THE WORLD BANK INEQUALITY in FOCUS 84370 Aspiration Traps: When Poverty Stifles Hope Svenja Flechtner I University of Flensburg, Germany n their 2012 book Poor Economics, Abhijit V. Banerjee and Esther Du o describe how they witnessed poor schoolchildren in the Indian Himalayas taking a test in which they were asked questions about a story with pictures. The researchers witnessed how one child refused to take the test. The mother of this seven-year-old boy tried to persuade him to participate, though she herself did not seem optimistic that he would change his mind or perform well if he did. A local farmer who talked about the incident with the research- ers started out by saying, “Children from homes like ours. . . . ” (Banerjee and Du o 2012, 91), suggesting that not much should be © Dorte Verner expected from children from impoverished homes like those in his Sometimes these low aspirations can lead to underachievement. community. When this occurs, it is known as an aspiration failure. An aspiration Low-income parents in Germany have similar feelings regarding trap occurs when these aspiration failures contribute to persistent the schooling of their children. This suggests that the phenomenon poverty and persistently low future aspirations, perpetuating a nega- occurs in wealthier countries as well as poor ones. When students tive cycle. in Germany complete primary school, their parents must decide how they want them to continue their secondary education. One Beliefs are not always rational option is a 12- or 13-year track that culminates in a college degree; Education is of course not the only relevant area where individu- the other option is a 10-year track that leads to the development of als underestimate their abilities. The concept of aspiration traps can vocational skills. Often, parents from lower socioeconomic back- also apply to professional success, business opportunities, or any grounds counsel their children to choose the shorter track simply form of upward mobilization where a sense of inferiority might be because nobody in their family has ever completed more years of prevalent. Alsop and others (2006, 12) report that “women and mi- schooling. Many of these poor parents fear that the longer track nority groups frequently underinvest in their human capital because might overwhelm their children, even if these kids have proven they have been brought up to believe that they cannot do certain themselves to be good students. Children from poor backgrounds things that other people can do. [They] internalize their second class who do enroll in the longer college track often report that their status in ways that cause them to make choices that perpetuate their families remain skeptical about their education even after they have disempowered status.” More privileged people, by contrast, tend to successfully enrolled at universities. Teachers, who can counsel par- be more optimistic—and even upwardly biased—about their capaci- ents about which track to choose, often express pessimism about the ties. As Wilkinson and Pickett (2010, 40) put it, “the further up the higher education potential of students from migrant backgrounds. social ladder you are, the more help the world seems to give you in This frequently leads to migrant parents placing their children on the shorter, technical track (El-Mafaalani 2012). keeping the self-doubts at bay.” Stutzer’s research (2004) con rms that income aspirations grow with higher income levels. Still, education is a key factor for social mobility: With higher Inside levels of education, people are more likely to attain better jobs and Paolo Verme looks at Egypt and the United States to higher incomes. In addition, people with higher levels of education explain how popular perceptions about inequality can tend to be better informed about health care or political and civil diverge significantly from the facts. | Page 5. rights, which leads to more informed political or nancial decisions. There is a broad consensus that education is a good way for a family to improve its well-being and future prospects. Poverty Reduction and Equity Department :: www.worldbank.org/inequalityinfocus :: Volume 2, Number 4 :: January 2014 However, not all families see the educational system as a produc- Poor people are more likely tive path for improving the future of their children. With data from to have low aspirations the Dominican Republic, Jensen (2010) nds that most eighth- Aspiration traps are particularly harmful to people at the bot- grade schoolboys expect fewer bene ts from secondary education, tom of the socioeconomic ladder. Poverty and social disadvantages despite evidence to the contrary. As a consequence, enrollment is promote low aspiration levels. According to Bandura (1977 and lower, and—predictably—so are achievements. Simply put, the less 1997), aspiration levels can be explained through what he referred of an advantage that schoolchildren expect to gain from education, to as the two dimensions of “self-ef cacy” and “locus of control.” the less they actually gain. St-Hilaire (2002) investigates perceived Self-ef cacy refers to the beliefs a person has about his or her capac- educational returns and aspirations among eighth- and ninth-grade ity to complete a certain task or achieve a