy as no effect. Both the responsi- Implementation would need to be with patents and compulsory licensing. bilities and the flexibilities of TRIPS coordinated across the developed countries So, if any country in the generic region remain unchanged. that have pharmaceutical research activity, had the ability to produce a given drug, then The size of the generic region depends including, at least, Canada, Europe, Japan, all other countries in the region could take on two parameters: the ceiling income level and the United States. The policy would advantage of its production capacity. This (here $5,000) and, more important, the require legislation to amend the patent would help get around the problem that global sales cutoff (here 2 percent). code in each country. In the United States most small countries do not have the capac- The proposal would be implemented by and the United Kingdom this would ity or market size to make domestic produc- having inventors in developed countries include adding an inventor declaration to tion of generic drugs a viable activity. make a legally binding commitment to an existing foreign filing license process; Firms have been willing to make a vol- their own governments not to enforce other countries would need to put a for- untarily commitment not to exercise patent rights in the generic region, as part eign filing license provision into their patent rights in the poorest countries. The of obtaining a license to make foreign codes.8 The classification of countries and foreign filing license proposal discussed patent filings (the foreign filing license). disease classes could be carried out by an here would take that commitment and Firms would continue to obtain patents international organization and reviewed convert it into a reliable part of the global wherever they like, and no decisions related annually. rules-based system. to the policy would be needed at the time of Developing countries would not be applying for a patent. Instead, decisions required to take any action to implement Source: Lanjouw (2002, 2004). Epilogue This report has argued that equity has a development was possible without markets central place in the interpretation of devel- and the private sector. opment experience and in the design of Although the resulting"Washington Con- development policy--and that this place sensus" is sometimes interpreted as anti- has been inadequately understood and state, this is not the main message that undervalued in much current thinking. We survives after more measured consideration. do not propose, however, yet another new Instead, just as events in the 1990s confirmed framework for development. Instead, recog- that markets were essential for development, nizing the importance of equity (that is, they also showed that good governments are equality of opportunity and the avoidance essential for well-functioning markets. Mar- of absolute deprivation) implies the need to kets operate within a framework determined integrate and extend existing approaches. In by institutions, and they work only as well as this epilogue, we seek to place the analysis those institutions do. They work best, there- and messages of the report in the context of fore, when a capable state maintains order some of the major contemporary strands of within the rule of law, provides effective thinking and action in development. regulation, macroeconomic stability and Four broad strands of thinking have other public goods, and corrects other mar- been at the core of development discourse ket failures. and practice over the last three decades or The second strand sees human develop- so: the central role of markets as resource ment as central to the development process, allocation mechanisms, the importance of through the expansion of the skills,health,and human development, the role of institu- capacity of all people to engage in social and tions, and a focus on empowerment. economic activities and to manage the risks The first strand emphasizes the superior- they face. Although the World Development ity of markets over central planning as Report 1980 was on Human Development,2 broad mechanisms to allocate resources and U.N. agencies--notably the UNDP in their determine the evolution of economic activ- series of Human Development Reports ity. This has long been understood in eco- (United Nations 2003)--later took the lead in nomics, but there was a time when it was a putting these concerns at the center of the minority view among development econo- development agenda. In this, they have been mists.1 The situation had definitely changed followed (rightly) by the whole development by the 1980s, as first India and then China community. moved away from planning, and the impor- For the World Bank, the 1990 World tance of incentives in determining individ- Development Report on Poverty3 marked ual behavior (as consumers, producers, and the beginning of a multiyear process of regulators) became more widely under- making poverty reduction the overarching stood. The rapid and sustained growth that objective of the institution, building on followed in those two countries underlined these first two strands of development the point. In the 1990s, the economic tran- thought. The 1990 Report argued that sition away from planning in the formerly poverty reduction required a two-part communist states of Eastern Europe and strategy--employment creation through Central Asia dispelled any serious view that market-based growth; and expansion of 226 Epilogue 227 human capital, especially through broad- building a good climate for investment and based provisioning of social services. empowering the poor.7 During the 1990s, the third and fourth The first pillar combined the strands of strands of thought rose to prominence. The thinking on the primacy of markets and on third strand emphasized the role of "institu- the centrality of institutions. It argued that tions" in development, building both on only by having governance institutions that trends in academic thought and on devel- were at once effective and accountable opment practice across many organiza- could markets generate the best possible tions. It reflected the acknowledgment that results for investment and growth. This markets, however important, do not work theme was explored in the 2005 Report, "A in a vacuum. They need rules and the insti- Better Investment Climate for Everyone."8 tutional enforcement of those rules. The The second pillar was also a merger of emphasis on institutions took a variety of sorts: in seeking the empowerment of poor forms: a focus on the costs of corruption; a people--whoshouldbeseenasthedrivingsub- broader concern with governance; support jects, not as passive objects of development-- for judicial reform; and a greater practical it combined thinking on human develop- understanding of the need for well- ment, institutions, and empowerment. The designed, accountable, and effective public 2004 Report, "Making Services Work for regulation of privatized monopolies. Poor People," explored these themes in the The fourth strand sought the empower- delivery of basic services.9 ment of the people for whom development Although the various elements of think- was supposedly taking place. If the central ing and policy are complementary--and goal of development is poverty reduction, indeed have been considered elements of a the poor should have a great deal of voice "comprehensive" or "holistic" development over its directions. If development needs process--the narratives associated with the markets, and markets need institutions, it different strands have often suffered, in should clearly matter how those institutions practice, from two important limitations. are governed. If power helps determine the One is a tendency to compartmentalize outcomes in market and government pro- poverty. The second is to treat actions in the cesses alike, the distribution of that power various realms as separate. There is a ten- over the population must be important for dency to assign market-related and macro- development. In practical terms, the em- policies to macroeconomic managers and phasis on empowerment has sought greater trade ministries, as though the "investment participation of the poor in projects affect- climate" concerned only rich people or as ing them, a greater preoccupation with the though the poor stood to benefit only indi- political economy of support for reforms, rectly from the trickle-down effects of the and explorations of the role of culture in investments by the rich today. development. Conversely, it sometimes seems as Several World Development Reports though empowerment would have no have sought to integrate the third and fourth impact on the quality of institutions, on the strands of thought: the 1997 Report on the investment opportunities of the poor, or on "State in a Changing World,"4 the 2002 the economy's growth process. According to Report on "Building Institutions for Mar- this view, empowerment should be the pre- kets,"5 and, emblematically, the millennial serve of well-meaning NGOs and social 2000/01 Report on "Attacking Poverty."6 The development folk, of little import for eco- 2001 Report argued that poverty reduction nomic performance. required an expansion in the opportunities Such a separation of the two pillars--for the of the poor (notably through market- investment climate and for empowerment-- oriented growth), the empowerment of the is profoundly misguided. The analysis in poor, and measures that provide security for this report suggests that the root causes of the poor. At the World Bank, this synthesis poverty are to be found in the combined was crystallized in a Strategic Framework for deprivations of power and investment development, which consisted of two pillars: opportunities. Lack of incomes, lack of 228 WORLD DEVELOPMENT REPORT 2006 access to services, lack of assets--these lead to changes in that distribution over deprivations go together with lack of voice, time. And if power is imbalanced, it is lack of power, lack of status. Public action because wealth and economic opportunities could enhance the investment capabilities are uneven. Inequality traps are vicious cir- of those who have limited opportunities by cles, with economic and political inequali- investing in their human capital and in the ties mutually reinforcing one another. infrastructure they use and by ensuring This report has argued that policy and fairness and security in the markets in institutional reforms can help break these which they transact. And if public action inequality traps, and turn the vicious circles fails to do that, it is because it somehow has into a virtuous process of greater equality in been decided otherwise. In that case, the economic opportunities reinforcing greater government will invest in expensive political equality, and vice versa. Reforms schools or universities, rather than in those can do this in many ways, which are closely used by the poor, for example. It will not related to the four strands of thinking dis- enforce tax collection, rather than build cussed above. Interventions that build rural roads. It will allow banks to retain a greater human capacities for those with the degree of market power and lend to the most limited opportunities (generally the friends of the government, rather than poor) will prepare them to be more eco- allow for entry and promote competition nomically productive and more politically that forces intermediaries to seek the great- effective. Processes that redistribute access est returns on capital. Observed policies to land, or to infrastructure services, or that fail to address inefficient inequities are indeed to justice, can add both to empower- the result of political choices, implicitly or ment and to the investment opportunities explicitly. of the poor. And promoting fairness in Such failures in public action, which arise markets is all about improvements in the from and perpetuate inequity, are also quality of institutions that support and inimical to prosperity. Those who have no complement markets in ways that broaden opportunities cannot contribute to the access and ensure equitable rules. development of their countries. Their poten- This is consistent with the twin pillars of tial talents are wasted, and capital, land, and a better investment climate and greater other resources are used in inferior ways. empowerment for the poor. It makes it clear Unequal control over resources reinforces that--for most people in the developing the unequal concentration of power, and this world, and certainly for the poor--it is not is reflected in worse governance institutions: possible to have one without the other. A public service delivery agencies are not good investment climate is about real eco- pushed to become more accountable. If all nomic opportunities. Equity is about level- the power brought to bear on regulators is ing the playing field so that opportunities that of the friends of the regulated, the qual- are available on the basis of talent and ity of regulatory agencies is not likely to efforts, rather than on the basis of gender, improve much. Police forces and judicial sys- race, family background, or other predeter- tems will not treat everyone the same way. mined circumstances. A level economic And so on. These institutional failures only playing field is not sustainable without a add to the negative effects of inequity on level political playing field, and vice versa. If development. we want a better investment climate for Government policies are what they are-- everyone, we want empowerment. The from Mali to Chile--because someone is combination of both implies equity. making them. No group is powerless, unless These issues apply with equal force at the some other group is powerful. If an global level. The extraordinary inequalities inequitable distribution of opportunities in opportunity faced by individuals born in means that the investment climate for large different countries reflect different political groups is poor, this is intimately linked to and economic histories across nations. the lack of power in those groups to affect While domestic policy is undoubtedly fun- the decision-making processes that could damental, global interactions help shape Epilogue 229 the context for national economic and tional partnership. But it also highlights social advance. The Monterrey Consensus inequalities in the processes forming the explicitly emphasizes the need for a com- rules of the game in the international play- pact between rich and poor societies if the ing field. Inequalities in economic and Millennium Development Goals are to be political power in the global arena influence achieved. It recognizes the role of action by the design of rules in ways that often rich countries, especially in the areas of aid restrict, rather than expand, the opportuni- and trade. For aid, this is reflected in the ties of poorer countries--and, even more, quest to change the donor-recipient rela- of poorer groups within these countries. tionship from one of giving to one of part- Just as in the domestic context, therefore, nership, with developing countries clearly equity and efficiency in the international in the lead in designing their policies and arena are more likely to be attained by re- institutions. forms that enhance the power and broaden This report underlines the importance of the economic access of the countries where that compact and a more equal interna- the world's poor live. Bibliographical Note This Report draws on a wide range of World Bank docu- Lankford, Stephen Mink, Pradeep Mitra, Ed Mountfield, Chris ments and on numerous outside sources. Background Murray, Edmundo Murrugarra, Mamta Murthi, Ijaz Nabi, papers were prepared by Martin Andersson, Armando Mustapha K. Nabli, Julia Nielson, Pedro Olinto, Robert O'Sulli- Barrientos, Carles Boix, Leila Chirayath, Stijn Claessens, van, Çaglar Özden, John Page, Sheila Page, Guillermo Perry, Klaus Decker, Ashwini Deshpande, Leopoldo Fergusson, José Lant Pritchett, Agnes Quisumbing, Maurizio Ragazzi, Robin Fernández-Albertos, Christer Gunnarsson, Emmanuel Michael Rajack, Raghuram G. Rajan, Dena Reingold, Kaspar Gymi-Boadi, Karla Hoff, Markus Jäntti, José Antonio Richter, Maria Estela Rivero-Fuentes, Peter Roberts, John Roe- Lucero, Marco Manacorda, Siobhan McInerney-Lankford, mer, Fabio Sánchez, Milena Sánchez de Boado, Stefano Scar- Joy Moncrieffe, Enrico Perotti, Vibha Pinglé, Pablo Querubi, petta, George Schieber, Maurice Schiff, Jesica Seacor, Binayak Martin Ravallion, Michael Ross, Juho Saari, Rachel Sabates- Sen, Shekhar Shah, Tony Shorrocks, Ricardo Silveira, Nistha Wheeler, Carolina Sánchez-Páramo, Norbert Schady, Sinha, Milena Stefanova, Nicholas Stern, Kalanidhi Subbarao, Andrew Shepherd, Milena Stefanova, and Juhana Vartiainen. Mark Sundberg, Rosa Alonso i Terme, Vinod Thomas, Peter Background papers for the Report are available either on the Timmer, Bernice K. Van Bronkhorst, Rogier J.E. van den Brink, World Wide Web http://www.worldbank.org/wdr2006, Rudolf Van Puymbroeck, Tara Vishwanath, Adam Wagstaff, under Background Papers or through the World Develop- L. Alan Winters, Ruslan Yemtsov, Nobuo Yoshida, Mary Eming ment Report office. The views expressed in these papers are Young, Hassan Zaman, and Heng-Fu Zou. not necessarily those of the World Bank or of this Report. Other valuable assistance was provided by Jean-Pierre S. Many people inside and outside the World Bank gave com- Djomalieu, Gytis Kanchas, Polly Means, Nacer Mohamed ments to the team. Valuable comments and contributions were Megherbi, and Kavita Watsa. Christopher Neal and Stephen provided by Nisha Agrawal, Asad Alam, Sabina Alkire, Sudhir Commins assisted the team with consultations and dissemina- Anand, Cristian Baeza, Gianpaolo Baiocchi, Catherine Baker, tion. Judy L. Baker, Giorgio Barba Navaretti, Catherine Barber, Despite efforts to compile a comprehensive list, some who Jacques Baudouy, Gordon Betcherman, Lisa Bhansali, Vinay K. contributed may have been inadvertently omitted. The team Bhargava, Amar Bhattacharya, Nancy Birdsall, Andrea Bran- apologizes for any oversights and reiterates its gratitude to all dolini, John Bruce, Barbara Bruns, Donald Bundy, Luis Felipe who contributed to this Report. López Calva, Shubham Chaudhuri, Martha Chen, Shaohua Chen, Aimee Christensen, Denis Cogneau, Giovanni Andrea Background Papers Cornia, Anis Dani, Roberto Dañino, Jishnu Das, Klaus Decker, Andersson, Martin, and Christer Gunnarsson. "Egalitarianism in Arjan de Haan, Klaus Deininger, Asli Demirguc-Kunt, Kemal the Process of Modern Economic Growth: The Case of Sweden." Dervis, Jean-Jacques Dethier, Shanta Devarajan, Peter A. Barrientos, Armando. "Cash Transfers for Older People Reduce Dewees, Charles Di Leva, Mala Escobar, Antonio Estache, Joan Poverty and Inequality." Maria Estebán, Shahrokh Fardoust, Massimo Florio, David Boix, Carles. "Spain: Development, Democracy and Equity." Freestone,Adrian Fozzard, Teresa Genta Fons,Vivien Foster, M. Chirayath, Leila, Caroline Sage, and Michael Woolcock. "Custom- Louise Fox, Sebastián Galiani, Alan Gelb, Alec Gershberg, Elena ary Law and Policy Reform: Engaging with the Plurality of Jus- Glinskaya, Delfin Go, Carol Graham, Maurizio Guadagni, tice Systems." Susana Cordeiro Guerra, Isabel Guerrero, David Gwatkin, Jeff Claessens, Stijn, and Enrico Perotti. "The Links Between Finance Hammer, Patrick Heller, Amy Jill Heyman, Bert Hofman, and Inequality: Channels and Evidence." Patrick Honohan, R. Mukami Kariuki, Christine Kessides, de Haan, Arjan. "Disparities Within India's Poorest Regions: Why Homi Kharas, Elizabeth King, Larry Kohler, Jacob Kolster, Do The Same Institutions Work Differently In Different Places?" Somik Lall, Ruben Lamdany, Danny M. Leipziger, Victoria Decker, Klaus, Siobhan McInerney-Lankford, and Caroline Sage. Levin, Sandy Lieberman, Peter Lindert, Amy Luinstra, Xubei "Human Rights and Equitable Development: `Ideals', Iissues and Luo, Bill Maloney, Katherine Marshall, Siobhan McInerney- Implications." 232 WORLD DEVELOPMENT REPORT 2006 Decker, Klaus, Caroline Sage, and Milena Stefanova. "Law or Jus- Pinglé, Vibha. "Faith, Equity, and Development." tice: Building Equitable Legal Institutions." Rao, Vijayendra. "Symbolic Public Goods and the Coordination of Deshpande, Ashwini. "Affirmative Action in India and the United Collective Action: A Comparison of Local Development in India States." and Indonesia." Hoff, Karla."What Can Economists Explain by Taking into Account Ravallion, Martin. "Why Should Poor People Care about Inequal- People's Perceptions of Fairness? Punishing Cheats, Bargaining ity?" Impasse, and Self-Perpetuating Inequalities." Ross, Michael. "Mineral Wealth and Equitable Development." Jäntti, Markus, Juho Saari, and Juhana Vartiainen. "Country Case Sabates-Wheeler, Rachel. "Asset Inequality and Agricultural Study: Finland-Combining Growth with Equity." Growth: How Are Patterns of Asset Inequality Established and Lucero, José Antonio. "Indigenous Political Voice and the Struggle Reproduced?" for Recognition in Ecuador and Bolivia." Shepherd, Andrew and Emmanuel Gyimah-Boadi, with Sulley Moncrieffe, Joy. "Beyond Categories: Power, Recognition, and the Gariba, Sophie Plagerson, and Abdul Wahab Musa."Bridging the Conditions for Equity." North-south Divide in Ghana." Endnotes Overview review them briefly in the report, but focus on the channels of more 1. The infant mortality rates are computed separately at the direct significance to equity. province level only, and do not take into account racial, gender, or 7. There may be many sound economic reasons for these risk- other social differences. The life expectancy statistics are for race adjusted interest rates to vary, including fixed administrative loan and gender groups, and do not take regional or income differences costs, greater informational asymmetries, and the like. The point is into account. The real differences between typical individuals with that this affects poorer groups more, in ways unrelated to their the listed characteristics are therefore likely to be understated. In investment opportunities, thus leading to both greater inefficiency addition, Nthabiseng's life expectancy could be much lower if she and the perpetuation of inequalities. were to become infected with HIV/AIDS, as are many young South 8. These averages are based on actual episodes and refer to the African women. Data come from Day and Hedberg (2004). Pre- total growth elasticity of poverty reduction, inclusive of any dicted years of schooling rely on disaggregated information--by changes in inequality. "Low" and "high" inequality refers to a Gini province, sex, race, rural-urban location, consumption expenditure coefficient of 0.3 and 0.6 respectively. The partial elasticity of quintile, and mother's education--from the Labor Force Survey poverty to growth, assuming no change in the Lorenz curve, shows and the Income and Expenditure Survey for 2000, which were car- a similar decline, but not to zero (see chapter 4). ried out by the South Africa Statistics Office. 9. While equity-enhancing redistribution will usually be from 2. Predicted monthly consumption expenditures in 2000 for richer groups to poorer groups, it could happen that "good" redis- persons with those characteristics were Rand 119 ($45 adjusted for tributions will be to groups that are not poor, especially those in the purchasing power parity) for Nthabiseng and Rand 3,662 ($1,370) middle. This will depend on the nature of the market failure. For for Pieter. The average white male with a highly educated mother, example, the initial beneficiaries of a less-captured financial system who lives in Cape Town and is in the top 20 percent of the distribu- may be small and medium entrepreneurs. Benefits to the poor will tion, happens to be in the ninety-ninth percentile of the overall occur when enhanced access to financial services among middle- income distribution. Data come from the Labor Force Survey and class entrepreneurs translates into faster growth and job creation. the Income and Expenditure Survey for 2000. 3. There are also income, consumption, and other differences: Chapter 1 Sven can expect to earn $833 a month compared with the South 1. This formulation draws loosely on Roemer (1998), but it is African mean of $207 (Nthabiseng will have $44 a month). If Sven also related to the works of Dworkin (1981b), Dworkin (1981a), had been even luckier, and had been born at the same rank in Swe- and Sen (1985). den's income distribution as Pieter occupied in South Africa, his 2. See Rawls (1971). expected monthly earnings would climb to $2,203. Sven will be able 3. See Acemoglu and Robinson (2000), Bourguignon and to visit any country on a whim, whereas Nthabiseng and Pieter can Verdier (2000), and Ferreira (2001). expect to spend hours waiting for a visa, which they may or may 4. This theme is one that recurs across many disciplines--in not obtain. sociology and anthropology see Bourdieu (1986), Bourdieu (1990), 4. In some cases, such as China's decollectivization of agricul- and Tilly (1998), in economics see Engerman and Sokoloff (2001), ture in the late 1970s, a reform may lead to more efficiency, broader Bénabou (2000), and Piketty (1995). opportunities, and yet greater (intrarural) income inequality. 5. See Acemoglu and Robinson (2000) for various perspectives China's experience--and the decompression of wages in a number on the interconnections among cultural, social, and economic of transition economies in Europe and Central Asia--is a good inequality, and Stewart (2001) for a general discussion of group- illustration of a more general point: because equity refers to fair based inequalities. processes and equal opportunities, it cannot be inferred from 6. Appadurai (2004). income distributions alone. Greater fairness will generally lead to 7. See Bourdieu (1990) on symbolic violence for more on this. lower income inequality, but not always. And not all policies that 8. Steele (1999). reduce inequality increase equity. 9. Appadurai (2004). 5. Mazumder (2005). 10. See Rao and Walton (2004) for more on such "inequalities of 6. Other interactions between unequal opportunities and social agency." conditions are also of societal concern, including links between 11. See also Birdsall, Graham, and Sabbot (1998) and Thorbecke inequality and crime, and between inequality and health. We (2005). 233 234 WORLD DEVELOPMENT REPORT 2006 12. "Too much" and "too little" are used here with respect to the has a higher-than-median value of the between-group share for a social optimum. The choices are usually privately rational. particular population breakdown. 13. The role of high inequality of political power and wealth as a 12. Bourguignon and Morrisson (1998). barrier to economic development in the modern era is a rapidly 13. Li, Squire, and Zou (1998). growing area of research. Striking results are reported in Sokoloff 14. The consumption module in India's National Sample Survey and Khan (1990), Engerman and Sokoloff (1997, 2002), Acemoglu, was slightly modified between the 1993/4 round and the 1999/0, Johnson, and Robinson (2001, 2002), and Banerjee and others compromising both poverty and inequality comparisons over time. (2001). Overviews of the broad set of research questions are Enger- Deaton and Kozel (2004) provide a clear overview of the issues and man and Sokoloff (2002), Hoff (2003), and Acemoglu, Johnson, their implications. and Robinson (2004). 15. Deaton and Drèze (2002), Sen and Himanshu (2004) and 14. This is so if the distribution of talents and informational Banerjee and Piketty (2003) all document increases in inequality, asymmetries between employers and employees are similar but by varying amounts. These estimates are all predicated on cer- between men and women. Notice that the efficiency gain does not tain assumptions given the fundamental problems of data compa- satisfy the Pareto criterion. Some individual men might lose out. rability referred to above. The efficiency criterion here is first-order dominance, under the 16. Khan and Sen (2001). anonymity axiom. 17. Narayan and Yoshida (2004). 15. Of course, the intrinsic valuation of equity may be 18. Nepal National Planning Commission (1995­6). reflected in the appropriate distributional weights underpinning 19. For a sociological perspective on the inheritance of inequal- these benefits. ity, see Erikson and Goldthrope (2002). 16. This has been a recurrent theme in development economics 20. Solon (1999). and at the World Bank. For an influential early treatment, see 21. Mazumder (2005). Chenery and others (1994). 22. Hertz (2001) for South Africa; Dunn (2003) for Brazil. 17. World Bank (1990). 23. Solon (2002). 18. World Bank (2001h). 24. World Bank (2001h). 25. Jha, Rao, and Woolcock (forthcoming). Focus 1 on Palanpur 26. Appadurai (2004). 1. The study was launched out of the Agricultural Economics 27. See, for example, Fernández-Kelly (1995) on life in the U.S. Research Centre of the University of Delhi and Oxford University, inner city. and then continued from the London School of Economics. 28. Appadurai (2004). 2. Drèze, Lanjouw, and Sharma (1998), 51. 29. This term comes from Nussbaum (2000) and her work on 3. Drèze, Lanjouw, and Sharma (1998), 211. gender discrimination and development, although the core idea has a long intellectual history in social science. Chapter 2 30. It is also important to note that the appearance of "internaliz- 1. Filmer (2004). ing disadvantage"(for example,working slowly,being tardy) can actu- 2. See, for instance, Wilkinson (1992) and Wilkinson (2000). ally be a covert strategy used by marginalized groups to subvert sys- 3. High rank, on the other hand, can be protective of health, tems over which they otherwise have little influence. See Scott (1986). including enhancing one's resistance to infectious disease. 31. If income inequality, a static measure, is a good proxy for 4. Fujii (2005). social mobility, a dynamic concept, then these theories find support 5. Interestingly, for each of the three population groupings, the in the large literature on income inequality and crime. See, for relative gap in infant mortality between groups rose in approxi- example, Demombynes and Özler (2005) for a discussion of the mately half of the countries and fell in the other half. subject at the country level, and Fajnzylber, Lederman, and Loayza 6. Chaudhury and others (2005). (2000), among others, on the cross-country level relationship 7. Araujo, Ferreira, and Schady (2004) use a new data set, con- between income inequality and crime. structed from individual record data in household surveys for 124 32. See Narayan (2002) for a categorization of approaches and countries. Qualitatively similar results were also obtained by case studies. Castello and Domenech (2002) and Thomas, Wang, and Fan 33. See Petesch, Smulovitz, and Walton (2005). (2002), both of which rely on the Barro and Lee (2001) interna- 34. Gibson and Woolcock (2005); for methodological details on tional education data set. the broader research project of which this study is a part (and the 8. See, for example, Kanbur (2000). evidence base on which the assertions made here rest), see Barron, 9. See Kanbur (2000), Elbers and others (2005). Smith, and Woolcock (2004). 10. Wan, Lu, and Chen (2004). 35. See also Rao (2005) on the related idea of such spaces as 11. These correlations hold whether or not between-group "symbolic public goods." inequality is measured on the basis of the conventional or alterna- 36. Maynard (1966); Casagrande and Piper (1969). tive methodology. They also hold after controlling for outliers 37. Oster (2005) has recently argued that hepatitis B affects off- (although South Africa is a particularly influential observation in spring ratios and has suggested that geographic patterns of hepati- the regression of inequality on social group differences). The results tis B prevalence can explain about 45 percent of the missing also hold when all the between-group shares are combined into a women. The magnitude of the hepatitis B effect is currently still the single-count indicator that reflects whether a particular country subject of controversy (see e.g., Klasen 2005). Endnotes 235 38. Das Gupta and others (2003). 10. Deaton (2004). 39. Lloyd (forthcoming), with original data from The Center for 11. Pritchett (forthcoming). The richest quintile is defined Reproductive Law and Policy. based on an asset index created by Filmer and Pritchett (1999). 40. Lloyd (2005)(forthcoming). 12. One example of such decomposition is Pradhan, Sahn, and 41. Agarwal (1994); Deere and León (2003). Younger (2003), who claim that less than one-third of the world 42. Mason and Carlsson (forthcoming). inequality in child health is attributable to differences between 43. Rahman and Rao (2004). countries. 44. Kabeer (1999). 13. Gwatkin (2002). Again, the richest decile here is defined 45. Kabeer (1997). based on the asset index by Filmer and Pritchett (1999). 46. This disparity is less apparent in enrollments in primary 14. Preston (1980) as cited in Deaton (2004). school, which has become more equitable over the last decade. 15. Also note that all of the countries that are significantly below 47. Browning and Chiappori (1998). the curve, that is, those with much lower life expectancy at birth 48. See Strauss, Mwabu, and Beegle (2000) for an excellent sur- than their GDP per capita would predict, such as South Africa, are vey of economic models of intrahousehold allocation. in Sub-Saharan Africa. 49. Thomas (1990). 16. See Deaton (2004). In fact, Cornia and Menchini (2005) cite 50. Lundberg, Pollak, and Wales (1997). the rise in parents literacy and female education as the main reason 51. Quisumbing and Maluccio (2003). behind the remarkable declines in infant mortality rates in Latin 52. Heise, Ellsberg, and Gottemoeller (1999). America and the Caribbean and Middle East and North Africa in 53. Kabeer (1997). the 1980s. 54. Rahman and Rao (2004). 17. The increase in inequality between countries in life 55. Munshi and Rosenzweig (forthcoming). expectancy at birth in the 1990s is also confirmed by Goesling and 56. Quisumbing, Estudillo, and Otsuka (2004). Firebaugh (2004). 57. Das Gupta and others (2004). 