Raghav Gaiha & Vani S Kulkarni: Is equity central to development?

World Development Report 2006 emphatically points out that equity is complementary to long-term prosperity. Raghav Gaiha and Vani S Kulkarni explain why the importance assigned is laudable

World Development Report 2006 (WDR 2006) makes a persuasive case for equity as the guiding principle of development. Equity denotes equality of opportunities to pursue a life of one's choice and protection from extreme deprivation. In this sense, equity is complementary to long-term prosperity.

Attention is drawn to various sources of inequality "" race, region of birth, parental education and occupation, gender, and family wealth. Gender differences in survival prospects are particularly egregious in some parts of rural China and northwest India, largely because of sex-selective abortion and discriminatory care after birth.

Persistent differences in power and influence are internalised into behaviour and aspirations perpetuating inequalities. Some forms of inequality across countries are even more staggering.

Largely as a result of HIV/AIDS (mainly in African countries) and higher mortality rates in transition economies (in Eastern Europe and Central Asia) during the 1990s, life expectancy has fallen sharply in some of the poorest countries, widening the divergence between them and rich countries.

WDR 2006 then turns to the centrality of equity to development. Equity influences development in two ways: inequalities of power and wealth result in waste and inefficient use of productive resources, and impair institutional development.

There is a strong link between differences in wealth and power and inefficient allocation of resources. No less worrying is the link between inequality in wealth and power and functioning of local institutions. WDR 2006 is emphatic that unequal power also impedes innovation and risk-taking.

The case for equity is reinforced by the "double dividend" for the poor. Expansion of opportunities for participation in the mainstream of development is accompanied by a more resilient development process involving better institutions, fewer conflicts and a more efficient use of resources.

Three major policy concerns emerge. These relate to redistribution of power and resources away from the dominant groups; trade-offs between equity-enhancing and efficiency-increasing redistributions; and the (presumed) dichotomy between policies for growth and for enhancing equity.

Few would dispute the pervasiveness of inequity in access to land, credit, housing, schooling, medical care, drinking water, sanitation and hygiene. But whether opportunities to live a healthy, productive and meaningful life have unambiguously improved during the 1990s is fiercely debated.

Social progress in India has followed diverse patterns, ranging from accelerated progress in some fields to a slowdown and even regression in others (that is, there was a decline in the female-male ratio among children in the age-group of zero to six years). Globally, income inequalities have risen, based on an absolute index of inequality (that is, the Kolm Index. For details, see WDR 2006, Chapter 3). So the importance assigned to equity in WDR 2006 is laudable.

Redistribution of power and wealth away from the dominant groups would mitigate resource allocation distortions (that is, fiscal constraints on public investment due to escalation of subsidies for water and electricity in India) with serious implications for long-term growth.

Equally serious is the impairment of various institutions, that is, village Panchayats are "captured" by influential persons or local elites in Uttar Pradesh ("Panchayats, Communities and Rural Poor in India" by R Gaiha and Vani S Kulkarni, Journal of Asian and African Studies, 37 (2), 2003).

There is, however, an overemphasis on the link between investment and protection of property rights with inadequate attention to coordination failures between public and private agencies.

The case for redistribution of power and wealth allows for trade-offs between equity and efficiency. Growth elasticity of poverty, for example, falls sharply with greater income inequality.

Two observations are pertinent: (a) while institutional quality matters a great deal in explaining income differences, income inequality does not; and (b) however, the elasticity of income Gini to poverty reduction is much higher than that of growth of income.

Simulations confirm that, on the assumption of the growth rate of 0.86 of per capita income observed during 1985-98 continuing over 1990-2015, and an unchanged income Gini, east and south-east Asia will achieve the MDG of halving poverty by 2015. With a 10 per cent reduction in the Gini, South Asia will also achieve this MDG.

If the reduction in the income Gini is 20 per cent, Latin America will do so as well. By contrast, even with the doubling of the income growth rate, the prospects of achieving the MDG remain largely bleak ("Do Institutions Matter in Poverty Reduction? Prospects of Achieving the MDG of Poverty Reduction in Asia" by R Gaiha and K Imai, Gini-Lorenz Centenary Conference, University of Siena, 2005). So poverty reduction with a moderately lower income inequality is likely to be substantial.

In a not-so-subtle and thinly disguised defence of its own agenda, WDR 2006 dismisses the dichotomy between policies for growth and for equity as false. Subsequently, the authors assert, inequitable policy outcomes are better dealt with through a safety net than by fine-tuning of policy reforms (adverse income distributional outcomes of trade policy reforms are better mitigated, for example, through workfare).

This is intriguing, as it invokes the dichotomy rejected earlier as false. More generally, different policy-mixes and their sequencing are rankable in terms of their efficiency and equity implications. Minimum support prices (MSPs) in India, for example, are fiscally unsustainable and their distortionary effects are substantial.

An option, therefore, is to freeze MSPs at current levels and use the resources released for investment in extension, credit and rural infrastructure in some of the most backward regions in India.

In conclusion, contrary to the claim, "the twin pillars of a better investment climate and greater empowerment for the poor" (WDR 2006, page 228) are far from fully connected.

Raghav Gaiha is Visiting Professor of Economics, University of Rome "Tor Vergata"; and Vani S Kulkarni is Pollak Fellow in Sociology, University of Pennsylvania