Thinking about inequality is back in fashion! In its November 2013 outlook, the World Economic Forum called rising inequality the second biggest risk for 2014-15. The 2014 English translation of French economist Thomas Piketty’s “Capital in the 21st Century” became an instant bestseller among academics and practitioners in both developed and developing countries. Discussions of inequality are popping up everywhere, and even seem to be setting the tone of many round tables and presentations in the World Bank Group’s upcoming Annual Meetings.
On the face of it, questioning the usefulness of “inequality of opportunity” seems about as wrongheaded as questioning the merits of family vacations, Thanksgiving or dessert trolleys. What’s not to like about it? Well, as we argue in a recent World Bank working paper, the idea is not quite as useful as it might at first glance appear, and is in fact rather dangerous. But turned upside down, it might yet be useful.
A simple idea – let’s see some numbers
The idea behind inequality of opportunity is simple yet powerful. Not all inequality is bad. The bad bit of inequality (‘inequality of opportunity’) is the part that emerges because of factors over which we have no control (our 'circumstances'). By contrast inequality that emerges because of our different choices and efforts (holding constant our circumstances) is fine, and to be encouraged.
Thanks to Thomas Piketty, we’ve heard a lot this year about rising inequality. And with just over a year to go before the MDG ‘window’ closes, we’ve also heard a lot about the ‘post-2015 agenda’. In a paper with Leander Buisman that just came out in the World Bank Research Observer, we bring these two themes together and ask: “Were the poor left behind by the health MDGs?” Influenced perhaps by all the talk of rising income inequality, there are certainly plenty of pessimistic folks out there who think that health inequalities, too, are on the rise; that the better off are likely to have seen much faster improvements in MDG indicators than the poor.
Jason Furman, appointed by President Barack Obama as the Chairman of the Council of Economic Affairs, spoke yesterday at the World Bank about inclusive growth in the US. Furman said that average income for the bottom 90% grew strongly across all OECD countries starting in the 1950s, but has flattened in the US since the ‘70s. Furthermore, Furman added that capital income contributes more to overall inequality towards the upper end of the American income distribution.
Furman also pointed out that starting in 2000, labor share in US income started falling, largely because of globalization.
A new World Bank policy research working paper by Bill Battaile, Richard Chisik, and Harun Onder shows how Dutch disease effects may arise solely from a shift in demand following a natural resource discovery. The natural resource wealth increases the demand for non-tradable luxury services due to non-homothetic preferences. Labor that could be used to develop other non-resource tradable sectors is pulled into these service sectors. As a result, manufactures and other tradable goods are more likely to be imported, and learning and productivity improvements accrue to the foreign exporters.
In April 2013, the World Bank Group endorsed two ambitious goals: (1) to end extreme poverty by 2030, and; (2) to promote “shared prosperity” by boosting the incomes of the poorest 40 percent of the population in every country. The introduction of the second goal marked a shift in the World Bank Group’s poverty reduction mission. Some might consider the goal #2 to constitute a refinement of a longer-standing -- albeit implicit -- emphasis on growth, widely considered a necessary condition for poverty reduction.
Is goal #1, ending extreme poverty by 2030, paramount and is goal #2 subsidiary to that first objective? On the other hand, if these two goals are prioritized equally, what might this mean for the extreme poor? What are the trade-offs between boosting the incomes of the bottom 40 percent in every developing country and ending extreme poverty globally?
'Our goal: Defeat malaria forever' is the title of a Path blog to commemorate World Malaria Day. Written by Dr. Carlos C. (Kent) Campbell and Bindiya Patel to commemorate World Malaria Day, it stresses that malaria control alone won't be enough to stop the disease.
Meanwhile, the economics world continues to be rocked by Piketty. His powerpoint on Capital in the 21st Century, presented recently at an IMF event where Martin Ravallion played the role of discussant, can be downloaded here. Ravallion provided his own take on historic inequality trends and explained why he thinks there is still hope that extreme poverty in the developing world will continue to fall, thanks in no small part to growth and other factors.
Social welfare functions that assign weights to individuals based on their income levels can be used to document the relative importance of growth and inequality changes for changes in social welfare. This method is applied in a new working paper by David Dollar, Tatjana Kleineberg, and Aart Kraay. They find that, in a large panel of industrial and developing countries over the past 40 years, most of the cross-country and over-time variation in changes in social welfare is due to changes in average incomes. In contrast, the changes in inequality observed during this period are on average much smaller than changes in average incomes, are uncorrelated with changes in average incomes, and have contributed relatively little to changes in social welfare.
Equitablog, run by the Washington Center for Equitable Growth, has launched a series of 'Notes and Finger Exercises on Thomas Piketty’s “Capital in the Twenty-First Century”.' Brad DeLong's post, 'There Are Four r’s', details some alleged oversights in Piketty's book. In particular, DeLong focuses on how the real interest rate behaves at different levels of economic activity. He highlights Larry Summers' concern about secular stagnation and the risk that rich folks might retreat from investing in industry. And DeLong pulls out some sexy math.
Matthew Gentzkow has won the John Bates Clark Medal, an honor conferred by the American Economic Association for his contributions to "our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement..."
Last week, Oxfam released a powerful report on inequality, “Working for the Many: Public services fight inequality.” The report makes a persuasive case for the need to bring more attention to the issue of inequality in policy discussions. Indeed, at the recent World Economic Forum Annual Meeting, World Bank President Jim Yong Kim stated that “at Davos, income inequality should be front and center” as an important item on the global agenda. I was recently a discussant in a session on the Oxfam report at a Spring Meetings event alongside Max Lawson of Oxfam Great Britain and David Coady of the IMF's Fiscal Affairs Department. The case Oxfam makes that inequality is harmful to the global economy is well articulated and their prescription for a solution is highly focused: increase the amount of progressive taxation to fund free and universal health and education. In the following slides, I provide a few examples of where we might want to broaden our thinking on the issue of inequality. In particular, I offer a couple of illustrations where a singular focus on inequality would lead us to undervalue some very important progress that has been made in the fight to eliminate poverty. In contrast, by ‘twinning’ the goals of eliminating extreme poverty and boosting shared prosperity, the policies we design may be more likely to ensure that everyone shares in growth and prosperity.