18. A recent paper by Brainerd and Cuttler (2004) cites increased alcohol use and psychosocial stress brought on by an unpredictable Chapter 3 future as the two main contributors to the decline in life expectancy 1. Deaton (2004), 31. The large differences in mortality do not in Russia and other countries of the former Soviet Union. just exist between rich and poor countries, or between different 19. This figure in Morocco compares with roughly three- groups of citizens in poor countries only. In 2002, the median age at quarters of the same cohort in Indonesia and Turkey, and about death in Australia for indigenous people was roughly 20 years less 85 percent in Colombia and Philippines. than that for nonindigenous males, which was approximately 76 20. While making these comparisons between countries, the years (Australian Bureau of Statistics 2003). reader should bear in mind the discussion on the comparability of 2. Botswana, which has one of the highest HIV/AIDS infection these data from box 2.5 and not interpret these differences literally. rates in the world, has seen its life expectancy drop from its peak of 21. The urban and rural figures for China (and India) have not 60 years in the mid-1980s to 39 years in 2000. been corrected for cost-of-living differences. Given that rural-urban 3. Bourguignon, Levin, and Rosenblatt (2004a), 3. price differentials have been increasing over time and are significant 4. See the following quotes that nicely demonstrate the debate today (Chen and Ravallion 2004), the figures here exaggerate the dif- on globalization and the inequality of incomes: "Globalization ferences in living standards between the rural and urban Chinese. raises incomes and the poor participate fully," The Economist, May 22. Kolm (1976) proposed the following class of absolute meas- 27, 2000, 94. "There is plenty of evidence that current patterns of ures of inequality: growth and globalization are widening income disparities." Policy 1 n 1 ( µ-yi) Director of Oxfam, letter to The Economist, June 20, 2000, 6. K = ln e , n 5. Doing this in practice requires household survey data and var- i=1 ious adjustments and assumptions--all far from simple--which is where >0 is a parameter that captures inequality aversion. why so many people discuss international or intercountry inequality 23. Atkinson and Brandolini (2004) discuss changes in interna- using National Accounts data instead of global inequality. tional as well as global inequality. We use only their results on inter- 6. Pritchett (1997). national inequality to make our point on the trend differences 7. It is important to note that all the evidence presented here when one switches from a relative concept of inequality to an refer to intercountry or international inequality in life expectancy at absolute one. birth, and not to global inequalities, because we do not use any evi- 24. Such as Milanovic (2005). dence on within-country differences in life expectancy. 25. See Firebaugh and Goesling (2004), Sala-i-Martin (2002). 8. Goesling and Firebaugh (2004). 26. Our analysis shows that we can estimate GE(0), that is, mean 9. Note that the declines in life expectancy for the mainly Sub- log deviation, from grouped data, especially if the number of Saharan African countries do not seem to be a direct result of groups is larger than 10, without any significant bias using our changes in infant mortality, which in many cases continued to smoothing techniques. decline. However, as Cornia and Menchini (2005) argue, the rate of 27. The difficulties in assembling a database to calculate global decline in infant mortality also slowed down significantly in the last inequality over such a long time period are detailed in Bour- decade, which cannot be explained solely by the changes in Europe guignon and Morrisson (2002), 729­30. and Central Asia and Sub-Saharan Africa. 28. Pritchett (1997), 14. 236 WORLD DEVELOPMENT REPORT 2006 29. Bourguignon, Levin, and Rosenblatt (2004a). 8. On the origins, structure and goals of KDP, see Guggenheim 30. Ravallion (2004a) as cited in Bourguignon, Levin, and (forthcoming). Rosenblatt (2004a). 9. Gibson and Woolcock (2005). 31. See, for example, Chen and Ravallion (2004). 10. Barron, Diprose, and Woolcock (2005). 32. Vietnam and Thailand practically eliminated $1 a day poverty during this period. Part II 33. The projections for meeting some of the other Millennium 1. In his second inaugural address, Roosevelt also suggested that Development Goals do not give one cause for greater optimism. avoiding deprivation in outcomes was a legitimate policy aim. As he East Asia and Europe and Central Asia are close to the target on pri- put it, "The test of our progress is not whether we add more to the mary education, while others are falling behind. A handful of coun- abundance of those who have much; it is whether we provide tries are on track to attain the child mortality goal, mainly in Latin enough for those who have too little" (Washington, DC, January 20, America and the Caribbean. Only 21 percent of the developing 1937). There tends to be less agreement on the importance of world's population is expected to achieve the maternal mortality inequality in specific outcome spaces. Writing about income goal. Halving the proportion of people without access to safe water inequality, Feldstein (1998) argues that increases in inequality and sanitation will require providing about 1.5 billion people with caused by larger incomes at the very top warrant no policy atten- access to safe water and 2 billion with basic sanitation facilities tion, and represent "pure Pareto improvements," to which only between 2000 and 2015. At current rates of service expansion, only "spiteful egalitarians" would object. about one-fifth of countries are on track. See http://www.un.org/ 2. Michel Ferry, online consultation message, dated October 26, millenniumgoals/ for more details on the 8 goals, 18 targets, and 2004, 10:56 a.m. nearly 50 indicators that comprise the Millennium Development 3. As chapter 1 also indicated, this is not equivalent to saying Goals. that implementing redistributions is free of tradeoffs, particularly 34. Deaton (2004). The rules of the game at the global level, and in the short run, or that terrible inefficiencies cannot arise if redis- especially the process of setting those rules, will be discussed in tributions are implemented in ways that pay no heed to incentives. great detail in chapter 10. We return to these difficult policy issues in chapters 7, 8, and 9. 35. Voting shares in the soft-lending arm of the World Bank, the International Development Association, are similar: Part I coun- Chapter 4 tries hold 61 percent of the vote and Part II countries 39 percent. 1. See Pinglé (2005). Developing countries are somewhat better represented in regional 2. Plato, The Laws, 745, quoted in Cowell (1995), 21. development banks, but developed countries hold large voting 3. The reason for this reputation is the combination of a utilitar- shares there too. ian objective with a set of (rather restrictive) assumptions about 36. In all other cases, the delegates in charge of economic mat- individual utilities: (i) individual preferences can be represented by ters may be covering, in addition to the WTO, also UNCTAD, ITU, a utility function; (ii) cardinal utility levels are meaningful indica- ILO and WIPO. tors of the individual's well-being; (iii) utilities can be compared 37. Each country belongs to one of the following four categories across different people; (iv) the utility functions are increasing but based on its GDP per capita in 2002: low income, lower-middle concave (that is, increase at a declining rate) in incomes; and (v) all income, higher-middle income, and high income. individuals have identical utility functions. If they all hold, then, for 38. López (2000) as cited in Deaton (2004). a fixed level of aggregate income, the greatest sum of utilities is 39. Pritchett (2001) and Pritchett (2004b). achieved by an equal division of incomes across all individuals. 40. Firebaugh and Goesling (2004). 4. Sen (2000), 69. 41. Sala-i-Martin (2002). 5. For example, within German Courts, the standard of what is 42. Pritchett attributes this phrase to Gerschenkron (1962). equitable is based on "the opinion of all those people who think in 43. Pritchett (1997), 15. equitable and just terms"(Palandt 2004, article 242). 44. As cited in Goesling and Firebaugh (2004). 6. For example, within common law jurisdictions, key principles 45. As cited in Sala-i-Martin (2002). that guide the application of equity include the principles of 46. Goesling and Firebaugh (2004). "unconscionability," "undue influence," "duress," and "unjust enrichment." A transaction has been deemed unconscionable Focus 2 on empowerment where "one party to a transaction is at a special disadvantage in 1. Evans (2004). dealing with the other party because illness, ignorance, inexperi- 2. See Petesch, Smulovitz, and Walton (2005) for the interac- ence, impaired faculties, financial need, or other circumstances tions between opportunity structure and the agency of subordinate affect his ability to conserve his own interests, and the other party groups. unconscientiously takes advantage of the opportunity thus placed 3. Chaudhuri and Heller (2003). in his hands" (High Court of Australia, Blomley v. Ryan 1956, 99 4. Baiocchi, Chaudhuri, and Heller (2005). CLR 362 at p. 415, per Kitto J.). 5. Chaudhuri, Harilal, and Heller (2004). 7. Aristotle, The Nicomachean Ethics, book 5, chapter 10, 350 BC. 6. The concepts of "terms of recognition" and "capacity to 8. Kritzer (2002), p. 495. For a more detailed discussion of the aspire" come from Appadurai (2004); "capacity to engage" is from philosophical evolution of the concept, see Alland and Rials (2003). Gibson and Woolcock (2005). 9. The Chancellory Courts have their origin in the residual dis- 7. Rao and Walton (2004). cretionary power of the King, generally exercised by the Chancellor, Endnotes 237 to correct or overturn cases in which justice could not be obtained 20. Ibid. by a common law court. 21. Terry, Carey, and Callan (2001). 10. In the common law tradition, equitable jurisdiction is also 22. This is the question in the United States General Social Sur- associated with a number of well-established principles, sometimes vey, which was fielded every year between 1972 and 1997. A similar called the "maxims of equity." Examples of these include: He who question is included in the Euro-Barometer surveys, which are also seeks equity must do equity--that is, a claimant who seeks equitable used in the study. relief must be prepared to act fairly toward the defendant (future 23. Subjective well-being--or "happiness"--surveys have also conduct); He who comes to equity must come with clean hands-- been used to test the relative income hypothesis in a number of dif- similar to the previous principle, but related to the claimant's past ferent settings. Following on original work by Easterlin (1974), conduct; Equity looks at intent rather than form--equity is more which suggested that, despite sustained economic growth, people in concerned with substance than form. some rich countries were not growing any happier, a number of 11. Cadiet (2004), 425. recent studies have found that reported well-being rises with per- 12. See Arnaud (1993) and Draï (1991). sonal income, but declines with the income of other people in a 13. Preamble to the Universal Declaration of Human Rights person's reference group. This is usually interpreted to mean that (1948). well-being is driven at least in part by relative incomes, rather than 14. Note also Article 1(3)--purposes of Charter--"promoting purely by their absolute levels. See Graham and Felton (2005) for and encouraging respect for human rights and for fundamental Latin America, Ravallion and Lokshin (2002) for the Russian Fed- freedoms for all without distinction as to race, sex, language or reli- eration, and Luttmer (2004) for the United States. The relative gion" Article 2(1)--"sovereign equality of all members"--indicates income literature is of tangential interest for this report, because it balance between the principles of sovereignty and noninterference provides additional backing for the idea that one's position in soci- and of respect for human rights; Article 55--"universal respect for, ety in relation to others matters, both for individual behavior and and observance of human rights." Other references to human rights for welfare. include Articles 13(b)(1), 62(2), and 68. 24. See De Ferranti and others (2004) for an earlier discussion of 15. Vienna Declaration and Programme of Action Vienna Dec- this data. laration (UNGA) (A/CONF. 157/23), July 12, 1993. This was issued 25. The professions included skilled factory worker, doctor in by the U.N. World Conference on Human Rights, Vienna, Austria, private practice, chairman of a large national company, lawyer, June 14­25, 1993. shop assistant, federal cabinet minister, judge of the nation's high- 16. Rights identified in the UDHR include the right "without est court, owner/manager of a large factory, and unskilled worker. any discrimination to equal protection before the law" (Article 7), Respondents were also asked about their own income. the right to "take part in the government of his country, directly or 26. Countries in the ISSP sample include the following: Austria, through freely chosen representatives" (Article 21), and the right to Australia, Canada, France, Germany, Italy, Israel, Japan, the Nether- education (Article 26). lands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, 17. There exist several different characterizations of the "core the United Kingdom, and the United States. human rights treaties." One is the "International Bill of Rights," 27. This figure is an update, based on more recent data, of an which comprises the Universal Declaration on Human Rights, the original figure that appeared in Ravallion and Chen (1997). International Covenant on Civil and Political Rights, and the Inter- 28. See, once again, Ravallion and Chen (1997) and Bour- national Covenant on Economic, Social and Cultural Rights.Another guignon (2003). conceptualization is that there are six major human rights treaties: 29. Using a slightly different dataset, and a decomposition tech- the ICCPR (1966), the ICESCR (1966), the Convention on the Elim- nique that also accounts for the differential sensitivity of different ination of All Forms of Racial Discrimination (ICERD) (1964), the poverty measures to changes in mean incomes, Kraay (forthcom- Convention on the Elimination of All Forms of Discrimination ing) finds that the growth share in this variance is closer to 70 per- Against Women (CEDAW) (1989), the Convention Against Torture cent. In a sample of long spells only, that share rises to 94 percent. (CAT) (1984) and the Convention on the Rights of the Child (CRC) 30. Whereas the total growth elasticity of poverty reduction (1989). None of these characterizations should be taken as exhaustive simply relates total change in poverty to the growth in mean or exclusive; there are several other extremely important human incomes, without controlling for changes in the relative distribu- rights treaties beyond these, both within the U.N. system and outside tion and is therefore given by it in regional systems. The OHCHR lists "seven core international human rights instruments": the six above, plus the International Tµ =P µ , Convention on the Protection of the Rights of Migrant Workers and P µ the Members of their Families (1990). In addition to this, mention the partial growth elasticity of poverty reduction controls for should also be made of the Genocide Convention (1948). changes in inequality. That means that it is calculated for a given 18. Henrich and others (2004) report on Ultimatum Games Lorenz curve: played in 15 small-scale societies around the world. In an Indone- sian experiment, Cameron (1999) found that high offers persisted µt +1 µt in games played with (locally) very high monetary stakes. z z Pµ = P µ = P Lt , - P Lt , µ . 19. See, for instance, Fehr and Schmidt (1999) on a theory of P µ µ Lt t "inequity aversion," and Rabin (1993) on a model of behavior that P Lt ,µz takes other people's intentions directly into account. 238 WORLD DEVELOPMENT REPORT 2006 This definition, like the decomposition on which it is based, is path- 13. Blair, Judd, and Chapleau (2004). See also Loury (2002) for a dependent, and the elasticity would be somewhat different if it was wide-ranging study. calculated on the basis of the final-period Lorenz curve, rather than 14. See the survey in Steele and Aronson (1995). the initial one. In this report, we always use the initial period rela- 15. From McKenzie and Woodruff (2003), figure 1. tive distribution when computing partial growth elasticities. No 16. Olley and Pakes (1996). regression method is used, so no functional form of any kind is 17. The ICOR measures the increase in output predicted by a imposed on the relationship. one-unit increase in capital stock. It is calculated by extrapolating 31. This finding is qualitatively consistent with alternative esti- from the past experience of the country and assumes that the next mates of the relationship between partial and total growth elastici- unit of capital will be used exactly as efficiently (or inefficiently) as ties, on the one hand, and income inequality, on the other. See the previous one. The inverse of the ICOR therefore gives an upper Bourguignon (2003) and Ravallion (2005). bound for the average marginal product for the economy--it is an 32. The other four combinations of poverty lines and measures upper bound because the calculation of the ICOR does not control were also computed, and the upward-sloping pattern is qualita- for the effect of the increases in the other factors of production, tively robust. which also contributes to the increase in output. The implicit 33. See also Bourguignon, Ferreira, and Lustig (2004) for a assumption that the other factors of production are growing is detailed discussion of seven country studies. probably reasonable for most developing countries, except perhaps 34. In fact, World Bank (2005b) finds that, on average, the poor- in Africa. est 20 percent of the population in each of 14 countries in their 18. Banerjee and Munshi (2004); Banerjee, Duflo, and Munshi study grow 0.7 percent for each 1 percentage point growth in mean (2003). incomes. 19. This is not because capital and talent happen to be substi- tutes. In these data, as is generally assumed, capital and ability Chapter 5 appear to be complements. 1. See, for example, Fisman (2001a). 20. From Goldstein and Udry (1999), figure 4. 2. Even in a hypothetical world with perfectly functioning mar- 21. From Goldstein and Udry (1999), 38. kets, there may still be an indirect influence, coming from the effect 22. Based on Berry and Cline (1979). of wealth or income on savings decisions. It has been suggested that 23. Some of the effects of lack of insurance may be quite subtle. the poor are less inclined to save than the rich, and as a result, Banerjee and Newman (1991) argue, for example, that the avail- aggregate savings as a proportion of aggregate income may go up if ability of insurance in one location (the village) and its unavailabil- the rich gain at the expense of the poor. This could affect invest- ity in another (the city) may lead to inefficient migration decisions, ment decisions through the effect of the supply of savings on the because some individuals with high potential in the city may prefer price of capital. Inequality, in this Kaldorian view of the world to stay in the village to remain insured. (after Nicholas Kaldor, the Cambridge economist), would enhance 24. The fact that there is underinvestment on average, and not growth, although it might yet be a Pyrrhic victory. Kaldor worried only a set of people with too many bullocks and a set of people with about the inevitability of crises under capitalism, and he saw faster too few, is probably due to the fact that bullocks are a lumpy invest- growth accompanied by burgeoning inequality as a recipe for ment, and owning more than two is inefficient for production ongoing crises. (there is no small adjustment possible at the margin). 3. Note that such redistributions from wealthier to poorer peo- 25. Another piece of relevant evidence comes from the effects of ple do not necessarily have to be to the poorest people in society, titling nonagricultural land. Field (2003) shows evidence from a land- but rather to those with good growth opportunities. titling program in the slums of urban Peru that suggests that the lack 4. Unless there are two different investment opportunities that of a clear title to the land where you have built your home reduces the have the exact same payoff, net of interest. ability of the household members to work outside. Field hypothesizes 5. Dasgupta, Nayar, and Associates (1989). that this is because someone needs to be home to defend the untitled 6. See also Gill and Singh (1977) and Swaminathan (1991). property from expropriation by others. But she does not find any evi- 7. See Djankov and others (2003). dence that land titling improves access to credit. 8. See Deaton (1997) for more details. 26. This number takes into account the fact that only 20 percent 9. See Townsend (1995). of the Indonesian population is iron deficient. The private returns 10. Fafchamps and Lund (2003) find that, in the Philippines, of iron supplementation for someone who knew they were iron households are much better insured against some shocks than deficient--which they can find out using a simple finger prick-- against others. In particular, they seem to be poorly insured against would be $200. health risk, a finding corroborated by Gertler and Gruber (2002) in 27. Kremer (1993). Indonesia. 28. Li and others (1994). 11. See Banerjee (2000) for a discussion of the alternative 29. Banerjee and Duflo (2004b), 11. views. 30. See Bénabou (1996) for a survey. 12. Although, there are instances of government scholarships 31. Forbes (2000) also corrects for the bias introduced by intro- for tertiary education in many countries that require beneficiaries ducing a lagged variable in a fixed-effect specification by using the to provide a specified number of years of service in government Generalized Method of Moments (GMM) estimator developed by after graduation. Arellano and Bond (1991). Endnotes 239 32. Barro (2000) estimates a cross-sectional relationship 36. Qian (2003), 305. between inequality and short-term growth and finds a negative 37. In China revenues were collected at the local level and shared relation in poor countries but a positive relation in rich ones. up with higher levels of government 33. Banerjee, Gertler, and Ghatak (2002). Focus 4 on Indonesia Chapter 6 1. World Bank (1993). 1. Engerman and Sokoloff (1997). 2. Using data from van der Eng (1993a, 1993b, 2002), it is possi- 2. Acemoglu, Johnson, and Robinson (2001), 1387. ble to construct an index of pro-poor growth from 1880 to 1990 3. Klarén (2000), 44­48. (Timmer 2005). Using this index, the rates of pro-poor growth for 4. See Hemming (1970), 264 on Pizzaro and Melo (1996), 222 each historical era were as follows: 1880­1905 = 0.05 percent per on Colombia. year; 1905­1925 = 4.57 percent per year; 1925­1950 = ­2.57 per- 5. Bakewell (1984), Cole (1985), Lockhart (1969) and Mörner cent per year; 1950­1965 = 2.37 percent per year; and 1965­1990 = (1973). 6.56 percent per year. 6. Lockhart and Schwartz (1983), 34. 3. All Indonesian distributional data are subject to the usual 7. Parry (1948). caveats about the difficulty of obtaining adequate responses from 8. Cardoso (1991), Mahoney (2001), and Lang (1975), 28. both the very poor and the very rich. In particular, SUSENAS does 9. An analogous story applies to the parts of the region suitable not capture the extremely uneven accumulation of wealth or the for plantation agriculture, especially sugar. Colonists in the conspicuous consumption of the ultra rich. Caribbean, present-day Brazil, and the southern United States took 4. There is a "standard" economic model behind this story, in advantage of the international market in slaves and developed dis- which the capital of individuals--formal and informal skills, tinct but also highly coercive regimes. land, location, and even accumulated savings--is deployed to 10. See Crosby (1986), 143­44. earn incomes, with the possibilities determined by technology, 11. See Craven (1932) and Morgan (1975). transactions costs, and market prices. See Alatas and Bour- 12. See Acemoglu, Johnson, and Robinson (2002), Acemoglu, guignon (2004). Johnson, and Robinson (2004), and Rodrik, Subramanian, and 5. Temple (2001). These institutions, for better and worse, lived Trebbi (2002). well beyond the Suharto era. 13. In addition to arguments noted above, see the econometric 6. Timmer (2005). analysis arguing that governance causes growth, but not the other way, in Kaufmann and Kraay (2002). Chapter 7 14. Haggard (1990) and Kang (2002). 1. The study finds that it is the quality of parent-child interac- 15. Liddle (1991) and MacIntyre (2001b), 259. tions, especially talking to the child, that matters the most (Hart 16. Geertz (1963), Elson (2001), 194­201, 280­81; Rock (2003), 14. and Risley 1995). 17. World Bank (1993). 2. Pollitt, Watkins, and Husaini (1997), Grantham-McGregor 18. Bates (1981). and Ani (2001), Stoltzfus, Kvalsvig, and Chwaya (2001), Black 19. Bates (1981), 122. (2003), Dickson and others (2000), Smith, Brooks-Gunn, and Kle- 20. Bates (1989). banov (1997). 21. Bowman (1991). 3. Shore (1997). 22. Fisman (2001b), MacIntyre (2001a), Stern (2003). 4. Rutter, Giller, and Hagell (2000), Karr-Morse and Wiley 23. Lipset (1959). (1977). 24. This conjecture is substantiated by the standard account of 5. Paxson and Schady (2005). the evolution of institutions in Britain, culminating in the Glorious 6. Pritchett (2004a). Revolution of 1688 (North and Thomas 1973, North and Weingast 7. Carneiro and Heckman (2003). 1989, and O'Brien 1993). 8. Three of the best-documented studies for the United States 25. See Brenner (1976), Tawney (1941), Moore (1966), and Ace- are on the Chicago Child-Parent Centers, a half-day program on a moglu, Johnson, and Robinson (2002b). large scale in the Chicago public schools; the Abecedarian program, 26. See Thompson (1963), Tilly (1995), and Tarrow (1998). a full-day year-round education program in Chapel Hill, North 27. Acemoglu and Robinson (2000), Acemoglu and Robinson Carolina, with followup to age 21; and the High/Scope Perry (2005). Preschool, a half-day program on a small scale in the Ypsilanti, 28. Lindert (2003), Lindert (2004). Michigan, public schools with follow up to age 40. The last two are 29. Other data on real wages and real rental rates on land sup- small randomized experiments. Studies on the Chicago program ports this claim; see O'Rourke and Williamson (2002). use statistical techniques to control for selection bias and other fac- 30. Li, Squire, and Zou (1998), Rodrik (1999b). tors that might confound interpretation of results. 31. This section is based on Andersson and Gunnarsson (2005) 9. Slide 5 of presentation on Heckman and Masterov (2004), at and Jäntti and others (2005). http://www.ced.org/docs/presentation_heckman1.pdf. 32. Wade (1990). 10. Young (2002). In the United States, Currie (2000) notes that, 33. Andersson and Gunnarsson (2005), 4. while all the children in the North Carolina Abecedarian project 34. Chen and Ravallion (2004). were at risk of mental retardation, positive effects were twice as 35. Montinola, Qian, and Weingast (1995), 51­52. large for the most disadvantaged children among them. Currie and 240 WORLD DEVELOPMENT REPORT 2006 Thomas (1999) find that gains in test scores associated with Head 35. See Glewwe, Kremer, and Moulin (2002), Glewwe, Ilias, and Start were greater for Hispanic children than for non-Hispanic Kremer (2003), Glewwe and others (2004), Kremer, Miguel, and whites. Thornton (2004), Miguel and Kremer (2004). 11. Grantham-McGregor and others (1991). 36. It is also important to take account of household behavior in 12. Deutsch (1998), Attanasio and Vera-Hernandez (2004). response to changes in school inputs. Das, Dercon, Habrayimana, 13. Paxson and Schady (2005). and Krishnan (2004) find that household spending and (nonsalary) 14. Scott-McDonald (2004). cash grants to schools are close substitutes with no impact on learn- 15. Doryan, Gautman, and Foege (2002). ing from anticipated increases in school funds. Unanticipated 16. Kirpal (2002). funds have significant learning impacts. 17. Many conditional cash transfers in Latin America already 37. Hanushek and Wößman (2005). have some of these features. 38. Ladd (2002). 18. Currie and Thomas (1995) find that gains in vocabulary and 39. The analysis is not able to separate the effects of private reading test scores faded out among black Head Start children schools from the effects of the incentives for greater effort gener- while they were still in elementary grades but not among whites ated by the voucher policy. The distinction is important because even though initial gains in test scores were the same for both effort can be encouraged also by awarding scholarships to students groups. Currie and Thomas (2000) attribute this to their finding attending public schools, as we saw with the Balshaki program. See that black children who attended Head Start go on to attend lower- Angrist and others (2002). quality schools than other black children but that the same is not 40. Chubb and Moe (1990). true for whites. 41. See McEwan (2000) on Chile. Hoxby (2002) finds improve- 19. King, Orazem, and Paterno (1999). ments from school choice from charter schools in Michigan and 20. UNESCO (2005). Arizona; Holmes, DeSimone, and Rupp (2003) find that competi- 21. Thirty-two more countries have too little data to assess tion from school choice in North Carolina improved test scores sig- (Bruns, Mingat, and Rakotomalala 2003 and FTI Secretariat 2004). nificantly. Cullen, Jacob, and Levitt (2000) and Cullen, Jacob, and 22. See Wodon (2005) for Niger and Senegal--in Senegal, Levitt (2003) found no impact from school choice in Chicago. See when the school is located less than 15 minutes away from home, also Witte (2000). Hoxby (2000) finds significant productivity gains the probability of enrollment for boys goes up by 30 percentage for a representative sample across the United States, while Roth- points as compared with having the school more than one hour stein (2005) uses the same data to find far more modest results. away. Burney and Irfan (1995) found negligible impacts of prox- 42. McEwan and Carnoy (2000) and Hsieh and Urquiola imity. (2003). 23. The study finds that children age two to four, in 1974, had an 43. Lindert (2004). additional 0.12 to 0.19 years of education and 1.5 to 2.7 percent 44. In Brazil, a 1997 reform set a minimum floor on education higher wages for each new school built per 1,000 children (Duflo spending in all regions, which led to an increase in primary school 2001). Other studies that find positive impacts of expanding school enrollments from 55 to 85 percent in only six years (World Bank infrastructure include Birdsall (1985) in urban Brazil, DeTray 2005f). (1988) and Lillard and Willis (1994) in Malaysia, Lavy (1996) in 45. See Grindle (2004) and Fiszbein (2005) for examples in Ghana, and Case and Deaton (1999) in South Africa. Latin America. 24. Pritchett (2004a). 46. World Bank (2003j). 25. Kremer, Moulin, and Namunyu (2002). 47. Wößmann (2004) argues for giving decision-making 26. In Brazil in 2001, the Bolsa Escola program was spending authority to those with the most relevant information and the low- almost $700 million a year and reaching 8.6 million school children, est prospects for personal gain. He finds that student performance one-third of all primary school children in Brazil. In Bangladesh, the improves with central control over the curriculum, budget, and Food for Education budget in 2000 was $77 million, benefiting 2.2 exams; delegation of process and personnel decisions to the school; million children, 13 percent of total school enrollment (Morley and greater say for teachers in the selection of appropriate teaching Coady 2003). In Mexico, according to government figures, by 2004, methods; regular scrutiny of students' education performance; and Opportunidades was spending approximately $2.3 billion annually, parental interest in education content. Competition from private or about 1.5 percent of total expenditture, and reaching 5 million education institutions and the presence of teacher unions, on the households--almost 20 percent of all families in Mexico. other hand, have adverse effects. 27. Morley and Coady (2003) and Schultz (2004). 48. See World Bank (2003j) and Pritchett (2004a). 28. There are some countries in which gender disparities require 49. World Bank (2003j) for South Africa; Duan (2005). attention to boys even for primary schooling (Mongolia) and quite 50. World Bank (2004k). a few for higher levels of attainment (Brazil, Philippines). 51. World Bank (2004k). 29. Herz and Sperling (2004). 52. Thailand's Ministry of Public Health and World Bank 30. World Bank (2004d). (2005). 31. Pritchett (2004a). 53. Rawlings (2004). 32. A score of more than one standard deviation below the 54. See Barber, Bertozzi, and Gertler (2005) for Mexico; Das and OECD mean is considered poor performance. Hammer (2004) and Das and Hammer (2005) for India; Barber, 33. See Hanushek (1986) and Hanushek (1996). Gertler, and Harimurti (2005) for Indonesia; and Leonard and 34. Wößmann (2000). Masatu (2005) for Tanzania. Endnotes 241 55. World Bank (2003j). democracy, the degree of ethnic homogeneity, and societal beliefs 56. Gertler and Barber (2004). about the causes of poverty. 57. World Bank (2005f). 79. This scheme covered about 10 percent of the unemployed 58. World Bank (2004h). labor force, so it was usefully supplemented by workfare (World 59. See World Bank (2001c) for Vietnam, World Bank (2005f) Bank 2000b). for Cambodia, and Lewis (2002) on ECA countries. 80. Coady, Grosh, and Hoddinott (2004). 60. Schieber (2005). 81. See World Bank (2002a), World Bank (2003d), and World 61. Gertler and Gruber (2002) find that while Indonesian fami- Bank (2003e). lies were able to self-insure reasonably well the costs of minor ill- 82. Social workers assess 52 separate factors grouped in 7 ness (up to 70 percent of the income loss associated with these), dimensions (identification, health, education, family dynamics, they were able to insure only 38 percent of the income loss associ- housing, work, and income). See Chile's Ministry of Planning ated with illness that severely limits physical functioning. (2004); on Bangladesh, see Hashemi (2000). 62. Sekhri and Savedoff (2005). 83. On Argentina, see Jalan and Ravallion (1999); on the Maha- 63. Savedoff (2004). rashtra scheme, Ravallion (1991); on Bolivia, Newman, Jorgensen, 64. Escobar (2005); Escobar and Panopoulou (2002); Castaneda and Pradhan (1992). (2003). 84. The analysis showed a decline in poverty of 11 percent in the 65. Uganda's use rates had dipped with the introduction of fees PROGRESA communities and an increase in poverty in the control in the 1990s, and although Uganda's poor were formally exempt, group. they often paid as much as other users. Deininger and Mpuga 85. See Bourguignon, Ferreira, and Leite (2004) on Brazil's Bolsa (2004) estimate that the revenues lost to the health system from the Escola; see Rawlings (2004) and Morley and Coady (2003) on Mex- elimination of user fees in 2001 were smaller than the value of ben- ico's PROGRESA; and see World Bank (2005d) on Cambodia's efits from the reduction in foregone earnings, thanks to a healthier lower secondary school program. population. 86. United Nations (2002). 66. Thailand's Ministry of Public Health and World Bank 87. See Holzmann and Hinz (2005) and World Bank (2001b). (2005). 