Inequality is back in the news. In his 2014 State of the Union address, U. S. President Obama lamented that, “after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled.” At the global scale, Oxfam is making the same point, noting in a recent report that the richest 85 people in the world own the same amount of wealth as the 3.5 billion bottom half of the Earth's population. Perhaps more surprising, the rich and powerful CEOs jetting to Davos earlier this year seemed to finally get it: capitalism cannot survive if income and wealth become concentrated in too few hands. Fighting inequality would therefore not only be the morally correct thing to do, it would also be smart economics. And this is what a recent Staff Discussion Note from the IMF suggests: “inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required in the face of shocks, and thus tends to reduce the pace and durability of growth.”
The three points made in my previous post—that services particularly fail poor people, money is not the solution, and “the solution” is not the solution—can be explained by failures of accountability in the service delivery chain. This was the cornerstone of the 2004 World Development Report, Making Services Work for Poor People. In a private market—when I buy a sandwich, for example—there is a direct or “short route” of accountability between the client (me) and the sandwich provider. I pay him directly; I know whether I got a sandwich or not; and If I don’t like the sandwich, I can go elsewhere—and the provider knows that.
Back in 2003, when we were writing the 2004 World Development Report, Making Services Work for Poor People, we had no idea that it would spawn so much research, innovation, debate and changes in the delivery of basic services. Last week, we had a fascinating conference, in collaboration with the Overseas Development Institute, to review this work, and chart the agenda for the coming decade. Being a blogger, I wanted to speak about what WDR2004 got wrong, but some of my teammates suggested I should start by describing what we got right. So here are three ways WDR2004 changed the conversation about service delivery (what we got wrong will be the next post).
Giving Cash Unconditionally in Fragile States
There have been many recent press articles, a couple of potentially seminal journal papers, and some great blogs from leading economists at the World Bank on the topic of Unconditional Cash Transfers (UCTs). It remains a widely debated subject, and one with perhaps a couple of myths associated with it. For example, what is cash from UCTs used for? Do the transfers lead to permanent increases in income? Does it matter how the transfers are labelled or promoted? I am particularly interested in whether UCTs could be a useful instrument in countries with low institutional capacity, such as fragile and conflict-affected states (FCS).
Why UCTs in FCS? UCTs present a new approach to reducing poverty, stimulating growth and improving social welfare, that may be the most efficient and feasible mechanism in FCS. A recent evaluation of the World Bank’s work on FCS recognized, “where government responsiveness to citizens has been relatively weak, finding the right modality for reaching people with services is vital to avoiding further fragility and conflict”. Plus there is always the risk of desperately needed finances being “spirited away” when channeled through central governments. UCTs may present a mechanism for stimulating the provision of quality services, which are often lacking, while directly reducing poverty at the same time. As Shanta Devarajan’s blog puts it, “But when they (the poor) are given cash with which to “buy” these services, poor people can demand quality—and the provider must meet it or he won’t get paid.” We should explore more about this approach to tackling poverty: where and when it has worked, what made it work, and whether we can predict whether it will work in different contexts.
- unconditional cash transfers
- Cast Transfers
- Fragile and Conflict Afflicted States
- Social Development
- Public Sector and Governance
- South Asia
- Middle East and North Africa
- Latin America & Caribbean
- Europe and Central Asia
- East Asia and Pacific
- Syrian Arab Republic
In terms of the World Bank’s twin goals of eliminating extreme poverty and boosting shared prosperity, the Middle East and North Africa Region was making steady progress. The percentage of people living on less than $1.25 a day was 2.4% and declining. And the incomes of the bottom 40% have been growing at higher rates than average incomes in almost all MENA countries for which we have information.
Yet, there were revolutions in several countries and widespread discontent. Why?
When the negotiations for IDA17 were wrapped up in December, there was great relief that IDA deputies were supportive of an IDA expansion despite their own significant budget difficulties. As part of that package, the World Bank Group itself pledged to give IDA $3 billion from profits.
This was a generous gesture by the World Bank (albeit a drop in the bucket of total aid), but how good was it for the global development effort? Consider the following—net disbursements of official grants and concessional loans (the category where IDA flows appear) have expanded from $39 billion per year in the 1980s (in constant 2005 dollars) to $85 billion in 2010 and 2011. In contrast, official non-concessional lending (the category where IBRD and IFC flows appear) has stayed steady. The latter was $15 billion in the 1980s and $22 billion in 2010/11. This picture is even more striking when considering the amounts in terms of recipient GDP. Grants and concessional flows to low income countries have gone from 3% of their GDP in the 1980s to 13% today, while non-concessional flows to lower middle-income countries (excluding India and China) have gone from 0.7% to 0.3% of their GDP. In fact, from 2000 to 2009, non-concessional flows to lower middle- income countries (and to developing countries as a whole) were negative, implying that developing countries repaid more to official development agencies than they received in gross disbursements.
Lessons from the recent history of Central Europe and the Baltics
Economic growth has returned to Central Europe and the Baltics. With the exception of Slovenia, all countries are expected to see positive growth in 2014 - ranging from a tepid 0.8% in Croatia, to more respectable growth rates of 2.2% in Romania and 2.8% in Poland, to highs of 3-4.5% percent in the Baltic Republics. Europe, more broadly, is also turning the corner and is expected to grow at around 1.5%.
Amidst this much welcome growth, however, one question remains: will economic growth be good for the bottom 40 percent and can they expect to see their incomes grow?
Shanta: Jishnu, your blog post and mine on cash transfers generated a lot of comments. Some people argued that giving poor people cash will not “work” because they will spend it on consumption rather than on their children’s education, which is something we care about. What do you have to say to that?
Jishnu: I don’t think the question “does giving cash to poor people work?” is well-defined. It can only be answered in the negative if we (the donors who give the cash) impose our preferences and judge what poor people spend on relative to those preferences. But if we give poor people cash so they will be better off, then—by definition—they are better off, regardless of how they choose to spend the extra money.
For those of us who have had an interest in corruption for much of our careers, there is little doubt that sometime in the late 1980s and early 1990s there was a shift in thinking within the development community about the role of corruption in the development process. The shift was tentative at first; continued reluctance to touch upon a subject that was seen to have a large political dimension coexisted for a while with increasing references to the importance of “good governance” in encouraging successful development. What were the factors that contributed to this shift? One that quickly comes to mind is linked to the falling of the Berlin Wall and the associated collapse of central planning as a supposedly viable alternative to the free market. It was obvious that it was not inappropriate monetary policies that led to the collapse of central planning but rather widespread institutional failings, including a lethal mix of authoritarianism (i.e., lack of accountability) and corruption.
As many across the world entered the New Year in a celebratory mood, others are still struggling to recover from the effect of the recent economic downturn. Five years ago began the worst economic recession the world has experienced in generations. With life support by Governments and Central Banks, the global economy seems to have stabilized, but the ‘patient’ is still weak. In 2013, the global economy is estimated to have expanded at a modest 2.2 percent rate (despite a contraction in the Euro zone) and for 2014 the World Bank and IMF project a slight uptick to 3.0 percent.
But what do these numbers actually tell us about the well-being of people? Does economic growth capture what really makes a difference in peoples’ lives?