goal. The locus of control, Mexican-American students in California. Approximately 90 percent in contrast, refers to whether or not people believe they can control of these students believed that education was a key to getting ahead the events in their lives. To have productive aspirations, they must in the United States, but only 75 percent believed they would nish perceive themselves as both capable and in control of their lives. The college, and less than 60 percent actually did. disbelief in control can stem from a person’s immersion in a socially Despite evidence to the contrary, immobile structure, like a rigid caste system. many people maintain low aspirations When do people acquire these characteristics? The anthropologist Arjun Appadurai (2004) has attracted a lot of attention among econ- In light of the consensus on the value of schooling, why wouldn’t omists for his answer to this question. He argues that people who everybody aspire to higher educational achievement? There are live in conditions of poverty have fewer opportunities than others to several answers to this question. One is nancial constraint: Poorer learn about their talents, opportunities, and potential goals. Conse- people have fewer resources at their disposal to cover the costs of quently, they tend to be more pessimistic and risk averse. Indeed, tuition, study materials, or school uniforms. In many countries, the the German sociologist Steffen Schindler (2012) found that risk fewer resources a person has, the more limited is his or her access aversion contributed to students from lower socioeconomic back- to loans that can be used to nance a quality education. This leaves grounds pursuing higher education less often than their wealthier poor families without the means to cover educational costs, espe- peers. In other words, poor people have a low “capacity to aspire.” cially for higher degrees. Given these economic realities, it makes He continues by saying that this capacity needs to be learned, a pro- sense for a poor student not to aspire to be a lawyer, when this goal cess that requires resources, time, and teachers or role models. All of is simply unrealistic for nancial reasons. these tend to be more accessible for af uent families. A second potential answer is a lack of information. Banerjee and A further explanation of why poorer people might aspire to lower Du o (2012) demonstrate that misinformation concerning educa- goals can be derived from the seminal work of the French sociolo- tion is prevalent among parents in developing countries. In the gist Pierre Bourdieu. In his book La Distinction (1979), Bourdieu case of eighth-graders in the Dominican Republic (Jenson 2010), describes how a person’s social environment generally determines many of the students were not informed of the bene ts of educa- his or her interests, tastes, and ideas about life. During the process tion. Predictably, these students had very little hope in the po- of socialization, children learn what “children like them” typically tential merits of their educational path. The author controlled for believe and enjoy doing (Bourdieu called this habitus). The children this by informing a subset of students of the value of attaining an then incorporate these social norms into their own lives. In this education. While these students responded more positively to the way, the subconscious incorporation of social norms, aspirations, value of education, they did not substantially outperform the less and goals in uences careers and other life choices. People usually informed students. A possible explanation for this is that despite consider pursuing only the options with which they are familiar. For knowing the value of schooling in general terms, students did not example, if going to college is not usually an option for “a person regard this information as applicable to their lives. This shows that like you,” you will not consider it. This approach emphasizes how a lack of information cannot fully explain the low aspirations felt aspiration levels and living standards are transmitted from one by poor students. generation to the next. Dercon and Singh (2013) demonstrate these In recent years, the idea has emerged that psychological barri- transmissions with data from Ethiopia and India. In these cases, ers can contribute to underachievement. The eld of psychology parents tend to have higher aspirations for boys than for girls. Over has shown that unambitious goals often lead to lower achievement time, as the children became older, they too assimilate the respective (Locke and Latham 2002). In this sense, lower aspirations and less aspirations of their parents. The study found that, eventually, the ambitious goals can act as self-ful lling prophecies (Dalton et al. educational levels of boys and girls re ected these aspirations, with 2013; Heifetz and Minelli 2006). Recent research from India has boys attaining higher levels of education. shown that parents with higher educational aspirations for their Bourdieu’s work also suggests an important link between aspira- children are willing to pay more for their education (Galab et al. tions and identity. When people construct an opinion about what is 2013). With a higher quality and longer education, these students possible for “a person like them,” they consider the experiences and are then more likely to earn higher incomes. By contrast, parents aspirations of peers (Ray 2006). As a result, role models can have who underestimate educational bene ts are less likely to promote an important impact on people’s aspirations in both a positive and their children’s schooling. negative way. Beaman and colleagues (2009) carried out eldwork 2 :: January 2014 :: Inequality in Focus Figure 1 lack of knowledge of how different groups live, act, and pursue op- Gini coe cients in five countries portunities. A more equal society would make it easier for disadvan- with incidences of protest, 2000–10 taged groups to observe the behaviors of others who are better off. 70 The dynamics of inequality and a steep social ladder can sti e the aspirations of less advantaged groups. Albert O. Hirschman’s famous 60 tunnel parable (1973) describes how car drivers in a traf c jam 50 Brazil become optimistic when the neighboring lane starts moving, but 40 Chile become increasingly more frustrated when only the neighboring lane Egypt, Arab Rep. continues moving and they stand still. Based on this parable, Ray 30 Tunisia (2010) argues that economic growth combined with increased in- 20 equality would stimulate aspirations under the condition that people Turkey 10 who are not bene ting from the growth could expect to bene t soon. In Latin America, for example, countries with more inclusive 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 growth—that is, growth that bene ts all levels of society—register Source: World Bank (2013a) more balanced aspiration levels across all income groups than coun- tries with less inclusive growth (Flechtner 2013). in India that showed that the presence of women in leadership posi- tions lessened the gender bias in parents’ aspirations. Trang Nguyen High aspirations with little success (2008) investigated the effect of role models on aspiration levels in can lead to social unrest Madagascar. The author carried out an experiment where people In some scenarios where people perceive that their social surround- with successful educations shared their experiences with skeptical ings do not allow them to make use of their capabilities, frustration parents in order to improve how much value the parents would and grievances develop. Bandura (1977) argues that social unrest can place on education. The study found that parents tended to be in- occur when individuals consider themselves highly capable (high uenced only if the “role model” came from a similar socioeconomic self-ef cacy) but perceive that they have little control over the social background—in this case, from a poor background. or political processes in their country. In other words, people engage in protest or outright rebellion when they see problems in their soci- Inequality and aspirations are linked ety or with their position in society and at the same time believe they The role model experiments suggest that there is a link between can effect change only by protesting the established system. inequality and aspirations. Debraj Ray (2006) has investigated pre- This argument may shed some light on the recent political unrest cisely this link and nds that when inequality is high there are fewer in Egypt, Brazil, Tunisia, Chile, and Turkey. In these countries, opportunities for the af uent and less af uent to interact. This con- inequality actually decreased in the years before the protests, and tributes to a sense of distance between the two groups, and a feeling education levels increased ( gures 1 and 2). Education contributes among the poor that the outcomes achieved by the rich are unat- to the political involvement of a growing portion of society through tainable for them. In unequal societies, the poor are also less able to greater awareness of rights and the political system. Campante and witness the decision-making or higher aspirations of the rich. As a Chor (2012) investigate the role of education in the protests that consequence, poor people’s capacity to aspire is hampered by their have swept the Arab world. They argue that greater education levels Figure 2 mixed with high levels of unemployment contrib- uted to the unrest. Sakbani (2011) emphasizes Tertiary school enrollment (% gross) in five countries that Tunisia, Egypt, and Libya have very young with incidences of protest, 1981–2010 populations, with few opportunities, particularly 80 for university graduates. This means that more edu- cation (and possibly higher aspirations) combined 70 with dissatisfaction with society’s status quo can 60 contribute to social unrest. Brazil 50 A role for further research Chile 40 and policy interventions Egypt, Arab Rep. 30 Much more research needs to be done to properly Tunisia understand these protests and uncover how psycho- 20 Turkey logical processes impact economic and politically 10 relevant decision-making. As discussed above, it is 0 already clear that such processes are highly relevant to poverty and inequality, but there are still very few 1987 1997 2007 1981 1991 2011 2001 1989 1999 2009 1983 1985 1993 1995 2003 2005 comparative analyses or available data sets related to Source: World Bank (2013b) people’s aspirations. The Young Lives International Inequality in Focus :: January 2014 :: 3 Study of Childhood Poverty is one of the few exceptions. This study Flechtner, Svenja. 