88. Except for the implicit constraint imposed by a means-tested 67. See Chaudhury, Hammer, and Murrugarra (2003) for Arme- scheme (Barrientos 2005). nia, World Bank (2005f) for China, and Meesen and Van Damme 89. Case and Deaton (1998). (2004) for Cambodia. 90. Barrientos (2005), Rawlings (2004), De Ferranti and others 68. Socialist Republic of Vietnam and World Bank (2005). (2004). 69. Preker and Carrin (2004), Atim (1999). 91. See James (2000) for the general argument, van der Berg and 70. Ranson and others (2005). Brendenkamp (2002) on South Africa, and Paes de Barros and de 71. World Bank (2004k), World Bank (2003j), Banerjee, Deaton, Carvalho (2004) on Brazil. and Duflo (2004), Chaudhury and Hammer (2004) on Bangladesh. 92. Lund (1999) and Atkinson (1995). 72. World Bank (1997a). 93. Hoogeveen and others (2004). 73. The equity- and opportunity-enhancing role of social pro- tection is the conceptual underpinning of the Bank's social Chapter 8 protection sector strategy (World Bank 2001e, Holzmann and 1. See Haber (2001). Jorgensen 2001). Other sources are World Bank (2003f), Devereux 2. Hellman, Jones, and Kaufmann (2003). (2001), and Ravallion (2003). 3. The separation of powers between the executive, legislative, 74. Improved access to credit is reported for South Africa and judicial arms of government aims to combat the dangers of (Ardington and Lund 1995) and Brazil (Schwarzer and Querino investing state power in one person or group, with each branch 2002), where the electronic banking card issued by the program holding the others accountable through differing "checks and bal- is often used as proof of creditworthiness. A significant share of ances." This system also arguably maintains competition within rural pension beneficiaries in Brazil report using part of the pen- political institutions. See Haber (2001). sion to purchase seeds and agricultural tools (Delgado and Car- 4. Asian Development Bank (2003), 24­25; Garapon (2003), doso Jr. 2000); others report investing in improvements in their Russel and O'Brien (2001). housing. Children and older people in beneficiary households 5. The Constitution of the Federal Democratic Republic of had better health in South Africa (Case 2001) and enrollment Ethiopia (1995). rates of school-age children were higher among pension benefi- 6. Tien Dung (2003), 8. ciary households in both South Africa (Duflo 2003) and Brazil 7. See Buscaglia and Dakolias (1999). (de Carvalho Filho 2000). 8. Ringera and others (2003). 75. Kanbur (2005). 9. See Langseth and Stolpe (2001), Dakolias and Thatchuk (2000). 76. Lindert (2004). 10. For East Asia, see Asian Development Bank (2003). 77. Esping-Andersen (1990) argues, for example, that the suc- 11. See www.tsj.gov.ve for an explanation of the judicial portal. cess of the welfare system in continental Europe is based on its uni- 12. The important distinction here is between campaigns that versality. impede judicial independence (targeting unpopular decisions) and 78. Alesina and Glaeser (2004) suggest that the different choices those that serve as a check on judicial misbehavior (exposing judi- depend on political and institutional factors, including the form of cial corruption). See Asian Development Bank (2003), 8­9. 242 WORLD DEVELOPMENT REPORT 2006 13. See World Bank (2004g), World Bank (2004c), and Ham- factors, tenancy increases the risk of poverty by nearly 30 percent mergreen (2004). compared with being a landowner (World Bank 2001f). 14. It is important to note that a vast array of practices, systems, 42. Cardenas (2003), Conning and Robinson (2002). and traditions have been defined as informal, traditional, or cus- 43. Deininger (forthcoming). tomary law, all existing within vastly differing contexts. The use of 44. Deininger and Olinto (2000) go further and suggest that "informal" is used in contrast to "formal" state systems and is not asset inequality is a causal determinant of growth performance. meant to imply that such institutions are procedurally informal. 45. Intermediaries were essentially tax collectors who received 15. World Bank (2004j), 12. land rights (in different forms, depending on the state) to"interme- 16. Augustinus (2003). diate" the flow of resources between cultivators and the colonial 17. See Centre for Housing Rights and Evictions (2004). administration. 18. Mamdani (1996). 46. Appu (1997), 196. 19. Fortman (1998). 47. Banerjee, Gertler, and Ghatak (2002). In West Bengal, efforts 20. See Buscaglia (1997) and Mattei (1998). See also Kranton in the late 1970s and 1980s to register sharecroppers and codify and Swamy (1999) and Pistor and Wellons (1999). their rights were backed by the ruling left parties (Appu 1997). 21. The sungusungu have avoided cooption by the state, and 48. Building on spontaneous transactions in which either the their lack of knowledge of the law and people's rights can lead to tenant or landlord buys out the other party's interest, the govern- abuse. See Mwaikusa (1995), 166­78, and Bukurura (1994). ment is considering ways to facilitate such buyouts in a more sys- 22. Buscaglia (1997). tematic and equitable fashion, thereby allowing one party to 23. See Bush (1979) discussion on different African nations' obtain full ownership rights to the land (Nielsen and Hanstad attempts at dynamic integrations. 2004). 24. Interestingly, a hundred years later, the 1927 Black Adminis- 49. De Janvry and Sadoulet (2002). tration Act, which recognized a dual system of official law, formed 50. Scott (1976), Gunning and others (2000), Deininger, the basis for separating whites and Africans under apartheid. See Hoogeveen, and Kinsey (2004), and Kinsey and Binswansger Van Niekerk (2001). (1993). 25. See Bennett (1999) for a discussion of this issue. 51. De Ferranti and others (2004). 26. More than two-thirds of the European Court of Human 52. See De Janvry and Sadoulet (1989), Jonakin (1996), Alston, Rights' case load between 1999 and 2003 was about violations of Libecap, and Mueller (1999). the right to a fair trial, in particular, the excessive length of court 53. See, for instance, Feder (1988) and Jacoby, Li, and Rozelle proceedings. (2002). Some studies report a doubling of investment and large 27. Between 2002 and 2004, 14,992 mediation cases were han- gains in land values (30­80 percent) with more secure tenure dled. See Malik (2005). (World Bank 2003i). To the extent that highly visible investments, 28. Feierstein and Moreira (2005). such as trees or fences, may be a means to establish landownership 29. Das (2004). rights, causality might run the other way (Brasselle, Gaspart, and 30. See Human Rights Watch (2000). Platteau 2002). A recent study from Ethiopia demonstrates that 31. See Greenwood and others (1998), Gottfredson (1998), tenure insecurity indeed encourages investment in trees that have Tremblay and Craig (1995), Waller, Welsh, and Sansfaçon (1999), little impact on productivity, while higher levels of tenure security Waller and Sansfaçon (2000), World Bank (2003a). are unambiguously associated with productivity-enhancing invest- 32. World Bank (2003a), Council for Scientific and Industrial ments (Deininger and others 2003). Research (2000). 54. De Ferranti and others (2004). 33. Graham and Bowling (1995), Shaw (2001). 55. See Palmade (2005) on India. See Field (2003) on Peru. 34. Sloth-Nielsen and Gallinetti (2004), Bottoms (1990), Shaw 56. Payne (2002), Durand-Lasserve (2003). (2001). 57. The three levels are as follows: (1) the right to somewhere to 35. See Harber (1999), Shaw (2004). live (either on the occupied plot or an alternative should relocation 36. For further details see the project Web site at http://www be necessary); (2) a 30-year lease transferable in the event of death; .bac.co.za/Web%20Content/Projects/Tiisa%20Thuto/Intro%20 and (3) a 199-year lease effectively conferring ownership rights Template%20for%20Tiisa%20Thuto.htm. upon survey and payment for the land. 37. Penal Reform International assisted in establishing commu- 58. World Bank (2003i). nity service orders as alternative sentencing in Zimbabwe, Kenya, 59. Land regulation can also work against the urban poor. Malawi, Uganda, Zambia, Burkina Faso, Congo, the Central African When formal land development parameters (such as minimum Republic, and Mozambique. plot sizes, setbacks, and infrastructure servicing standards) are not 38. Morrison, Ellsberg, and Bott (2004). benchmarked against affordability levels for the majority of the 39. Council for Scientific and Industrial Research (2000). urban population, the poor are excluded from access to formal 40. Mtani (2002). landownership. Bertaud and Malpezzi (2001), Payne and Majale 41. See Binswanger, Deininger, and Feder (1995). In India, (2004). employment in agricultural wage labor (as opposed to self- 60. Gravois (2005) employed cultivation) is strongly correlated with poverty (Kijima 61. Brasselle, Gaspart, and Platteau (2002). and Lanjouw 2004). Similarly, in Thailand, controlling for other 62. World Bank (2003i) Endnotes 243 63. Historically, distress sales have played a major role in the 85. Lifeline tariffs mean that rates increase after surpassing a accumulation of land by large manorial estates in China (Shih certain consumption threshold (the level deemed necessary to meet 1992) and in early Japan (Takeoshi 1967) and by large landlord basic household needs). estates in Punjab (Hamid 1983). The abolition of communal tenure 86. Wodon, Ajwad, and Siaens (2005) and Estache, Foster, and and the associated loss of mechanisms for diversifying risk are Wodon (2001). among the factors underlying the emergence of large estates in 87. Estache, Foster, and Wodon (2001). Central America (Brockett 1984). 88. Kariuki and Schwartz (2005). 64. World Bank (2003i). 89. Gulyani, Talukdar, and Kariuki (2005). 65. World Bank (2003i). 90. Estache (2003). 66. For Sudan, see Kevane (1996); for Colombia, Deininger, 91. Irwin and Yamamoto (2004). Castagnini, and González (2004). 92. See Chisari, Estache, and Romero (1999) and Guasch 67. World Bank (2003i). (2003). 68. Long-term fixed rental contracts are the most efficient from an economic perspective because they are compatible with incen- Focus 5 on taxation tives for effort and investment but various imperfections in mar- 1. Bird, Martínez-Vazquez, and Torgler (2004). kets make these rare (chapter 5). 2. Bird, Martínez-Vazquez, and Torgler (2004). 69. In most states, lack of political support for the legislation 3. Moore (2001); Davis, Ossowski, and Fedelino (2003). allowed landlords to subvert the intent of the laws. West Bengal is 4. Moore (2001). an exception--a tenant registration campaign had strong political 5. Gupta and others (2003). support and succeeded in protecting tenants (Appu 1997). 6. De Ferranti and others (2004). 70. De Janvry and Sadoulet (2002). 7. Bird and Slack (2002). 71. De Ferranti and others (2005). 8. Rudnik and Gordon (1996). 72. World Bank (2003j). 9. Boskin (1977). 73. See Van de Walle and Cratty (2004) on Vietnam. See Jalan 10. Rajan and Zingales (2003). and Ravallion (2002) on China. 11. Prud'Homme (1990). 74. See Jalan and Ravallion (2003). The findings also indicate 12. Bird (1991). that the health gains largely bypass children in poor families with poorly educated mothers. Chapter 9 75. See Malmberg Calvo (1994) on African countries; Ilahi and 1. Smith (1776), 128. Grimard (2000) and Ilahi and Jafarey (1999) on Pakistan; World 2. See Tilly (1998) on opportunity hoarding by middle groups. Bank (2001g) on electricity and gas; and Khandker, Lavy, and 3. World Bank (2004b), Perotti and Volpin (2004). Filmer (1994) on Morocco. 4. See De Soto (2000), Glaeser, Sheinkman, and Shleifer (2003), 76. Some 60 percent of the rural population in Africa lives in and Haber, Noel, and Razo (2003). areas of good agricultural potential, but with poor market 5. See Morck, Wolfenzon, and Yeung (2004) and Claessens, access, while only 23 percent live in areas of good agricultural Djankov, and Lang (2000). potential and good market access. The remainder have both 6. Morck, Stangeland, and Yeung (2000), Morck and Yeung poor market access and poor agricultural potential (Byerlee and (2004). Kelley 2004). 7. On developed countries, see Rajan and Zingales (2003). 77. Between 1970 and 1998, roads (in km) increased by 8.3 per- 8. Halac and Schmukler (2003) and Perotti and Feijen (2005). cent per year (World Bank 2005c). 9. See Velasco (1988), Valdés-Prieto (1992), Haber and Kantor 78. World Bank (2005c). (2004), Claessens and Pohl (1994), and Perotti (2002). Also see box 79. De Ferranti and others (2004). 9.2 on Russia. 80. Economies from large production and delivery have dimin- 10. Haggard, Lim, and Kim (2003), 87. See also Siegel (2003) for ished in some activities, especially telecommunications and power a discussion of the importance of political connectedness in the generation. And regulatory innovation made unbundling possible. Republic of Korea. Unbundling promoted competition by separating activities in 11. Feijen and Perotti (2005); Claessens and Perotti (2005). which economies of scale are important (for example, electricity 12. Bertrand, Schoar, and Thesmar (2004). transmission and distribution) from activities in which it is less so 13. Braverman and Guasch (1986). (electricity generation). See World Bank (1994) and World Bank 14. See discussion in Armendáriz de Aghion and Morduch (2004l). (2005), Pulley (1989), and Meyer and Nagarajan (2000) for the 81. World Bank (2004f) and chapter 10. poor repayment performance, and Burgess and Pande (2004) for 82. According to the Latinobarómetro, the proportion of positive impacts on the poor of social banking. respondents who said they thought privatization had benefited 15. Honohan (2004). their country dropped steadily from 46 percent in 1998 to 21 per- 16. The discussion of the Czech and Polish stock markets builds cent in 2003 (Lagos 2005). on Glaeser, Johnson, and Shleifer (2001). 83. Estache, Foster, and Wodon (2001). 17. Rajan and Zingales (2003), 159. 84. Estache, Foster, and Wodon (2001). 18. Guiso, Sapienza, and Zingales (2004). 244 WORLD DEVELOPMENT REPORT 2006 19. Roland and Verdier (2000) and Claessens and Perotti (2005). minimum wage ends up being regressive, improving the living 20. See, for example, Diamond (1981), Blanchard (2004), conditions of families in the middle and the upper part of the Bertola (2003), Agell (2002), among others. income distribution with net losses for those at the bottom." 21. For discussions of India's labor market regulation and its 41. See the ILO Web site (www.ilo.org) for a description of labor adverse effects, see Stern (2002), Hasan, Mitra, and Ramaswamy standards. As an example of the range of policy choices for the spe- (2003), and Besley and Burgess (2004). For example, industrial sec- cific case of child labor, see ILO (2003) and Burra (1995). tor legislation requires employers with more than 100 workers to 42. See World Bank (2004a). Almost 80 percent of Cambodia's seek prior approval of the government before dismissing workers. overseas buyers rated labor standards as one of their top priorities This has earned the country a 90 out of 100 on the World Bank's in sourcing decisions. They also stated that standards have had pos- Doing Business in 2005 "difficulty in firing index" (World Bank itive effects on accident rates, workplace productivity, product (2005e). quality, turnover, and absenteeism. 22. See Kingdon, Sandefur, and Teal (2005). Strict enforcement 43. López (2004). of labor market regulations in South Africa--even for small 44. There are two ways to measure outcomes: ex ante simula- firms--can also contribute to unemployment by inhibiting the tion using CGE (Computable General Equilibrium) analysis and development of informal sector firms. ex post econometric analysis relying on household survey data. In 23. In 1997­98, 83 percent of nonagricultural employment in the absence of such analysis, it is hard to predict the impact of India was informal (ILO 2002). trade reform on poverty or equity. A number of studies related to 24. Kugler (2004). the themes of this section can be found in Hertel and Winters 25. Maloney (1999), Maloney and Nuñez Mendez (2004). (2005). 26. Chen, Vanek, and Carr (2004). 45. Schiff and Valdés (1998), 30. 27. ILO (2002). 46. The CGE analysis generates price and wage changes that 28. Besley and Burgess (2004). include the direct price effect of trade policy changes and 29. The unemployment figure relies on the broad definition of the "second-round" indirect effects on factor returns and nontraded labor force (employed + searching and nonsearching unemployed). goods prices. Certain dynamic gains from greater trade openness Using the strict labor force measure (employed + searching unem- are not captured. For instance, trade could bring new technolo- ployed), the unemployment rate was 32 percent in 2003. Data is gies and innovations that boost long-term productivity (Raval- from the 2003 Labor Force Survey cited by Kingdon, Sandefur, and lion 2004b). Teal (2005). "The ratio of non-agricultural informal sector em- 47. Winters, McCulloch, and McKay (2004); Mundlak and Lar- ployment to unemployment is 0.7 in South Africa but 4.7 in Sub- son (1992); Lloyd and others (1999); McKay, Morrissey, and Vail- Saharan Africa, 7.0 in Latin America and ll.9 in Asia." (Kingdon, lant (1997). Sandefur, and Teal 2005). 48. Minot and Goletti (1998). 30. Estimates suggest high levels of unemployment (20 to 30 49. See Bates (1981) and chapter 6 for Ghana, and CUTS (Con- percent for urban males), but there are measurement problems that sumer Unity and Trust Society) (2003) for Malawi. bias the estimates upward. 50. McMillan, Rodrik, and Horn Welsh (2002). 31. Rodrik (1999b). 51. See Hanson (2003). Other research attributes some of the 32. Galli and Kucera (2004). benefits of trade reform in border states to higher levels of human 33. The unions then played a critical role pushing the social and and industrial capital and better communications and transporta- economic agenda toward more welfare-oriented policies (Fishman tion infrastructure (Chiquiar 2005). 1990, Boix 1998, and Boix 2005). 52. See Nicita (2004) on Mexico and Goetz (1992); Interna- 34. Some might argue that the Scandinavian systems are not tional Fund for Agricultural Development (2001); Minot (1998); easily replicable, on the grounds that they rely on extraordinary lev- and Thomas and others (1999) on Indonesia. els of trust and social capital. In other words, the political condi- 53. Arulpragasam and others (2004), World Bank (2003c). tions necessary to obtain Scandinavian-type social democracy and 54. Annamalai and Rao (2003), India Today (2004). "solidaristic bargaining" might be difficult to achieve in developing 55. Palmade (2005). countries, despite their potential economic benefits. See Moene and 56. Carruthers, Bajpai, and Hummels (2004). Wallerstein (2002). But this was not always the case; high levels of 57. Wood (1997). trust emerged from widespread conflict in the mid-1930s. 58. See Wood (1997), Sánchez-Páramo and Schady (2003), and 35. Nickell (1997). De Ferranti and others (2004). 36. Boeri (2002); Blunch and Verner (2004); Bover, Bentolila, 59. Topalova (2004). and Arellano (2002); Chaykowsky and Slotsve (2002); Panagides 60. World Bank (2004i), Cord and Wodon (2001). and Patrinos (1994). 61. McMillan, Rodrik, and Horn Welsh (2002). 37. Bertola, Blau, and Kahn (2001). 62. For a brief survey of the different generations of models of 38. Kingdon, Sandefur, and Teal (2005). crises, see Krugman (1999). For selected references see Aghion, 39. Damiani (2003). Bacchetta, and Banerjee (2001), Chang and Velasco (2001), Krug- 40. See Neumark, Cunningham, and Siga (forthcoming) for a man (1979), Obstfeld (1996), and Velasco (1996). discussion of how Brazil's minimum wage does not seem to have 63. Acemoglu and others (2003). lifted family incomes at the lower points of the income distri- 64. On Bolivia, see Morales and Sachs (1998); on Israel, see bution. In Colombia, Arango and Pachón (2004) find that "the Bruno (1993). Endnotes 245 65. Blejer and Guerrero (1990). tances spend significantly more on housing, which has positive 66. Ferreira and Litchfield (2001). indirect effects on wages, business, and employment opportunities. 67. See also Diwan (2002). Yang (2004) finds that Filipino households receiving higher remit- 68. Rodrik (1999a). tances, because of positive exchange rate shocks, had greater child 69. Honohan and Klingebiel (2000). schooling, reduced child labor, more hours worked in self-employ- 70. Halac and Schmukler (2003). ment, and greater entry into relatively capital-intensive enterprises. 71. See De Ferranti and others (2004), Lanjouw and Ravallion 10. Ehrenreich and Hochschild (2003). (2005). 11. On the phenomenon of brain waste, see Mattoo, Neagu, and 72. Bruno (1993). Ozden (2005); on brain drain, see Faini (2003) and Schiff (2005). 73. Perry (2003). 12. Mode IV is one of four interrelated modes of supply of serv- 74. Robinson (2003); see focus 5 on taxation for discussion of ices across borders considered in the GATS. social-fiscal contracts. 13. As of May 2004, only 25 countries, mostly migrant-sending, had ratified the convention. Focus 6 on regional inequality 14. An interesting example of innovative partnerships to facili- 1. Massey (2001). tate remittance flows is the New Alliance Task Force launched by 2. Shepherd and others (2005); Massey (2001). the Federal Deposit Insurance Corporation (FDIC) and Mexican 3. Psacharopoulos and Patrinos (1994); Hall and Patrinos (2005); Consulate of Chicago, which aims to improve access to the U.S. Vakis (2003). banking system, provide financial education, and develop products 4. de Haan (2005). with remittance features. 5. Galiani and Schargrodsky (2002). 15. Smuggling and trafficking are a multibillion dollar industry 6. Manor (1999). increasingly run by criminal networks. The United Nations Inter- 7. Fox (1990). national Organization for Migration (2000) estimated that up to 2 8. Ferreira (2004). million women and children are trafficked globally every year. 9. Funck and Pizzati (2003). 16. One option to address these losses is to lock development 10. Shepherd and others (2005); Willanakuy (2004). assistance to poor countries hurt by specific measures into the 11. Ross (2005). WTO agreements on these measures; see Ricupero (2005). 17. The current tariff structure could change through both Chapter 10 bilateral and multilateral negotiations. For instance, if the Central 1. Pogge (2004). American Free Trade Agreement is approved by the U.S. Congress, 2. Chauvet and Collier (2004) estimated that the cost, to a coun- most textiles from countries such as Honduras and El Salvador try and its neighbors, of a country descending into the status of would benefit from tariff-free entry into the United States, now the low-income country under stress (LICUS), as defined by the World case for some items under existing unilateral preferences. Bank, is in present value terms approximately $80 billion, and that 18. See for example Birdsall (2002). this cost was mostly borne by neighbors. 19. Price-fixing by international cartels brings significant losses 3. These conclusions are consistent with the findings of the to developed- and developing-country consumers alike. Analysis of World Commission on the Social Dimensions of Globalization six high-profile cartels uncovered in the 1990s (vitamins, citric (2004). acid, bromine, seamless steel tubes, graphite electrodes, lysine) 4. Goldin and others (forthcoming). indicated that the estimated price increases ranged from 10 percent 5. That is, 4 percent not 4 percentage points. for stainless steel tubes to 45 percent for graphite electrodes, and 6. Stark and Bloom (1985); Cox, Eser, and Jimenez (1998). that cumulative overcharges to developing countries over the life of 7. The assumption that income after migration is higher than the six cartels ranged from $3 billion to $7 billion, depending on income forgone does not always hold. Adams finds that income the calculation method. See Connor (2001), OECD (2000), and levels would have been higher without migration in three Egyptian World Bank (2003b). villages and would have been the same in four rural districts in 20. Ronchi (2001) and Ronchi (2002). Pakistan (Adams 1989, 1992). Barham and Boucher (1998) find 21. Lewin, Giovannucci, and Varangis (2004). essentially similar results for three neighborhoods in Nicaragua. 22. For more information, see www.ethicaltrade.org and On the potential impact on income inequality, Mendola (2004) www.fairlabor.org. finds that remittances from members of households with large 23. Fung, O'Rourke, and Sabel (2001). land holdings in rural Bangladesh are correlated with adoption of 24. "Trade-Related Aspects of Intellectual Property Rights," new agricultural technologies, thus leading to higher productivity Annex 1C of the Agreement Establishing the World Trade Organi- for already better-off households and a possible increase in zation. inequality. 25. Lanjouw and Jack (2004). 8. McKenzie and Rapoport (2004). 26. Sell (2003). 9. A number of studies by the World Bank Research Program on 27. Fink and Reichenmuller (2005). International Migration and by others document the positive 28. These are the agreements between the United States and impact of remittances. See Taylor (1992), Taylor and Wyatt (1996), Morocco (2004), Bahrain (2004), and the Dominican Republic- and Yang (2004) for examples of easing of credit constraints. CAFTA (signed but not yet approved by the U.S. Congress). Adams (2005) finds that Guatemalan households receiving remit- 29. Claessens and Underhill (2004). 246 WORLD DEVELOPMENT REPORT 2006 30. World Bank (2005g) and UNCTAD (2004). 41. See the G-24 Communique, available at http://web. 31. See Claessens, Underhill, and Zhang (2003) and Bhat- worldbank.org/WBSITE/EXTERNAL/DEVCOMMEXT/0,, tacharya and Griffith-Jones (2004). menuPK:60001663~pagePK:64001141~piPK:64034162~ 32. We discuss representation on the World Bank and IMF theSitePK:277473,00.html. Boards below. 33. O'Sullivan and Christensen (2005). Focus 7 on drug access 34. Moore (2004). 1. See Lanjouw and MacLeod (2005) and World Health Organi- 35. McGillivray (2005). zation (2004). 36. Updating the results for 2001 led to similar results (Levin 2. See Kremer and Glennester (2004) and Barder (2004). 2005). 3. See Masters (2005). 37. The findings of Burnside and Dollar (2000) and Collier and 4. See an interesting article by Maurer, Sali, and Rai (2004) on Dollar (2001), Collier and Dollar (2002) are not robust to changes how an open-source approach could work. in functional form, the specification of the interaction terms, and 5. World Health Organization (2004). sample selection; see Hansen and Tarp (2001), Easterly, Levine, and 6. Based on data from IMS HEALTH Global Services at http:// Roodman (2004), and Dalgaard, Hansen, and Tarp (2004). These www.ims-global.com. studies also point to the importance of climate, among other fac- 7. This proposal is detailed in Lanjouw (2002). tors. 8. For legal details see Lanjouw (2002). 38. Levin and Dollar (2005). 39. These figures include official development assistance Epilogue (ODA) provided by countries that are members of the Develop- 1. This is evident from the very title of Bauer (1971). ment Assistance Committee (DAC) of the Organisation for 2. World Bank (1980). Economic Co-operation and Development (OECD). Non-DAC 3. World Bank (1990). countries also provide ODA; the largest non-DAC donors are 4. World Bank (1997c). Saudi Arabia (providing $2.4 billion in 2003 out of a total of $3.4 5. World Bank (2002b). billion), the Republic of Korea ($366 million), the United Arab 6. World Bank (2001h). Emirates ($188 million), and Kuwait ($133 million). 7. See Stern, Dethier, and Rogers (2005) for a detailed treatment 40. Eighteen countries qualify immediately, and as many as of this synthesis. another 20 could qualify over time. See the G-8 Finance Ministers' 8. World Bank (2005h). Conclusions on Development, London, June 10­11, 2005 (G-8 9. World Bank (2003j). Finance Ministers, 2005) at http://www.hm-treasury.gov.uk/oth- erhmtsites/g7/news/conclusions_on_development_110605.cfm. 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"Consumption and Liquidity Constraints: An bridge University Press. Empirical Investigation."Journal of Political Economy 97(2):305­46. Selected Indicators Measuring equity 277 Introduction Table A1. Poverty Table A2. Income/consumption inequality measures Table A3. Health Table A4. Education Technical notes Selected world development indicators 289 Introduction Classification of economies by region and income Table 1. Key indicators of development Table 2. Millennium Development Goals: eradicating poverty and improving lives Table 3. Economic activity Table 4. Trade, aid, and finance Table 5. Key indicators for other economies Technical notes Measuring equity This report has concerned itself with equity, a concept which mortality, and years of education in a slightly different format we have defined to mean equality of opportunities and the than what we are normally used to seeing for as many coun- avoidance of absolute deprivation. As we made clear in the tries in the world as possible. Table A1 presents poverty rates report, the focus is mostly on inequality of opportunity, and using national poverty lines as well as those using the interna- much less on overall inequality in a one-dimensional space, tional $1 and $2 per day poverty lines; information for the such as income or education. We might be quite sanguine national poverty line is also presented for urban and rural about certain types of inequality across people if, for exam- breakdowns of the population. Table A2 presents alternative ple, their outcomes varied for reasons that had to do mainly inequality measures to the commonly used Gini Index, fol- with their own efforts. But we are concerned with systematic lowed by evidence on inequality of land. In Table A3, we pre- differences in opportunities between individuals and groups sent infant mortality rates for more than 50 countries by the of people due to different "circumstances" not under their sex of the infant, the education level of the mother, the loca- control, i.e. when these groups are distinguishable from one tion (urban or rural) of the family, and the ranking of the another only in characteristics that in some sense can be household by an asset index. Finally, in Table A4, we present argued to be "morally irrelevant" to their opportunities and educational attainment by location and gender, but also pre- outcomes in life. sent measures of inequality in years of schooling, along with To give the audience a sense of inequality of opportuni- the share of this inequality that is attributable to gender and ties, we chose to present data on income/consumption, infant location. 277 278 WORLD DEVELOPMENT REPORT 2006 Table A1. Poverty National poverty line International poverty line Population below Population below Population Poverty Population Poverty the poverty line the poverty line below gap at below gap at Survey Rural Urban National Survey Rural Urban National Survey $1 a day $1 a day $2 a day $2 a day year % % % year % % % year % % % % Albania 2002 29.6 19.8 25.4 .. .. .. .. 2002 a <2 <0.5 11.8 2.0 Algeria 1995 30.3 14.7 22.6 1998 16.6 7.3 12.2 1995 a <2 <0.5 15.1 3.8 Angola .. .. .. .. .. .. .. .. .. .. .. .. .. Argentina 1995 .. 28.4 .. 1998 .. 29.9 .. 2001 b 3.3 0.5 14.3 4.7 Armenia 1998­99 50.8 58.3 55.1 2001 48.7 51.9 50.9 2003 a, c <2 <0.5 31.1 7.1 Australia .. .. .. .. .. .. .. .. .. .. .. .. .. Austria .. .. .. .. .. .. .. .. .. .. .. .. .. Azerbaijan 1995 .. .. 68.1 2001 42.0 55.0 49.0 2001 a 3.7 0.6 33.4 9.1 Bangladesh 1995­96 55.2 29.4 51.0 2000 53.0 36.6 49.8 2000 a 36.0 8.1 82.8 36.3 Belarus 2000 .. .. 41.9 .. .. .. .. 2000 a <2 <0.5 <2 <0.5 Belgium .. .. .. .. .. .. .. .. .. .. .. .. .. Benin 1995 25.2 28.5 26.5 1999 33.0 23.3 29.0 .. .. .. .. .. Bolivia 1997 77.3 53.8 63.2 1999 81.7 50.6 62.7 1999 a 14.4 5.4 34.3 14.9 Bosnia & Herzegovina 2001­02 19.9 13.8 19.5 .. .. .. .. .. .. .. .. .. Brazil 1996 54.0 15.4 23.9 1998 51.4 14.7 22.0 2001 b 8.2 2.1 22.4 8.8 Bulgaria 1997 .. .. 36.0 2001 .. .. 12.8 2003 a, c <2 <0.5 6.1 1.5 Burkina Faso 1994 51.0 10.4 44.5 1998 51.0 16.5 45.3 1998 a 44.9 14.4 81.0 40.6 Burundi 1990 36.0 43.0 36.4 .. .. .. .. 1998 a 54.6 22.7 87.6 48.9 Cambodia 1997 40.1 21.1 36.1 1999 40.1 13.9 35.9 1997 a 34.1 9.7 77.7 34.5 Cameroon 1996 59.6 41.4 53.3 2001 49.9 22.1 40.2 2001 a 17.1 4.1 50.6 19.3 Canada .. .. .. .. .. .. .. .. .. .. .. .. .. Central African Rep. .. .. .. .. .. .. .. .. 1993 a 66.6 38.1 84.0 58.4 Chad 1995­96 67.0 63.0 64.0 .. .. .. .. .. .. .. .. .. Chile 1996 .. .. 19.9 1998 .. .. 17.0 2000 b <2 <0.5 9.6 2.5 China 1996 7.9 <2 6.0 1998 4.6 <2 4.6 2001 a 16.6 3.9 46.7 18.4 Hong Kong, China .. .. .. .. .. .. .. .. .. .. .. .. .. Colombia 1995 79.0 48.0 60.0 1999 79.0 55.0 64.0 1999 b 8.2 2.2 22.6 8.8 Congo, Dem. Rep. .. .. .. .. .. .. .. .. .. .. .. .. .. Congo, Rep. .. .. .. .. .. .. .. .. .. .. .. .. .. Costa Rica 1992 25.5 19.2 22.0 .. .. .. .. 2000 b 2.0 0.7 9.5 3.0 Côte d'Ivoire .. .. .. .. .. .. .. 2002 a, c 14.8 4.1 48.8 18.4 Croatia .. .. .. .. .. .. .. .. 2001 a <2 <0.5 <2 <0.5 Czech Rep. .. .. .. .. .. .. .. .. 1996 b <2 <0.5 <2 <0.5 Denmark .. .. .. .. .. .. .. .. .. .. .. .. .. Dominican Rep. 1992 49.0 19.3 33.9 1998 42.1 20.5 28.6 1998 b <2 <0.5 <2 <0.5 Ecuador 1994 47.0 25.0 35.0 .. .. .. .. 1998 b 17.7 7.1 40.8 17.7 Egypt, Arab Rep. 1995­96 23.3 22.5 22.9 1999­00 .. .. 16.7 1999­2000 a 3.1 <0.5 43.9 11.3 El Salvador 1992 55.7 43.1 48.3 .. .. .. .. 2000 b 31.1 14.1 58.0 29.7 Eritrea 1993­94 .. .. 53.0 .. .. .. .. .. .. .. .. .. Ethiopia 1995­96 47.0 33.3 45.5 1999­00 45.0 37.0 44.2 1999­2000 a 23.0 4.8 77.8 29.6 Finland .. .. .. .. .. .. .. .. .. .. .. .. .. France .. .. .. .. .. .. .. .. .. .. .. .. .. Georgia 1997 9.9 12.1 11.1 .. .. .. .. 2001 a 2.7 0.9 15.7 4.6 Germany .. .. .. .. .. .. .. .. .. .. .. .. .. Ghana 1992 .. .. 50.0 1998­99 49.9 18.6 39.5 1998­99 a 44.8 17.3 78.5 40.8 Greece .. .. .. .. .. .. .. .. .. .. .. .. .. Guatemala 1989 71.9 33.7 57.9 2000 74.5 27.1 56.2 2000 b 16.0 4.6 37.4 16.0 Guinea 1994 .. .. 40.0 .. .. .. .. .. .. .. .. .. Haiti 1987 .. .. 65.0 1995 66.0 .. .. 2001 a, c 67.0 40.0 83.3 58.5 Honduras 1992 46.0 56.0 50.0 1993 51.0 57.0 53.0 1999 b 20.7 7.5 44.0 20.2 Hungary 1993 .. .. 14.5 1997 .. .. 17.3 2002 a <2 <0.5 <2 <0.5 India 1993­94 37.3 32.4 36.0 1999­00 30.2 24.7 28.6 1999­2000 a 35.3 7.2 80.6 34.9 Indonesia 1996 .. .. 15.7 1999 27.1 2002 a 7.5 0.9 52.4 15.7 Iran, Islamic Rep. .. .. .. .. .. .. .. .. 1998 a <2 <0.5 7.3 1.5 Ireland .. .. .. .. .. .. .. .. .. .. .. .. .. Israel .. .. .. .. .. .. .. .. .. .. .. .. .. Italy .. .. .. .. .. .. .. .. .. .. .. .. .. Jamaica 1995 37.0 18.7 27.5 2000 25.1 12.8 18.7 2000 a <2 <0.5 13.3 2.7 Japan .. .. .. .. .. .. .. .. .. .. .. .. .. Jordan 1991 .. .. 15.0 1997 .. .. 11.7 2002 a, c <2 <0.5 6.5 1.4 Kazakhstan 1996 39.0 30.0 34.6 .. .. .. .. 2003 a <2 <0.5 24.9 6.3 Kenya 1994 47.0 29.0 40.0 1997 53.0 49.0 52.0 1997 a 22.8 5.9 58.3 23.9 Korea, Rep. .. .. .. .. .. .. .. .. 