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Reducing Inequality

• Offering an overview of policy perspectives for inequality reduction

• What are the available options?

• And the political feasibility?

Outline• Static redistribution: taxation and expenditure• Static redistribution: redistributing assets • Pro-poor growth: areas of intervention

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Static redistribution via the budget: taxationProgressivity of Taxation and Expenditure: (i) tax obligations which

accrue at an increasing rate with the income of the taxpayer; (ii) benefits from government expenditures which rise inversely as a proportion of beneficiary incomes

• Personal income tax and taxes on corporate profits: are most progressive. Limitation: adverse incentives created by rising marginal rates (e.g. work over leisure, saving and investment, tax compliance).

• Indirect taxes: if applied uniformly, they are regressive, because the poor consume a larger proportion of their income than the rich. Exemptions and differential tax rates can be used for items important in the consumption baskets of the poor.

• Wealth taxes: e.g. land and property holdings. These are little used in developing countries (no significant revenues). Problem: ability to establish value ownership. Scope for doing more: taxation of mineral concessions, identifiable concentrations of taxable assets.

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Static redistribution via the budget: expenditure

Expenditure: (i) transfer payments; (ii) social services (education and health)• Transfer payments: unemployment benefits, state pensions, income

support schemes are affordable as economies develop. They are potentially progressive, as long as they can be targeted on the poorest.

• On education: taking all levels together, delivery of schooling was progressive in 31 of 55 studies, but was poorly targeted in more than half. In Sub-Saharan Africa, the poorest income quintile receiving only 13% of benefits, against 32% for the top quintile.

• Primary schooling was everywhere progressive. Secondary education was progressive in Asia and Latin America but not in Africa or the Middle East. Tertiary education mostly benefited the richest quintile in all regions; in Africa the poorest quintile received under 5% of benefits, against 59% for the richest quintile.

• Health services are found to be progressive (transition economies and sub-Saharan Africa). Results were not reported by service type.

Overall incidence of the budget: most progressivity in developing country fiscal systems is derived from the expenditure side rather than from taxes.

Strategy: establishing a broad tax base, which does not widen disparities, in order to mobilise resources for progressive state spending.

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Static redistribution: redistributing assetsLand reform: Transferring the control of land from large landowners to

small farmers, allows them to transform their labour into food and cash, and provides an insurance against shocks

• Problem: fiscal compensation payments to expropriated landowners.• New approaches: development of land-rental markets and through

'market-assisted' processes. The latter relies on voluntary land transfers based on negotiation between buyers and willing sellers, often mediated through local government or traditional authorities, with the central government establishing a legal framework and providing part of the purchase price to eligible beneficiaries. Examples: Brazil, Colombia and South Africa.

Privatisation of formerly publicly-owned enterprises is likely to increase ownership inequalities; e.g. cases of 'crony capitalism’, where it is used to reward the government's friends, but even where transparency prevails it is the rich who are best able to take advantage of the new investment possibilities.

• Other inequality-increasing consequences: short-term job losses, price increases, for example, for utilities. Transparency and competition policy are among the safeguards against the dangers of privatisation. However, there are examples where privatisation has been beneficial, as with Bolivia's use of divestiture to fund a flat, universal pension.

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Pro-poor growth: definition & areas of intervention 1

Redistribution with growth • Absolute definition: A process in which the share of

the poor in increments to income exceeds their pre-existing share.

• Relative definition: Growth is ‘pro-poor’ if the incomes of poor people grow faster than those of the population as a whole

• Policy interventions most likely to result in progressive growth are those targeted on the poor (e.g. health, education, micro-credit); but, trade-offs might also arise (e.g. reduced aggregate savings)

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Pro-poor growth

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Pro-poor growth: areas of intervention 2Policy framework• Avoidance of crises: Macroeconomic management

(monetary policies, currency crises) • Agricultural development: most of the poorest live in rural

economies (e.g. water management, rural infrastructures)• Factor markets: (i) labour-intensive agriculture and

industrialisation (e.g. East Asia); (ii) improved access to capital through financial sector reforms and micro-credit schemes

• Infrastructural investment to reduce the remoteness of many of the poorest;

• Social policies to promote education, health and social capital;

• Measures to eliminate biases against women as producers and consumers

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SummaryWhat have we learnt?- What are the prospects for reducing inequalities?- the difficulty stems from the fact that wealth equals power

- A substantial number of instruments have been identified above but none are new and not all are of great proven potency. But it would be wrong to conclude that there is little that can be done

- Success stories tend to point particularly to the importance of agricultural progress, rural development and, in some cases, land reform as crucially important ingredients of progressive growth.

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ReferencesCore readings:• Killick T., (2002), “Responding to Inequality”, ODI Inequality briefing paper No 3• Kanbur, R. (2000), “Income distribution and Development”, Chapter 13 in Atkinson, A. B. and

Bourguignon, F. eds., Handbook of Income Distribution, North Holland-Elsevier, section 3

Static redistribution:• Chu, K., Davoodi, H. and Gupta, S. (2000). Income Distribution and Tax, and Government Social

Spending Policies in Developing Countries. Helsinki: WIDER Working Paper 214.• Gemmell N. and Morrissey O., (2005), Distribution and Poverty Impacts of Tax Structure Reform in

Developing Countries: How Little We Know, Development Policy Review, 23(2): 131-144• de Janvry, A., Gordillo, G., Platteau, J. and Sadoulet, E. (eds.), 2001, Access to Land, Rural Poverty

and Public Action. Oxford: Oxford University Press • Pablo Bandeira and José María Sumpsi, (2009), Access to Land, Rural Development and Public

Action: The When and the How, Development Policy Review, 27(1): 33-49• Justino P. and Acharya A., (2003), Inequality in Latin America: Processes and Inputs, Poverty

Research Unit at Sussex, working paper no.22

Dynamic redistribution:• Bird K., (2008), “The Political Economy of Pro-Poor Growth”, ODI briefing paper 35, January • Wiggins S., (2008), “Pro-Poor Growth and Development”, ODI briefing paper 33, January• DFID – Dept for International Development, (2004), What Is Pro-Poor growth and Why Do We Need to

know?, Pro-poor growth briefing note 1, February • DFID – Dept for International Development, (2004), How To Accelerate Pro-Poor growth: a Basic

framework for Policy Analysis, Pro-poor growth briefing note 2, September• Hyun H. Son, (2007), Pro-Poor Growth: Concept s and Measures, Asian Development Bank Economic

and Research Dept Technical Note No. 22, June• White, H. and Anderson, E. (2001). Growth versus Distribution: Does the Pattern of Growth Matter?,

Development Policy Review 19(3): 267-289