2013. “40 Years after Hirschman’s Tunnel Parable: corroborates the assumption that poverty is related to low aspirations Income Inequality, Growth and Aspirations in Latin America.” (Woodhead et al. 2013). Future research with such data promises http://iim.uni- ensburg.de/ leadmin/ms3/inst/iim/Upload/ much better insights into the nature and effects of low aspirations. 5_Lehrstuehle/Internationale_und_Institutionelle_OEkonomik/ Forschung/Flechtner_2013_Hirschman_paper.pdf. It is clear that policy makers can help combat poverty by improv- ing the aspirations of the poor and avoiding aspiration traps. One Galab, S., Uma Vennam, Anuradha Komanduri, Liza Benny, and Andreas Georgiadis. 2013. “The Impact of Parental Aspirations on Private way to do this is to provide disadvantaged children with opportu- School Enrollment: Evidence from Andhra Pradesh, India.” Young nities to succeed in challenging new experiences. The Venezuelan Lives Working Paper 97. http://www.younglives.org.uk/ les/ Classical Music Orchestras Program is one such example. The working-papers/yl-wp97_vennam-et-al. purpose of the program is to teach disadvantaged youth to play in- Heifetz, Aviad, and Enrico Minelli. 2006. “Aspiration Traps.” struments and perform in concerts. Ongoing research suggests that http://www.openu.ac.il/Personal_sites/Aviad-Heifetz/ these experiences are highly positive for the participating children Aspiration-Traps.pdf. by raising their aspiration levels (Dalton et al. 2013). Hirschman, A. O., and M. Rothschild. 1973. “The Changing Tolerance At the same time, this does not mean that policy makers should for Income Inequality in the Course of Economic Development.” aim simply to raise aspirations for everyone; rather, aspirations Quarterly Journal of Economics, 87 (4): 544–566. should be well informed and suitable to the speci c needs of the Jensen, Robert. 2010. “The (Perceived) Returns to Education and the De- individual. For example, college might not be the appropriate path mand for Schooling.” Quarterly Journal of Economics 125 (2): 515–548. for a person who would prefer to work in a trade that requires tech- Locke, Edwin A., and Gary P . Latham. 2002. “Building a Practically Useful nical training, not a university degree. When speci c social groups Theory of Goal Setting and Task Motivation: A 35-Year Odyssey.” In consistently aim for low goals, however, a certain level of bias likely American Psychologist 57 (9): 705–717. exists, perpetuating an unequal socioeconomic hierarchy. Nguyen, Trang. 2008. “Information, Role Models and Perceived Returns to Education: Experimental Evidence from Madagascar.” Poverty Action Staff writer Maximillian Ashwill contributed to this article. Lab. http://www.povertyactionlab.org/sites/default/ les/documents/ Nguyen%202008.pdf References Ray, Debraj. 2006. “Aspirations, Poverty and Economic Change.” In Abhijit Alsop, Ruth, Mette Frost Bertelsen, and Jeremy Holland. 2006. “Empow- V. Banerjee, Roland Bénabou, and Dilip Mookherjee, eds.: Understand- erment in Practice: From Analysis to Implementation.” Washington, ing Poverty 409–421. New York: Oxford University Press. DC: World Bank (Directions in Development). Ray, Debraj. 2010. “Uneven Growth: A Framework for Research in Devel- Appadurai, Arjun. 2004. “The Capacity to Aspire: Culture and the Terms opment Economics.” Journal of Economic Perspectives 24 (3): 45–60. of Recognition.” In Vijayendra Rao and Michael Walton, eds.: Culture Sakbani, M. 2011. “The Revolutions of the Arab Spring: Are Democracy, and Public Action 59–84. Stanford, California: Stanford University Development and Modernity at the Gates?” Contemporary Arab Affairs Press; Stanford Social Sciences. 4 (2): 127–47. Bandura, Albert. 1977. Social Learning Theory. Englewood Cliffs, N.J.: Schindler, Steffen. 2012. Aufstiegsangst? Eine Studie zur sozialen Ungleichheit Prentice Hall. beim Hochschulzugang im historischen Zeitverlauf. Edited by Vodafone Bandura, Albert. 1997. Self-Ef cacy. The Exercise of Control. New York: W. Stiftung Deutschland. http://www.vodafone-stiftung.de/meta_ H. Freeman. downloads/53423/studie_hochschulzugang_web.pdf. St-Hilaire, Aonghas. 2002. “The Social Adaptation of Children of Mexican Banerjee, Abhijit V., and Esther Du o. 2012. Poor Economics. A Radical Immigrants: Educational Aspirations Beyond Junior High School.” In Rethinking of the Way to Fight Global Poverty. New York: PublicAffairs. Social Science Quarterly 83 (4): 1,026–1,043. Beaman, Lori, Raghabendra Chattophadhyay, Esther Du o, Rohini Wilkinson, Richard G., and Kate Pickett. 2010. The Spirit Level. Why Pande, and Petia Topalova. 2009. “Powerful Women: Does Exposure Equality is Better for Everyone. London: Penguin Books (Penguin Reduce Bias?” Quarterly Journal of Economics 124 (4): 1,497–1,540. sociology). Bourdieu, Pierre. 1979. La Distinction. Critique Sociale du Jugement. Paris: Woodhead, Martin, Paul Dornan, and Helen Murray. 