1998 b <2 <0.5 <2 <0.5 Kuwait .. .. .. .. .. .. .. .. .. .. .. .. Kyrgyz Rep. 2000 56.4 43.9 52.0 2001 51.0 41.2 47.6 2002 a <2 <0.5 24.7 5.8 Lao PDR 1993 48.7 33.1 45.0 1997­98 41.0 26.9 38.6 1997­98 a 26.3 6.3 73.2 29.6 Measuring equity 279 Table A1. Poverty--continued National poverty line International poverty line Population below Population below Population Poverty Population Poverty the poverty line the poverty line below gap at below gap at Survey Rural Urban National Survey Rural Urban National Survey $1 a day $1 a day $2 a day $2 a day year % % % year % % % year % % % % Latvia .. .. .. .. .. .. .. .. 1998 a <2 <0.5 11.5 2.6 Lebanon .. .. .. .. .. .. .. .. .. .. .. .. .. Lithuania .. .. .. .. .. .. .. .. 2000 a <2 <0.5 6.9 1.5 Macedonia, FYR .. .. .. .. .. .. .. .. 2003 a, c <2 <0.5 <2 <0.5 Madagascar 1997 76.0 63.2 73.3 1999 76.7 52.1 71.3 2001 a 61.0 27.9 85.1 51.8 Malawi 1990­91 .. .. 54.0 1997­98 66.5 54.9 65.3 1997­98 a 41.7 14.8 76.1 38.3 Malaysia 1989 .. .. 15.5 .. .. .. .. 1997 b <2 <0.5 9.3 2.0 Mali 1998 75.9 30.1 63.8 .. .. .. .. 1994 a 72.3 37.4 90.6 60.5 Mauritania 1996 65.5 30.1 50.0 2000 61.2 25.4 46.3 2000 a 25.9 7.6 63.1 26.8 Mexico 1988 .. .. 10.1 .. .. .. .. 2000 a 9.9 3.7 26.3 10.9 Moldova 1997 26.7 19.3 23.3 .. .. .. .. 2001 a 21.8 5.7 64.1 25.2 Mongolia 1995 33.1 38.5 36.3 1998 32.6 39.4 35.6 1998 a 27.0 8.1 74.9 30.6 Morocco 1990­91 18.0 7.6 13.1 1998­99 27.2 12.0 19.0 1999 a <2 <0.5 14.3 3.1 Mozambique 1996­97 71.3 62.0 69.4 .. .. .. .. 1996 a 37.9 12.0 78.4 36.8 Namibia .. .. .. .. .. .. .. .. 1993 b 34.9 14.0 55.8 30.4 Nepal 1995­96 44.0 23.0 42.0 .. .. .. .. 1995­96 a 39.1 11.0 80.9 37.6 Netherlands .. .. .. .. .. .. .. .. .. .. .. .. .. New Zealand .. .. .. .. .. .. .. .. .. .. .. .. .. Nicaragua 1993 76.1 31.9 50.3 1998 68.5 30.5 47.9 2001 a 45.1 16.7 79.9 41.2 Niger 1989­93 66.0 52.0 63.0 .. .. .. .. 1995 a 60.6 34.0 85.8 54.6 Nigeria 1985 49.5 31.7 43.0 1992­93 36.4 30.4 34.1 2003 a, c 70.8 34.5 92.4 59.5 Norway .. .. .. .. .. .. .. .. .. .. .. .. .. Oman .. .. .. .. .. .. .. .. .. .. .. .. .. Pakistan 1993 33.4 17.2 28.6 1998­99 35.9 24.2 32.6 2001 a, c 17.0 3.1 73.6 26.1 Panama 1997 64.9 15.3 37.3 .. .. .. .. 2000 b 7.2 2.3 17.6 7.4 Papua New Guinea 1996 41.3 16.1 37.5 .. .. .. .. .. .. .. .. .. Paraguay 1991 28.5 19.7 21.8 .. .. .. 2002 b 16.4 7.4 33.2 16.2 Peru 1994 67.0 46.1 53.5 1997 64.7 40.4 49.0 2000 b 18.1 9.1 37.7 18.5 Philippines 1994 53.1 28.0 40.6 1997 50.7 21.5 36.8 2000 a 15.5 3.0 47.5 17.8 Poland 1993 .. .. 23.8 .. .. .. .. 2002 a, c <2 <0.5 <2 <0.5 Portugal .. .. .. .. .. .. .. .. 1994 b <2 <0.5 <2 <0.5 Romania 1994 27.9 20.4 21.5 .. .. .. .. 2002 a <2 0.5 14.0 3.4 Russian Federation 1994 .. .. 30.9 .. .. .. .. 2002 a <2 <0.5 7.5 1.3 Rwanda 1993 .. .. 51.2 1999­00 65.7 14.3 60.3 1999­2000 a 51.7 20.0 83.7 45.5 Saudi Arabia .. .. .. .. .. .. .. .. .. .. .. .. .. Senegal 1992 40.4 23.7 33.4 .. .. .. .. 1995 a 22.3 5.7 63.0 25.2 Serbia & Montenegro .. .. .. .. .. .. .. .. .. .. .. .. .. Sierra Leone 1989 .. .. 82.8 2003­04 79.0 56.4 70.2 1989 a 57.0 39.5 74.5 51.8 Singapore .. .. .. .. .. .. .. .. .. .. .. .. .. Slovak Rep. .. .. .. .. .. .. .. 1996 b <2 <0.5 2.9 0.8 Slovenia .. .. .. .. .. .. .. .. 1998 a <2 <0.5 <2 <0.5 South Africa .. .. .. .. .. .. .. .. 2000 a 10.7 1.7 34.1 12.6 Spain .. .. .. .. .. .. .. .. .. .. .. .. .. Sri Lanka 1990­91 22.0 15.0 20.0 1995­96 27.0 15.0 25.0 2002a, c 5.6 <0.5 41.6 11.9 Sudan .. .. .. .. .. .. .. .. .. .. .. .. .. Sweden .. .. .. .. .. .. .. .. .. .. .. .. .. Switzerland .. .. .. .. .. .. .. .. .. .. .. .. Syrian Arab Rep. .. .. .. .. .. .. .. .. .. .. .. .. .. Tajikistan .. .. .. .. .. .. .. .. 2003 a 7.4 1.3 42.8 13.0 Tanzania 1991 40.8 31.2 38.6 2000­01 38.7 29.5 35.7 1991 a 48.5 24.4 72.5 43.3 Thailand 1990 .. .. 18.0 1992 15.5 10.2 13.1 2000a, c <2 <0.5 32.5 9.0 Togo 1987­89 .. .. 32.3 .. .. .. .. .. .. .. .. .. Tunisia 1990 13.1 3.5 7.4 1995 13.9 3.6 7.6 2000 a <2 <0.5 6.6 1.3 Turkey .. .. .. .. .. .. .. .. 2002 a, c 4.8 1.0 24.7 7.5 Turkmenistan .. .. .. .. .. .. .. .. 1998 a 12.1 2.6 44.0 15.4 Uganda 1993 .. .. 55.0 1997 .. .. 44.0 .. .. .. .. .. Ukraine 1995 .. .. 31.7 .. .. .. .. 1999 b 2.9 0.6 45.7 16.3 United Kingdom .. .. .. .. .. .. .. .. .. .. .. .. .. United States .. .. .. .. .. .. .. .. .. .. .. .. .. Uruguay .. .. .. .. .. .. .. .. 2000 b <2 <0.5 3.9 0.8 Uzbekistan 2000 30.5 22.5 27.5 .. .. .. .. 2000 a 17.3 4.3 71.7 25.2 Venezuela, RB de 1989 .. .. 31.3 .. .. .. .. 2000 b, c 9.9 3.6 32.1 12.2 Vietnam 1998 45.5 9.2 37.4 2002 35.6 6.6 28.9 .. .. .. .. .. West Bank & Gaza .. .. .. .. .. .. .. .. .. .. .. .. .. Yemen, Rep. 1998 45.0 30.8 41.8 .. .. .. .. 1998 a 15.7 4.5 45.2 15.0 Zambia 1996 82.8 46.0 69.2 1998 83.1 56.0 72.9 1998 a 63.7 32.7 87.4 55.4 Zimbabwe 1990­91 35.8 3.4 25.8 1995­96 48.0 7.9 34.9 1995­96 a 56.1 24.2 83.0 48.2 a = expenditure base; b = income base; c = preliminary data; .. denotes no data. 280 WORLD DEVELOPMENT REPORT 2006 Table A2. Income/consumption inequality measures Income/consumption inequality Land inequality Survey year y/c* Gini index GE (0) 90th/10th percentile ratio Survey year Gini index Albania 2002 c 0.31 0.15 3.95 1998 0.84 Algeria 1995 c 0.35 .. .. .. .. Argentina--urban 2001 y 0.51 0.49 13.71 1988 0.83 Armenia 2003 c 0.26 0.11 3.17 .. .. Australia 1994 y 0.32 0.20 4.88 .. .. Austria 1997 y 0.28 0.14 3.58 1999/2000 0.59 Azerbaijan 2001 c 0.36 0.22 4.62 .. .. Bangladesh 2000 c 0.31 0.16 3.85 1996 0.62 Belarus 2000 c 0.30 .. .. .. .. Belgium 2000 y 0.26 0.12 3.22 1999/2000 0.56 Benin 2003 c 0.36 0.22 4.93 .. .. Bolivia 2002 y 0.58 0.76 29.65 .. .. Bosnia & Herzegovina 2001 c 0.25 0.10 3.25 .. .. Botswana 1993.5 c 0.63 .. .. .. .. Brazil 2001 y 0.59 0.65 16.25 1996 0.85 Bulgaria 2003 c 0.28 0.12 3.56 .. .. Burkina Faso 2003 c 0.38 0.23 4.91 1993 0.42 Burundi 1998 c 0.42 0.31 6.49 .. .. Cambodia 1997 c 0.40 0.28 4.80 .. .. Cameroon 2001 c 0.45 .. .. .. .. Canada 2000 y 0.33 0.18 4.52 1991 0.64 Central African Rep. 1993 c 0.61 .. .. .. .. Chile 2000 y 0.51 0.47 10.72 .. .. China 2001 c 0.45 .. .. .. .. Colombia 1999 y 0.54 0.57 15.00 2001 0.8 Costa Rica 2000 y 0.46 0.39 9.65 .. .. Côte d'Ivoire 2002 c 0.45 0.33 6.75 .. .. Croatia 2001 c 0.29 0.17 .. .. .. Czech Rep. 1996 y 0.25 0.12 .. 2000 0.92 Denmark 1997 y 0.27 0.14 .. 1999/2000 0.51 Dominican Rep. 1997 y 0.47 0.40 9.17 .. .. East Timor 2001 c 0.37 0.22 5.42 .. .. Ecuador 1998 y 0.54 0.61 16.09 .. .. Egypt, Arab Rep. 2000 c 0.34 0.20 .. 1990 0.65 El Salvador 2002 y 0.50 0.52 15.88 .. .. Estonia 1998 c 0.32 0.17 4.73 2001 0.79 Ethiopia 2000 c 0.30 0.15 3.34 2001 0.47 Finland 2000 y 0.25 0.10 3.12 1999/2000 0.27 France 1994 y 0.31 0.15 .. 1999/2000 0.58 Gambia, The 1998 c 0.48 0.44 .. .. .. Georgia 2002 c 0.38 0.25 6.11 .. .. Germany 2000 y 0.28 0.12 3.58 1999/2000 0.63 Ghana 1999 c 0.41 0.28 7.30 .. .. Greece 1998 c 0.36 0.22 .. 1999/2000 0.58 Guatemala 2000 y 0.58 0.66 16.81 .. .. Guinea 2003 c 0.39 0.24 5.09 .. .. Guinea-Bissau 1993 c 0.40 .. .. 1988 0.62 Guyana 1998 y 0.45 .. .. .. .. Haiti 2001 y 0.68 0.98 45.43 .. .. Honduras 1999 y 0.52 0.51 11.72 1993 0.66 Hungary 2002 c 0.24 0.09 2.96 .. .. India 1999/2000 c 0.33 .. .. .. .. Indonesia 2000 c 0.34 .. .. 1993 0.46 Iran 1998 c 0.43 0.33 .. .. .. Ireland 2000 y 0.31 0.16 4.27 1999/2000 0.44 Israel 2001 c 0.35 0.20 4.90 .. .. Italy 2000 c 0.31 0.16 4.26 1999/2000 0.73 Jamaica 2001 c 0.42 0.28 5.90 .. .. Japan 1993 y 0.25 0.10 .. 1995 0.59 Jordan 2002 c 0.39 0.25 5.46 1997 0.78 Kazakhstan 2003 c 0.30 0.14 3.88 .. .. Kenya 1997 c 0.44 0.32 6.56 .. .. Korea, Rep. 1998 y 0.32 0.15 .. 1990 0.34 Kyrgyzstan 2002 c 0.29 0.13 3.63 .. .. Lao PDR 1997/1998 c 0.35 0.20 4.10 1999 0.39 Measuring equity 281 Table A2. Income/consumption inequality measures--continued Income/consumption inequality Land inequality Survey year y/c* Gini index GE (0) 90th/10th percentile ratio Survey year Gini index Latvia 1998 c 0.34 0.19 .. 2001 0.58 Lesotho 1995 c 0.63 .. .. 1989/1990 0.49 Lithuania 2000 c 0.29 0.14 3.94 .. .. Luxembourg 2000 y 0.29 0.13 3.92 1999/2000 0.48 Macedonia, FDR 2003 c 0.36 0.21 5.60 .. .. Madagascar 2001 c 0.46 0.36 8.05 .. .. Malawi 1997/1998 c 0.50 0.44 .. 1993 0.52 Malaysia 1997 y 0.49 0.43 .. .. .. Mali 2001 c 0.39 0.25 5.81 .. .. Mauritania 2000 c 0.38 0.24 5.92 .. .. Mexico 2002 y 0.49 0.47 11.87 .. .. Moldova 2001 c 0.36 .. .. .. .. Mongolia 1998 c 0.30 0.16 .. .. .. Morocco 1998 c 0.38 0.23 5.33 1996 0.62 Mozambique 1996/1997 c 39.60 0.27 .. .. .. Namibia 1993 c 70.70 .. .. 1997 0.36 Nepal 1996 c 0.36 0.21 4.54 1992 0.45 Netherlands 1999 y 0.29 0.16 3.87 1999/2000 0.57 New Zealand 1997 y 0.37 0.23 .. .. .. Nicaragua 2001 c 0.40 0.27 6.52 2001 0.72 Niger 1995 c 0.51 .. .. .. .. Nigeria 2003 c 0.41 0.29 7.26 .. .. Norway 2000 y 0.27 0.14 2.95 1999 0.18 Pakistan 2001 c 0.27 0.12 3.09 1990 0.57 Panama 2000 c 0.55 0.60 18.65 2001 0.52 Paraguay 2001 y 0.55 0.61 18.26 1991 0.93 Peru 2000 c 0.48 0.51 14.60 1994 0.86 Philippines 2000 c 0.46 .. .. 1991 0.55 Poland 2002 c 0.31 0.15 4.03 2002 0.69 Portugal 1997 y 0.39 0.27 .. 1999/2000 0.74 Romania 2002 c 0.28 0.12 3.63 .. .. Russian Federation 2002 c 0.32 0.17 4.67 .. .. Senegal 1995 c 0.40 0.26 5.18 1998 0.5 Serbia & Montenegro 2003 c 0.28 0.12 3.60 .. .. Singapore 1998 y 0.43 0.33 .. .. .. Slovak Rep. 1996 y 0.26 0.12 .. .. .. Slovenia 1998 c 0.28 0.13 .. 1991 0.62 South Africa 2000 c 0.58 0.61 16.91 .. .. Spain 2000 y 0.35 0.21 4.74 1999/2000 0.77 Sri Lanka 2002 c 0.38 0.23 4.98 .. .. St. Lucia 1995 c 0.44 0.37 9.38 .. .. Sweden 2000 y 0.25 0.11 3.18 1999/2000 0.32 Switzerland 1992 y 0.31 0.17 .. 1990 0.5 Taiwan, China 2000 c 0.24 0.09 2.86 .. .. Tajikistan 2003 c 0.32 0.16 4.08 .. .. Tanzania 2001 c 0.35 0.20 4.89 .. .. Thailand 2002 c 0.40 0.25 5.56 1993 0.47 Trinidad & Tobago 1992 c 0.39 0.26 6.24 .. .. Tunisia 2000 c 0.40 0.28 .. 1993 0.7 Turkey 2002 c 0.37 0.23 5.73 1991 0.61 Turkmenistan 1998 c 0.41 0.28 .. .. .. Uganda .. .. .. 1991 0.59 Ukraine 1999 y 0.29 .. .. .. .. United Kingdom 1999 y 0.34 0.20 5.00 1999/2000 0.66 United States 2000 y 0.38 0.26 6.30 1997 0.76 Uruguay--urban 2000 y 0.43 0.32 7.73 2000 0.79 Uzbekistan 2000 c 0.27 0.12 .. .. .. Venezuela, RB de 2000 y 0.42 0.33 7.94 1996/1997 0.88 Vietnam 2002 c 0.35 0.20 4.73 1994 0.53 Yemen, Rep. 1998 c 0.33 0.19 4.56 .. .. Zambia 1998 c 0.53 0.51 .. .. .. Zimbabwe 1995 c 0.57 .. .. .. .. Note: * c in this column indicates that the inequality measures refer to a distribution of consumption expenditures; y indicates that the inequality measures refer to a distribution of incomes; .. denotes no data. 282 WORLD DEVELOPMENT REPORT 2006 Table A3. Health Infant mortality rate (deaths under age 12 months per 1,000 live births) By gender By asset quintiles By location By mother's education level Survey year Overall Male Female Lowest Second Middle Fourth Highest Urban Rural No Primary Secondary education or higher Armenia 2000 44.1 46.1 41.9 52.3 50.0 36.8 49.6 27.3 35.9 52.7 .. .. 44.3 Bangladesh 1993 100.5 107.3 93.4 .. .. .. .. .. 80.9 102.6 113.3 89.0 57.5 Bangladesh 1996/1997 89.6 94.9 84.3 96.5 98.8 96.7 88.8 56.6 73.0 91.2 98.1 82.3 64.8 Bangladesh 1999/2000 79.7 82.3 76.9 92.9 93.6 78.1 62.8 57.9 74.2 80.7 91.9 74.5 54.7 Benin 1996 103.5 109.3 97.6 119.4 111.1 105.8 103.8 63.3 84.4 112.3 108.4 94.0 49.9 Benin 2001 94.8 97.6 92.0 111.5 108.2 106.3 78.1 50.0 72.9 104.5 100.2 87.5 53.1 Bolivia 1989 90.6 98.9 82.0 .. .. .. .. .. 73.9 106.6 116.1 98.7 50.2 Bolivia 1994 86.6 90.8 82.3 .. .. .. .. .. 68.8 105.8 122.2 99.5 48.2 Bolivia 1998 73.5 77.6 69.2 106.5 85.0 75.5 38.6 25.5 53.0 99.9 112.5 86.6 41.3 Brazil 1986 84.0 97.3 70.1 .. .. .. .. .. 72.9 106.0 113.2 89.1 23.1 Brazil 1996 48.1 51.6 44.4 83.2 46.7 32.9 24.7 28.6 42.4 65.3 93.2 58.1 32.0 Botswana 1988 38.6 46.4 31.0 .. .. .. .. .. 38.5 38.7 43.7 35.6 37.3 Burkina Faso 1992/1993 107.6 114.5 100.3 .. .. .. .. .. 76.4 113.0 111.3 84.0 52.8 Burundi 1987 85.8 97.1 74.2 .. .. .. .. .. 84.5 85.9 87.8 82.2 33.4 Cambodia 2000 92.7 102.8 82.2 109.7 108.2 88.2 88.7 50.3 72.3 95.7 102.5 93.6 59.7 Cameroon 1991 80.3 86.4 74.3 103.9 101.0 78.8 65.1 51.2 71.7 85.8 112.7 51.6 50.6 Cameroon 1998 79.8 85.1 74.6 108.4 86.3 72.6 58.7 55.8 61.0 86.9 103.9 74.1 49.9 Central African Rep. 1994/1995 101.8 109.2 94.1 132.3 116.8 99.2 97.6 53.7 79.9 116.3 114.2 100.2 52.0 Chad 1996/1997 109.8 119.6 100.0 79.8 136.7 120.2 115.0 89.3 99.3 112.8 112.7 101.6 74.9 Colombia 1986 38.7 40.8 36.4 .. .. .. .. .. 37.5 40.7 49.3 42.0 28.6 Colombia 1990 27.0 27.6 26.4 .. .. .. .. .. 28.9 23.4 60.5 27.3 20.4 Colombia 1995 30.8 34.9 26.5 40.8 31.4 27.0 31.5 16.2 28.3 35.2 26.9 36.5 25.6 Colombia 2000 24.4 28.5 20.1 32.0 31.6 22.0 11.9 17.6 21.3 31.1 42.3 28.2 19.6 Comoros 1996 83.7 92.5 74.8 87.2 108.5 83.7 62.6 64.6 63.8 90.0 87.4 78.5 67.1 Côte d'Ivoire 1994 91.3 99.1 83.2 117.2 97.3 88.9 78.8 63.3 74.7 99.7 98.8 78.1 61.0 Côte d'Ivoire 1998 111.5 130.3 92.5 .. .. .. .. .. 84.7 123.9 123.5 94.7 61.8 Dominican Rep. 1986 70.1 79.0 61.0 .. .. .. .. .. 71.9 67.9 96.1 73.7 47.5 Dominican Rep. 1991 44.4 53.3 34.9 .. .. .. .. .. 37.2 54.4 46.8 54.1 25.9 Dominican Rep. 1996 48.6 51.0 46.1 66.7 54.5 52.3 33.5 23.4 45.8 52.6 84.7 53.8 29.3 Dominican Rep. 1999 36.8 38.8 34.9 .. .. .. .. .. 35.3 39.1 34.7 50.6 17.9 Ecuador 1987 65.2 70.4 59.7 .. .. .. .. .. 51.6 77.7 104.5 68.7 39.4 Egypt, Arab Rep. 1988 93.1 93.7 92.4 .. .. .. .. .. 64.2 113.8 112.3 82.8 37.8 Egypt, Arab Rep. 1992 79.9 84.4 75.3 .. .. .. .. .. 54.4 96.2 97.8 73.0 42.4 Egypt, Arab Rep. 1995 72.9 72.5 73.3 109.7 88.7 64.6 50.6 31.8 51.1 86.8 93.4 70.0 37.5 Egypt, Arab Rep. 2000 54.7 55.0 54.5 75.6 63.9 53.9 43.9 29.6 43.1 61.8 68.3 58.8 35.9 El Salvador 1985 70.9 81.1 59.7 .. .. .. .. .. 57.6 82.4 99.7 64.2 24.9 Eritrea 1995 75.6 81.9 69.0 74.0 66.2 87.0 85.8 67.5 79.8 74.4 76.0 77.0 67.2 Ethiopia 2000 112.9 124.4 100.6 92.8 114.9 141.5 118.1 95.1 96.5 114.7 119.1 85.0 63.5 Gabon 2000 61.1 73.6 48.9 57.0 68.1 66.6 72.7 35.9 60.7 62.2 65.5 58.7 62.5 Ghana 1988 80.9 88.9 72.5 .. .. .. .. .. 66.0 86.6 87.2 74.5 80.2 Ghana 1993 74.7 79.2 70.1 77.5 94.6 82.8 64.2 45.8 54.9 82.2 87.1 66.7 44.9 Ghana 1998 61.2 64.4 57.9 72.7 58.0 82.1 52.5 26.0 42.6 67.5 66.1 70.3 51.3 Guatemala 1987 79.2 89.5 68.5 .. .. .. .. .. 66.6 84.2 82.9 80.1 41.8 Guatemala 1995 57.2 62.7 51.5 56.9 79.7 55.7 46.7 35.0 45.4 62.9 69.8 53.6 26.1 Guatemala 1998/1999 49.1 50.0 48.1 58.0 50.8 52.1 39.6 39.2 49.0 49.1 55.7 46.5 41.1 Guinea 1999 106.6 112.3 100.6 118.9 127.9 113.5 91.4 70.2 79.2 115.8 112.0 78.4 60.6 Haiti 1994 87.1 97.7 76.2 93.7 93.6 85.6 81.7 74.3 83.2 88.9 95.2 78.4 75.6 Haiti 2000 89.4 96.5 82.6 99.5 70.0 93.4 88.4 97.2 87.0 90.5 90.9 97.5 55.9 India 1992/1993 86.3 88.6 83.9 109.2 106.3 89.7 65.6 44.0 59.4 94.3 100.6 68.2 46.3 India 1998/1999 73.0 74.8 71.1 96.5 80.7 76.3 55.3 38.1 49.2 79.7 87.0 66.9 42.2 Indonesia 1987 .. 84.1 63.8 .. .. .. .. .. 49.9 83.3 100.9 75.0 36.2 Indonesia 1991 .. 79.9 67.9 .. .. .. .. .. 57.2 81.0 89.0 81.1 34.6 Indonesia 1994 .. 73.5 58.8 .. .. .. .. .. 43.1 75.2 90.5 70.4 39.5 Indonesia 1997 52.2 59.1 44.9 78.1 57.3 51.4 39.4 23.3 35.7 58.0 77.5 58.8 28.0 Jordan 1990 .. 36.4 37.3 .. .. .. .. .. 35.8 39.2 38.7 41.1 33.8 Jordan 1997 29.0 34.3 23.4 35.4 28.8 30.1 25.9 23.4 26.7 39.1 54.2 31.9 25.5 Kazakhstan 1995 40.7 46.7 34.6 39.2 43.1 36.6 48.9 35.1 39.2 42.1 .. .. 40.9 Kazakhstan 1999 54.9 62.0 47.3 67.6 65.3 65.8 27.3 42.3 43.7 63.8 .. .. 55.2 Kenya 1989 .. 63.4 54.3 .. .. .. .. .. 56.7 59.2 72.1 55.4 42.3 Kenya 1993 .. 66.6 58.6 .. .. .. .. .. 45.5 64.9 66.3 70.6 34.8 Kenya 1998 70.7 74.5 66.8 95.8 82.9 58.5 61.0 40.2 55.4 73.8 82.2 79.7 40.0 Kyrgyz Rep. 1997 66.2 71.9 60.2 83.3 73.3 67.5 49.6 45.8 54.3 70.4 .. 255.6 66.0 Liberia 1986 .. 168.9 135.4 .. .. .. .. .. 140.4 160.7 162.7 146.3 112.5 Madagascar 1992 .. 103.2 101.8 .. .. .. .. .. 74.7 106.8 137.9 97.6 72.9 Madagascar 1997 99.3 108.7 89.5 119.1 118.3 103.2 76.2 57.5 77.9 105.0 124.2 102.0 63.5 Measuring equity 283 Table A3. Health--continued Infant mortality rate (deaths under age 12 months per 1,000 live births) By gender By asset quintiles By location By mother's education level Survey year Overall Male Female Lowest Second Middle Fourth Highest Urban Rural No Primary Secondary education or higher Malawi 1992 136.1 141.7 130.4 141.2 133.7 154.1 139.2 106.1 118.1 138.4 143.4 129.6 96.3 Malawi 2000 112.5 117.1 107.9 131.5 110.7 117.4 109.1 86.4 82.5 116.7 116.6 114.3 65.4 Mali 1987 .. 136.6 125.5 .. .. .. .. .. 89.8 144.1 139.1 74.6 74.1 Mali 1995 133.5 140.5 126.5 151.4 146.9 138.9 129.0 93.2 98.7 145.0 139.6 112.7 59.6 Mali 2001 126.2 136.4 115.6 137.2 125.2 140.6 128.7 89.9 105.9 131.9 130.0 122.4 51.7 Mauritania 2000/2001 66.8 .. .. 60.8 59.4 78.0 72.8 62.3 .. .. .. .. .. Mexico 1987 .. 60.4 52.4 .. .. .. .. .. 41.6 79.2 27.6 .. 83.9 Morocco 1987 .. 82.8 80.6 .. .. .. .. .. 64.1 90.9 85.6 52.8 62.5 Morocco 1992 63.1 68.6 57.4 79.7 67.7 62.4 58.5 35.1 51.9 69.3 67.7 53.2 20.9 Mozambique 1997 147.4 153.0 141.9 187.7 136.2 144.3 134.2 94.7 100.8 159.7 155.6 143.9 72.5 Namibia 1992 61.5 66.6 56.5 63.6 63.0 48.4 72.2 57.3 63.1 60.7 57.9 65.5 57.0 Nepal 1996 93.0 101.9 83.7 96.3 107.2 103.6 84.7 63.9 61.1 95.3 97.5 80.0 53.4 Nepal 2001 77.2 79.2 75.2 85.5 87.7 76.6 72.8 53.2 50.1 79.3 84.6 61.0 39.1 Nicaragua 1997/1998 45.2 50.2 40.2 50.7 53.7 45.7 40.2 25.8 40.0 51.1 62.1 45.3 31.0 Niger 1990 .. 135.8 133.0 .. .. .. .. .. 89.0 142.6 137.0 114.9 48.8 Niger 1998 135.8 140.9 130.5 131.1 152.3 157.2 142.0 85.8 79.9 146.7 140.9 99.6 70.1 Nigeria 1990 91.6 93.9 89.3 102.2 102.3 93.1 85.8 68.6 75.6 95.9 96.1 87.2 69.9 Nigeria 1999 .. 73.3 68.0 .. .. .. .. .. 59.3 74.9 76.9 70.8 55.7 Pakistan 1990 94.0 102.1 85.5 88.7 108.7 109.3 95.7 62.5 74.6 102.2 98.6 90.4 59.5 Paraguay 1990 35.9 39.0 32.6 42.9 36.5 46.1 33.5 15.7 32.6 38.7 52.2 39.1 22.9 Peru 1986 .. 83.2 74.8 .. .. .. .. .. 55.8 106.1 118.8 88.3 41.5 Peru 1992 .. 68.1 59.2 .. .. .. .. .. 47.5 89.9 100.0 83.2 33.9 Peru 1996 49.9 56.1 43.5 78.3 53.6 34.4 36.0 19.5 34.9 71.0 78.9 61.7 30.6 Peru 2000 43.2 46.0 40.2 63.5 53.9 32.6 26.5 13.9 28.4 60.3 73.4 53.5 27.4 Philippines 1993 .. 43.5 32.9 .. .. .. .. .. 31.9 44.3 76.7 46.6 28.9 Philippines 1998 36.0 39.4 32.3 48.8 39.2 33.7 24.9 20.9 30.9 40.2 78.5 45.1 28.3 Rwanda 1992 90.2 98.4 82.1 .. .. .. .. .. 87.5 90.4 97.3 84.9 65.3 Rwanda 2000 117.4 123.2 111.6 138.7 120.2 123.4 118.9 87.9 77.9 123.5 134.8 113.9 59.5 Senegal 1986 90.9 98.6 82.9 .. .. .. .. .. 70.1 101.9 96.2 67.2 51.4 Senegal 1992/1993 76.1 83.6 68.7 .. .. .. .. .. 54.5 86.8 81.2 58.5 32.1 Senegal 1997 69.4 73.6 65.0 84.5 81.6 69.6 58.8 44.9 50.2 79.1 76.1 52.1 28.7 South Africa 1998 42.2 49.0 35.3 61.6 51.6 35.8 34.0 17.0 32.6 52.2 58.8 47.6 36.1 Sri Lanka 1987 .. 39.6 24.9 .. .. .. .. .. 34.4 32.2 52.2 34.0 27.9 Sudan 1990 77.1 83.7 70.3 .. .. .. .. .. 74.0 78.6 82.4 70.1 62.5 Tanzania 1992 99.4 103.6 95.1 .. .. .. .. .. 108.3 97.1 103.1 97.9 71.8 Tanzania 1996 94.1 100.8 87.1 87.3 118.0 95.6 102.1 64.8 81.7 96.8 105.9 89.3 63.9 Tanzania 1999 107.8 .. .. 114.8 107.5 115.4 106.8 91.9 .. .. .. .. .. Thailand 1987 38.5 45.6 30.9 .. .. .. .. .. 25.9 40.8 55.5 38.7 18.5 Togo 1988 84.0 88.5 79.3 .. .. .. .. .. 74.7 87.3 88.2 79.3 54.3 Togo 1998 80.3 89.1 71.4 84.1 81.7 90.0 73.9 65.8 65.3 85.0 87.4 72.1 54.4 Trinidad & Tobago 1987 30.5 28.4 32.8 .. .. .. .. .. 34.2 27.9 69.0 24.2 38.5 Tunisia 1988 55.5 56.3 54.7 .. .. .. .. .. 49.6 61.8 61.8 49.6 34.4 Turkey 1993 68.3 70.5 66.0 99.9 72.7 72.1 54.4 25.4 58.1 82.6 92.2 63.4 25.4 Turkey 1998 48.4 51.0 45.5 68.3 54.6 42.1 37.5 29.8 42.2 58.6 66.3 46.2 27.9 Turkmenistan 2000 71.6 83.0 59.7 89.3 78.6 68.2 62.4 58.4 60.1 79.9 113.8 29.7 71.4 Uganda 1988 106.0 111.3 100.6 .. .. .. .. .. 103.8 106.2 114.9 101.1 85.8 Uganda 1995 86.1 87.4 84.9 109.0 79.5 90.4 84.5 63.2 74.4 87.6 94.0 87.9 48.0 Uganda 2000/2001 89.4 93.3 85.5 105.7 98.3 94.5 81.0 60.2 54.5 93.7 106.7 88.4 52.6 Uzbekistan 1996 43.5 50.2 36.7 54.4 39.8 36.0 39.0 45.9 42.9 43.8 .. .. 43.6 Vietnam 1997 34.8 42.0 26.9 42.8 43.2 35.2 27.2 16.9 23.2 36.6 48.8 43.3 29.0 Yemen, Rep. 1991/1992 100.3 108.1 92.1 .. .. .. .. .. 90.9 102.2 102.4 77.5 43.7 Yemen, Rep. 1997 89.5 98.4 80.0 108.5 102.0 88.9 80.9 60.0 75.4 93.6 92.6 71.6 66.9 Zambia 1992 98.3 106.2 90.5 .. .. .. .. .. 78.0 116.0 114.9 98.9 79.4 Zambia 1996 107.7 116.3 99.3 123.6 131.5 105.1 104.1 69.8 91.9 117.9 132.9 110.2 81.7 Zambia 2001/2002 93.9 95.1 92.7 115.2 93.1 113.8 80.8 56.7 76.7 102.6 108.1 98.8 70.3 Zimbabwe 1988 56.4 63.2 49.5 .. .. .. .. .. 37.0 63.4 77.1 53.9 38.2 Zimbabwe 1994 51.2 56.9 45.5 52.0 49.5 47.4 64.2 41.6 44.3 53.6 61.6 53.9 38.6 Zimbabwe 1999 59.7 63.1 56.2 59.1 63.9 67.1 63.1 44.3 47.2 65.3 81.1 60.6 54.0 Note: Only countries for which some data are available are included in this table; .. denotes no data. 284 WORLD DEVELOPMENT REPORT 2006 Table A4. Education Share of total population Education Share of inequality by years of schooling Mean years of schooling inequality measures attributable By location By gender To location To gender Survey year 0 1­6 7­12 13 or Total Urban Rural Male Female Gini index GE (0.5) years years above Afghanistan .. .. .. .. .. .. .. .. .. .. .. .. .. .. Albania 2002 0.04 0.10 0.76 0.10 9.19 10.55 8.09 9.58 8.83 0.21 0.14 0.06 0.01 Angola 2000 0.33 0.47 0.20 0.00 3.65 .. .. .. .. .. .. .. .. Argentina 2001 0.01 0.08 0.65 0.26 10.33 .. .. 10.26 10.40 0.22 0.09 .. 0.00 Armenia 2000 0.01 0.02 0.61 0.36 11.44 11.98 10.60 11.50 11.38 0.13 0.04 0.05 0.00 Australia 1994 0.00 0.00 0.58 0.42 12.50 12.64 12.21 13.07 11.89 0.15 0.04 0.00 0.03 Austria 1995 0.00 0.01 0.89 0.10 10.64 11.10 10.35 10.97 10.30 0.14 0.03 0.02 0.02 Azerbaijan 1995 0.02 0.03 0.65 0.30 10.99 11.61 10.23 11.62 10.43 0.15 0.07 0.03 0.02 Bangladesh 1999/2000 0.46 0.26 0.24 0.04 3.92 6.31 3.29 4.94 2.90 0.62 1.18 0.04 0.03 Belarus 2002 0.02 0.28 0.27 0.44 11.27 .. .. 10.84 11.61 0.25 0.13 .. 0.00 Belgium 1997 0.03 0.12 0.47 0.38 11.52 .. .. 11.65 11.39 0.22 0.12 .. 0.00 Benin 2001 0.63 0.23 0.12 0.03 2.47 4.28 1.34 3.63 1.53 0.75 1.69 0.10 0.05 Bolivia 1998 0.10 0.35 0.35 0.20 7.63 9.28 4.07 8.48 6.84 0.38 0.38 0.16 0.02 Bosnia & Herzegovina 2001 0.06 0.16 0.69 0.10 9.32 11.03 8.71 10.29 8.39 0.24 0.18 0.03 0.03 Brazil 2001 0.20 0.21 0.23 0.36 8.38 8.67 6.61 8.44 8.32 0.39 0.53 0.01 0.00 Bulgaria 2003 0.06 0.22 0.24 0.48 10.85 12.22 7.50 10.76 10.94 0.19 0.26 0.05 0.04 Burkina Faso 1998/1999 0.86 0.08 0.04 0.02 1.00 4.28 0.33 1.48 0.63 0.90 2.63 0.27 0.03 Burundi 2000 0.61 0.32 0.05 0.02 2.13 .. .. .. .. .. .. .. .. Cambodia 1999 0.00 0.63 0.36 0.01 5.70 7.12 5.52 6.35 5.15 0.28 0.12 0.04 0.04 Cameroon 1998 0.32 0.29 0.30 0.08 5.32 7.58 4.14 6.54 4.27 0.50 0.84 0.05 0.03 Canada 2000 0.00 0.01 0.34 0.65 14.27 14.39 13.30 14.34 14.20 0.13 0.03 0.01 0.00 Central African Rep. 1994/1995 0.48 0.35 0.14 0.02 2.95 4.53 1.82 4.22 1.79 0.66 1.32 0.08 0.07 Chad 1996/1997 0.76 0.16 0.06 0.01 1.30 3.09 0.69 2.20 0.53 0.86 2.23 0.12 0.10 Chile 2000 0.02 0.19 0.54 0.24 10.27 10.83 6.77 10.42 10.14 0.23 0.13 0.08 0.00 China 2000 0.07 0.33 0.55 0.05 6.54 8.53 5.18 7.22 5.82 0.37 0.35 0.08 0.02 Colombia 2000 0.07 0.44 0.36 0.13 7.19 8.29 4.08 7.19 7.19 0.36 0.31 0.13 0.00 Comoros 1996 0.64 0.17 0.16 0.04 2.76 4.41 2.06 3.69 1.96 0.71 1.82 0.04 0.00 Congo, Dem. Rep. 2000 0.25 0.35 0.36 0.04 5.39 .. .. .. .. .. .. .. .. Costa Rica 2000 0.05 0.48 0.31 0.16 7.90 9.02 6.15 7.91 7.89 0.30 0.22 .. 0.00 Côte d'Ivoire 1998/1999 0.56 0.24 0.14 0.06 3.43 5.30 2.16 4.40 2.52 0.68 1.48 0.07 0.03 Czech Rep. 1996 0.00 0.16 0.74 0.10 9.14 .. .. 9.31 8.98 0.19 0.06 .. 0.00 Denmark 1992 0.00 0.00 0.83 0.17 11.62 11.82 11.23 11.78 11.47 0.11 0.02 0.01 0.00 Dominican Rep. 2002 0.10 0.35 0.40 0.15 7.47 8.32 5.85 7.38 7.56 0.38 0.36 0.04 0.00 East Timor 2001 0.60 0.19 0.20 0.02 3.19 5.40 2.52 3.43 0.86 0.69 1.68 0.04 0.03 Ecuador 1998/1999 0.08 0.42 0.33 0.18 8.12 9.67 5.49 8.26 7.98 0.33 0.28 0.12 0.00 Egypt, Arab Rep. 2000 0.35 0.19 0.28 0.17 6.60 8.60 4.83 7.90 5.28 0.51 0.90 0.05 0.02 El Salvador 2000 0.18 0.38 0.32 0.12 6.56 8.32 3.53 6.98 6.22 0.45 0.56 0.13 0.00 Estonia 2000 0.00 0.02 0.58 0.40 12.49 .. .. 12.13 12.80 0.16 0.04 .. 0.01 Ethiopia 2000 0.74 0.16 0.09 0.01 1.56 5.16 0.88 2.21 0.94 0.83 2.14 0.15 0.04 Finland 2000 0.00 0.00 0.70 0.30 12.03 12.24 11.26 11.88 12.17 0.15 0.03 0.02 0.00 France 1994 0.20 0.12 0.48 0.20 8.26 8.58 7.36 8.24 8.28 0.37 0.49 0.00 0.00 Gabon 2000 0.19 0.32 0.38 0.11 6.71 7.45 4.55 7.62 5.78 0.39 0.52 0.04 0.02 Gambia, The 2000 0.58 0.14 0.19 0.09 3.82 .. .. .. .. .. .. .. .. Germany 2000 0.02 0.36 0.39 0.23 10.07 10.39 9.57 10.07 10.07 0.25 0.13 0.01 0.00 Ghana 1998/1999 0.31 0.14 0.41 0.14 6.62 8.79 5.39 8.31 5.22 0.46 0.78 0.04 0.04 Guatemala 1998/1999 0.29 0.45 0.21 0.05 4.58 6.28 3.10 5.14 4.07 0.54 0.83 0.07 0.01 Guinea 1999 0.77 0.09 0.09 0.05 1.97 4.44 0.86 3.06 1.08 0.84 2.22 0.14 0.06 Guinea-Bissau 2000 0.72 0.14 0.05 0.09 2.34 .. .. .. .. .. .. .. .. Guyana 2000 0.00 0.28 0.62 0.10 8.89 10.00 8.37 8.94 8.84 0.20 0.07 0.05 0.00 Haiti 2000 0.40 0.33 0.22 0.05 3.93 6.70 2.14 4.75 3.19 0.61 1.12 0.15 0.02 Honduras 2001 0.19 0.55 0.20 0.06 5.55 7.41 3.64 5.57 5.52 0.45 0.56 0.11 0.00 Hungary 1999 0.00 0.10 0.75 0.14 10.01 .. .. 10.09 9.94 0.18 0.06 .. 0.00 India 1998/2000 0.41 0.20 0.31 0.08 5.03 7.78 3.93 6.50 3.57 0.56 1.02 0.05 0.04 Indonesia 2002 0.09 0.50 0.34 0.07 7.38 9.04 5.85 7.99 6.77 0.32 0.29 0.08 0.01 Iraq 2000 0.26 0.33 0.27 0.14 6.36 .. .. .. .. .. .. .. .. Ireland 1996 0.00 0.03 0.79 0.18 11.00 .. .. 11.14 10.86 0.11 0.04 .. 0.00 Israel 2001 0.02 0.03 0.51 0.44 12.63 12.55 13.08 12.75 12.52 0.14 0.07 0.00 0.00 Italy 2000 0.03 0.19 0.68 0.10 9.05 9.49 8.56 9.32 8.79 0.23 0.12 0.01 0.00 Jamaica 2000 0.01 0.15 0.71 0.12 9.31 .. .. 9.17 9.43 0.19 0.08 .. 0.00 Japan 2000 0.00 0.11 0.53 0.36 11.74 11.99 10.79 11.95 11.52 0.17 0.08 0.01 0.00 Jordan 2002 0.00 0.19 0.54 0.26 10.42 10.70 9.55 10.74 10.13 0.21 0.07 0.01 0.01 Kazakhstan 1999 0.01 0.03 0.79 0.17 10.69 11.15 10.23 10.75 10.64 0.12 0.04 0.02 0.00 Kenya 1999 0.20 0.26 0.52 0.02 6.26 8.05 5.48 7.01 5.56 0.38 0.51 0.03 0.01 Kosovo 2000 0.07 0.12 0.63 0.18 9.35 10.46 8.61 10.85 7.93 0.46 0.21 0.03 0.15 Kyrgyz Rep. 1997 0.01 0.03 0.79 0.17 10.58 11.35 10.16 10.76 10.41 0.12 0.05 0.03 0.00 Measuring equity 285 Table A4. Education--continued Share of total population Education Share of inequality by years of schooling Mean years of schooling inequality measures attributable By location By gender To location To gender Survey year 0 1­6 7­12 13 or Total Urban Rural Male Female Gini index GE (0.5) years years above Lao PDR 1997 0.32 0.44 0.20 0.04 4.08 7.32 3.36 5.38 2.85 0.53 0.84 0.07 0.06 Lesotho 2000 0.15 0.39 0.42 0.03 5.82 .. .. .. .. .. .. .. .. Luxembourg 2000 0.01 0.17 0.34 0.49 12.31 .. .. 12.96 11.65 0.21 0.08 .. 0.02 Madagascar 2001 0.00 0.65 0.26 0.09 6.34 8.02 5.65 6.38 6.30 0.31 0.16 0.08 0.00 Malawi 2000 0.30 0.40 0.30 0.01 4.23 7.67 3.60 5.46 3.08 0.52 0.80 0.06 0.05 Mali 2001 0.81 0.10 0.06 0.03 1.45 3.80 0.56 2.03 0.94 0.87 2.36 0.18 0.03 Mexico 1999 0.08 0.41 0.37 0.14 7.78 8.63 4.67 8.10 7.49 0.34 0.30 0.09 0.00 Moldova 2000 0.01 0.07 0.55 0.37 11.75 .. .. 11.71 11.77 0.20 0.07 .. 0.00 Mongolia 2000 0.02 0.08 0.63 0.27 10.05 .. .. .. .. .. .. .. .. Morocco 1992 0.63 0.18 0.15 0.04 2.84 4.70 0.94 3.92 1.90 0.74 1.72 0.03 0.04 Mozambique 1997 0.48 0.43 0.08 0.00 2.24 4.65 1.54 3.20 1.45 0.65 1.27 0.11 0.06 Myanmar 2000 0.26 0.47 0.27 0.00 4.32 .. .. .. .. .. .. .. .. Namibia 2000 0.20 0.23 0.53 0.04 6.65 8.29 5.35 6.73 6.57 0.38 0.52 0.05 0.00 Nepal 2001 0.64 0.17 0.17 0.02 2.46 5.38 2.09 3.88 1.22 0.74 1.76 0.04 0.09 Netherlands 1999 0.00 0.01 0.71 0.28 12.36 .. .. 12.67 12.03 0.13 0.03 .. 0.01 Nicaragua 2001 0.23 0.41 0.26 0.10 5.57 7.28 2.91 5.54 5.59 0.49 0.67 0.13 0.00 Niger 1998 0.85 0.09 0.05 0.02 1.12 3.49 0.52 1.57 0.75 0.88 2.56 0.16 0.03 Nigeria 1999 0.39 0.23 0.28 0.11 5.77 8.06 4.77 7.06 4.61 0.53 0.97 0.03 0.02 Norway 2000 0.00 0.00 0.70 0.30 12.70 12.97 12.36 12.75 12.65 0.11 0.03 0.01 0.00 Pakistan 2001 0.59 0.15 0.21 0.05 3.51 5.95 2.43 5.05 2.02 0.70 1.55 0.06 0.06 Panama 2000 0.04 0.32 0.43 0.21 9.52 10.84 7.04 9.29 9.74 0.27 0.17 0.11 0.00 Papua New Guinea 1996 0.48 0.33 0.11 0.08 3.90 .. .. 4.98 2.79 0.62 1.25 .. 0.03 Paraguay 2000 0.06 0.53 0.29 0.12 7.26 8.77 5.15 7.36 7.16 0.35 0.26 0.12 0.00 Peru 2000 0.08 0.32 0.39 0.21 8.76 10.24 5.56 9.51 8.03 0.30 0.26 0.14 0.01 Philippines 1998 0.03 0.32 0.46 0.19 8.77 9.94 7.41 8.71 8.84 0.24 0.14 0.07 0.00 Poland 1999 0.00 0.21 0.67 0.11 9.27 .. .. 9.05 9.47 0.19 0.06 .. 0.00 Romania 2002 0.01 0.14 0.70 0.15 9.73 .. .. 10.14 9.33 0.21 0.09 .. 0.01 Russian Federation 2000 0.00 0.01 0.40 0.59 13.70 .. .. 13.60 13.79 0.14 0.04 .. 0.00 Rwanda 2000 0.38 0.41 0.20 0.01 3.59 6.67 2.96 4.19 3.14 0.55 0.99 0.06 0.01 São Tomé & Principe 2000 0.17 0.42 0.27 0.15 6.54 .. .. .. .. .. .. .. .. Senegal 1992/1993 0.77 0.13 0.07 0.03 1.80 3.73 0.51 2.60 1.19 0.83 2.18 0.19 0.03 Sierra Leone 2000 0.74 0.04 0.19 0.03 2.44 .. .. .. .. .. .. .. .. Slovak Rep. 1992 0.01 0.14 0.74 0.11 10.36 .. .. 10.74 9.99 0.15 0.05 .. 0.01 Slovenia 1999 0.01 0.00 0.86 0.14 11.32 .. .. 11.37 11.27 0.10 0.03 .. 0.00 South Africa 1998 0.74 0.14 0.09 0.03 1.95 3.93 0.58 2.72 1.33 0.79 2.10 0.19 0.11 Spain 1990 0.13 0.22 0.43 0.22 9.12 .. .. 9.48 8.77 0.31 0.33 .. 0.00 Sri Lanka 2002 0.00 0.25 0.57 0.18 9.22 .. .. 8.94 9.47 0.23 0.10 .. 0.00 Sudan 2000 0.51 0.20 0.24 0.05 4.01 .. .. .. .. .. .. .. .. Suriname 2000 0.01 0.38 0.52 0.09 7.96 .. .. 7.95 7.98 0.24 0.11 .. 0.00 Swaziland 2000 0.20 0.24 0.52 0.04 6.78 .. .. .. .. .. .. .. .. Sweden 2000 0.00 0.09 0.61 0.30 12.00 12.53 11.46 11.84 12.15 0.16 0.04 0.02 0.00 Switzerland 1992 0.00 0.00 0.79 0.21 11.64 11.57 11.71 12.24 11.04 0.13 0.03 0.00 0.05 Taiwan, China 2000 0.05 0.22 0.47 0.26 9.48 9.74 7.03 10.15 8.84 0.30 0.24 0.02 0.01 Tajikistan 1999 0.00 0.05 0.63 0.32 11.96 11.33 12.18 11.94 11.97 0.20 0.07 0.01 0.00 Tanzania 1999 0.30 0.19 0.50 0.01 4.58 6.03 4.05 5.36 3.93 0.41 0.74 0.02 0.02 Thailand 2000 0.05 0.47 0.34 0.15 6.89 8.97 5.79 7.19 6.62 0.33 0.21 0.10 0.00 Togo 1998 0.47 0.32 0.19 0.02 3.15 5.03 2.12 4.57 1.98 0.62 1.25 0.08 0.07 Trinidad & Tobago 2000 0.01 0.12 0.78 0.09 9.17 .. .. 9.19 9.14 0.19 0.09 .. 0.00 Turkey 1998 0.17 0.50 0.23 0.09 6.14 6.93 4.61 7.23 5.08 0.38 0.47 0.04 0.03 Turkmenistan 1998 0.00 0.02 0.77 0.20 10.60 10.98 10.27 10.96 10.28 0.12 0.03 0.02 0.00 United Kingdom 1999 0.00 0.00 0.68 0.31 12.16 12.31 11.98 12.21 12.11 0.11 0.02 0.00 0.00 United States 2000 0.00 0.02 0.42 0.55 13.83 13.96 13.37 13.85 13.80 0.13 0.04 0.00 0.00 Uganda 1995 0.32 0.39 0.27 0.03 4.23 7.53 3.71 5.46 3.12 0.50 0.82 0.05 0.05 Uruguay 2000 0.01 0.34 0.45 0.20 9.41 .. .. 9.32 9.49 0.24 0.10 .. 0.00 Uzbekistan 1996 0.01 0.02 0.81 0.17 10.66 11.06 10.37 11.00 10.33 0.11 0.03 0.01 0.01 Venezuela, RB de 2000 0.08 0.34 0.42 0.17 8.29 9.92 7.96 8.08 8.51 0.30 0.26 0.01 0.00 Vietnam 2000 0.06 0.34 0.57 0.02 6.96 8.48 6.44 7.43 6.53 0.28 0.22 0.04 0.01 Yemen, Rep. 1999 0.65 0.11 0.17 0.07 3.34 5.95 2.27 5.35 1.54 0.73 1.81 0.06 0.10 Zambia 1992 0.16 0.30 0.49 0.06 6.26 8.45 4.91 7.41 5.14 0.37 0.44 0.08 0.04 Zimbabwe 1999 0.10 0.21 0.62 0.07 7.57 9.52 6.22 8.41 6.81 0.30 0.30 0.08 0.02 286 WORLD DEVELOPMENT REPORT 2006 Technical notes and adjusted to local currency using purchasing power pari- ties (PPP), was chosen because it is typical of the national Table A1 Poverty poverty lines in low-income countries. Recalculated in 1993 National poverty rate is the percentage of the population consumption PPP terms in 1993 prices, the original $1 a day living below the national poverty line. Rural (urban) in 1985 PPP is now about $1.08 a day. PPP exchange rates are poverty rate is the percentage of the rural (urban) popula- used because they take into account the local prices of goods tion living below the national rural (urban) poverty line. and services not traded internationally. But PPP rates were Population below $1 a day and population below $2 a day designed for comparing aggregates from national accounts, are the percentages of the population living on less than not for making international poverty comparisons. As a $1.08 a day and $2.15 a day at 1993 international prices. All result, there is no certainty that an international poverty line above poverty indicators are also called headcount ratios. measures the same degree of need or deprivation across Poverty gap is the mean shortfall from the poverty line countries. Furthermore, any revisions in the PPP of a coun- (counting the nonpoor as having zero shortfall), expressed try to incorporate better price indexes can produce dramati- as a percentage of the poverty line. cally different poverty lines in local currency. To measure poverty, one needs to define the relevant wel- Since the World Bank produced its first global poverty fare measure, to select a poverty line, and to select a poverty estimates for World Development Report 1990 using house- indicator. The two most commonly used poverty indicators hold survey data, the database has expanded considerably are the headcount ratio and the poverty gap, part of the FGT and now includes 440 surveys representing almost 100 class of indexes from Foster, Greer, and Thorbecke (1984). developing countries. Some 1.1 million randomly sampled The indexes are defined by households were interviewed in these surveys, representing 93 percent of the population of developing countries. Along 1 with improvements in data coverage and quality, the under- P = n J (Z -Yi ) Z lying methodology has also improved, resulting in better and i = 1 more comprehensive estimates. where i is a subgroup of individuals with income below the Data availability. Since 1979 there has been considerable poverty line Z; n is the total number of individuals in the expansion in the number of countries that field such sur- sample; Yi is the income of individual i; and is a distin- veys, in the frequency of the surveys, and in the quality of guishing parameter between FGT indexes. When equals 0, their data. The number of data sets rose dramatically from a the expression simplifies to J/n, or the headcount ratio. The mere 13 between 1979 and 1981, to 100 between 1997 and poverty gap is given by equal to 1. 1999. Sub-Saharan Africa continues to lag behind all other The welfare measure can be income or consumption. regions, with only 28 countries out of 48 having at least one Income is generally more difficult to measure accurately, and data set available. consumption comes closer to the notion of standard of liv- Data quality. A number of issues arise in measuring ing. And income can vary over time even if the standard of household living standards from survey data. As indicated living does not. So whenever possible, consumption data are above, one relates to the choice of income or consumption as used to estimate poverty. But when consumption data are a welfare indicator. Another issue is that household surveys not available, income data are used. can differ widely, for example, in the number of consumer Poverty line is a threshold below which a given household goods they identify. And even similar surveys may not be or individual will be regarded as poor. National poverty lines strictly comparable because of differences in timing or the are established according to countries' own judgment of quality and training of survey enumerators. minimum acceptable living standards. Because countries Comparisons of countries at different levels of develop- have different definitions of poverty, consistent comparisons ment pose a potential problem because of differences in the between countries can be difficult. Local poverty lines tend relative importance of consumption of nonmarket goods. to have higher purchasing power in rich countries, where The local market value of all consumption in kind (includ- more generous standards are used than in poor countries. Is ing own production, particularly important in underdevel- it reasonable to treat two people with the same standard of oped rural economies) should be included in total con- living--in terms of their command over commodities--dif- sumption expenditure. Similarly, imputed profit from the ferently because one happens to live in a better-off country? production of nonmarket goods should be included in Poverty measures based on an international poverty line income. This is not always done, though such omissions attempt to hold the real value of the poverty line constant were a far bigger problem in surveys before the 1980s. Most across countries, as is done when making comparisons over survey data now include valuations for consumption or time. The commonly used $1 a day standard, an interna- income from own production. Nonetheless, valuation meth- tional poverty line measured in 1985 international prices ods vary. For example, some surveys use the price in the Measuring equity 287 nearest market, while others use the average farm-gate sell- common values of c used are 0, 1 and 2: hence a value of c =0 ing price. gives more weight to distances between incomes in the lower In all cases the measures of poverty have been calculated tail; c = 1 applies equal weights across the distribution; and a from primary data sources (tabulations or household data) value of c = 2 give proportionately more weight to gaps in rather than existing estimates. Estimation from tabulations the upper tail. The GE measures with parameters 0 and 1 uses an interpolation method based on Lorenz curves with become, with l'Hopital's rule, two of Theil's measures of flexible functional forms, which have proved reliable in past inequality (Theil, 1967), the mean log deviation and the work. Empirical Lorenz curves were weighted by household Theil-T index respectively, as follows: size, so they are based on percentiles of population, not n 1 y households. GE(0) = log y The Poverty Monitoring team in the World Bank's Devel- n i=1 i opment Research Group calculates the number of people liv- ing below various international poverty lines, as well as other n 1 i yi log poverty and inequality measures that are published in World GE(1) = n yy y Development Indicators. That database is updated annually as i=1 new survey data become available, and a major reassessment 90th/10th percentile ratio is constructed by dividing the of progress against poverty is made about every three years. income (consumption) in the 90th percentile by the income (consumption) in the 10th percentile. A 90th/10th ratio of 5 Table A2 Income Distribution means that the household in the 90th percentile earns (spends) The Gini index measures the extent to which the distribu- five times as much as the household in the 10th percentile. tion of income/consumption (or land) among individuals Survey year gives the year in which the country survey or households within an economy deviates from a perfectly used to generate the reported data was completed. equal distribution. A Lorenz curve plots the cumulative per- centage of total income received against the cumulative pro- Table A3 Health portion of recipients, starting with the poorest individual or To measure equity in health, we have only used data from 123 household. The Gini index measures the area between the Demographic Health Surveys (DHS) collected in 67 coun- Lorenz curve and a hypothetical line of absolute equality, tries between 1985 and 2002. In addition to breaking down expressed as the share of the maximum area under the line. infant mortality rates by "asset indices" created by Filmer and Thus a Gini index of zero represents perfect equality, while Pritchett (1998) (as documented in Gwatkin and others an index of 1 implies perfect inequality. The Gini coefficient (2003, 2004), we compiled population breakdowns for differ- takes on values between 0 and 1 with zero interpreted as no ent groupings using the interactive "STATcompiler" feature inequality. in the DHS website. Infant mortality rate is the number of deaths to children n n Gini = 1 under 12 months of age per 1,000 live births. Figures used in 2 n2 y y i- yj the table are based on births in the 10 years preceding the i=1 j=1 survey. Generalized Entropy (or GE) indexes provide us with an Asset quintiles are constructed using the Filmer-Pritch- alternative class of income/consumption (or other) inequal- ett method to create an index of wealth based on 20­30 ity measures, given by household attributes--type of flooring and/or roof, source of water, availability of electricity, possession of such items as watches, radios, etc. Once the index is created it is applied GEc = 1 n1 c2 -c n c yi to the country's household surveys to construct a distribu- y . i=1 -1 tion of assets that is then divided into fifths, each household belonging to one of these quintiles. Indicators for the quin- The value of the measure GE ranges from 0 to infinity, tiles are then formed as the average result for all families for with zero representing an equal distribution (all incomes that indicator (e.g. infant mortality rate) within each asset identical) and higher values represent higher levels of quintile. inequality. The parameter c in the GE class represents the Education is the number of years (or level) of formal weight given to distances between incomes at different parts education the child's mother has completed at the time of of the income distribution, and can take any real value. For the survey. lower values of c, GE is more sensitive to changes in the Gender is the sex of the child (male or female) as lower tail of the distribution, and for higher values GE is reported by the child's mother (or household head if mother more sensitive to changes that affect the upper tail. The most is not present). 288 WORLD DEVELOPMENT REPORT 2006 Location is listed as urban if the surveyed household lives The GE class of inequality measures can be decomposed in a recognized city or surroundings, and listed as rural if into a between- and within-group component along the fol- otherwise. lowing lines: Table A4 Education c c 1 For measuring educational attainment, we used a database GEc = 1 - g + j GE j if c =/ 0,1 that was put together by Araujo, Ferreira, and Schady. The c(c -1) µ µ j µj j g j µj data come from the individual-level records of various household surveys for 124 countries. The selection criteria were to choose a survey instrument that: (a) was nationally µ representative; (b) was collected on 2000 or on the closest g if c = 0 j + GE jg j year; and (c) included information on the actual number of GEc = j log µj j years of education completed by the interviewees. The five- year cohorts group adults who were likely to have completed their education at the time of the survey. The cohorts are g if c = 1 µ + j GE j constructed based on one survey per country. GEc = µ µ j µj log µj j g j µj The measure share of total population by years of schooling gives the percent of the population having com- where µ is average per capita consumption, j refers to sub- pleted the reported number of years of schooling at the time groups, gj refers to the population share of group j, and GEj the survey was taken. refers to inequality in group j. The between-group compo- Mean years of schooling gives the arithmetic mean for nent of inequality is captured by the first term to the right of years of formal schooling for the total population, those liv- the equal sign. It can be interpreted as measuring what ing in urban areas, and those living in rural areas, as well as would be the level of inequality in the population if everyone for males and females. within the group had the same (group average) consump- The Gini index and the Generalized Entropy indexes tion level µ j. The second term on the right reflects the within reported in this table are the same as those described in table group inequality GEj. Ratios of the respective components A2, except for the fact that y now denotes years of schooling. with the overall inequality level provide a measure of per- We report the share of inequality in education which is centage contribution of between-group and within-group due to differences between urban and rural dwellers (loca- inequality to total inequality. tion) and between males and females (gender). Selected world development indicators In this year's edition, development data are presented in four and reliability arising from differences in the capabilities and tables presenting comparative socioeconomic data for more resources devoted to basic data collection and compilation. than 130 economies for the most recent year for which data For some topics, competing sources of data require review are available and, for some indicators, for an earlier year. An by World Bank staff to ensure that the most reliable data additional table presents basic indicators for 75 economies available are presented. In some instances, where available with sparse data or with populations of less than 2 million. data are deemed too weak to provide reliable measures of The indicators presented here are a selection from more levels and trends or do not adequately adhere to interna- than 800 included in World Development Indicators 2005. tional standards, the data are not shown. Published annually, World Development Indicators reflects a The data presented are generally consistent with those in comprehensive view of the development process. Its opening World Development Indicators 2005. However, data have been chapter reports on the Millennium Development Goals, revised and updated wherever new information has become which grew out of agreements and resolutions of world con- available. Differences may also reflect revisions to historical ferences organized by the United Nations (U.N.) in the past series and changes in methodology. Thus data of different decade, and reaffirmed at the Millennium Summit in Sep- vintages may be published in different editions of World tember 2000 by member countries of the U.N. The other five Bank publications. Readers are advised not to compile data main sections recognize the contribution of a wide range of series from different publications or different editions of the factors: human capital development, environmental sustain- same publication. Consistent time-series data are available ability, macroeconomic performance, private sector devel- on World Development Indicators 2005 CD-ROM and opment and the investment climate, and the global links that through WDI Online. influence the external environment for development. World All dollar figures are in current U.S. dollars unless other- Development Indicators is complemented by a separately wise stated. The various methods used to convert from published database that gives access to over 1,000 data tables national currency figures are described in the Technical notes. and 800 time-series indicators for 222 economies and Because the World Bank's primary business is providing regions. This database is available through an electronic sub- lending and policy advice to its low- and middle-income scription (WDI Online) or as a CD-ROM. members, the issues covered in these tables focus mainly on these economies. Where available, information on the high- Data sources and methodology income economies is also provided for comparison. Readers Socioeconomic and environmental data presented here are may wish to refer to national statistical publications and drawn from several sources: primary data collected by the publications of the OECD and the European Union for more World Bank, member country statistical publications, information on the high-income economies. research institutes, and international organizations such as Classification of economies the U.N. and its specialized agencies, the International Mon- etary Fund (IMF), and the Organisation for Economic Co- and summary measures operation and Development (OECD). Although interna- The summary measures at the bottom of each table include tional standards of coverage, definition, and classification economies classified by income per capita and by region. apply to most statistics reported by countries and interna- GNI per capita is used to determine the following income tional agencies, there are inevitably differences in timeliness classifications: low-income, $825 or less in 2004; middle- 289 290 WORLD DEVELOPMENT REPORT 2006 income, $826 to $10,065; and high-income, $10,066 and Terminology and country coverage above. A further division at GNI per capita $3,255 is made The term country does not imply political independence but between lower-middle-income and upper-middle-income may refer to any territory for which authorities report separate economies. See the table on classification of economies on social or economic statistics. Data are shown for economies as the next page for a list of economies in each group (includ- they were constituted in 2003, and historical data are revised to ing those with populations of less than 2 million). reflect current political arrangements. Throughout the tables, Summary measures are either totals (indicated by t if the exceptions are noted. aggregates include estimates for missing data and nonre- porting countries, or by an s for simple sums of the data Technical notes available), weighted averages (w), or median values (m) cal- Because data quality and intercountry comparisons are often culated for groups of economies. Data for the countries problematic, readers are encouraged to consult the Technical excluded from the main tables (those presented in Table 5) notes, the table on Classification of Economies by Region and have been included in the summary measures, where data Income (next page), and the footnotes to the tables. For more are available, or by assuming that they follow the trend of extensive documentation see World Development Indicators reporting countries. This gives a more consistent aggregated 2005. measure by standardizing country coverage for each period Readers may find more information on the WDI 2005, and shown. Where missing information accounts for a third or orders can be made online, by phone, or fax as follows: more of the overall estimate, however, the group measure is reported as not available. The section on Statistical methods For more information and to order online: http://www. in the Technical notes provides further information on aggre- worldbank.org/data/wdi2005/index.htm. gation methods. Weights used to construct the aggregates are To order by phone or fax: 1-800-645-7247 or 703-661- listed in the technical notes for each table. 1580; Fax 703-661-1501 From time to time an economy's classification is revised To order by mail: The World Bank, P.O. Box 960, Herndon, because of changes in the above cutoff values or in the econ- VA 20172-0960, U.S.A. omy's measured level of GNI per capita. When such changes occur, aggregates based on those classifications are recalcu- lated for the past period so that a consistent time series is maintained. Classification of economies by region and income, FY2006 East Asia and the Pacific Latin America and the Caribbean South Asia High income OECD American Samoa UMC Antigua & Barbuda UMC Afghanistan LIC Australia Cambodia LIC Argentina UMC Bangladesh LIC Austria China LMC Barbados UMC Bhutan LIC Belgium Fiji LMC Belize UMC India LIC Canada Indonesia LMC Bolivia LMC Maldives LMC Denmark Kiribati LMC Brazil LMC Nepal LIC Finland Korea, Dem. Rep. LIC Chile UMC Pakistan LIC France Lao PDR LIC Colombia LMC Sri Lanka LMC Germany Malaysia UMC Costa Rica UMC Greece Marshall Islands LMC Cuba LMC Sub-Saharan Africa Iceland Micronesia, Fed. Sts. LMC Dominica UMC Angola LMC Ireland Mongolia LIC Dominican Republic LMC Benin LIC Italy Myanmar LIC Ecuador LMC Botswana UMC Japan Northern Mariana Islands UMC El Salvador LMC Burkina Faso LIC Korea, Rep. Palau UMC Grenada UMC Burundi LIC Luxembourg Papua New Guinea LIC Guatemala LMC Cameroon LIC Netherlands Philippines LMC Guyana LMC Cape Verde LMC New Zealand Samoa LMC Haiti LIC Central African Rep. LIC Norway Solomon Islands LIC Honduras LMC Chad LIC Portugal Thailand LMC Jamaica LMC Comoros LIC Spain Timor-Leste LIC Mexico UMC Congo, Dem. Rep. LIC Sweden Tonga LMC Nicaragua LIC Congo, Rep. LIC Switzerland Vanuatu LMC Panama UMC Côte d'Ivoire LIC United Kingdom Vietnam LIC Paraguay LMC Equatorial Guinea UMC United States Peru LMC Eritrea LIC Europe and Central Asia St. Kitts and Nevis UMC Ethiopia LIC Other high-income Albania LMC St. Lucia UMC Gabon UMC Andorra Armenia LMC St. Vincent & the Gambia, The LIC Aruba Azerbaijan LMC Grenadines UMC Ghana LIC Bahamas, The Belarus LMC Suriname LMC Guinea LIC Bahrain Bosnia & Herzegovina LMC Trinidad & Tobago UMC Guinea-Bissau LIC Bermuda Bulgaria LMC Uruguay UMC Kenya LIC Brunei Croatia UMC Venezuela, RB UMC Lesotho LIC Cayman Islands Czech Rep. UMC Liberia LIC Channel Islands Estonia UMC Middle East and North Africa Madagascar LIC Cyprus Georgia LMC Algeria LMC Malawi LIC Faeroe Islands Hungary UMC Djibouti LMC Mali LIC French Polynesia Kazakhstan LMC Egypt, Arab Rep. LMC Mauritania LIC Greenland Kyrgyz Rep. LIC Iran, Islamic Rep. LMC Mauritius UMC Guam Latvia UMC Iraq LMC Mayotte UMC Hong Kong, China Lithuania UMC Jordan LMC Mozambique LIC Isle of Man Macedonia, FYR LMC Lebanon UMC Namibia LMC Israel Moldova LIC Libya UMC Niger LIC Kuwait Poland UMC Morocco LMC Nigeria LIC Liechtenstein Romania LMC Oman UMC Rwanda LIC Macao, China Russian Federation UMC Syrian Arab Rep. LMC São Tomé & Principe LIC Malta Serbia & Montenegro LMC Tunisia LMC Senegal LIC Monaco Slovak Rep. UMC West Bank & Gaza LMC Seychelles UMC Netherlands Antilles Tajikistan LIC Yemen, Rep. LIC Sierra Leone LIC New Caledonia Turkey UMC Somalia LIC Puerto Rico Turkmenistan LMC South Africa UMC Qatar Ukraine LMC Sudan LIC San Marino Uzbekistan LIC Swaziland LMC Saudi Arabia Tanzania LIC Singapore Togo LIC Slovenia Uganda LIC Taiwan, China Zambia LIC United Arab Emirates Zimbabwe LIC Virgin Islands (U.S.) Note: This table classifies all World Bank member economies, and all other economies with populations of more than 30,000. Economies are divided among income groups according to 2004 GNI per capita, calculated using the World Bank Atlas method. The groups are: low-income economies (LIC), $825 or less; lower-middle-income economies (LMC), $826­3,255; upper-middle- income economies (UMC), $3,256­10,065; and high-income economies, $10,066 or more. Source: World Bank data. 291 Table 1. Key indicators of development Population Gross national PPP Life income (GNI)a gross national expectancy income (GNI)b at birth Millions Average Density $ $ $ $ Gross Adult Carbon annual people per billions per capita billions per capita domestic literacy dioxide % growth sq. km product (GDP) rate emissions per capita Male Female % ages 15 per capita % growth years years and older metric tons 2004 2000­4 2004 2004 2004 2004 2004 2003­4 2003 2003 1998­2004 2000 Albania 3.2 0.6 116 6.6 2,080 16 5,070 5.6 72 77 99 c 0.9 Algeria 32.4 1.6 14 73.7 2,280 203 d 6,260d 3.4 70 72 70 e 2.9 Angola 14.0 3.0 11 14.4 1,030 28 d 2,030d 7.7 45 48 67 e 0.5 Argentina 38.2 1.0 14 142.3 3,720 476 12,460 8.0 71 78 97 c 3.8 Armenia 3.0 ­0.5 108 3.4 1,120 13 4,270 10.3 71 79 99 c 1.1 Australia 20.1 1.2 3 541.2 26,900 588 29,200 1.8 77 83 .. 18.0 Austria 8.1 0.3 98 262.1 32,300 258 31,790 1.9 76 82 .. 7.6 Azerbaijan 8.3 0.7 100 7.8 950 32 3,830 10.6 .. .. 99 c 3.6 Bangladesh 140.5 1.7 1,079 61.2 440 278 1,980 3.7 62 63 41 0.2 Belarus 9.8 ­0.4 47 20.9 2,120 68 6,900 11.5 62 74 100 c 5.9 Belgium 10.4 0.4 344 322.8 31,030 326 31,360 2.6 75 81 .. 10.0 Benin 6.9 2.6 62 3.7 530 8 1,120 0.2 51 55 34 c 0.3 Bolivia 9.0 1.9 8 8.7 960 23 2,590 1.6 62 66 87 c 1.3 Bosnia & Herzegovina 3.8 0.4 75 7.8 2,040 29 7,430 4.6 71 77 95 e 5.1 Brazil 178.7 1.2 21 552.1 3,090 1,433 8,020 3.9 65 73 88 e 1.8 Bulgaria 7.8 ­0.9 70 21.3 2,740 61 7,870 6.1 69 76 98 c 5.3 Burkina Faso 12.4 2.4 45 4.4 360 15 d 1,220d 1.6 42 43 .. 0.1 Burundi 7.3 1.9 286 0.7 90 5 d 660d 3.5 41 42 59 e 0.0 Cambodia 13.6 1.8 77 4.4 320 30 d 2,180d 4.2 53 56 74 e 0.0 Cameroon 16.4 2.0 35 13.1 800 34 2,090 2.8 47 49 68 e 0.4 Canada 31.9 0.9 3 905.6 28,390 978 30,660 2.0 76 83 .. 14.2 Central African Rep. 3.9 1.5 6 1.2 310 4 d 1,110d ­0.8 41 42 49 e 0.1 Chad 8.8 2.9 7 2.3 260 13 1,420 27.4 47 50 26 e 0.0 Chile 16.0 1.2 21 78.4 4,910 168 10,500 4.9 73 80 96 c 3.9 China 1,296.5 0.7 139 1,676.8 1,290 7,170 f 5,530f 8.8 69 73 91 c 2.2 Hong Kong, China 6.8 0.7 6,569 183.5 26,810 216 31,510 7.7 78 83 .. 5.0 Colombia 45.3 1.7 44 90.6 2,000 309 d 6,820d 2.3 69 75 94 e 1.4 Congo, Dem. Rep. 54.8 3.0 24 6.4 120 37 d 680d 3.2 45 46 65 e 0.1 Congo, Rep. 3.9 2.8 11 3.0 770 3 750 1.4 50 54 83 0.5 Costa Rica 4.1 1.6 80 19.0 4,670 39 d 9,530d 2.7 76 81 96 1.4 Côte d'Ivoire 17.1 2.0 54 13.3 770 24 1,390 ­4.0 45 46 48 e 0.7 Croatia 4.5 0.7 81 29.7 6,590 53 11,670 2.2 70 78 98 c 4.5 Czech Republic 10.2 ­0.2 132 93.2 9,150 187 18,400 4.2 72 79 .. 11.6 Denmark 5.4 0.3 127 219.4 40,650 170 31,550 2.2 75 80 .. 8.4 Dominican Rep. 8.9 1.5 183 18.4 2,080 60 d 6,750d 0.6 64 70 88 e 3.0 Ecuador 13.2 1.5 48 28.8 2,180 49 3,690 5.0 69 74 91 c 2.0 Egypt, Arab Rep. 68.7 1.8 69 90.1 1,310 283 4,120 2.5 68 71 .. 2.2 El Salvador 6.7 1.7 321 15.6 2,350 33 d 4,980d ­0.2 67 74 80 1.1 Eritrea 4.5 2.2 44 0.8 180 5 d 1,050d ­0.2 50 52 .. 0.1 Ethiopia 70.0 2.1 70 7.7 110 57 d 810d 11.2 41 43 42 0.1 Finland 5.2 0.2 17 171.0 32,790 154 29,560 3.6 75 82 .. 10.3 France 60.0 0.5 109 1,858.7 30,090 g 1,759 29,320 1.9 76 83 .. 6.2 Georgia 4.5 ­1.1 65 4.7 1,040 13 d 2,930d 9.6 69 78 .. 1.3 Germany 82.6 0.1 237 2,489.0 30,120 2,310 27,950 1.5 76 81 .. 9.6 Ghana 21.1 1.8 93 8.1 380 48 d 2,280d 3.3 54 55 54 c 0.3 Greece 11.1 0.4 86 183.9 16,610 244 22,000 3.8 75 81 91 e 8.2 Guatemala 12.6 2.6 116 26.9 2,130 52 d 4,140d 0.1 63 69 69 c 0.9 Guinea 8.1 2.1 33 3.7 460 17 2,130 0.5 46 47 .. 0.2 Haiti 8.6 1.9 312 3.4 390 14 d 1,680d ­5.5 50 54 52 0.2 Honduras 7.1 2.5 64 7.3 1,030 19 d 2,710d 2.1 63 69 80 c 0.7 Hungary 10.1 0.1 109 83.3 8,270 157 15,620 4.6 69 77 99 c 5.4 India 1,079.7 1.5 363 674.6 620 3,347 d 3,100d 5.4 63 64 61 c 1.1 Indonesia 217.6 1.3 120 248.0 1,140 753 3,460 3.7 65 69 88 1.3 Iran, Islamic Rep. 66.9 1.2 41 154.0 2,300 505 7,550 5.7 68 71 77 e 4.9 Ireland 4.0 1.3 58 137.8 34,280 133 33,170 4.2 75 80 .. 11.1 Israel 6.8 1.9 313 118.1 17,380 160 23,510 2.6 77 81 97 e 10.0 Italy 57.6 ­0.1 196 1,503.6 26,120 1,604 27,860 1.3 77 83 .. 7.4 Jamaica 2.7 0.8 246 7.7 2,900 10 3,630 1.2 74 78 88 4.2 Japan 127.8 0.2 351 4,749.9 37,180 3,838 30,040 2.5 78 85 .. 9.3 Jordan 5.4 2.7 61 11.6 2,140 25 4,640 4.9 71 74 90 e 3.2 Kazakhstan 15.0 ­0.2 6 33.8 2,260 104 6,980 8.8 56 67 100 c 8.1 Kenya 32.4 1.9 57 15.0 460 34 1,050 0.4 45 46 74 e 0.3 Korea, Rep. 48.1 0.6 488 673.0 13,980 982 20,400 4.1 71 78 .. 9.1 Kuwait 2.5 2.9 138 43.1 17,970 47 d 19,510 d 7.1 75 79 83 21.9 Kyrgyz Rep. 5.1 0.9 27 2.1 400 9 1,840 6.1 61 69 99 c 0.9 Lao PDR 5.8 2.3 25 2.2 390 11 1,850 3.6 54 56 69 e 0.1 Latvia 2.3 ­0.7 37 12.6 5,460 27 11,850 9.4 66 76 100 c 2.5 Lebanon 4.6 1.3 445 22.7 4,980 25 5,380 5.0 69 73 .. 3.5 Lithuania 3.4 ­0.5 55 19.7 5,740 43 12,610 7.1 66 78 100 c 3.4 Macedonia, FYR 2.1 0.4 81 4.9 2,350 13 6,480 1.9 71 76 96 c 5.5 Madagascar 17.3 2.8 30 5.2 300 14 830 2.6 54 57 71 e 0.1 Malawi 11.2 2.0 119 1.9 170 7 620 1.8 37 38 64 c 0.1 Malaysia 25.2 2.0 77 117.1 4,650 243 9,630 5.2 71 76 89 c 6.2 Mali 11.9 2.4 10 4.3 360 12 980 ­0.3 40 42 19 c 0.1 Mauritania 2.9 2.4 3 1.2 420 6 d 2,050d 4.5 49 53 51 c 1.2 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. 292 Table 1. Key indicators of development--continued Population Gross national PPP Life income (GNI)a gross national expectancy income (GNI)b at birth Millions Average Density $ $ $ $ Gross Adult Carbon annual people per billions per capita billions per capita domestic literacy dioxide % growth sq. km product (GDP) rate emissions $ per capita Male Female % ages 15 per capita % growth years years and older metric tons 2004 2000­4 2004 2004 2004 2004 2004 2003­4 2003 2003 1998­2004 2000 Mexico 103.8 1.4 54 703.1 6,770 995 9,590 2.9 71 77 90e 4.3 Moldova 4.2 ­0.4 128 2.6 710 h 8 1,930 7.8 63 71 96e 1.5 Mongolia 2.5 1.2 2 1.5 590 5 2,020 9.1 64 68 98c 3.1 Morocco 30.6 1.6 69 46.5 1,520 125 4,100 1.9 67 71 51 1.3 Mozambique 19.1 2.0 24 4.7 250 22 d 1,160d 5.9 40 42 46 0.1 Namibia 2.0 1.8 2 4.8 2,370 14 d 6,960d 3.2 41 40 85c 1.0 Nepal 25.2 2.2 176 6.5 260 37 1,470 1.6 60 60 49c 0.1 Netherlands 16.3 0.5 480 515.1 31,700 507 31,220 1.2 76 81 .. 8.7 New Zealand 4.1 1.3 15 82.5 20,310 90 22,130 3.1 77 81 .. 8.3 Nicaragua 5.6 2.5 46 4.5 790 18 3,300 1.4 67 71 77e 0.7 Niger 12.1 3.0 10 2.8 230 10 d 830d ­1.9 46 47 14c 0.1 Nigeria 139.8 2.4 154 54.0 390 130 d 930d 1.1 44 45 67 0.3 Norway 4.6 0.5 15 238.4 52,030 177 38,550 2.5 77 82 .. 11.1 Oman 2.7 2.5 9 20.5 7,890 34 13,250 0.1 73 76 74 8.2 Pakistan 152.1 2.4 197 90.7 600 328 2,160 3.9 63 65 49e 0.8 Panama 3.0 1.5 41 13.5 4,450 21 d 6,870d 4.7 73 77 92c 2.2 Papua New Guinea 5.6 2.3 12 3.3 580 13 d 2,300d 0.5 56 58 57c 0.5 Paraguay 5.8 2.3 15 6.8 1,170 28 d 4,870d 0.4 69 73 92e 0.7 Peru 27.5 1.5 22 65.0 2,360 148 5,370 3.5 68 72 88e 1.1 Philippines 83.0 2.0 278 96.9 1,170 406 4,890 4.3 68 72 93c 1.0 Poland 38.2 ­0.3 125 232.4 6,090 482 12,640 5.4 71 79 .. 7.8 Portugal 10.4 0.5 114 149.8 14,350 201 19,250 1.1 73 80 .. 5.8 Romania 21.9 ­0.7 95 63.9 2,920 179 8,190 7.7 66 74 97c 3.8 Russian Federation 142.8 ­0.5 8 487.3 3,410 1,374 9,620 7.7 60 72 99c 9.9 Rwanda 8.4 2.2 341 1.9 220 11 d 1,300d 3.5 39 40 64e 0.1 Saudi Arabia 23.2 2.8 11 242.2 10,430 325 d 14,010 d 2.1 72 75 79e 18.1 Senegal 10.5 2.3 54 7.0 670 18 d 1,720d 3.8 51 54 39e 0.4 Serbia & Montenegro 8.2 .. 80 21.7 2,620 i .. .. 7.0 70 75 96c 3.7 Sierra Leone 5.4 1.9 76 1.1 200 4 790 5.4 36 39 30e 0.1 Singapore 4.3 1.9 6,470 105.0 24,220 115 26,590 6.3 76 80 93c 14.7 Slovak Rep. 5.4 0.0 110 34.9 6,480 77 14,370 5.5 69 78 100 c 6.6 Slovenia 2.0 0.1 99 29.6 14,810 41 20,730 4.6 72 80 100 7.3 South Africa 45.6 0.9 38 165.3 3,630 500 d 10,960 d 4.3 45 46 .. 7.4 Spain 41.3 0.5 83 875.8 21,210 1,035 25,070 2.6 76 84 .. 7.0 Sri Lanka 19.4 1.3 301 19.6 1,010 78 4,000 4.8 72 76 90c 0.6 Sudan 34.4 2.2 14 18.2 530 64 1,870 3.5 57 60 59e 0.2 Sweden 9.0 0.3 22 321.4 35,770 267 29,770 3.3 78 82 .. 5.3 Switzerland 7.4 0.7 187 356.1 48,230 261 35,370 1.3 78 83 .. 5.4 Syrian Arab Rep. 17.8 2.3 97 21.1 1,190 63 3,550 1.3 68 73 83e 3.3 Tajikistan 6.4 1.1 46 1.8 280 7 1,150 9.4 63 69 99c 0.6 Tanzania 36.6 2.0 41 11.6 j 330 j 24 660 4.3 42 43 69c 0.1 Thailand 62.4 0.7 122 158.7 2,540 500 8,020 5.4 67 72 93c 3.3 Togo 5.0 2.1 91 1.9 380 8 d 1,690d 0.8 49 51 53e 0.4 Tunisia 10.0 1.1 64 26.3 2,630 73 7,310 4.5 71 75 74c 1.9 Turkey 71.7 1.5 93 268.7 3,750 551 7,680 7.4 66 71 88e 3.3 Turkmenistan 4.9 1.5 10 6.6 1,340 34 6,910 15.4 61 68 .. 7.5 Uganda 25.9 2.7 132 6.9 270 39 d 1,520d 3.1 43 44 69 0.1 Ukraine 48.0 ­0.8 83 60.3 1,260 300 6,250 12.9 63 74 99c 6.9 United Kingdom 59.4 0.2 247 2,016.4 33,940 1,869 31,460 3.0 75 80 .. 9.6 United States 293.5 1.0 32 12,150.9 41,400 11,655 39,710 3.4 75 80 .. 19.8 Uruguay 3.4 0.6 19 13.4 3,950 31 9,070 11.6 72 79 98 1.6 Uzbekistan 25.9 1.3 63 11.9 460 48 1,860 6.3 64 70 99 4.8 Venezuela, RB 26.1 1.8 30 105.0 4,020 150 5,760 15.3 71 77 93c 6.5 Vietnam 82.2 1.1 252 45.1 550 222 2,700 6.4 68 72 90c 0.7 West Bank & Gaza 3.5 4.2 564 3.8 1,120 .. .. ­5.6 71 75 92e .. Yemen, Rep. 19.8 3.0 37 11.2 570 16 820 ­0.4 57 58 49 0.5 Zambia 10.5 1.6 14 4.7 450 9 890 3.2 36 37 68e 0.2 Zimbabwe 13.2 1.0 34 .. ..k 28 2,180 ­6.7 39 38 90 1.2 World 6,345.1 s 1.2 w 49 w 39,833.6 t 6,280 w 55,584 t 8,760 w 2.9 w 65 w 69 w 82 w 3.8 w Low income 2,338.1 1.8 80 1,184.3 510 5,279 2,260 4.4 57 59 64 0.8 Middle income 3,006.2 0.9 44 6,594.2 2,190 19,483 6,480 6.0 67 72 90 3.2 Lower middle income 2,430.3 0.9 63 3,846.9 1,580 13,709 5,640 6.2 68 72 89 2.9 Upper middle income 575.9 0.7 20 2,747.8 4,770 5,814 10,090 5.9 65 73 93 6.3 Low & middle income 5,344.3 1.3 55 7,777.5 1,460 24,753 4,630 5.5 63 66 81 2.2 East Asia & Pacific 1,870.2 0.9 118 2,389.4 1,280 9,488 5,070 7.6 68 71 85 2.1 Europe & Central Asia 472.1 ­0.1 20 1,553.3 3,290 3,947 8,360 7.0 64 73 98 6.7 Latin America & Carib. 541.3 1.4 27 1,948.1 3,600 4,146 7,660 4.5 68 74 88 2.7 Middle East & N. Africa 294.0 1.8 33 588.6 2,000 1,693 5,760 3.3 67 70 74 4.2 South Asia 1,447.7 1.7 303 860.3 590 4,103 2,830 5.0 62 64 64 0.9 Sub-Saharan Africa 719.0 2.2 30 432.0 600 1,331 1,850 2.4 45 46 61 0.7 High income 1,000.8 0.7 30 32,064.0 32,040 31,000 30,970 2.8 75 81 91 12.4 Note: a. Calculated using the World Bank Atlas method. b. PPP is purchasing power parity; see definitions. c. National estimates based on census data. d. The estimate is based on regression; others are extrapolated from the latest International Comparison Programme benchmark estimates. e. National estimates based on survey data. f. Estimate based on bilateral comparison between China and the United States (Ruoen and Kai 1995). g. GNI and GNI per capita estimates include the French overseas departments of French Guiana, Guadeloupe, Martinique, and Réunion. h. Excludes data for Transnistria. i. Excludes data for Kosovo. j. Data refers to mainland Tanzania only. k. Estimated to be low income ($825 or less). 293 Table 2. Millennium Development Goals: eradicating poverty and improving lives Achieve Combat universal Promote Reduce HIV/AIDS Eradicate extreme primary gender child and other poverty and hunger education equality mortality diseases Improve maternal health Proportion of Prevalence of Primary Gender parity Under-five HIV Maternal Births attended population child malnutrition completion ratio in mortality prevalence mortality by skilled below $1 % of children rate (%) primary and rate per % of rate per health staff (PPP) a day under 5 secondary 1,000 population 100,000 % of total % school ages 15­49 live births (%) Modeled estimates 1988/89­ 2000/01­ Survey year 1989­94a 2000­3a 1993/94b 2003/04a 1990/91 2002/03 1990 2003 2003 2000 1990­2a 2000­3a Albania 2002 c <2 .. 13.6 .. 101 96 100 45 21 .. 55 .. 94 Algeria 1995 c <2 9.2 6.0 80 96 83 99 69 41 0.1 140 77 92 Angola .. 20.0 30.5 39 .. .. .. 260 260 3.9 1,700 .. 45 Argentina 2001 d 3.3 1.9 .. 100 103 .. 102 28 20 0.7 82 96 99 Armenia 2003 c, e <2 .. 2.6 91 110 .. 101 60 33 .. 55 .. 97 Australia .. .. .. .. .. 101 98 10 6 0.1 8 100 .. Austria .. .. .. .. 101 95 97 10 6 0.3 4 .. .. Azerbaijan 2001 c 3.7 .. 6.8 .. 106 100 97 105 91 <0.1 94 .. 84 Bangladesh 2000 c 36.0 68.3 52.2 46 73 77 107 144 69 .. 380 .. 14 Belarus 2000 c <2 .. .. 94 99 .. 102 17 17 .. 35 .. 100 Belgium .. .. .. .. .. 101 106 9 5 0.2 10 .. .. Benin .. 35.0 22.9 22 51 48 66 185 154 1.9 850 .. 66 Bolivia 1999 c 14.4 14.9 .. 71 101 90 98 120 66 0.1 420 .. 65 Bosnia & Herzegovina .. .. 4.1 .. .. .. .. 22 17 <0.1 31 97 100 Brazil 2001 d 8.2 7.0 .. 97 112 .. 103 60 35 0.7 260 72 .. Bulgaria 2003 c, e <2 .. .. 90 97 99 97 19 17 0.1 32 .. .. Burkina Faso 1998 c 44.9 32.7 37.7 19 29 61 72 210 207 1.8f 1,000 .. .. Burundi 1998 c 54.6 37.5 45.1 47 31 82 79 190 190 6.0 1,000 .. 25 Cambodia 1997 c 34.1 .. 45.2 .. 81 73 85 115 140 2.6 450 .. 32 Cameroon 2001 c 17.1 15.1 .. 56 70 83 85 139 166 5.5g 730 58 60 Canada .. .. .. .. .. 99 100 8 7 0.3 6 .. .. Central African Rep. 1993 c 66.6 .. .. 27 .. 60 .. 180 180 13.5 1,100 .. 44 Chad .. .. 28.0 19 25 41 59 203 200 4.8 1,100 .. 16 Chile 2000 d <2 1.0 0.8 .. 104 101 100 19 9 0.3 31 .. 100 China 2001 c 16.6 17.4 10.0 105 98 87 98 49 37 0.1 56 .. 97 Hong Kong, China .. .. .. 102 101 103 101 .. .. 0.1 .. .. .. Colombia 1999 d 8.2 10.1 6.7 71 88 114 104 36 21 0.7 130 82 86 Congo, Dem. Rep. .. .. 31.0 47 32 .. .. 205 205 4.2 990 .. 61 Congo, Rep. .. 23.9 .. 54 59 85 87 110 108 4.9 510 .. .. Costa Rica 2000 d 2.0 2.2 .. 72 94 100 101 17 10 0.6 43 98 98 Côte d'Ivoire 2002 c, e 14.8 23.8 .. 46 51 66 69 157 192 7.0 690 .. 63 Croatia 2001 c <2 0.7 .. 83 96 102 101 13 7 <0.1 8 .. .. Czech Rep. 1996 d <2 1.0 .. .. 106 98 101 13 5 0.1 9 .. .. Denmark .. .. .. 98 107 101 103 9 6 0.2 5 .. .. Dominican Rep. 1998 d <2 10.3 5.3 62 93 .. 108 65 35 1.7 150 93 98 Ecuador 1998 d 17.7 16.5 .. 92 100 .. 100 57 27 0.3 130 .. .. Egypt, Arab Rep. 1999­2000 c 3.1 9.9 8.6 .. 91 81 94 104 39 <0.1 84 37 69 El Salvador 2000 d 31.1 11.2 10.3 59 89 101 96 60 36 0.7 150 .. 69 Eritrea .. 41.0 39.6 19 40 .. 76 147 85 2.7 630 .. 28 Ethiopia 1999­2000 c 23.0 47.7 47.2 22 39 68 69 204 169 4.4 850 .. 6 Finland .. .. .. 97 101 109 106 7 4 0.1 6 .. .. France .. .. .. 104 98 102 100 9 6 0.4 17 .. .. Georgia 2001 c 2.7 .. .. 81 82 98 100 47 45 0.1 32 .. .. Germany .. .. .. 101 101 99 99 9 5 0.1 8 .. .. Ghana 1998­99 c 44.8 27.3 22.1 61 62 77 91 125 95 3.1 540 .. .. Greece .. .. .. 100 .. 99 100 11 5 0.2 9 .. .. Guatemala 2000 d 16.0 33.2 22.7 .. 66 .. 93 82 47 1.1 240 .. 41 Guinea .. .. .. 17 41 44 69 240 160 3.2 740 31 .. Haiti 2001 c, e 67.0 26.8 17.2 29 .. 95 .. 150 118 5.6 680 .. 24 Honduras 1999 d 20.7 18.3 16.6 65 79 .. .. 59 41 1.8 110 45 56 Hungary 2002 c <2 2.2 .. 82 102 100 100 17 7 0.1 16 .. .. India 1999­2000 c 35.3 53.2 .. 78 81 70 88 123 87 0.9 540 .. 43 Indonesia 2002 c 7.5 39.9 27.3 93 95 93 98 91 41 0.1 230 32 68 Iran, Islamic Rep. 1998 c <2 .. .. 101 107 85 95 72 39 0.1 76 .. 90 Ireland .. .. .. .. .. 104 104 9 7 0.1 5 .. .. Israel .. .. .. .. .. 105 99 12 6 0.1 17 .. .. Italy .. .. .. 104 101 100 99 9 6 0.5 5 .. .. Jamaica 2000 c <2 4.6 .. 89 85 102 101 20 20 1.2 87 .. .. Japan .. .. .. 101 .. 101 100 6 5 <0.1 10 100 .. Jordan 2002 c <2 6.4 4.4 104 98 101 101 40 28 <0.1 41 87 100 Kazakhstan 2003 c <2 .. .. .. 110 102 100 63 73 0.2 210 .. .. Kenya 1997 c 22.8 22.5 19.9 86 73 92 94 97 123 6.7f 1,000 .. 41 Korea, Rep. 1998 d <2 .. .. 98 97 99 100 9 5 <0.1 20 98 .. Kuwait .. .. .. 53 96 97 104 16 9 .. 5 .. .. Kyrgyz Rep. 2002 c <2 .. 5.8 .. 93 .. 100 80 68 0.1 110 .. .. Lao PDR 1997­98 c 26.3 40.0 40.0 46 74 75 83 163 91 0.1 650 .. 19 Latvia 1998 c <2 .. .. 73 101 100 99 18 12 0.6 42 .. .. Lebanon .. .. .. .. 68 .. 102 37 31 0.1 150 .. .. Lithuania 2000 c <2 .. .. 89 102 .. 99 14 11 0.1 13 .. .. Macedonia, FYR 2003 c <2 .. .. 99 100 99 99 33 11 <0.1 23 .. 98 Madagascar 2001 c 61.0 45.2 33.1 35 47 98 .. 168 126 1.7 550 57 46 Malawi 1997­98 c 41.7 27.6 25.4 36 71 81 92 241 178 14.2 1,800 55 61 Malaysia 1997 d <2 22.4 .. 88 92 102 105 21 7 0.4 41 .. 97 Mali 1994 c 72.3 30.6 33.2 12 40 58 71 250 220 1.7h 1,200 .. 41 Mauritania 2000 c 25.9 47.6 31.8 33 43 67 94 162 107 0.6 1,000 40 57 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. 294 Table 2. Millennium Development Goals: eradicating poverty and improving lives--continued Achieve Combat universal Promote Reduce HIV/AIDS Eradicate extreme primary gender child and other poverty and hunger education equality mortality diseases Improve maternal health Proportion of Prevalence of Primary Gender parity Under-five HIV Maternal Births attended population child malnutrition completion ratio in mortality prevalence mortality by skilled below $1 % of children rate (%) primary and rate per % of rate per health staff (PPP) a day under 5 secondary 1,000 population 100,000 % of total % school ages 15­49 live births (%) Modeled estimates 1988/89­ 2000/01­ Survey year 1989­94a 2000­3a 1993/94b 2003/04a 1990/91 2002/03 1990 2003 2003 2000 1990­2a 2000­3a Mexico 2000 c 9.9 16.6 .. 