2013. “What In- Éditions de Minuit. equality Means for Children. Evidence from Young Lives.” Young Lives. Campante, Filipe R., and Davin Chor. 2012. “Why was the Arab World World Bank. 2013a. World Development Indicators: Distribution of Income or Poised for Revolution? Schooling, Economic Opportunities, and the Consumption. http://wdi.worldbank.org/table/2.9. Arab Spring.” Journal of Economic Perspectives 26 (2): 167–188. World Bank. 2013b. World Development Indicators: Participation in Educa- Dalton, Patricio S., Sayantan Ghosal, and Anandi Mani. 2013. “Poverty tion. http://wdi.worldbank.org/table/2.11. and Aspiration Failures.” https://sites.google.com/site/psdalton/ Poverty%20and%20Aspirations?attredirects=0. Dercon, Stefan, and Abhijeet Singh. 2013. “From Nutrition to Aspira- tions and Self-Ef cacy: Gender Bias over Time among Children in Four Countries.”World Development 45: 31–50. El-Mafaalani, Aladin. 2012. BildungsaufsteigerInnen aus benachteiligten Milieus. Habitustransformation und soziale Mobilität bei Einheimischen und Türkeistämmigen. Wiesbaden: Springer VS. 4 :: January 2014 :: Inequality in Focus Explaining the Gap Between Facts and Perceptions of Inequality Paolo Verme investments can result in signi cant shifts in income distribution. Senior Economist, World Bank Likewise, the choices made by governments on taxes and public spending can do the same. It is also clear that the “distribution” A paradox mechanism has a greater potential impact on inequality simply P opular perceptions about inequality can diverge sig- because it relates to a bigger slice of the economic pie. Alternatively, ni cantly from the facts. This was recently the case in the resources managed by the government via the “redistribution” two countries as diverse as the United States and Egypt. mechanism are only a fraction of the “distribution” mechanism, Income inequality in the United States did not change and consequently have less of an in uence on income inequality. before and after the 2007–09 global nancial crisis, but The social contract between capital, workers, banks, and the state perceptions of inequality among U.S. citizens changed signi cantly. determines the distribution of wealth, while government taxing and Similarly, income inequality did not change in Egypt during the de- spending policies determine the redistribution of wealth. These are cade that led to the 2011 revolution, but the perceptions of income the two mechanisms that drive income inequality and they are fairly inequality among Egyptian citizens changed substantially. At times, well understood in economics. facts and perceptions of inequality diverge as if there were no rela- What is less clear is the optimal level of inequality in a given tion between the two. How can this gap between facts and percep- society, or to put it simply, what levels of inequality people prefer. To tions of inequality be explained? better understand people’s preferences, I asked groups of interna- To answer these questions, we need to better understand what tional students two simple questions about income inequality: drives income inequality and its perceptions. This article draws on t Would you like income inequality to increase or decrease? theories developed across the social sciences over the past century, t Would you like all incomes to be equal? as well as recent empirical evidence about income inequality and The answer to the rst question, for most people, but not all, is social discontent. While there is some overlap between the drivers that they would like income inequality to decrease, while the answer of inequality and its perceptions, they are not the same. This is true to the second question for most people, but not all, is that they to the extent that facts and perceptions of inequality convey two sets would not like all incomes to be equal. It is then obvious that there of different but equally important information about a society. One must be an optimal level of income inequality that rests between the set of information is related to the absolute well-being of citizens in current inequality level and zero inequality. This is referred to as the terms of income. The other set is related to the well-being of citizens intrinsic optimal level of inequality. By answering these questions, relative to the well-being of others or to their own well-being in the students revealed that they have a sense of what this optimal years past. The two recent examples of the United States and Egypt level should be. Consequently, if inequality is higher than what they will help illustrate these points. believe it should be, they will disapprove of a further rise in inequal- ity. In contrast, if inequality is lower than what they believe it should Drivers of inequality be, they will appreciate a rise in inequality. People’s perceptions of To simplify the economics, one should consider two major inequality have to do with their personal beliefs and intrinsic values mechanisms that drive income inequality: “distribution” and related to the state of inequality. But what determines these beliefs “redistribution.” Every year, economies produce a certain amount and values? of wealth, typically summarized by the value of Gross Domestic Product (GDP). Annual GDP is the sum of all products and services Drivers of inequality perceptions produced by a country’s economy in the private and public sectors To begin to understand what drives perceptions of inequality, during a particular year. First, companies distribute this wealth to we can ask why people would like