88 99 98 103 46 28 0.3 83 .. .. Moldova 2001 c 21.8 .. .. 95 83 105 102 37 32 0.2 36 .. .. Mongolia 1998 c 27.0 12.3 12.7 .. 108 109 110 104 68 <0.1 110 .. 99 Morocco 1999 c <2 9.5 .. 47 75 70 88 85 39 0.1 220 31 .. Mozambique 1996 c 37.9 .. .. 28 52 73 79 242 147 12.2 1,000 .. 48 Namibia 1993 d 34.9 26.2 24.0 77 92 111 104 86 65 21.3 300 68 78 Nepal 1995­96 c 39.1 .. 48.3 55 78 57 85 145 82 0.5 740 7 11 Netherlands .. .. .. .. 98 97 98 9 6 0.2 16 .. .. New Zealand .. .. .. 98 96 100 103 11 6 0.1 7 .. .. Nicaragua 2001 c 45.1 11.0 9.6 44 75 112 104 68 38 0.2 230 .. 67 Niger 1995 c 60.6 42.6 40.1 18 26 56 69 320 262 1.2 1,600 15 16 Nigeria 2003 c, e 70.8 39.1 28.7 63 82 78 81 235 198 5.4 800 31 35 Norway .. .. .. .. .. 102 101 9 5 0.1 16 .. .. Oman .. 24.3 .. 73 73 89 97 30 12 0.1 87 .. 95 Pakistan 2001 c, e 17.0 40.0 35.0 .. .. .. 71 138 98 0.1 500 19 23 Panama 2000 d 7.2 6.1 .. 86 98 99 100 34 24 0.9 160 .. .. Papua New Guinea .. .. .. 51 53 79 87 101 93 0.6 300 .. .. Paraguay 2002 d 16.4 3.7 .. 66 93 98 98 37 29 0.5 170 67 .. Peru 2000 d 18.1 10.7 7.1 .. 102 .. 97 80 34 0.5 410 .. 59 Philippines 2000 c 15.5 29.6 .. 87 95 100 102 63 36 <0.1 200 .. 60 Poland 2001 c <2 .. .. 96 98 101 97 19 7 0.1 13 .. .. Portugal 1994 d <2 .. .. 98 .. 103 102 15 5 0.4 5 .. .. Romania 2002 c <2 5.7 3.2 96 89 99 100 32 20 <0.1 49 .. .. Russian Federation 2002 c <2 4.2 5.5 95 93 104 .. 21 21 1.1 67 .. 99 Rwanda 1999­2000 c 51.7 29.4 24.3 44 37 96 95 173 203 5.1 1,400 26 31 Saudi Arabia .. .. .. 57 61 84 93 44 26 .. 23 .. .. Senegal 1995 c 22.3 22.2 22.7 45 48 68 87 148 137 0.8 690 .. 58 Serbia & Montenegro .. .. 1.9 71 96 103 101 26 14 0.2 11 .. 99 Sierra Leone 1989 c 57.0 28.7 27.2 .. 56 67 70 302 284 .. 2,000 .. 42 Singapore .. .. 3.4 .. .. 95 .. 8 5 0.2 30 .. .. Slovak Rep. 1996 d <2 .. .. 96 99 .. 100 15 8 <0.1 3 .. .. Slovenia 1998 c <2 .. .. 97 95 .. 99 9 4 <0.1 17 100 .. South Africa 2000 c 10.7 .. .. 81 99 103 100 60 66 15.6 i 230 .. .. Spain .. .. .. .. .. 104 102 9 4 0.7 4 .. .. Sri Lanka 2002 c, e 5.6 37.7 .. 103 113 102 103 32 15 <0.1 92 .. 97 Sudan .. 33.9 40.7 44 49 77 86 120 93 2.3 590 69 .. Sweden .. .. .. 96 101 102 111 7 4 0.1 2 .. .. Switzerland .. .. .. .. 99 97 96 9 6 0.4 7 .. .. Syrian Arab Rep. .. 12.1 6.9 99 88 85 93 44 18 <0.1 160 .. .. Tajikistan 2003 c 7.4 .. .. 100 100 .. 88 119 95 <0.1 100 .. 71 Tanzania 1991 c 48.5 28.9 .. 46 58 96 .. 163 165 8.8 1,500 44 .. Thailand 2000 c <2 18.6 .. .. 86 95 97 40 26 1.5 44 .. 99 Togo .. 24.6 .. 40 78 59 .. 152 140 4.1 570 .. 49 Tunisia 2000 c <2 10.3 4.0 75 101 86 102 52 24 <0.1 120 .. 90 Turkey 2002 c, e 4.8 10.4 .. .. 95 81 85 78 39 .. 70 .. .. Turkmenistan 1998 c 12.1 .. 12.0 .. .. .. .. 97 102 <0.1 31 .. 97 Uganda .. 23.0 22.9 .. 63 77 96 160 140 4.1 880 .. 39 Ukraine 1999 d 2.9 .. 3.2 93 98 .. 99 22 20 1.4 35 .. .. United Kingdom .. .. .. .. .. 98 116 10 7 0.2 13 .. .. United States .. 1.4 .. .. .. 100 100 11 8 0.6 17 .. .. Uruguay 2000 d <2 4.4 .. 95 92 .. 105 24 14 0.3 27 .. .. Uzbekistan 2000 c 17.3 .. 7.9 .. 103 94 98 79 69 0.1 24 .. 96 Venezuela, RB 2000 d, e 9.9 4.5 4.4 81 90 105 104 27 21 0.7 96 .. 94 Vietnam 2000 c .. 44.9 33.8 .. 95 .. 93 53 23 0.4 130 .. 85 West Bank & Gaza .. .. .. .. 106 .. 1 .. .. .. .. .. 97 Yemen, Rep. 1998 c 15.7 39.0 .. .. 66 .. 61 142 113 0.1 570 16 .. Zambia 1998 c 63.7 25.2 28.1 .. 69 .. 91 180 182 15.6 j 750 51 43 Zimbabwe 1995­96 c 56.1 15.5 .. 96 81 96 95 80 126 24.6 1,100 .. .. World 29.3 t .. w .. w .. w 87 w 95 w 95 w 84 w 1.1 w 407 w .. w 57 w Low income 46.8 .. 65 71 74 87 148 119 2.1 689 .. 38 Middle income 14.7 11.8 94 96 91 99 56 40 0.7 115 .. 86 Lower middle income 15.9 12.3 95 96 89 99 60 42 0.7 121 .. 85 Upper middle income 9.2 .. 90 96 99 99 40 30 0.6 67 .. .. Low & middle income 30.6 .. 81 84 84 94 103 85 1.2 444 .. 57 East Asia & Pacific 20.6 15.3 97 97 89 98 59 41 0.2 116 .. 87 Europe & Central Asia .. .. 94 k 95 k 98 .. 46 36 0.7 58 97 .. Latin America & Carib. 9.7 .. 88 96 .. 102 53 33 0.7 193 .. .. Middle East & N. Africa 13.0 .. 82 87 82 92 80 56 0.1 162 .. 80 South Asia 53.2 .. 74 80 71 89 130 86 0.8 567 .. 36 Sub-Saharan Africa 33.2 31.4 50 59 79 83 187 171 7.2 916 .. 39 High income .. .. .. .. 100 101 11 7 0.4 13 .. .. a. Data are for the most recent year available. b. Data are for 1990 or closest year. c. Expenditure base. d. income base. e. Preliminary data. f. Survey data, 2003. g. Survey data, 2004. h. Survey data, 2001. i. Survey data, 2002. j. Survey data, 2001/2002. k. Represent only 61% of the population. 295 Table 3. Economic activity Value added as % of GDP Agricultural productivity Agr. Value added per Gross domestic agricultural worker product 2000 dollars Agriculture Industry Services External GDP Household General gov't. Gross balance of implicit Avg. final cons. final cons. capital goods and deflator $ annual expenditure expenditure formation services Avg. annual millions % growth % of GDP % of GDP % of GDP % of GDP % growth 2004 2000­4 1989­91 2001­3 2004 2004 2004 2004 2004 2004 2004 2000­4 Albania 7,590 6.0 770 1,354 25 19 56 88 10 25 ­23 3.6 Algeria 84,649 4.8 1,801 1,964 13 74 14 49 8 29 14 6.0 Angola 20,108 8.1 207 161 9 65 27 71 .. a 12 17 95.3 Argentina 151,501 ­0.1 6,507 9,272 10 32 59 70 8 18 5 13.3 Armenia 3,549 12.0 .. 2,646 25 39 36 83 10 25 ­18 4.1 Australia 631,256 3.3 20,601 26,957 3 26 71 60 18 25 ­2 2.9 Austria 290,109 1.2 11,153 24,456 2 32 66 57 19 23 2 1.8 Azerbaijan 8,523 10.7 .. 1,026 13 54 32 63 12 49 ­24 4.1 Bangladesh 56,844 5.1 239 309 21 27 53 78 5 23 ­7 4.5 Belarus 22,849 6.7 .. 2,259 16 38 46 77 11 14 ­2 41.7 Belgium 349,830 1.2 19,687 38,431 1 26 72 55 23 20 3 1.9 Benin 4,075 4.5 360 583 36 14 50 77 14 20 ­11 3.2 Bolivia 8,773 2.6 662 739 15 30 55 72 14 13 1 4.8 Bosnia & Herzegovina 8,121 3.8 .. .. 15 32 53 91 23 21 ­35 3.0 Brazil 604,855 2.0 1,658 3,004 5 17 78 61 14 19 5 10.6 Bulgaria 24,131 4.7 2,434 6,310 10 27 63 69 19 23 ­11 4.0 Burkina Faso 4,824 5.2 140 163 31 20 49 82 13 19 ­14 3.0 Burundi 657 2.7 119 104 51 20 29 98 8 11 ­16 6.6 Cambodia 4,597 5.6 .. 292 36 28 37 88 .. a 23 ­11 1.5 Cameroon 14,733 4.6 725 1,143 44 16 40 71 11 18 0 2.7 Canada 979,764 2.5 27,739 36,702 .. .. .. 56 19 20 4 2.2 Central African Rep. 1,331 ­1.4 291 407 61 25 14 87 10 7 ­4 2.0 Chad 4,285 14.3 164 220 61 9 30 53 5 25 18 5.7 Chile 94,105 3.4 4,775 6,177 9 34 57 58 12 23 7 5.5 China 1,649,329 8.7 242 357 15 51 35 42 12 45 1 2.0 Hong Kong, China 163,005 3.2 .. .. 0 12 88 59 10 22 9 ­3.9 Colombia 97,384 2.9 3,315 2,900 13 0 87 67 21 15 ­2 7.0 Congo, Dem. Rep. 6,571 3.5 230 196 58 19 23 92 4 7 ­3 55.5 Congo, Rep. 4,384 3.4 319 329 6 56 39 36 16 23 26 ­2.9 Costa Rica 18,395 3.9 3,039 4,306 9 29 63 71 10 21 ­2 9.0 Côte d'Ivoire 15,286 ­1.5 610 806 25 19 55 73 9 8 10 3.3 Croatia 34,200 4.5 .. 8,956 8 29 63 57 20 28 ­5 3.3 Czech Rep. 107,047 2.9 .. 4,300 3 39 57 50 23 28 0 3.1 Denmark 243,043 1.2 18,564 36,320 2 26 71 47 26 20 7 1.9 Dominican Rep. 18,673 2.4 2,273 4,076 11 31 58 73 5 21 1 20.6 Ecuador 30,282 4.2 1,969 1,441 7 30 63 64 11 22 3 12.0 Egypt, Arab Rep. 75,148 3.5 1,497 1,952 15 32 52 75 10 17 ­2 4.3 El Salvador 15,824 1.9 1,571 1,613 9 33 58 86 12 17 ­14 2.7 Eritrea 925 3.3 .. 64 15 24 61 97 54 22 ­73 15.8 Ethiopia 8,077 3.7 .. 123 46 10 44 77 22 20 ­19 2.3 Finland 186,597 2.2 16,056 30,391 3 31 66 52 22 18 7 1.3 France 2,002,582 1.4 20,265 38,647 3 24 73 55 24 19 1 1.7 Georgia 5,091 7.6 .. 1,374 20 25 54 81 9 24 ­15 5.0 Germany 2,714,418 0.5 10,963 22,127 1 29 69 59 19 18 4 1.2 Ghana 8,620 4.8 315 338 35 22 43 80 12 27 ­19 24.4 Greece 203,401 4.1 7,579 9,226 7 24 69 67 15 26 ­8 3.5 Guatemala 27,451 2.3 2,121 2,261 22 19 59 90 5 17 ­12 7.2 Guinea 3,508 2.9 171 225 25 37 38 86 6 11 ­2 8.6 Haiti 3,535 ­1.0 802 469 28 17 55 98 5 23 ­27 17.5 Honduras 7,371 3.3 950 1,133 14 31 55 74 14 29 ­17 7.3 Hungary 99,712 3.5 2,247 4,041 4 31 65 69 11 24 ­4 7.6 India 691,876 6.2 341 397 22 26 52 67 11 23 ­1 3.9 Indonesia 257,641 4.6 477 556 17 46 38 65 8 23 4 7.9 Iran, Islamic Rep. 162,709 6.2 1,799 2,354 11 41 48 49 14 36 1 19.3 Ireland 183,560 5.4 .. .. 3 42 55 44 15 22 19 3.8 Israel 117,548 0.9 .. .. .. .. .. 59 29 18 ­6 1.8 Italy 1,672,302 0.8 11,411 21,436 3 28 70 60 19 20 1 2.8 Jamaica 8,030 1.7 1,910 1,937 5 29 66 71 16 32 ­20 9.9 Japan 4,623,398 1.3 19,163 25,339 1 30 68 57 18 24 2 ­1.9 Jordan 11,196 5.1 1,456 960 2 25 73 81 20 21 ­22 1.7 Kazakhstan 40,743 10.3 .. 1,385 7 39 53 58 11 25 6 9.2 Kenya 15,600 1.5 184 148 16 19 65 79 17 12 ­8 9.9 Korea, Rep. 679,674 4.7 5,312 9,888 3 35 62 55 13 29 3 2.9 Kuwait 41,748 2.4 .. .. .. .. .. 50 26 9 16 0.6 Kyrgyz Rep. 2,205 4.5 .. 929 39 23 38 71 17 16 ­4 4.2 Lao PDR 2,412 5.7 351 459 49 26 25 84 5 19 ­8 11.3 Latvia 13,629 7.5 .. 2,385 4 25 71 63 21 29 ­13 3.9 Lebanon 21,768 4.4 .. 24,371 13 19 68 82 17 21 ­20 2.7 Lithuania 22,263 7.5 .. 4,071 7 33 60 67 16 23 ­7 0.4 Macedonia, FYR 5,246 0.8 .. 2,935 12 28 60 83 11 22 ­17 2.3 Madagascar 4,364 0.9 187 176 29 16 55 81 9 24 ­15 9.6 Malawi 1,813 1.8 77 130 39 15 46 88 15 11 ­15 15.0 Malaysia 117,776 4.3 3,694 4,571 10 48 42 45 14 21 21 2.8 Mali 4,863 6.3 203 227 38 26 36 78 10 20 ­8 4.7 Mauritania 1,357 5.3 244 278 19 30 51 85 18 17 ­20 6.8 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. 296 Table 3. Economic activity--continued Value added as % of GDP Agricultural productivity Agr. Value added per Gross domestic agricultural worker product 2000 dollars Agriculture Industry Services External GDP Household General gov't. Gross balance of implicit Avg. final cons. final cons. capital goods and deflator Millions annual expenditure expenditure formation services Avg. annual of dollars % growth % of GDP % of GDP % of GDP % of GDP % growth 2004 2000­4 1989­91 2001­3 2004 2004 2004 2004 2004 2004 2004 2000­4 Mexico 676,497 1.5 2,224 2,708 4 25 71 68 12 22 ­2 7.0 Moldova 2,595 6.9 .. 726 23 21 55 97 15 21 ­32 11.5 Mongolia 1,525 5.2 1,003 694 26 14 60 53 19 38 ­10 9.5 Morocco 50,055 4.5 1,580 1,515 17 30 53 65 18 24 ­6 1.0 Mozambique 5,548 8.5 117 136 26 31 43 76 11 22 ­9 12.0 Namibia 5,456 3.2 792 1,003 11 26 64 56 29 23 ­7 6.6 Nepal 6,707 2.6 196 208 40 23 37 76 10 26 ­12 3.9 Netherlands 577,260 0.3 23,496 38,085 3 26 72 50 25 21 5 3.2 New Zealand 99,687 3.9 19,930 26,526 .. .. .. 60 18 21 1 2.6 Nicaragua 4,353 2.3 1,167 1,934 18 25 57 74 16 36 ­26 5.8 Niger 3,081 4.1 174 172 40 17 43 82 12 16 ­10 1.9 Nigeria 72,106 4.9 576 836 26 49 24 40 22 21 17 15.7 Norway 250,168 1.7 19,055 30,854 1 38 61 46 23 18 14 1.4 Oman 21,698 3.5 .. .. .. .. .. 44 22 16 18 ­0.6 Pakistan 96,115 4.1 563 690 23 24 54 73 9 18 0 5.1 Panama 13,793 3.3 2,320 3,470 7 17 76 64 6 27 3 1.0 Papua New Guinea 3,909 0.6 390 434 26 39 35 56 14 18 12 7.3 Paraguay 7,127 1.2 2,201 2,380 27 24 49 79 7 18 ­4 11.9 Peru 68,395 3.6 1,196 1,734 10 30 60 70 10 19 2 2.2 Philippines 86,429 4.2 910 1,016 14 32 54 73 10 17 0 5.0 Poland 241,833 2.8 .. 1,358 3 31 66 64 18 20 ­2 1.9 Portugal 168,281 0.3 3,807 5,444 4 29 68 61 21 25 ­7 3.6 Romania 73,167 5.5 2,079 3,430 13 40 47 67 11 22 ­1 23.7 Russian Federation 582,395 6.1 .. 2,204 5 34 61 51 19 21 9 15.8 Rwanda 1,845 5.1 179 222 42 22 36 84 13 21 ­18 5.1 Saudi Arabia 250,557 3.4 7,270 13,964 5 55 40 30 23 19 28 3.9 Senegal 7,665 4.6 270 260 17 21 62 76 14 21 ­11 1.9 Serbia & Montenegro 23,996 4.5 .. .. .. .. .. 92 18 18 ­29 29.6 Sierra Leone 1,075 15.8 .. .. 53 30 17 83 13 20 ­16 4.7 Singapore 106,818 2.8 25,523 32,980 0 35 65 41 11 18 30 0.5 Slovak Rep. 41,092 4.6 .. .. 3 29 68 56 20 26 ­3 4.3 Slovenia 32,182 3.2 .. 30,243 3 36 61 54 20 27 ­1 6.4 South Africa 212,777 3.2 1,992 2,359 4 31 65 63 20 18 0 7.1 Spain 991,442 2.5 8,740 14,852 3 30 67 58 18 26 ­2 4.3 Sri Lanka 20,055 3.8 696 737 17 25 58 76 8 25 ­9 8.4 Sudan 19,559 6.0 308 613 39 18 43 71 12 20 ­3 8.3 Sweden 346,404 2.0 20,416 30,469 2 28 70 49 28 16 7 1.7 Switzerland 359,465 0.5 .. .. .. .. .. 61 12 20 7 1.2 Syrian Arab Rep. 23,133 3.1 2,065 2,799 24 28 47 60 10 23 7 3.2 Tajikistan 2,078 9.9 .. 412 24 21 55 101 .. a 9 ­10 23.8 Tanzania b 10,851 6.8 246 283 45 16 39 78 13 19 ­10 5.9 Thailand 163,491 5.3 493 588 10 44 46 57 11 27 5 2.1 Togo 2,061 2.6 356 404 41 23 36 86 10 18 ­13 0.7 Tunisia 28,185 4.3 2,144 2,438 13 28 60 65 14 25 ­4 2.5 Turkey 301,950 4.2 1,749 1,764 12 27 61 65 13 26 ­4 31.9 Turkmenistan 6,167 18.5 .. 1,253 .. .. .. 51 14 27 8 7.0 Uganda 6,833 5.8 187 230 32 21 47 76 16 22 ­14 4.0 Ukraine 65,149 8.6 .. 1,442 14 40 46 55 19 19 7 9.0 United Kingdom 2,140,898 2.2 21,655 25,609 1 27 72 66 21 16 ­3 3.0 United States 11,667,515 2.6 26,105 47,566 .. .. .. 71 15 18 ­4 1.9 Uruguay 13,138 ­1.2 5,346 6,632 13 27 60 71 12 15 2 13.4 Uzbekistan 11,960 4.8 .. 1,520 35 22 43 55 18 18 8 33.1 Venezuela, RB 109,322 ­1.3 5,016 6,153 4 41 54 50 13 21 16 27.7 Vietnam 45,210 7.2 212 290 22 40 38 66 7 35 ­8 5.1 West Bank & Gaza 3,454 ­13.3 .. .. 6 12 82 84 53 3 ­39 10.9 Yemen, Rep. 12,834 3.6 361 504 15 40 45 78 13 17 ­8 8.0 Zambia 5,389 4.4 188 205 21 35 44 68 13 25 ­6 20.8 Zimbabwe 17,750 ­7.0 260 277 17 24 59 72 17 8 2 87.9 World 40,887,837 t 2.5 w .. w 817 w .. w .. w .. w 62 w 17 w 21 w 0 w Low income 1,253,353 5.4 320 375 23 25 52 69 12 22 ­3 Middle income 6,930,704 4.4 .. 699 10 34 56 58 13 27 2 Lower middle income 3,941,575 5.7 413 567 12 37 51 55 13 31 1 Upper middle income 2,988,438 2.7 .. 2,664 7 30 64 62 14 21 3 Low & middle income 8,183,030 4.6 434 556 12 33 55 59 13 26 1 East Asia & Pacific 2,367,508 7.5 .. 398 15 49 36 47 12 39 2 Europe & Central Asia 1,768,088 5.0 .. 1,856 8 31 61 60 17 23 ­1 Latin America & Carib. 2,018,715 1.5 2,174 2,837 7 23 70 65 12 20 4 Middle East & N. Africa 600,256 4.5 .. .. 14 39 47 62 12 26 ­1 South Asia 878,785 5.8 344 406 22 26 52 69 10 22 ­3 Sub-Saharan Africa 543,990 3.9 312 326 13 28 58 65 18 19 0 High income 32,715,777 2.0 .. .. .. .. .. 63 18 20 0 Note: a. Data on general government final consumption expenditure are not available; they are included in household final consumption expenditure. b. Data covers mainland Tanzania only. 297 Table 4. Trade, aid, and finance Merchandise trade Exports Imports External debt High Official Manufactured technology Current Net private Foreign development exports exports account capital direct assistance Domestic credit % of total % of balance flows investment or official aida Total Present provided by Net $ $ merchandise manufactured $ $ $ $ $ value banking sector migration millions millions exports exports millions millions millions per capita millions % of GNI % of GDP thousands 2004 2004 2003 2003 2004 2003 2003 2003 2003 2003 2004 1995­2000 Albania 580 2,150 84 1 ­407 176 178 108 1,482 21 45.7 ­267 Algeria 31,713 18,199 2 2 .. 593 634 7 23,386 40 24.8 ­185 Angola 14,440 4,960 .. .. 1,178 1,903 1,415 37 9,698 100 4.5 ­120 Argentina 34,320 22,309 27 9 3,029 1,169 1,020 3 166,207 115 45.4 ­100 Armenia 715 1,351 62 1 ­167 115 121 81 1,127 29 6.6 ­225 Australia 86,582 107,763 30 14 ­39,542 .. 7,032 .. .. 110.0 510 Austria 115,657 115,072 78 13 988 .. 7,276 .. .. 122.7 45 Azerbaijan 3,600 3,500 6 5 ­2,021 3,235 3,285 36 1,680 23 11.2 ­128 Bangladesh 8,150 12,100 89 0 132 86 102 10 18,778 25 40.7 ­300 Belarus 11,093 16,343 62 4 ­1,043 127 172 3 2,692 18 21.2 14 Belgium 308,854 287,236 80 b 8b .. .. 125,060b .. .. .. 112.2 99 Benin 600 770 8 2 ­143 51 51 44 1,828 28 c 9.9 ­29 Bolivia 2,092 1,772 17 8 36 295 167 105 5,684 37 c 52.2 ­100 Bosnia & Herzegovina 1,784 5,890 .. .. ­1,917 400 382 141 2,920 37 45.7 350 Brazil 96,474 65,904 52 12 11,669 13,432 10,144 2 235,431 54 80.9 ­130 Bulgaria 9,888 14,378 66 4 ­1,813 1,655 1,419 53 13,289 86 36.2 ­50 Burkina Faso 380 1,150 17 2 ­449 11 11 37 1,844 19 c 13.5 ­121 Burundi 42 180 2 22 ­100 8 0 31 1,310 150 36.6 ­400 Cambodia 2,455 2,985 1 .. ­125 87 87 38 3,139 71 8.7 100 Cameroon 2,630 2,100 7 2 .. 154 215 55 9,189 52 c 14.9 0 Canada 321,967 275,799 61 14 25,870 .. 6,273 .. .. 96.8 733 Central African Rep. 115 145 37 0 .. 4 4 13 1,328 155 16.4 11 Chad 1,820 780 .. .. .. 837 837 29 1,499 45 c 7.7 99 Chile 32,000 24,823 16 3 1,390 3,844 2,982 5 43,231 67 70.2 60 China 593,369 561,423 91 27 45,875 59,455 53,505 1 193,567 15 166.9 ­1,950 Hong Kong, China 265,670 d 273,010 93 d 13 16,039 .. 13,624 1 .. .. 149.3 300 Colombia 16,090 16,530 36 7 ­1,110 ­1,185 1,746 18 32,979 46 34.2 ­200 Congo, Dem. Rep. 1,600 1,940 10 .. .. 187 158 101 11,170 149 1.3 ­1,410 Congo, Rep. 3,150 1,570 .. .. ­3 201 201 19 5,516 368 11.8 42 Costa Rica 6,301 8,268 66 45 ­967 842 577 7 5,424 36 42.5 128 Côte d'Ivoire 5,500 3,650 20 8 ­305 69 180 15 12,187 89 18.8 150 Croatia 8,022 16,583 72 12 ­1,668 8,031 1,998 27 23,452 102 68.4 ­150 Czech Rep. 66,008 67,876 90 13 ­5,661 5,342 2,514 26 34,630 48 45.7 52 Denmark 75,565 67,200 66 20 6,963 .. 1,185 .. .. 165.9 84 Dominican Rep. 5,660 7,660 34 1 867 1,112 310 8 6,291 33 36.2 ­180 Ecuador 7,538 7,861 12 6 ­455 2,143 1,555 14 16,864 82 20.1 ­300 Egypt, Arab Rep. 7,682 12,831 31 0 3,743 ­361 237 13 31,383 31 116.2 ­500 El Salvador 3,295 6,269 57 5 ­612 406 89 29 7,080 56 49.2 ­38 Eritrea 20 670 .. .. ­78 22 22 70 635 57 148.2 ­9 Ethiopia 650 3,300 11 0 ­65 54 60 22 7,151 24 c 4.0 ­77 Finland 61,144 51,043 84 24 7,810 .. 3,436 .. .. 69.5 20 France 451,034 464,090 81 19 ­4,833 .. 43,068 .. .. 107.2 219 Georgia 649 1,847 31 24 ­349 320 338 48 1,935 44 18.8 ­350 Germany 914,839 717,491 84 16 104,301 .. 25,568 .. .. 142.9 1,134 Ghana 2,830 3,910 16 3 352 ­166 137 44 7,957 38 c 31.4 ­51 Greece 14,760 53,082 58 12 ­11,225 .. 717 .. .. 105.1 300 Guatemala 2,792 7,420 40 7 ­1,051 68 116 20 4,981 21 15.1 ­390 Guinea 640 700 25 0 ­245 79 79 30 3,457 59 c 15.5 ­227 Haiti 362 1,301 .. .. ­13 8 8 24 1,308 29 31.7 ­105 Honduras 1,560 3,890 21 0 ­279 140 198 56 5,641 55 37.4 ­20 Hungary 54,175 59,216 87 26 ­8,819 5,149 2,506 25 45,785 70 59.6 100 India 72,530 95,156 77 5 6,853 10,651 4,269 1 113,467 19 59.9 ­1,400 Indonesia 69,710 46,180 52 14 .. ­3,685 ­597 8 134,389 71 48.8 ­900 Iran, Islamic Rep. 42,450 32,700 8 2 .. 1,151 120 2 11,601 8 9.7 ­456 Ireland 104,100 60,118 86 34 ­748 .. 26,599 .. .. 118.4 89 Israel 36,874 43,425 93 18 504 .. 3,880 66 .. .. 82.8 276 Italy 346,060 349,049 87 8 ­20,556 .. 16,538 .. .. 105.3 600 Jamaica 1,385 3,641 64 0 ­761 513 721 1 5,584 86 31.3 ­100 Japan 565,490 454,530 93 24 172,059 .. 6,238 .. .. 154.8 280 Jordan 3,970 7,892 69 2 ­44 ­161 376 233 8,337 82 94.1 35 Kazakhstan 20,251 13,300 18 9 533 5,674 2,088 18 22,835 94 18.5 ­1,320 Kenya 2,650 4,660 24 4 ­847 195 82 15 6,766 43 40.8 ­21 Korea, Rep. 253,910 224,440 93 32 27,613 .. 3,222 ­10 .. .. 100.8 ­80 Kuwait 27,390 11,630 7 1 18,884 .. ­67 2 .. .. 106.0 347 Kyrgyz Rep. 719 941 39 2 ­95 ­12 46 39 2,021 98 8.4 ­27 Lao PDR 455 655 .. .. .. 19 19 53 2,846 91 9.6 ­7 Latvia 3,882 6,898 60 4 ­1,673 570 300 49 8,803 92 54.5 ­56 Lebanon 1,749 9,338 68 2 ­4,109 394 358 51 18,598 104 179.0 ­30 Lithuania 9,111 12,362 63 5 ­1,590 ­141 179 108 8,342 58 30.0 ­109 Macedonia, FYR 1,637 2,856 72 1 ­279 90 95 114 1,837 40 22.1 ­5 Madagascar 990 1,260 38 0 ­309 13 13 32 4,958 31 c 15.0 ­3 Malawi 470 745 12 1 ­185 23 23 45 3,134 109 c 23.2 ­50 Malaysia 126,497 105,176 77 58 13,381 2,207 2,473 4 49,074 56 134.3 390 Mali 1,140 1,200 40 8 ­271 129 129 45 3,129 42 c 17.7 ­284 Mauritania 365 400 21 .. .. 218 214 85 2,360 73 c ­6.7 10 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. 298 Table 4. Trade, aid, and finance--continued Merchandise trade Exports Imports External debt High Official Manufactured technology Current Net private Foreign development exports exports account capital direct assistance Domestic credit % of total % of balance flows investment or official aida Total Present provided by Net $ $ merchandise manufactured $ $ $ $ $ value banking sector migration millions millions exports exports millions millions millions per capita millions % of GNI % of GDP thousands 2004 2004 2003 2003 2004 2003 2003 2003 2003 2003 2004 1995­2000 Mexico 188,627 206,423 81 21 ­7,798 9,541 10,783 1 140,004 25 34.9 ­2,000 Moldova 986 1,774 32 3 ­132 84 58 28 1,901 95 32.0 ­70 Mongolia 858 988 38 0 ­105 131 132 100 1,472 97 36.8 ­90 Morocco 9,661 17,514 69 11 1,434 2,395 2,279 17 18,795 47 82.5 ­300 Mozambique 1,390 1,765 8 3 ­516 313 337 55 4,930 38 c 5.9 75 Namibia 1,830 2,450 41 3 337 .. .. 73 .. .. 55.8 20 Nepal 756 1,877 .. .. 171 14 15 19 3,253 38 .. ­99 Netherlands 358,781 319,864 71 31 16,403 .. 15,695 .. .. 166.9 161 New Zealand 20,358 23,186 29 10 ­6,232 .. 2,438 .. .. 120.6 20 Nicaragua 771 1,884 13 4 ­780 230 201 152 6,915 40 c 88.4 ­155 Niger 430 560 8 3 .. 23 31 39 2,116 26 c 11.4 ­6 Nigeria 31,148 14,164 .. .. .. 952 1,200 2 34,963 76 13.2 ­95 Norway 82,018 48,203 21 19 34,445 .. 2,055 .. .. 11.1 67 Oman 14,236 7,865 14 2 1,446 ­557 138 17 3,886 19 38.1 ­40 Pakistan 13,326 17,908 85 1 ­808 132 534 7 36,345 41 40.1 ­41 Panama 950 3,466 11 1 ­1,104 1,077 792 10 8,770 92 90.4 11 Papua New Guinea 2,460 1,670 6 39 .. 2 101 40 2,463 81 23.4 0 Paraguay 1,626 2,916 14 6 76 121 91 9 3,210 51 18.5 ­25 Peru 12,467 9,880 22 2 ­72 2,562 1,377 18 29,857 60 17.4 ­350 Philippines 39,598 42,635 90 74 3,347 1,350 319 9 62,663 81 54.0 ­900 Poland 74,094 87,849 81 3 ­3,585 7,118 4,123 31 95,219 48 34.6 ­71 Portugal 34,983 53,776 86 9 ­12,682 .. 6,610 .. .. 151.1 175 Romania 23,553 32,691 83 4 ­3,311 3,880 1,844 28 21,280 46 15.3 ­350 Russian Federation 183,185 94,834 21 19 60,109 15,784 7,958 9 175,257 52 26.0 2,300 Rwanda 80 250 10 25 ­76 5 5 39 1,540 58 c 13.5 1,977 Saudi Arabia 119,550 42,954 10 0 51,488 .. ­587 1 .. .. 64.2 75 Senegal 1,530 2,680 34 9 ­507 79 78 44 4,419 36 c 21.7 ­100 Serbia & Montenegro 3,408 11,194 .. .. ­3,148 1,462 1,360 162 14,885 e 84 .. ­100 Sierra Leone 140 285 7 31 ­65 3 3 56 1,612 100 c 30.3 ­110 Singapore 179,547 d 163,820 85 d 59 28,183 .. 11,431 2 .. .. 80.2 368 Slovak Rep. 27,660 29,448 88 4 ­282 1,525 571 30 18,379 69 44.0 9 Slovenia 15,805 17,297 90 6 ­275 .. 337 33 .. .. 55.7 8 South Africa 45,929 f 55,200 f 58 f 5 ­6,982 4,148 820 14 27,807 22 84.5 364 Spain 178,960 249,813 77 7 ­49,225 .. 25,513 .. .. 138.7 676 Sri Lanka 5,800 7,950 74 1 ­131 236 229 35 10,238 50 44.6 ­160 Sudan 3,777 4,075 3 7 ­818 1,349 1,349 19 17,496 120 11.5 ­207 Sweden 121,012 97,644 81 15 22,844 .. 3,268 .. .. 113.1 60 Switzerland 118,384 111,468 93 22 50,568 .. 17,547 .. .. 175.2 80 Syrian Arab Rep. 6,435 5,320 11 1 752 146 150 9 21,566 113 30.1 ­30 Tajikistan 915 1,375 .. .. ­40 6 32 23 1,166 77 16.5 ­345 Tanzania 1,440 2,535 18 2 ­1,062 264 248 47 7,516 22 c,g 9.2 ­206 Thailand 97,701 95,384 75 30 7,281 1,155 1,949 ­16 51,793 41 105.4 ­88 Togo 720 930 58 1 ­140 20 20 9 1,707 91 16.7 128 Tunisia 9,685 12,738 81 4 ­715 1,326 541 31 15,502 75 71.0 ­20 Turkey 62,774 97,161 84 2 ­15,451 2,849 1,562 2 145,662 81 0.0 135 Turkmenistan 3,870 3,320 .. .. 444 .. 100 6 .. 0 .. ­50 Uganda 705 1,480 9 8 ­250 202 194 38 4,553 33 c 11.0 ­66 Ukraine 32,672 28,996 67 5 2,891 1,550 1,424 7 16,309 37 30.7 ­700 United Kingdom 345,610 461,983 78 26 ­46,879 .. 20,696 .. .. 157.9 574 United States 819,026 1,526,380 80 31 ­665,939 .. 39,889 .. .. 270.8 6,200 Uruguay 2,905 3,072 34 2 103 37 275 5 11,764 91 53.3 ­16 Uzbekistan 4,238 3,310 .. .. 1,134 79 70 8 5,006 46 .. ­400 Venezuela, RB 31,360 17,300 13 4 14,575 3,539 2,520 3 34,851 43 10.8 40 Vietnam 26,229 31,029 50 2 ­604 1,192 1,450 22 15,817 39 61.0 ­200 West Bank & Gaza .. .. .. .. .. .. .. 289 .. .. .. 11 Yemen, Rep. 4,555 3,790 .. .. ­296 ­89 ­89 13 5,377 40 5.2 ­50 Zambia 1,410 1,670 14 2 .. 91 100 54 6,425 121 35.3 86 Zimbabwe 1,250 2,990 38 3 .. ­5 20 14 4,445 50 58.7 ­125 World 9,122,837 t 9,338,667 t 77 w 18 w .. s 572,774 s 12 w .. s 171.1 w .. w,i Low income 215,695 251,818 60 4 18,208 13,283 14 414,454 47.1 ­4,422 Middle income 2,244,720 2,138,024 64 20 181,237 138,493 9 2,139,684 76.4 ­9,689 Lower middle income 1,223,079 1,170,291 68 22 103,824 90,627 8 1,053,736 104.4 ­10,646 Upper middle income 1,021,641 967,734 61 19 77,412 47,867 10 1,085,948 40.7 957 Low & middle income 2,460,424 2,389,837 64 19 199,444 151,776 14 2,554,138 72.1 ­14,111 East Asia & Pacific 964,989 895,174 81 33 62,049 59,612 4 525,535 140.7 ­3,859 Europe & Central Asia 615,333 j 626,097 j 57 12 67,110 35,614 22 675,998 27.2 ­1,858 Latin America & Carib. 458,500 437,379 57 14 41,087 36,533 12 779,632 49.7 ­4,156 Middle East & N. Africa 170,996 153,367 20 3 4,848 4,756 26 158,827 49.0 ­1,396 South Asia 101,332 138,464 79 4 11,143 5,163 4 182,785 56.1 ­2,401 Sub-Saharan Africa 149,265 139,357 .. .. 13,208 10,099 34 231,360 45.4 ­439 High income 6,662,445 6,948,809 80 18 .. 420,998 .. 205.5 14,104 Note: a. Regional aggregates include data for economies that are not specified elsewhere. World and income group totals include aid not allocated by country or region. b. Includes Luxembourg. c. Data are from debt sustainability analysis undertaken as part of the Heavily Indebted Poor Countries (HIPC) initiative. d. Includes re-exports. e. Data are estimates and reflect borrowing by the former Socialist Federal Republic of Yugoslavia that are not yet allocated to the successor republics. f. Data on total exports and imports refer to South Africa only. Data on export commodity shares refer to the South African Customs Union (Botswana, Lesotho, Namibia, South Africa, and Swaziland). g. GNI refers to mainaland Tanzania only. i. World totals com- puted by the UN sum to zero, but because the aggregates shown here refer to World Bank definitions, regional and income group totals do not equal zero. j. Data include the intratrade of the Baltic states and the Commonwealth of Independent States. 299 Table 5. Key indicators for other economies PPP Life Gross national gross national expectancy Population income (GNI)a income (GNI)b at birth Gross Adult Carbon Density domestic literacy dioxide Avg. people $ $ product rate emissions annual per $ per $ per per capita Male Female % ages 15 per capita Thousands % growth sq. km millions capita millions capita % growth years years and older metric tons 2004 2000­4 2004 2004 2004 2004 2004 2003­4 2003 2003 1998­2004 2000 Afghanistan .. .. .. 5,543 ..c .. .. .. .. .. .. .. American Samoa 57 .. 285 .. ..d .. .. .. .. .. .. .. Andorra 66 .. 136 .. ..e .. .. .. .. .. .. .. Antigua and Barbuda 80 2.5 182 800 10,000 829 10,360 2.3 73 78 .. 4.9 Aruba 99 .. 521 .. ..e .. .. .. .. .. .. .. Bahamas, The 320 1.2 32 4,684 14,920 5,068 16,140 ­0.6 66 74 .. 5.9 Bahrain 725 2.0 1,022 8,834 12,410 12,860 18,070 4.7 71 76 88 f 29.1 Barbados 272 0.4 632 2,507 9,270 4,075 15,060 0.9 72 77 100 4.4 Belize 283 3.1 12 1,115 3,940 1,840 6,510 0.9 70 73 77 f 3.1 Bermuda 64 0.0 1,280 .. ..e .. .. .. 75 80 .. 7.2 Bhutan 896 2.7 19 677 760 .. .. 2.3 62 65 .. 0.5 Botswana 1,727 0.8 3 7,490 4,340 15,405 8,920 4.3 38 38 79 2.3 Brunei 361 1.7 69 .. ..e .. .. .. 74 79 93 f 14.2 Cape Verde 481 2.5 119 852 1,770 2,720 g 5,650 g 2.9 66 72 76 0.3 Cayman Islands 44 .. 745 .. ..e .. .. .. .. .. .. .. Channel Islands 149 0.0 745 .. ..e .. .. .. 75 84 .. .. Comoros 614 2.4 276 328 530 1,131 g 1,840 g ­0.5 60 63 56 0.1 Cuba 11,365 0.4 103 .. ..h .. .. 0.9 75 79 97 2.8 Cyprus 776 0.6 84 13,633 17,580 17,320 g 22,330 g 2.9 76 81 97 f 8.5 Djibouti 716 1.8 31 739 1,030 1,624 g 2,270 g 1.6 43 43 .. 0.6 Dominica 71 0.0 95 261 3,650 375 5,250 1.6 75 79 .. 1.4 Equatorial Guinea 506 2.5 18 .. ..d 3,745 7,400 7.4 50 54 84 i 0.4 Estonia 1,345 ­0.5 32 9,435 7,010 17,741 13,190 6.8 65 77 100 f 11.7 Faeroe Islands 48 .. 34 .. ..e .. .. .. .. .. .. .. Fiji 848 1.1 46 2,281 2,690 4,893 g 5,770 g 2.2 68 71 .. 0.9 French Polynesia 246 1.1 67 .. ..e .. .. .. 71 77 .. 2.3 Gabon 1,374 2.2 5 5,415 3,940 7,692 5,600 ­0.2 52 54 .. 2.8 Gambia, The 1,449 2.5 145 414 290 2,753 g 1,900 g 6.2 52 55 .. 0.2 Greenland 57 0.4 0 .. ..e .. .. .. 65 73 .. 9.9 Grenada 106 1.0 311 397 3,760 740 7,000 ­3.8 70 76 .. 2.1 Guam 164 1.5 298 .. ..e .. .. .. 76 80 .. 26.3 Guinea-Bissau 1,533 2.9 55 250 160 1,058 690 1.3 44 47 .. 0.2 Guyana 772 0.4 4 765 990 3,173 g 4,110 g 1.1 58 67 .. 2.1 Iceland 290 0.8 125 11,199 38,620 9,384 32,360 4.8 78 82 .. 7.7 Iraq 25,261 2.1 58 .. ..h .. .. .. 62 64 .. 3.3 Isle of Man 77 .. 135 .. ..e .. .. .. .. .. .. .. Kiribati 98 1.9 134 95 970 .. .. 0.3 60 66 .. 0.3 Korea, Dem. Rep. 22,745 0.5 189 .. ..c .. .. .. 61 65 .. 8.5 Lesotho 1,809 0.9 60 1,336 740 5,806 3,210 2.1 36 38 81 i .. Liberia 3,449 2.4 171 391 110 .. .. ­0.2 46 48 56 0.1 Libya 5,674 2.0 3 25,257 4,450 .. .. 2.4 70 75 82 10.9 Liechtenstein 34 .. 213 .. ..e .. .. .. .. .. .. .. Luxembourg 450 0.7 174 25,302 56,230 27,549 61,220 4.0 75 82 .. 19.4 Macao, China 449 1.0 265 .. ..e 9,605 g 21,880 g 8.9 77 82 91 f 3.8 Maldives 300 2.2 998 752 2,510 .. .. 6.5 68 71 97 1.8 Malta 401 0.7 400 4,913 12,250 7,507 18,720 0.9 76 81 .. 7.2 Marshall Islands 60 3.7 174 142 2,370 .. .. ­3.6 .. .. .. .. Mauritius 1,234 1.0 16,842 5,730 4,640 14,650 11,870 3.2 69 76 84 f 2.4 Mayotte 172 .. 460 .. ..d .. .. .. .. .. .. .. Micronesia, Fed. Sts. 127 1.8 181 252 1,990 .. .. ­5.5 67 71 .. .. Monaco 33 .. 159 .. ..e .. .. .. .. .. .. .. Myanmar 49,910 1.2 76 .. ..c .. .. .. 55 60 90 i 0.2 Northern Mariana Islands 77 .. 161 .. ..d .. .. .. .. .. .. .. Netherlands Antilles 222 0.8 277 .. ..e .. .. .. 73 79 97 46.2 New Caledonia 229 1.8 13 .. ..e .. .. .. 70 78 .. 7.8 Palau 20 1.2 43 137 6,870 .. .. 0.5 .. .. .. 12.7 Puerto Rico 3,929 0.7 277 .. ..e .. .. .. 72 82 94 2.3 Qatar 637 2.1 58 .. ..e .. .. .. 75 75 89 i 69.6 Samoa 179 1.0 63 333 1,860 1,015 g 5,670 g 2.6 67 73 99 0.8 San Marino 28 .. 463 653 ..e .. .. .. .. .. .. .. São Tomé & Principe 161 2.0 167 60 370 .. .. 2.4 63 69 .. 0.6 Seychelles 85 1.1 188 685 8,090 1,320 15,590 ­3.2 69 77 92 f 2.8 Solomon Islands 471 2.9 17 260 550 829 g 1,760 g 0.7 68 71 .. 0.4 Somalia 9,938 3.3 16 .. ..c .. .. .. 46 49 .. .. St. Kitts and Nevis 47 1.5 131 357 7,600 526 11,190 3.3 69 74 .. 2.4 St. Lucia 164 1.2 268 706 4,310 910 5,560 1.6 72 76 90 f 2.1 St. Vincent & the Grenadines 108 ­0.8 278 396 3,650 677 6,250 4.8 70 76 .. 1.4 Suriname 443 1.0 3 997 2,250 .. .. 3.5 68 73 88 i 5.0 Swaziland 1,120 1.7 65 1,859 1,660 5,566 4,970 0.8 42 43 79 i 0.4 Timor-Leste 925 4.3 62 506 550 .. .. ­3.5 60 64 .. .. Tonga 102 0.4 141 186 1,830 735 g 7,220 g 1.3 69 74 .. 1.2 Trinidad & Tobago 1,323 0.7 258 11,360 8,580 14,795 11,180 5.3 70 74 98 20.5 United Arab Emirates 4,284 6.9 51 .. ..e 78,834 g 21,000 g ­5.4 74 77 77 18.1 Vanuatu 215 2.2 18 287 1,340 600 2,790 0.7 67 70 74 f 0.4 Virgin Islands (U.S.) 113 1.0 333 .. ..e .. .. .. 77 80 .. 121.2 Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified. a. Calculated using the World Bank Atlas method. b. PPP is purchasing power parity; see Definitions. c. Estimated to be low income ($825 or less). d. Estimated to be upper middle income ($3,256­$10,065 ). e. Estimated to be high income ($10,066 or more). f. National estimate based on census data. g. The estimate is based on regression; others are extrapolated from the latest International Comparison Programme benchmark estimates. h. Estimated to be lower middle income ($826­$3,255 ). i. National estimates based on survey data. 300 Selected world development indicators 301 Technical notes among economies rather than offering precise quantitative These technical notes discuss the sources and methods used measures of those differences. Discrepancies in data pre- to compile the indicators included in this edition of Selected sented in different editions reflect updates by countries as World Development Indicators. The notes follow the order well as revisions to historical series and changes in method- in which the indicators appear in the tables. Note that the ology. Thus readers are advised not to compare data series Selected World Development Indicators uses terminology in between editions or between different editions of World line with the 1993 System of National Accounts (SNA). For Bank publications. Consistent time series are available from example, in the 1993 SNA gross national income replaces the World Development Indicators 2005 CD-ROM. gross national product. Ratios and growth rates Sources For ease of reference, the tables usually show ratios and rates The data published in the Selected World Development of growth rather than the simple underlying values. Values Indicators are taken from World Development Indicators in their original form are available from the World Develop- 2005. Where possible, however, revisions reported since the ment Indicators 2005 CD-ROM. Unless otherwise noted, closing date of that edition have been incorporated. In addi- growth rates are computed using the least-squares regression tion, newly released estimates of population and gross method (see statistical methods on page 305). Because this national income (GNI) per capita for 2004 are included in method takes into account all available observations during table 1. a period, the resulting growth rates reflect general trends The World Bank draws on a variety of sources for the sta- that are not unduly influenced by exceptional values. To tistics published in the World Development Indicators. Data exclude the effects of inflation, constant price economic on external debt for developing countries are reported indicators are used in calculating growth rates. Data in italics directly to the World Bank by developing member countries are for a year or period other than that specified in the col- through the Debtor Reporting System. Other data are drawn umn heading--up to two years before or after for economic mainly from the U.N. and its specialized agencies, from the indicators and up to three years for social indicators, because IMF, and from country reports to the World Bank. Bank staff the latter tend to be collected less regularly and change less estimates are also used to improve currentness or consis- dramatically over short periods. tency. For most countries, national accounts estimates are obtained from member governments through World Bank Constant price series economic missions. In some instances these are adjusted by An economy's growth is measured by the increase in value staff to ensure conformity with international definitions and added produced by the individuals and enterprises operating concepts. Most social data from national sources are drawn in that economy. Thus measuring real growth requires esti- from regular administrative files, special surveys, or periodic mates of GDP and its components valued in constant prices. censuses. The World Bank collects constant price national accounts For more detailed notes about the data, please refer to the series in national currencies and recorded in the country's World Bank's World Development Indicators 2005. original base year. To obtain comparable series of constant price data, it rescales GDP and value added by industrial ori- Data consistency and reliability gin to a common reference year, currently 2000. This process Considerable effort has been made to standardize the data, gives rise to a discrepancy between the rescaled GDP and the but full comparability cannot be assured, and care must be sum of the rescaled components. Because allocating the dis- taken in interpreting the indicators. Many factors affect data crepancy would give rise to distortions in the growth rate, it availability, comparability, and reliability: statistical systems is left unallocated. in many developing economies are still weak; statistical methods, coverage, practices, and definitions differ widely; Summary measures and cross-country and intertemporal comparisons involve The summary measures for regions and income groups, pre- complex technical and conceptual problems that cannot be sented at the end of most tables, are calculated by simple unequivocally resolved. Data coverage may not be complete addition when they are expressed in levels. Aggregate growth because of special circumstances or for economies experi- rates and ratios are usually computed as weighted averages. encing problems (such as those stemming from conflicts) The summary measures for social indicators are weighted by affecting the collection and reporting of data. For these rea- population or subgroups of population, except for infant sons, although the data are drawn from the sources thought mortality, which is weighted by the number of births. See the to be most authoritative, they should be construed only as notes on specific indicators for more information. indicating trends and characterizing major differences 302 WORLD DEVELOPMENT REPORT 2006 For summary measures that cover many years, calcula- time. The PPP conversion factors used here are derived from tions are based on a uniform group of economies so that the price surveys covering 118 countries conducted by the Inter- composition of the aggregate does not change over time. national Comparison Program. For Organisation for Eco- Group measures are compiled only if the data available for a nomic Co-operation and Development (OECD) countries given year account for at least two-thirds of the full group, as data come from the most recent round of surveys, com- defined for the 2000 benchmark year. As long as this crite- pleted in 1999; the rest are either from the 1996 survey, or rion is met, economies for which data are missing are data from the 1993 or earlier round and extrapolated to the assumed to behave like those that provide estimates. Readers 1996 benchmark. Estimates for countries not included in the should keep in mind that the summary measures are esti- surveys are derived from statistical models using available mates of representative aggregates for each topic and that data. nothing meaningful can be deduced about behavior at the PPP GNI per capita is PPP GNI divided by midyear pop- country level by working back from group indicators. In ulation. addition, the estimation process may result in discrepancies Gross domestic product (GDP) per capita growth is between subgroup and overall totals. based on GDP measured in constant prices. Growth in GDP is considered a broad measure of the growth of an economy. Table 1. Key indicators of development GDP in constant prices can be estimated by measuring the Population is based on the de facto definition, which counts total quantity of goods and services produced in a period, all residents, regardless of legal status or citizenship, except valuing them at an agreed set of base year prices, and sub- for refugees not permanently settled in the country of asy- tracting the cost of intermediate inputs, also in constant lum, who are generally considered part of the population of prices. See the section on statistical methods for details of the country of origin. the least-squares growth rate. Average annual population growth rate is the exponen- Life expectancy at birth is the number of years a new- tial rate of change for the period (see the section on statisti- born infant would live if patterns of mortality prevailing at cal methods on page 305). its birth were to stay the same throughout its life. Population density is midyear population divided by land Adult literacy rate is the percentage of persons aged 15 area. Land area is a country's total area excluding areas under and above who can, with understanding, read and write a inland bodies of water and coastal waterways. Density is cal- short, simple statement about their everyday life. culated using the most recently available data on land area. Carbon dioxide (CO2) emissions measures those emis- Gross national income (GNI--formerly gross national sions stemming from the burning of fossil fuels and the product or GNP), the broadest measure of national income, manufacture of cement. These include carbon dioxide pro- measures total value added from domestic and foreign duced during consumption of solid, liquid, and gas fuels and sources claimed by residents. GNI comprises gross domestic from gas flaring. product (GDP) plus net receipts of primary income from The Carbon Dioxide Information Analysis Center foreign sources. Data are converted from national currency (CDIAC), sponsored by the U.S. Department of Energy, cal- to current U.S. dollars using the World Bank Atlas method. culates annual anthropogenic emissions of CO2. These calcu- This involves using a three-year average of exchange rates to lations are derived from data on fossil fuel consumption, smooth the effects of transitory exchange rate fluctuations. based on the World Energy Data Set maintained by the See the section on statistical methods for discussion of the UNSD, and from data on world cement manufacturing, Atlas method. based on the Cement Manufacturing Data Set maintained by GNI per capita is GNI divided by midyear population. It the U.S. Bureau of Mines. Each year the CDIAC recalculates is converted into current U.S. dollars by the Atlas method. the entire time series from 1950 to the present, incorporating The World Bank uses GNI per capita in U.S dollars to classify its most recent findings and the latest corrections to its data- economies for analytical purposes and to determine borrow- base. Fuels supplied to ships and aircraft engaged in interna- ing eligibility. tional transportation are excluded in these estimates because PPP gross national income, which is GNI converted into of the difficulty of apportioning these fuels among the coun- international dollars using purchasing power parity (PPP) tries benefiting from that transport. conversion factors, is included because nominal exchange rates do not always reflect international differences in rela- Table 2. Millennium Development Goals: tive prices. At the PPP rate, one international dollar has the eradicating poverty and improving lives same purchasing power over domestic GNI that the U.S. dol- Proportion of population below $1 a day (PPP$) is the per- lar has over U.S. GNI. PPP rates allow a standard compari- centage of the population living on less than $1.08 a day at son of real price levels between countries, just as conven- 1993 international prices. For further information on tional price indexes allow comparison of real values over poverty data, see the technical note for Table A1. Selected world development indicators 303 Prevalence of child malnutrition is the percentage of mortality rates and their reference dates using weighted least children under five whose weight for age is less than minus squares was developed and adopted by both UNICEF and two standard deviations from the median for the interna- the World Bank. tional reference population ages 0­59 months. The reference Prevalence of HIV is the percentage of people ages 15­49 population, adopted by the World Health Organization who are infected with HIV. Adult HIV prevalence rates (WHO) in 1983, is based on children from the United States, reflect the rate of HIV infection in each country's popula- who are assumed to be well nourished. Estimates of child tion. Low national prevalence rates can be very misleading, malnutrition are from national survey data. The proportion however. They often disguise serious epidemics that are ini- of children who are underweight is the most common indi- tially concentrated in certain localities or among specific cator of malnutrition. Being underweight, even mildly, population groups and threaten to spill over into the wider increases the risk of death and inhibits cognitive develop- population. In many parts of the developing world most new ment in children. Moreover, it perpetuates the problem from infections occur in young adults, with young women espe- one generation to the next, as malnourished women are cially vulnerable. The estimates of HIV prevalence are based more likely to have low-birth-weight babies. on extrapolations from data collected through surveys and Primary completion rate is the percentage of students from surveillance of small, nonrepresentative groups. completing the last year of primary school. It is calculated by Maternal mortality rate is the number of women who die taking the total number of students in the last grade of pri- from pregnancy-related causes during pregnancy and child- mary school, minus the number of repeaters in that grade, birth, per 100,000 live births. The data shown here have been divided by the total number of children of official graduation collected in various years and adjusted to a common 1995 age. The primary completion rate reflects the primary cycle as base year. The values are modeled estimates based on an exer- defined by the International Standard Classification of Educa- cise carried out by the World Health Organization (WHO) tion (ISCED), ranging from three or four years of primary and United Nations Children's Fund(UNICEF). In this exer- education (in a very small number of countries) to five or six cise maternal mortality was estimated with a regression model years (in most countries), and seven (in a small number of using information on fertility, birth attendants, and HIV countries). Because curricula and standards for school com- prevalence. This cannot be assumed to provide an accurate pletion vary across countries, a high rate of primary comple- estimate of maternal mortality in any country in the table. tion does not necessarily mean high levels of student learning. Births attended by skilled health staff are the percentage Gender parity ratio in primary and secondary school is of deliveries attended by personnel trained to give the neces- the ratio of female gross enrollment rate in primary and sec- sary supervision, care, and advice to women during preg- ondary school to the gross enrollment rate of males. Eliminat- nancy, labor, and the postpartum period, to conduct deliveries ing gender disparities in education would help to increase the on their own, and to care for newborns. The share of births status and capabilities of women. This indicator is an imper- attended by skilled health staff is an indicator of a health sys- fect measure of the relative accessibility of schooling for girls. tem's ability to provide adequate care for a pregnant women. With a target date of 2005, this is the first of the targets to fall Good antenatal and postnatal care improves maternal health due. School enrollment data are reported to the UNESCO and reduces maternal and infant mortality. But data may not Institute for Statistics by national education authorities. Pri- reflect such improvements because health information system mary education provides children with basic reading, writing, are often weak, material deaths are underreported, and rates and mathematics skills along with an elementary understand- of maternal mortality are difficult to measure. ing of such subjects as history, geography, natural science, social science, art, and music. Secondary education completes Table 3. Economic activity the provision of basic education that began at the primary Gross domestic product is gross value added, at purchasers' level, and aims at laying foundations for lifelong learning and prices, by all resident producers in the economy plus any human development, by offering more subject-or skill- taxes and minus any subsidies not included in the value of the oriented instruction using more specialized teachers. products. It is calculated without deducting for depreciation Under-five mortality rate is the probability that a new- of fabricated assets or for depletion or degradation of natural born baby will die before reaching age five, if subject to cur- resources. Value added is the net output of an industry after rent age-specific mortality rates. The probability is expressed adding up all outputs and subtracting intermediate inputs. as a rate per 1,000. The main sources of mortality data are The industrial origin of value added is determined by the vital registration systems and direct or indirect estimates International Standard Industrial Classification (ISIC) revi- based on sample surveys or censuses. To produce harmo- sion 3. The World Bank conventionally uses the U.S. dollar nized estimates of under-five mortality rates that make use and applies the average official exchange rate reported by the of all available information in a transparent way, a method- International Monetary Fund for the year shown. An alterna- ology that fits a regression line to the relationship between tive conversion factor is applied if the official exchange rate is 304 WORLD DEVELOPMENT REPORT 2006 judged to diverge by an exceptionally large margin from the idents of a country and the rest of the world involving a rate effectively applied to transactions in foreign currencies change in ownership of general merchandise, goods sent for and traded products. processing and repairs, nonmonetary gold, and services. Gross domestic product average annual growth rate is The GDP implicit deflator reflects changes in prices for all calculated from constant price GDP data in local currency. final demand categories, such as government consumption, Agricultural productivity refers to the ratio of agricul- capital formation, and international trade, as well as the main tural value added, measured in constant 2000 U.S. dollars, to component, private final consumption. It is derived as the the number of workers in agriculture. ratio of current to constant price GDP. The GDP deflator may Value added is the net output of an industry after adding also be calculated explicitly as a Paasche price index in which up all out-puts and subtracting intermediate inputs. The the weights are the current period quantities of output. industrial origin of value added is determined by the Inter- National accounts indicators for most developing coun- national Standard Industrial Classification (ISIC) revision 3. tries are collected from national statistical organizations and Agriculture value added corresponds to ISIC divisions central banks by visiting and resident World Bank missions. 1­5 and includes forestry and fishing. Data for high-income economies come from the OECD data Industry value added comprises mining, manufacturing, files. construction, electricity, water, and gas (ISIC divisions 10­45). Services value added correspond to ISIC divisions 50­99. Table 4. Trade, aid, and finance Household final consumption expenditure (private Merchandise exports show the f.o.b. (free on board) value of consumption in previous editions) is the market value of all goods provided to the rest of the world valued in U.S. dollars. goods and services, including durable products (such as cars, Merchandise imports show the c.i.f. value of goods (the washing machines, and home computers), purchased by cost of the goods including insurance and freight) purchased households. It excludes purchases of dwellings but includes from the rest of the world valued in U.S. dollars. Data on imputed rent for owner-occupied dwellings. It also includes merchandise trade come from the World Trade Organization payments and fees to governments to obtain permits and (WTO) in its annual report. licenses. Here, household consumption expenditure includes Manufactured exports comprise the commodities in the expenditures of nonprofit institutions serving house- Standard Industrial Trade Classification (SITC) sections 5 holds, even when reported separately by the country. In (chemicals), 6 (basic manufactures), 7 (machinery and practice, household consumption expenditure may include transport equipment), and 8 (miscellaneous manufactured any statistical discrepancy in the use of resources relative to goods), excluding division 68. the supply of resources. High technology exports are products with high R&D General government final consumption expenditure intensity. They include high-technology products such as in (general government consumption in previous editions) aerospace, computers, pharmaceuticals, scientific instru- includes all government current expenditures for purchases ments, and electrical machinery. of goods and services (including compensation of employ- Current account balance is the sum of net exports of ees). It also includes most expenditures on national defense goods and services, net income, and net current transfers. and security, but excludes government military expenditures Net private capital flows consist of private debt and non- that are part of government capital formation. debt flows. Private debt flows include commercial bank Gross capital formation (gross domestic investment in lending, bonds, and other private credits; nondebt private previous editions) consists of outlays on additions to the fixed flows are foreign direct investment and portfolio equity assets of the economy plus net changes in the level of invento- investment. ries and valuables. Fixed assets include land improvements Foreign direct investment is net inflows of investment to (fences, ditches, drains, and so on); plant, machinery, and acquire a lasting management interest (10 percent or more equipment purchases; and the construction of buildings, of voting stock) in an enterprise operating in an economy roads, railways, and the like, including commercial and indus- other than that of the investor. It is the sum of equity capital, trial buildings, offices, schools, hospitals, and private dwellings. re-investment of earnings, other long-term capital, and Inventories are stocks of goods held by firms to meet tempo- short-term capital, as shown in the balance of payments. rary or unexpected fluctuations in production or sales, and Data on the current account balance, private capital flows, "work in progress". According to the 1993 SNA net acquisitions and foreign direct investment are drawn from the IMF's Bal- of valuables are also considered capital formation. ance of Payments Statistics Yearbook and International Finan- External balance of goods and services is exports of cial Statistics. goods and services less imports of goods and services. Trade Official development assistance or official aid from the in goods and services comprise all transactions between res- high-income members of the OECD are the main source of Selected world development indicators 305 official external finance for developing countries, but official loan associations. Data are from the IMF's International development assistance (ODA) is also disbursed by some Finance Statistics. important donor countries that are not members of OECD's Development Assistance Committee (DAC). DAC has three Statistical methods criteria for ODA: it is undertaken by the official sector; it This section describes the calculation of the least-squares promotes economic development or welfare as a main objec- growth rate, the exponential (endpoint) growth rate, and the tive; and it is provided on concessional terms, with a grant World Bank's Atlas methodology for calculating the conver- element of at least 25 percent on loans. sion factor used to estimate GNI and GNI per capita in U.S. Official development assistance comprises grants and dollars. loans, net of repayments, that meet the DAC definition of ODA and are made to countries and territories in part I of Least-squares growth rate the DAC list of aid recipients. Official aid comprises grants Least-squares growth rates are used wherever there is a suffi- and ODA-like loans, net of repayments, to countries and ter- ciently long time series to permit a reliable calculation. No ritories in part II of the DAC list of aid recipients. Bilateral growth rate is calculated if more than half the observations grants are transfers in money or in kind for which no repay- in a period are missing. ment is required. Bilateral loans are loans extended by gov- The least-squares growth rate, r, is estimated by fitting a ernments or official agencies that have a grant element of at linear regression trendline to the logarithmic annual values least 25 percent and for which repayment is required in con- of the variable in the relevant period. The regression equa- vertible currencies or in kind. tion takes the form Total external debt is debt owed to nonresidents repayable in foreign currency, goods, or services. It is the ln Xt = a + bt, sum of public, publicly guaranteed, and private non-guaran- which is equivalent to the logarithmic transformation of the teed long-term debt, use of IMF credit, and short-term debt. compound growth equation, Short-term debt includes all debt having an original matu- rity of one year or less and interest in arrears on long-term Xt = Xo (1 + r)t. debt. In this equation, X is the variable, t is time, and a = log Xo Present value of debt is the sum of short-term external and b = ln (1 + r) are the parameters to be estimated. If b* is debt plus the discounted sum of total debt service payments the least-squares estimate of b, the average annual growth due on public, publicly guaranteed, and private nonguaran- rate, r, is obtained as [exp(b*) ­ 1] and is multiplied by 100 teed long-term external debt over the life of existing loans. to express it as a percentage. The main sources of external debt information are The calculated growth rate is an average rate that is repre- reports to the World Bank through its Debtor Reporting Sys- sentative of the available observations over the entire period. tem from member countries that have received World Bank It does not necessarily match the actual growth rate between loans. Additional information has been drawn from the files any two periods. of the World Bank and the IMF. Summary tables of the external debt of developing countries are published annually Exponential growth rate in the World Bank's Global Development Finance. The growth rate between two points in time for certain Net migration is the total number of migrants during the demographic data, notably labor force and population, is period, that is, the number of immigrants less the number of calculated from the equation emigrants, including both citizens and noncitizens. Data shown in the table are five-year estimates. Data are from the r = ln (pn /p1)/n, United Nations Population Division's World Population where pn and p1 are the last and first observations in the Prospects: The 2004 Revision. period, n is the number of years in the period, and ln is the Domestic credit provided by banking sector includes all natural logarithm operator. This growth rate is based on a credit to various sectors on a gross basis, with the exception model of continuous, exponential growth between two of credit to the central government, which is net. The bank- points in time. It does not take into account the intermediate ing sector includes monetary authorities, deposit money values of the series. Note also that the exponential growth banks, and other banking institutions for which data are rate does not correspond to the annual rate of change mea- available (including institutions that do not accept transfer- sured at a one-year interval which is given by able deposits but do incur such liabilities as time and savings deposits). Examples of other banking institutions include (pn ­ pn­ 1)/pn­ 1 . savings and mortgage loan institutions and building and 306 WORLD DEVELOPMENT REPORT 2006 World Bank Atlas method is judged to diverge by an exceptionally large margin from In calculating GNI and GNI per capita in U.S. dollars for cer- the rate effectively applied to domestic transactions of for- tain operational purposes, the World Bank uses the Atlas eign currencies and traded products. This applies to only a conversion factor. The purpose of the Atlas conversion factor small number of countries, as shown in Primary data docu- is to reduce the impact of exchange rate fluctuations in the mentation table in World Development Indicators 2005. cross-country comparison of national incomes. The Atlas Alternative conversion factors are used in the Atlas method- conversion factor for any year is the average of a country's ology and elsewhere in the Selected World Development exchange rate (or alternative conversion factor) for that year Indicators as single-year conversion factors. and its exchange rates for the two preceding years, adjusted Table 5. Key indicators for other economies for the difference between the rate of inflation in the country and that in Japan, the United Kingdom, the United States, Population is based on the de facto definition, which counts and the Euro Zone. A country's inflation rate is measured by all residents, regardless of legal status or citizenship, except the change in its GDP deflator. The inflation rate for Japan, for refugees not permanently settled in the country of asy- the United Kingdom, the United States, and the Euro Zone, lum, who are generally considered part of the population of representing international inflation, is measured by the the country of origin. change in the SDR deflator. (Special drawing rights, or SDRs, Average annual population growth rate is the exponen- are the IMF's unit of account.) The SDR deflator is calcu- tial rate of change for the period (see the section on statisti- lated as a weighted average of these countries' GDP deflators cal methods below). in SDR terms, the weights being the amount of each coun- Population density is midyear population divided by land try's currency in one SDR unit. Weights vary over time area. Land area is a country's total area excluding areas under because both the composition of the SDR and the relative inland bodies of water and coastal waterways. Density is cal- exchange rates for each currency change. The SDR deflator is culated using the most recently available data on land area. calculated in SDR terms first and then converted to U.S. dol- Gross national income (GNI--formerly gross national lars using the SDR to dollar Atlas conversion factor. The product or GNP), the broadest measure of national income, Atlas conversion factor is then applied to a country's GNI. measures total value added from domestic and foreign The resulting GNI in U.S. dollars is divided by the midyear sources claimed by residents. GNI comprises gross domestic population to derive GNI per capita. product (GDP) plus net receipts of primary income from When official exchange rates are deemed to be unreliable foreign sources. Data are converted from national currency or unrepresentative of the effective exchange rate during a to current U.S. dollars using the World Bank Atlas method. period, an alternative estimate of the exchange rate is used in This involves using a three-year average of exchange rates to the Atlas formula (see below). smooth the effects of transitory exchange rate fluctuations. The following formulas describe the calculation of the (See the section on statistical methods below for further dis- Atlas conversion factor for year t: cussion of the Atlas method.) GNI per capita is GNI divided by midyear population. It S$ S$ is converted into current U.S. dollars by the Atlas method. e*t = [et 1 pt pt pt pt / / The World Bank uses GNI per capita in U.S dollars to classify 3 -2 pt S$ -2 pt-2 + et-1 pt S$ -1 pt-1 + et] economies for analytical purposes and to determine borrow- ing eligibility. and the calculation of GNI per capita in U.S. dollars for year t: PPP Gross national income, which is GNI converted into Y$t = (Yt/Nt)/et * international dollars using purchasing power parity (PPP) conversion factors, is included because nominal exchange where et* is the Atlas conversion factor (national currency to rates do not always reflect international differences in relative the U.S. dollar) for year t, et is the average annual exchange prices. At the PPP rate, one international dollar has the same rate (national currency to the U.S. dollar) for year t, pt is the purchasing power over domestic GNI that the U.S. dollar has GDP deflator for year t, pS$ is the SDR deflator in U.S. dollar t over U.S. GNI. PPP rates allow a standard comparison of real terms for year t, Yt is the Atlas GNI per capita in U.S. dollars $ price levels between countries, just as conventional price in year t, Yt is current GNI (local currency) for year t, and Nt indexes allow comparison of real values over time. The PPP is the midyear population for year t. conversion factors used here are derived from price surveys covering 118 countries conducted by the International Com- Alternative conversion factors parison Program. For Organisation for Economic Co-opera- The World Bank systematically assesses the appropriateness tion and Development (OECD) countries data come from of official exchange rates as conversion factors. An alterna- the most recent round of surveys, completed in 1999; the rest tive conversion factor is used when the official exchange rate are either from the 1996 survey, or data from the 1993 or ear- Selected world development indicators 307 lier round and extrapolated to the 1996 benchmark. Esti- Carbon dioxide (CO2) emissions measures those emis- mates for countries not included in the surveys are derived sions stemming from the burning of fossil fuels and the from statistical models using available data. manufacture of cement. These include carbon dioxide pro- PPP GNI per capita is PPP GNI divided by midyear pop- duced during consumption of solid, liquid, and gas fuels and ulation. from gas flaring. Gross domestic product (GDP) per capita growth is The Carbon Dioxide Information Analysis Center based on GDP measured in constant prices. Growth in GDP (CDIAC), sponsored by the U.S. Department of Energy, cal- is considered a broad measure of the growth of an economy. culates annual anthropogenic emissions of CO2. These calcu- GDP in constant prices can be estimated by measuring the lations are derived from data on fossil fuel consumption, total quantity of goods and services produced in a period, based on the World Energy Data Set maintained by the valuing them at an agreed set of base year prices, and sub- UNSD, and from data on world cement manufacturing, tracting the cost of intermediate inputs, also in constant based on the Cement Manufacturing Data Set maintained by prices. See the section on statistical methods for details of the U.S. Bureau of Mines. Each year the CDIAC recalculates the least-squares growth rate. the entire time series from 1950 to the present, incorporating Life expectancy at birth is the number of years a new- its most recent findings and the latest corrections to its data- born infant would live if patterns of mortality prevailing at base. Estimates exclude fuels supplied to ships and aircraft its birth were to stay the same throughout its life. engaged in international transportation because of the diffi- Adult literacy rate is the percentage of persons aged 15 culty of apportioning these fuels among the countries bene- and above who can, with understanding, read and write a fiting from that transport. short, simple statement about their everyday life. Index Aarhus Convention, 217 improving allocation of, 218­19 absolute deprivation, avoidance of, 19 increasing levels of, 219­20 accountability. See voice and accountability innovative funding mechanisms, 221 acquired immunodeficiency syndrome. See HIV/AIDS official development assistance, 219­20 affluence and wealth providing assistance for endowments, 218­21 business investment and, 102 tax issues and, 176 inequalities in, 55 voluntary contributions/private assistance, 221 social distinctions and distribution of wealth, 2­3, 74, 89 altruistic rewarding/altruistic punishment, 80 Afghanistan Argentina health care, 144 Center for Financial Stability, 184 reconstruction aid, 219 educational attainment/achievement, 61 Africa infrastructure, 172, 173­74 aid to, 218, 219 legal approach to equity, 79 capital markets, 8 poor institutional quality, 113, 119 Commission for Africa, 218 squatters' rights, 164­65 customary systems, 159 Aristotle, 78­79 development experiences, 115­16 Armenia education trends, 35­36, 68 health care payments, 147 government policy effect on labor markets, 187 "My Rights" television show, 157 health services, 32 stunting in children, 29 human rights regimes, 79 Asia inequality trends, 46, 68 crisis behavior and costs, 201 infant mortality, 6 inequality trends, 45 infrastructure, 169, 170, 171 infant mortality, 6 intercountry inequality, 38 poverty trends, 66 land relations, 93 programs for nonworking young, 152 life expectancy, 56, 58, 69 schooling years, 60­61 overall inequality levels, 65 (see also specific countries and regions) programs for nonworking young, 152 Asian Development Bank, credit market report, 90 schooling years, 60­61 Australia trade credit, 97 educational attainment/achievement, 61 (see also specific countries) means-tested pensions, 154 agency, 5, 48­49, 49­50 enhancing, 205 inequalities of, 28, 49­51 Bangladesh internalization of disadvantage and, 49­50 absent health care providers, 148 agriculture Food for Education Program, 137 subsidies, 220 health care, 144 underinvestment, 98­100 income inequality, 64 aid, 17 income information sharing within household, 54 "aid orphans/darlings," 219 inequality trends, 45 debt cancellation, 221 infrastructure, 169 debt forgiveness, 222 land and safety net programs, 166 debt relief, 221 legal approach to equity, 79 designing, 17 means-tested pensions, 154 efficient and effective, 17, 218, 229 microfinance, 184 309 310 WORLD DEVELOPMENT REPORT 2006 Bangladesh (continued) HIV/AIDS, 59 poverty trends, 66 inequality trends, 46 teacher absenteeism, 35 life expectancy, 58 women and household assets, 53 Centre for Development Studies, Trivandrum, credit survey, Basel Committee on Banking Supervision, 216 90 biases, institutional and judicial, 5 children Bolivia disadvantaged, 2 obstetric care, 144 health issues. See health and health care pensions, 154 Chile Bosnia, legal institutions, 160 bank privatization, 182 Botswana educational attainment/achievement, 61 HIV/AIDS, 69 health insurance, 145, 147 pensions, 154 labor market reforms, 191 Brazil physician availability, 144 basic education, 140 China Bolsa Escola, 137, 153 accession to WTO and trade reforms, 194 educational attainment/achievement, 61 economic growth, 7 health education, 142, 143 gender equity, 54 health insurance, 145 health care payments, 147 inequality trends, 46 income and expenditure, 63, 64, 65 infant mortality, 29 inequality trends, 45, 68 land access, 13 infrastructure, 169 legal approach to equity, 79 institutional transitions and economic development, 119, local government democratization, 70­71 122­24, 125 pensions, 148­49 labor market reforms, 191 productivity gaps in agriculture, 99 land distribution, 166­67 stunting in children, 29 life expectancy, 56, 142 trade unions, 189­90 poverty trends, 66 Bulgaria, education, 12 voice rank, 68 Burkino Faso, head of household education, 35 (see also specific provinces) circumstances of birth and life. See predetermined