or dislike inequality in the rst stakeholders. These are workers (salaries), shareholders (dividends), place. Two of the most in uential theories of the 20th century on government (taxes and social contributions), and banks (savings the perceptions of inequality come to rather opposite conclusions. and investments). This is the “distribution” mechanism. Second, the Hirschman and Rothschild (1973) in their seminal paper on the “tun- part of this wealth that is managed by the government (taxes and nel effect” theory argue that people might appreciate rising inequality social contributions) is then redistributed to citizens in the form of because it signals an overall improvement in living conditions: public spending (health, education, pensions, and so on). This is “The tunnel effect operates because advances of others sup- the “redistribution” mechanism; it is a byproduct of the distribution ply information about a more benign external environment; mechanism and does not generate new wealth, it simply redistrib- receipt of this information produces grati cation; and this utes existing wealth. grati cation overcomes, or at least suspends, envy. (546) It is clear that both mechanisms can drive income inequality. . . . In this eventuality, the increase in income inequality The choices made by private enterprise on salaries, dividends, and would not only be politically tolerable; it would also be out- Inequality in Focus :: January 2014 :: 5 right desirable from the point of view of social welfare” (548). Figure 1 Runciman’s theory of social justice (1966) comes to a very differ- Individual Happiness/Satisfaction Evaluation System ent conclusion. His theory of relative deprivation shifts the focus from absolute levels of income to relative levels of income. This relative income level is reached when people compare themselves to a group of peers: “For the purpose of addressing relative deprivation, how- ever, people’s estimates of their incomes are if anything more important than their actual income.” (189) As shown later by Yitzhaki (1979), the measurement of rela- tive deprivation corresponds to the measurement of inequality. In other words, while Hirschman and Rothschild believe the potential bene ts of income inequality will lead to society’s tolerance of it, Runciman and Yitzhaki believe that rising inequality invariably leads to less tolerance. So, who is right? To answer this question we need to understand how perceptions of income inequality have evolved over time and in what context. This includes a keen understanding of history, people’s future expectations, and the relative position of individuals in society. In this respect, there is a lot of agreement across the social sciences. To assess one’s own relative position, people look at the past and compare it to the present, or compare their own status to Source: Verme 2010. that of others in society. Based on these comparisons, they determine their expectations for the future. On the one hand, if a country’s with absolute income being equal (Verme 2013). Consequently, if economy is growing and expected to continue to grow in the future rising inequality makes people less happy, it is natural to conclude and people are faring better across classes, then tolerance for in- that their tolerance for inequality will decline as well. equality will be high and Hirschman and Rothschild (1973) have a Understanding the “ego” value system also contributes to a better point. On the other hand, if a country’s economy is not growing or understanding of how the perceptions of inequality are formed. if certain segments of the population are faring worse than others, or Theorists of revolutions, such as Karapetoff (1903) and Davies worse than they were in the past, then tolerance for inequality will (1962), developed separate theories around the idea that the rate decrease and Runciman (1966) and Yitzhaki (1979) have a point. of economic change is a key to understanding changes in people’s These relations between the past and the future and between the satisfaction. These theories suggest that a wealthy and fast-growing relative positions of individuals in society are summarized in gure economy that suddenly experiences a recession is more at risk of 1. In this scheme, the “ego” system refers to the horizontal axis and social unrest than a poor economy that experiences persistently slow is determined by how people compare their past with their present growth. Economic shocks, whether positive or negative, are at least situations and the expected future. The “alter” system refers to the as important in understanding people’s perceptions of the economy vertical axis and is determined by how people compare their own situation to that of others, richer or poorer. as the state of the economy itself. Within the social sciences, there are many theories that help Combining the ndings related to the “ego” and “alter” systems to better explain how the “ego” and “alter” value systems operate can be powerful in explaining changes in satisfaction. Hirschman and how they contribute to perceptions of inequality. In the “alter” and Rothschild (1973)—who argue for a positive role of inequality system, for example, the role of relative income or poverty in con- in times of growth—show how persistent