characteristics/circumstances of human beings Cambodia CIS. See Commonwealth of Independent States (CIS) health care payments, 147 civil law, 79 labor standards, 190 collective action, Palanpur example, 27 programs for nonworking young, 153 Colombia spatial differences, 42 education, 11 squatters' rights, 165 health insurance, 12, 146 stunting/underweight in children, 32 infant mortality, 29 voice rank, 68 infrastructure, 172 Canada labor market reforms, 191 intergenerational mobility, 47 land rental markets, 167 intergenerational transmission of inequality, 47 PACES voucher program, 140 capacity to aspire/capacity to engage, 21, 71 student achievement, 139 capital markets, 7­8, 16, 21­22 Commission for Real Property Claims of Displaced Persons and (see also financial markets; human capital markets) Refugees, 160 Caribbean. See Latin America and the Caribbean Commission on Macroeconomics and Health report, 100­101 caste systems, 5, 8, 26, 96 Commitment to Development Index, 222 CBHI. See community-based health insurance (CBHI) common law, 79 Center for Global Development, 222 Commonwealth of Independent States (CIS), land transferability, Central America 166 elites and taxes, 176 community-based health insurance (CBHI), 147­48 health education, 143 complementaries between equity and efficiency, 21­22, 74 human rights regimes, 79 equity­efficiency tradeoffs, 22­23, 130, 179, 204­5 (see also specific countries) complementaries between equity and prosperity, 2, 23, 74, Central Asia 130 education trends, 36 Core 25 Principles for Banking Supervision, 216 health care payments, 145 corruption, 130, 227 Index 311 Côte d'Ivoire early childhood development (ECD), 11, 132­33 Côte d'Ivoire Living Standards Measurement Surveys, 91­92 benefits of early intervention, 133­34 trade credit, 97 designing programs, 134­35 credit markets, 89­91 earnings. See incomes, assets, and liabilities crime/violence East Asia domestic violence, 54 billionaire wealth, 38 improved crime policies, 161­62 development experiences, 114­15 inequality traps and, 49­50 East Asian crisis, 185 against women, 162 elite capture of financial policy and institutions, 181 crises and crises resolution, 199­202 income distribution dynamics, 46 Cuba, health care, 144 inequality trends, 45 culture, social networks and, 21 life expectancy, 56 Czech Republic poverty trends, 66 educational attainment/achievement, 61 schooling years, 60­61 effects of regulation and disclosure in, 184­85 (see also specific countries) financial markets, 14 Eastern Europe education trends, 36 inequality trends, 46 Dayton Agreement, 160 (see also specific countries) debt cancellation, 221 ECD. See early childhood development (ECD) Declaration on the TRIPS Agreement and Public Health, economic inequalities, 28, 36­43, 229 215­16 between-group shares of total inequality, 40­48 democracy relationship between group differences and inequality, in governance institutions, 70­71 43­48 Spanish transition to, 105­6 spatial differences/inequalities, 42­43, 204­5 Demographic and Health Survey (DHS), 29­34, 59 economic liberalization, 179 Denmark, voice rank, 68 economic policies developing countries pathologies arising in pursuit of equity, 129­30 "advantage to backwardness," 69 populist macropolicy, 16, 130 catch up countries, 68­69 Ecuador customary systems, 159 education test results, 34 development Program for the Development of Indigenous and Afro- long-term, 8­9, 22 Ecuadorian Peoples, 51 regional inequality and lagging regions, 204­5 Quichua people, 5, 50­51 (see also equity­development relationship) spatial differences, 42 Development Agenda Framework Agreement, 216 teacher absenteeism, 35 development assistance. See aid; equity­development education and educational attainment relationship access to schooling, 6­7, 136­38 development community, recent thinking and agreements of, 131, access to teachers, 35 226­29 differences in, 6, 56 DHS. See Demographic and Health Survey (DHS) disadvantaged students, 139­40 Dictator Game, 81 excluded groups, 138 directed credit, 130, 184 global inequality, 55, 60­62, 68 disability and disabled persons, 32, 154­55 improving gender equity, 138 discrimination and stereotyping, 7, 21, 74, 94­96, 131 inequalities in, 27 analysis of missing women and girls/gender discrimination, inequalities within countries, 34­36 223 male and female household heads, 34­35 explicit discrimination, 21 reaching ethnic groups, 138 in justice systems, 158 rural and urban household heads, 35 displaced persons and refugees, 160 schooling and basic education, 6­7, 11­12, 27, 135­41 distributive justice, 77­78, 217 strengthening accountability, 140­41 distributive policies, 3, 23, 228 test results, 34 investment and growth using, 102­4 TIMSS data, 139 poverty reduction and redistributive policies, 9­10, 74 trends, 35­36 Doha Round, 16, 210­11, 212 upgrading quality, 138­40 Declaration on the TRIPS Agreement and Public Health, women and girls, 52­53, 138 215­16 efficiency, increased, 10, 74, 101­4 Development Agenda Framework Agreement, 216 elderly, social programs for nonworking elderly, 153­54 312 WORLD DEVELOPMENT REPORT 2006 elites, 130, 131 European Union, human rights norms and regimes, 80 capture and discrimination by, 156­58, 175, 178, 180­82, extreme poverty, 19 194 extreme predation, 130 El Salvador, education system, 141 employment and occupations discrimination and stereotypes, 95­96 fair and ethical trade, 213­14, 222 inequalities in, 27 fairness women, 52­53 equity and. See equity and fairness concerns empowerment, 50­51, 70­71, 227 in markets, 11 endowments, 19­20 financial markets, 14, 131 development assistance, 218­21 accountability and, 184­85 unequal, 17 achieving equity and efficiency in, 179­85 Enhanced HICP Initiative, 222 Basel II Capital Accord, 215 environment, Aarhus Convention, 217 bias in, 202 equal opportunity, 2­3, 18­19, 74 competition in, 184­85 "equal opportunity policy," 77 Core 25 Principles for Banking Supervision, 215 equity elite influence/capture, 180­81 concepts of, 78 Financial Stability Forum, 216 defined, 18­19, 74 foreign direct investment, 216 versus equality, 74 global standards, 216 ethical and philosophical approaches to, 76­78 liberalization, 216­17 importance/significance considerations, 73­75 liberalization paradox, 14, 179, 182­83, 203 legal institutions/justice and, 78­81 ROSC, 216 equity and fairness concerns, 73­75, 129 segmentation, 185 income inequality and poverty reduction, 84­88 technical design issues, 183­84 income inequality and subjective well-being, 82­83 unequal access considerations, 180­81 intrinsic human behavior/shared concern, 7, 76, 80­84 Financial Stability Forum, 216 well-being and, 76, 82­83 Finland (see also complementaries between equity and prosperity; educational attainment/achievement, 61 equity­development relationship) institutional transitions, 119, 121­23 equity­development relationship, 2­4, 7, 10, 17, 129, 226­29 intergenerational mobility, 47 contemporary evidence, 113­18 intergenerational transmission of inequality, 47 historical evidence, 109­13 Foreign Policy magazine, 222 Indonesian example, 126­27 France institutional quality, 124­25, 227­28 financial liberalization, 182 power distribution and institutional quality, 107­9, 129, 228 reading levels, 62 transitions to equitable institutions, 118­24 ethics codes of conduct, 213­14 Gambia, health care, 144 ethical approaches to equity, 76­78 GATS. See General Agreement in Trade and Services (GATS) fair and ethical trade, 213­14, 222 gender differences/inequalities, 4­5, 26, 51­54 Ethiopia gender discrimination, 158, 223 health education, 142 improving equity in education, 138 land transactions, 93 infrastructure investments and gender equity, 138 voice rank, 68 redressing, 223 Europe General Agreement in Trade and Services (GATS), Mode IV, 2 basic education, 140 10 health care payments, 145 Ghana HIV/AIDS, 59 infrastructure, 169 human rights regimes, 79 opportunities for women, 54 income inequality and subjective well-being, 82 trade unions, 189 income support for children, 152 global equity achievement, 206­7 inequality trends, 46 analysis and research, 223 legal approach to equity, 79 citizen mobilization, 222­23 life expectancy, 58 greater global equity policies, 11, 16­17, 22 overall inequality levels, 65 international organizations and, 223 programs for nonworking young, 152 making global markets work more equitably, 207­17, 227 (see also specific countries) providing development assistance for endowments, 218­21 Index 313 summary, 223 history and historical perspective, 23 transitions to greater equity, 221­23 evidence regarding development and political power, 109­13 global governance, 131 HIV/AIDS, 6, 18, 32­33, 33, 58, 59, 68, 69, 143, 145­55, 154 global inequity and well-being, 6­7, 129 Honduras, gender discrimination, 158 catch up countries and, 68­69 Hong Kong, China, inequality trends, 45 education, 60­62 households examples and concepts, 55­56 domestic violence, 54 future of, 68­69 gender inequality and function of, 51­54 global income inequality, 7, 55 human behavior health, 56, 58­59 conditioned by group identity, 81­82 three competing concepts of, 56 discrimination/ stereotype effects on, 94­96 trends, 6 equity and fairness concerns, 7, 80­82 global markets, 17, 207­17, 227 human capacities, 10­11, 11­13, 130, 226­27 (see also markets; specific markets) considerations, 132 governance, 11, 227 early childhood development, 11, 132­35 deepening and extending democracy in institutions, 70­71 health and health care, 12, 141­48 global, 131 schooling and basic education, 11­12, 135­41 inequalities of power and, 48­51, 129 social protection systems/risk management, 12, 148­55 Greece, educational attainment/achievement, 61 summary, 155 Group of Twenty-Four, 223 human capital markets, 8, 94­96, 130 groups and group differences underinvestment, 100­101 individual behavior/performance and group identity, 81­82 Human Development Report of the United Nations Development local group participation and empowerment, 23, 70­71 Programme, 17 marginal groups, 70­71, 161 human immunodeficiency virus. See HIV/AIDS membership and initial circumstances, 19 human rights protection, 17 political inequality between groups, 21 relationship between group differences and inequality, 43­48 IBRD. See International Bank for Reconstruction and social programs for special vulnerable groups, 154­55 Development (IBRD) trends, 44­48 ICOR. See incremental capital­output ratio (ICOR) Guatemala ICRISAT. See International Crop Research Institute in the Semi- basic education, 140 Arid Tropics (ICRISAT) between-group differences in inequality, 41 IFF. See International Financing Facility (IFF) stunting in children, 31 ILO. See International Labour Office (ILO) Guyana, development experiences, 116­18 immunization, access to, 31 imperfect markets. See markets incomes, assets, and liabilities health and health care, 12 income inequality and incentives, 83­84 access to immunization, 31 income inequality and poverty reduction, 84­88 cognitive development in children, 11, 133 income inequality and subjective well-being, 82­83 community-based health insurance, 147­48 inequalities in, 23, 27, 55, 62­66, 68 differences in, 6 redistribution of, 102­4 disability, 32 women, 52­53 enhancing provider incentives, 148 incremental capital­output ratio (ICOR), 97­98 expanding access to, 143­44 India expanding knowledge of, 142­43 affirmative action programs, 158 financing affordable care, 144­48 billionaire wealth, 38 high-impact health services, 31­32 capital markets, 8 inequalities in, 141­42 caste system, 5, 8, 26, 96, 184 inequalities within countries, 29­34 credit markets, 90 infant and child mortality, 6, 29, 56, 59, 68 economic growth, 7 life expectancy, 7, 55, 56, 58­59, 69 education, 12 social inequalities damaging health, 32 effects of government intervention in labor markets, 187 stunting, 29­31 gender equity, 54 trends, 32­34 Gounders, 98, 102 Highly Indebted Poor Countries (HIPC), 219, 221 health care, 144 Enhanced HICP Initiative, 222 health care payments, 147­48 HIPC. See Highly Indebted Poor Countries (HIPC) ICOR estimates, 98 314 WORLD DEVELOPMENT REPORT 2006 India (continued) inequality traps, 2­3, 20­23, 28, 129, 228 ICRISAT household insurance data, 92 between-group differences, 43 improved marketing channels and technology, 196 crime/violence-related, 49­50, 161­62 income and expenditure, 63, 64 Palanpur example, 26­27 inequality trends, 45, 68 for women, within countries, 51­54 infant and child mortality, 144 inequity within countries, 4­6, 23, 28­29, 129 infrastructure, 169 economic inequalities, 28, 36­43 Integrated Rural Development Program loans, 184 in education, 34­36 lack of voice, 48 examples in various countries, 45­46 land and safety net programs, 166 group differences and, 43­48 land rights of rent-collecting intermediaries, 163 in health, 29­34 legal approach to equity, 79 inequalities of power, 48­51, 229. (see also agency; power and local government democratization, 70­71 influence) means-tested pensions, 154 inequality traps for women, 51­54 misallocation of capital, 98, 102 intergenerational transmission of inequality, 28, 46­48 Operation Barga, 103­4 regional disparities/inequalities, 204­5 poverty trends, 66 infrastructure "priority sector" lending, 97 access to, 6, 10­11, 169, 171­74, 175 product licensing restrictions, 196 accountability and, 174­75 product market reforms, 195­96 corruption and, 14, 174, 175 remedial education program, 140 equitable provision of, 14, 168­75 Self-Employed Women's Association, 147­48 privatization, 14, 170­71 stereotypes and behavior, 96 service affordability, 171­74 teacher absenteeism, 35 strengthening governance, voice, accountability of, 174­75 voice rank, 68 inheritance and inheritance laws, gender inequalities and, 52, worker organizations/trade unions, 190 162­63, 165 indigenous peoples institutional quality, 124­25 ILO Covenant 169, 222 power distribution and, 107­9, 129, 228 Quichua people, 5, 50­51 institutions and institutional development, 8­9, 107­9, 130, individuals 227­28 differences in opportunities for, 131 colonial origins of contemporary institutions, 9, 109­13 responsibility for own welfare, 77 contemporary evidence/perspective, 113­18 Indonesia democratic governance institutions, 70­71 development experiences, 114­15, 118, 125 historical evidence/perspective, 74­75, 109­13 elite influence/capture, 193 inequalities of power and, 48­51, 109­18, 129, 228 financial markets, 14 inequitable/exclusionary, 2, 74 growth, equity, and poverty reduction in, 126­27 transitions to more equitable, 118­24 health insurance, 12 insurance markets, 91­93, 130 infant mortality, 29 intellectual property rights protection, 214­16 Kecamatan Development Project, 50, 71 intergenerational transmission of inequality, 5­6, 28, 46­48, 73 microfinance, 184 International Bank for Reconstruction and Development (IBRD), physician availability, 144 membership and voting shares, 66­67 reading levels, 62 International Chirstelijk Steunfonds Africa, learning experiments, school enrollment problems, 139 139 teacher absenteeism, 35 International Conference on Financing for Development, 218­19 wealth inequality, 37 International Crop Research Institute in the Semi-Arid Tropics industry and trade, underinvestment, 96­98 (ICRISAT), 92, 99 inefficient inequalities, 89 International Development Association, 219 inequalities International Financing Facility (IFF), 221 interaction of various, 20­21 international inequity. See global inequity and well-being macroeconomic instability as cause and consequence of, International Labour Office (ILO), 187, 190 198­99 Covenant 169 on indigenous peoples, 222 mobility and, 2­3, 50 international law, 79 three competing concepts of, 56 global markets and, 17 views on, 84 human rights, 79­80 (see also global inequity and well-being; inefficient intellectual property rights protection, 214­16 inequalities; inequity within countries; specific areas of International Monetary Fund, 223 inequality) ICOR estimates, 98 Index 315 International Organization for Migration, 210 labor markets, 15, 16, 21­22, 131, 202 International Social Survey Program, 83 achieving equity and efficiency in, 185­94 Inter-university Consortium for Political and Social Research, addressing links with unequal power, 187­88 83 improved design of, 188­90 investment and investment opportunity, 7­8, 227­28 interaction between product markets and, 1997 inequalities and, 101­4 international labor mobility, 208­10 microcredit, 102 reasons to intervene, 186­87 underinvestment, 96­101 reforming poor institutions, 191­93 (see also markets; specific markets) worker organizations/trade unions, 189­90 Iraq, reconstruction aid, 219 lagging regions, 204­5 Ireland land educational attainment/achievement, 61 access to, 10­11, 13, 162­68, 175 labor market reforms, 191 formal land titling, 165­66 voice rank, 68 sharecropping, 93 Islamic law, justice and equity in, 79 squatters' rights, 164­65 Israel transferability, 166 hyperinflation, 202 women's inheritance rights, 52, 162­63, 165 voice rank, 68 land distribution, 162­63 Italy cost-effective, 167­68 banking segmentation, 185 land markets, 8, 21­22, 93­94, 166­67 means-tested pensions, 154 land reform, 13, 175 experience with, 163­64 Laos People's Democratic Republic, head of household education, 35 Jamaica Latin America and the Caribbean child development study, 11 billionaire wealth, 38 value-added tax exemptions, 177 colonization example, 9, 111­12 Japan crises behavior and costs, s201 educational attainment/achievement, 61 education trends, 68 life expectancy, 56 financial liberalization, 183 Jewish law, justice and equity in, 79 income distribution dynamics, 46 Joint United Nations Programme on HIV/AIDS, 69 income inequality and subjective well-being, 82­83, 84 Jordan inequality trends, 45­46 infant mortality, 29 infant mortality, 6 stunting in children, 29 infrastructure investments, 170 Jubilee 2000 campaign, 222 land reform, 163 justice and justice systems legal approach to equity, 79 access to, 10­11, 130­31, 158­60 means-tested pensions, 154 building equitable systems, 13, 130­31, 156­62 means tests, 151 combating discriminatory norms and practices, 158 overall inequality levels, 65 combating elite capture and discrimination, 156­58, 175 product and labor market interaction, 197 compatibility of state and customary systems, 158­59 programs for nonworking young, 152 enhancing judicial independence and accountability, schooling years, 60­61 156­58 trade liberalization, 194 equity and legal institutions, 78­81 (see also specific countries) improved crime policies, 161­62 legal institutions improved personal safety policies, 161­62 equity and, 78­81 legal institution establishment, 159­60 establishment, 159­60 to level the playing field, 175 leveling the economic and political playing field, 3, 4, 9­17, 23, 131 theories of, 76­78 justice and justice systems and, 175 pathologies making uneven playing field, 178­79 role of public action, 10­11, 228. (see also specific focal points, Kazakhstan, stunting in children, 29 e.g., human capacities, markets, etc.) Kecamatan Development Project (KDP), 50, 71 life chances, 1­2, 19, 55 Kenya land reform, 163 learning experiments, 139 macroeconomy, 14­17 trade credit, 97 accountability structures and, 201­3 Kyoto Protocol, 217 macroeconomic policies, 131 316 WORLD DEVELOPMENT REPORT 2006 macroeconomy (continued) schooling years, 60­61 macroeconomic stability/instability, 15­17, 198­203 (see also specific countries) policy design considerations, 201­3 Millennium Declaration, 131 Madagascar Millennium Development Goals, 17, 66 health care, 144 Millennium Summit+5, 222 spatial differences, 42 mobility Malaysia anomie and, 50 financial markets, 14 facilitating, 205 inequality trends, 45 inequalities and, 2­3 obstetric care, 144 international labor mobility, 208­10 productivity gaps in agriculture, 99 women, 52 wealth inequality, 37 Mongolia, product market reforms, 195-96 Mali Monterrey Consensus, 131 head of household education, 35 Morocco inequality contrasted to United States, 56 academic achievement, 62 infant mortality, 29 education, 11 voice rank, 68 immunization, 31 marginal products, 97­98 school enrollment problems, 139 markets, 7­8, 14­17, 226 spatial differences, 42 access to, 11, 178­79 student achievement, 139 barriers to, 178, 179, 202-3 trade liberalization, 194 fairness in, 11 Mozambique imperfect markets and market failures, 7­8, 17, 21­22, 74, 89, infant mortality, 29 101­2, 130 product markets and trade reform, 194­95, 198 inequality traps and market failures, 21 spatial differences, 42 making global markets work more equitably, 207­17, 227 Multi-Fiber Agreement phaseout, 211 possibilities for change, 178­79 relating to equity, 178­79 (see also specific markets, e.g., credit markets, financial markets, NAFTA. See North American Free Trade Agreement (NAFTA) etc.) Namibia marriage and kinship systems, gender inequalities and, 52 health insurance, 145 Mauritius pensions, 154 development experiences, 116­18, 119, 125 Nash equilibrium, equity and fairness and, 81 economic inequality, 38 National Institute of Public Finance and Policy, credit market pensions, 154 report, 90 medicine markets, drug access example, 224­25 natural resources, rectifying inequities in use of, 216­17 Mexico Nepal, inequality trends, 45 banking system evolution, 109 the Netherlands, labor market reforms, 191 bank privatization, 182 New Zealand capital markets, 8 labor market reforms, 191 crises, 200 means-tested pensions, 154 educational attainment/achievement, 61 Niger financial markets, 14 infant mortality, 29 financial system reform, 179 infrastructure, 173 inequality trends, 46 legal approach to equity, 79 legal approach to equity, 79 Nigeria, poverty trends, 66 Oportuniades (PROGRESA) program, 12, 137­38, 143, 153 North America physician availability, 144 basic education, 140 Procampo, 197 colonization example, 9, 112­13 property rights reforms, 164 human rights regimes, 79 safety nets and, 197-98 (see also Canada; Mexico; United States) social security spending, 145­46 North American Free Trade Agreement (NAFTA), 195 trade liberalization, 15, 195 safety nets and, 197 trade unions, 189 Norway, educational attainment/achievement, 61 Middle East education trends, 36 inequality trends, 46 official development assistance, 219­20 life expectancy, 56 opportunity, equal. See equal opportunity Index 317 opportunity disparities/inequalities, 1, 2­3, 18­19, 73­74, 131 group-based inequalities and, 49­51. (see also agency; poor (see also specific aspects and scope, e.g., global inequity and people) well-being, inequity within countries, etc.) poverty reduction, 3, 23, 226­27 outcomes, significance and importance of, 3 income inequality and, 84­88 Indonesian example, 126­27 redistributive policies and, 9­10, 23, 74 Pakistan power and influence credit market, 89­90 global inequalities, 55­56, 66­68 financial markets, 14 institutional quality and distribution of, 107­9, 129 inequality trends, 45 (see also agency; political power) infrastructure, 169 predetermined characteristics/circumstances of human beings, 19, poverty trends, 66 28, 55, 131, 205 productivity gaps in agriculture, 99 product markets, 15, 16, 131 stunting in children, 29 design of reform, 198, 202-03 voice rank, 68 domestic product markets and equity, 194­97 Palanpur, India, inequality traps example, 26­27 drug access example, 224­25 Paraguay, between-group differences in inequality, 41 elite influence/capture, 193-94 pensions interaction between labor markets and, 196­97 programs for nonworking elderly, 148­49, 153­54 safety nets, 197-98 South Africa, 104 trade reform and, 193­98 personal safety, protection, 131, 161­62 Program for the Development of Indigenous and Afro-Ecuadorian Peru Peoples, 51 gender discrimination, 158 property rights labor shares and crises, 200 access to finance and weak rights, 180 teacher absenteeism, 35 gender inequalities and, 52 pharmaceutical patents, intellectual property rights issue, protection and security, 100, 131, 175, 214­16 214­16 prosperity. See complementaries between equity and prosperity the Philippines protection of rights, 13, 17 education, 11 (see also specific rights) opportunities for women, 54 student achievement, 139 wealth inequality, 38 Quichua people, 5, 50­51 philosophical approaches to equity, 76­78 Plato, 76 Poland reforms, equity-enhancing, 70­71, 228 effects of regulation and disclosure in, 184­85 religion and religious faiths/beliefs, 21 trade unions, 189 equity and fairness concerns, 7, 76 voice rank, 68 relocation assistance, 205 policy design, 3­4, 10, 131 Repeated Public Good Game with Punishment, 81 costs of policies, 130 Reports on the Observance of Standards and Codes (ROSC), growth and equity policy dichotomy, 10 216 oligarchic dominance and, 130 Republic of Korea two types of pathologies in, 129­30 chaebols, 182 (see also leveling the economic and political playing field) development experiences, 114­15, 119, 125 policy implementation, 10 educational attainment/achievement, 61 policy tradeoffs, 19­20, 130, 204­5 financial markets, 14 short-term versus long-term, 3­4, 22­23 gender equity, 54 political inequality, 2­3, 20, 74­75, 109­18 inequality trends, 45 between groups, 21 labor market reforms, 192 political power trade unions, 189 contemporary evidence regarding development and, 113­18 Republic of Yemen government intervention in labor markets and, 187­88 stunting in children, 29 institutional quality and distribution of, 107­9, 129 voice rank, 68 poor people resource allocation/distribution "negative terms of recognition," 49­50 arguments and principles of, 77­78 social programs for working poor, 150­52 rectifying natural resource use inequities, 216­17 Portugal, educational attainment/achievement, 61 resource flows, 11 poverty, 227­28 Roosevelt, Franklin D., 74 318 WORLD DEVELOPMENT REPORT 2006 ROSC. See Reports on the Observance of Standards and Codes South America (ROSC) human rights regimes, 79 Russian Federation (see also specific countries) bank privatization, 182 South Asia crisis of 1990s, 201 education trends, 35­36 financial markets, 14 inequality trends, 45, 68 voice rank, 68 life expectancy, 56, 69 poverty trends, 66 schooling years, 60­61 safety nets (see also specific countries) product markets and, 197-98 Soviet Union (former), inequality trends, 46 risk management and, 12 Spain Scandinavia equity and development, 105­6 labor markets, 188 Latin America colonization, 9, 111­12 tax design, 176 trade unions, 189 (see also specific countries) Sri Lanka schooling. See education and educational attainment; specific inequality trends, 45 countries and regions microfinance, 184 secular philosophical traditions, equity and, 76 obstetric care, 144 Senegal Sudan, land rental markets, 167 growth incidence curve and, 85­86 Sumatra, opportunities for women, 54 infrastructure, 173 "Summary Report on Informal Credit Markets in India," 90 means-tested pensions, 154 sustainable development, 3, 74­75 Serbian Poverty Reduction Strategy, disability report, 32 Sweden Singapore institutional transitions, 119, 120­22 inequality trends, 45 intergenerational mobility, 47 wealth inequality, 37 intergenerational transmission of inequality, 47 Slovak Republic, labor market reforms, 191 Smith, Adam, 178 social distinctions, distribution of wealth and, 2­3 Taiwan, China social inequalities, damaging health, 32 development experiences, 114­15 social justice, 76­78 inequality trends, 45 social networks, 21 Tanzania social protection systems/risk management, 12, 148­49 infrastructure, 169 contributory schemes, 149 trade credit, 97 general tax funded transfers, 149 taxes and tax policies, 12­13, 130, 176­77 program choice variance by country, 149­50 tenure, land, 13, 164­67 programs for nonworking elderly, 153­54 Thailand programs for nonworking youth, 152­53 health education, 143 programs for special vulnerable groups, 154­55 health insurance, 12, 146­47 programs for working poor, 150­52 insurance, 92 social assistance programs, 149­55 land titling, 165 Somalia, health care, 144 physician availability, 144 South Africa worker organizations/trade unions, 190 billionaire wealth, 38 Third International Mathematics and Science Study (TIMSS), customary systems, 159 139 development experiences, 1 13th General Review of IMF Quotas, 223 health insurance, 145 TIMSS. See Third International Mathematics and Science Study HIV/AIDS, 69 (TIMSS) infant and child mortality, 142 trade liberalization, 15, 194, 210­14 land access, 13 capture by vested interests and, 197­98 land reform, 163 trade reform means-tested pensions, 154 codes of conduct in, 213­14 pensions, 104, 148­49 fair and ethical trade, 213­14, 222 voice rank, 68 product markets and, 193­98 women and household assets, 53 Trade-Related Aspects of Intellectual Property Rights (TRIPS), worker organizations/trade unions, 189, 190 215­16 Index 319 Trinidad and Tobago Kyoto Protocol and, 217 land security, 165 labor markets, 188 stunting in children, 29 migrant labor, 95 TRIPS. See Trade-Related Aspects of Intellectual Property Rights reconstruction aid, 219 (TRIPS) safety nets, 197 Tunisia sharecropping, 93 growth incidence curve and, 85­86 voice rank, 68 health care, 144 Uruguay Turkey disabled children education grants, 138 educational attainment/achievement, 61 health insurance, 145 school enrollment problems, 139 utilitarianism, 76­77 Uganda values and norms basic education, 140 anomie and, 50 health care user fees, 146 World Value Survey, 83­84 health education, 143 Vietnam ICOR estimates, 98 health insurance, 12, 145, 147 teacher absenteeism, 35 inequality trends, 45 Ultimatum Game, 80­81 infrastructure, 169 Ultimatum Game with Multiple Proposers, 81 land distribution, 166 U.N. Charter, 79 land titling program, 165 underachievement, perpetuating, 2 Poverty Reduction Strategy, 165 underinvestment women's land rights, 165 agriculture, 98­100 violence. See crime/violence human capital, 100­101 voice and accountability, 2, 22­23, 67­68, 178, 227, 228 industry and trade, 96­98 enhancing judicial independence and accountability, 156­58 UN/ECE Convention on Access to Information, Public macroeconomic policies and accountability structures, 201­3 Participation in Decision-making and Access to Justice in political accountability, 124, 130 Environmental Matters (Aarhus Convention), 217 strengthening accountability in education, 140­41 unequal power, perpetuation of inequality and, 8­9, 229 voluntary contributions/private assistance, 221 United Kingdom vulnerable groups Britain's institutional transitions, 119­20, 125 social programs for, 154­55 Ethical Trading Initiative, 213 (see also specific groups, e.g., caste systems, disability and income inequality, 64 disabled persons, etc.) inequality trends, 45 intergenerational mobility/elasticity, 47, 48 intergenerational transmission of inequality, 47 wealth. See affluence and wealth women and household assets, 53 welfare United Nations distributive justice and, 77 Commission for Africa, 218 intergenerational transmission of inequality, 46­48 Kyoto Protocol, 216 well-being. See equity and fairness concerns; global inequity and membership, 66 well-being U.N. Charter, 79 WHO. See World Health Organization (WHO) U.N. Convention on the Rights of All Migrant Workers and women Their Families, 210 benefits from infrastructure investments, 169 United States crime/violence against, 162 affirmative action programs, 158 discrimination/missing women and girls, 223 banking system evolution, 109 inequality traps, 51­54 educational attainment/achievement, 61 land/inheritance rights, 52, 162­63, 165 Fair Labor Association, 213 status and inequality traps, 20­21 health insurance, 145 World Development Report 1990, 23, 226­27 income inequality, 64 World Development Report 2000, 23 income inequality and subjective well-being, 82 World Development Report 2004, 12 inequality contrasted to Mali, 56 World Development Report 2006, 2, 17 inequality trends, 45 World Development Reports, various, 227 intergenerational mobility/elasticity, 6, 47­48 World Health Organization (WHO), violence data, 54 intergenerational transmission of inequality, 47 World Migration Organization, 210 320 WORLD DEVELOPMENT REPORT 2006 World Trade Organization (WTO) Zambia fairness of decision-making process, 211­13 infrastructure, 169 GATS Mode IV, 210 trade credit, 97 membership and representation, 66­67 Zimbabwe migration issues, 210 health insurance, 145 World Value Survey, 83­84 land reform, 163 WTO. See World Trade Organization (WTO) trade credit, 97 youth, social programs for nonworking youth, 152­53 E C O - A U D I T Environmental Benefits Statement The World Bank is committed to pre- Saved: serving endangered forests and nat- · 148 trees ural resources. We printed the World · 6,913 pounds of Development Report 2006 on 15 per- solid waste cent post-consumer recycled paper, processed chlorine free. The World · 62,699 gallons of Bank has formally agreed to follow water the recommended standards for · 13,579 pounds of paper usage set by Green Press Ini- net greenhouse tiative--a nonprofit program sup- gases porting publishers in using fiber that · 25,215 kw hours is not sourced from endangered of electricity forests. For more information, visit www.greenpressinitiative.org. I nequalities in incomes, in health, and in educational outcomes have long been a stark fact of life in many developing countries. When such inequalities in outcomes arise from unequal opportu- nities, there are both intrinsic and instrumental grounds for concern. Because inequalities in opportunity are often accompanied by profound differences in influence, power, and social status-- whether at the level of individuals or groups--they have a tendency to persist. And because it leads to an inefficient use of resources and to less effective institutions, inequity is inimical to long-term development. It follows that there is a legitimate role for public action in the promotion of fairness and in the pursuit of equity, provided such action is cognizant of the primacy of individual freedoms, and of the role of markets in allocating resources. World Development Report 2006 presents evidence on the inequality of opportunity, within and across countries, and illustrates the mechanisms through which it impairs development. The Report advocates taking explicit account of equity in determining development priorities: public action should aim to expand the opportunities of those who, in the absence of policy interventions, have the least resources, voice, and capabilities. Domestically, it makes the case for investing in people, expanding access to jus- tice, land, and infrastructure, and promoting fairness in markets. Internationally, the report considers the functioning of global markets and the rules that govern them, as well as the complementary pro- vision of aid to help poor countries and poor people build greater endowments. Drawing on the World Bank's 60 years of development experience, the World Development Report 2006 is essential reading for understanding how greater equity can reduce poverty, enhance economic growth, advance devel- opment, and deliver increased opportunities to the poorest groups in our societies. ISBN 0-8213-6249-6