welfare immobility over tributing to individuals’ satisfaction is now very well-established. time can turn into an explosive social device in the face of societal Leibenstein (1962) was perhaps the rst to develop a theory around change. By broadening the spectrum of analysis to the past and the idea that individuals derive utility from both their absolute and future and to relationships with others, one can accommodate the relative income, an idea described as the “compromise Pareto com- tunnel effect theory, the relative deprivation theory, and theories of parison.” This is a concept that was explored in much greater detail societal change into a coherent framework. by the social science literature on happiness, which initially emerged Explaining the mismatch from the “Easterlin paradox” (Easterlin 1974). This is the paradox that shows how as GDP per capita in the United States climbed dur- between facts and perceptions ing the post-war period, it was not accompanied by a proportional These theories can help us understand the evolving perceptions of growth in happiness. Indeed, it is now standard in econometrics inequality observed today in the United States and Egypt. Consider models to use absolute income and relative income together as ex- rst the United States. Only a decade ago, inequality as a social phe- planatory factors for people’s life satisfaction. Most of this literature nomenon was largely ignored in the public discourse and certainly nds an important role for relative income in explaining happiness, not perceived as a relevant economic issue by the population at 6 :: January 2014 :: Inequality in Focus Table 1 of inequality is that it is high, has been rising over the past decade, Gini Coe cient in the United States and Egypt and that it contributed to the revolution. How can this paradox be explained? Again, theory and facts related 2000 2004 2007 2010 to the Egyptian economy can help. First, Egypt experienced signi - United 0.367 0.372 0.378 0.373 cant GDP growth during the decade that preceded the revolution—5 States percent per year on average—but this growth largely remained with private enterprises and did not trickle down to households. In fact, 2000 2005 2009 2011 household income and expenditure had slightly declined for all Egypt 0.338 0.318 0.307 0.313 income groups, leaving inequality unchanged. While Egyptian news- Sources: Luxembourg Income Study (U.S.) and CAPMAS (Egypt). papers reported income growth, Egyptian families did not experience any of that growth. The persistence of this phenomenon has probably turned high expectations about the future into bitter disappointment large. Alesina and colleagues (2004), for example, noted how in the for the present, which contributes to the suspicion that “others” were 1990s U.S. citizens had a much greater appreciation of inequality bene ting from growth. Second, the processes of liberalization and than European citizens after controlling for various individual and privatization launched in the 1990s were largely captured by the household characteristics. During the 1980s and 1990s, inequality elites, with little participation by the population at large. This likely rose signi cantly in the United States, but so did people’s incomes contributed to a general sense of injustice. Third, the rise in Egypt’s generally. This helps explain Americans’ tolerance for inequality as GDP has not been accompanied by greater economic opportunity, theorized by Hirschman and Rothschild (1973) and demonstrated better public services, or access to jobs. As is the case with many by Alesina and colleagues (2004). But when the global crisis hit the other emerging economies, despite a growing GDP , the employ- United States and the world, perceptions of inequality changed. This ment rate has not increased. And fourth, these economic changes is what Karapetoff (1903) and Davies (1962) theorized would hap- occurred during a period when Egypt’s demographics, especially a pen and what was demonstrated by the “we are the 99 percent” and larger population of young people, and access to technology changed “occupy Wall Street” social movements. signi cantly. The penetration of social media and mobile phones Suddenly, politicians and economists brought the topic of “in- suddenly made cross-country and interpersonal comparisons much equality” back to the forefront of U.S. society. In his 2012 book, The easier and more widespread. This exposed Egyptians to other realities Price of Inequality, Joseph Stiglitz makes a convincing case that the and changed the way Egyptians view themselves. The combination U.S. economy during the past three decades has been “hijacked” by of these factors helps to explain the increase in peoples’ aversion to the top 1 percent of the income distribution and that this phenom- inequality as observed in the World Values Surveys. enon is constraining growth and compromising future prosperity. In his column on December 15, 2013, Paul Krugman argued, “. . . if Conclusion you take a longer perspective, rising inequality becomes by far the The realities and perceptions of inequality are related but often most important single factor behind lagging middle-class incomes.”1 inconsistent. Inequality statistics contribute to these perceptions Politicians have chimed in on the debate. President Obama stated but they are only a piece of a much more complex puzzle, a puzzle recently that income inequality “. . . is the de ning challenge of that must be understood within the broader framework of the past, our time.”2 This would have been an unthinkable statement from a present, and expected future and the relative position occupied by U.S. president only 10 years ago. Yet, according to the Luxembourg individuals in society. It should be clear by now that perceptions of Income Study (LIS), income inequality in the U.S., as measured inequality are not a good measure of income inequality. Realities and by the Gini coef cient, rose signi cantly between 1979 and 2000 perceptions of inequality should not be understood as two measures (from 0.30 to 0.38) but remained rather stable in the 2000s (table of the same phenomenon. Perceptions of inequality relate to income 1).3 It can be seen that while inequality levels did not change much inequality, but they convey a broader message about the state and between 2007 and 2010 (table 1), the economic context and percep- evolution of the economy and any resulting economic injustices. tions of inequality have changed dramatically. Perceptions of inequality should neither be considered a proxy of Consider Egypt. This is another country where income inequality, income inequality nor dismissed by policy makers as irrelevant. If we measured by the Gini coef cient, did not change during the decade are prepared to dig into the social science literature and learn from that led to the 2011 revolution or afterwards. This is well document- the history of social unrest, then perceptions of inequality become a ed in both of cial Egyptian government statistics and World Bank very valid instrument to measure the degree of economic dissatisfac- studies, which demonstrated the robustness of these statistics (World tion in a given society. Bank 2012, Hlasny and Verme 2013). In fact, the Gini coef cient for Egypt declined slightly from 2000 to 2011 (table 1). Yet, and in total Endnotes contrast with these gures, the World Bank (2014) found that the 1 Krugman, Paul. December 15, 2013. “Why Inequality Matters.” New dislike for inequality in Egypt has signi cantly increased during the York Times. http://www.nytimes.com/2013/12/16/opinion/ past decade as reported by respondents to the World Values Surveys, krugman-why-inequality-matters.html?ref=paulkrugman&_r=0 which investigates questions of political and socioeconomic change. 2 Jackson, David. December 4, 2013. “Obama: Income inequality Despite persistently low inequality in Egypt, the popular perception threatens American Dream.” http://www.usatoday.com/story/news/poli- Inequality in Focus :: January 2014 :: 7 tics/2013/12/04/obama-income-inequality-speech-center-for-american- Leibenstein, H. 1962. “Notes on Welfare Economics and the Theory of progress/3867747/ Democracy.” Economic Journal, 72 (286): 299–319. 3 Luxembourg Income Study. http://www.lisdatacenter.org/lis-ikf- Runciman, W. G. 1966. “Relative Deprivation and Social Justice.” Reports webapp/app/search-ikf- gures of the Institute of Community Studies. London, Boston, and Henley: Rout- References ledge & Kegan Paul. Alesina, A., R. Di Tella, and R. MacCulloch. 2004. “Inequality and Hap- Stiglitz, J. 2012. The Price of Inequality: How Today’s Divided Society Endan- piness: Are Europeans and Americans Different?” Journal of Public gers Our Future. New York and London: W. W. Norton and Co. Economics, 88:2009–2042. Yitzhaki, S. 1979. “Relative Deprivation and the Gini Coef cient.” Quar- Davies, J. C. 1962. “Toward a Theory of Revolution.” American Sociological terly Journal of Economics. 93 (2): 321–324. Review, 27 (1): 5–19. Verme, P. 2010. “Happiness, Deprivation and the Alter Ego.” The Measure- Easterlin, R. 1974. Does Economic Growth Improve the Human Lot? Some Empirical Evidence. New York: Academic Press. ment of Individual Well-being and Group Inequalities: Essays in Memory of Gurr, T. 1968. “A Causal Model of Civil Strife: A Comparative Analysis Us- Z. M. Berrebi. Deutsch, J. and J. Silber (eds.). Routledge. ing New Indices.” American Political Science Review, 62 (4): 1104–1124. Verme, P . 2013. “The Relative Income and Relative Deprivation Hypothe- Hirschman, A. O., and M. Rothschild. 1973. “The Changing Tolerance for ses: A Review of the Empirical Literature.” World Bank Policy Research Income Inequality in the Course of Economic Development.” Quarterly Working Papers, Journal of Economics, 87 (4): 544–566. No. 6606. Hlasny, V., and P. Verme. 2013. “Top Incomes and the Measurement of World Bank. 2012. “Inside Inequality in Egypt: Historical Trends, the Inequality in Egypt.” World Bank Policy Research Working Papers, No. 6557. Spatial Dimension, Recent Facts and People’s Perceptions.” World Bank Karapetoff, W. 1903. “On Life-Satisfaction.” American Journal of Sociology, 8 report. (5): 681–686. World Values Survey. 2013. http://www.worldvaluessurvey.org. The Inequality in Focus series aims at informing the public debate on equity, inequality of opportunity, and socioeconomic mobility. It features articles written by World Bank staff, as well as researchers and policy makers from the broad development community. 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