Addis Fortune (Addis Ababa)

3 August 2014

Ethiopia: Thinking Twice About Inequality

opinion

At the United Nations Millennium Summit in September 2000, UN member states took a dramatic step by putting people, rather than states, at the centre of the agenda. In their Millennium Declaration, the assembled world leaders agreed to a set of breathtakingly broad goals touching on peace through development, the environment, human rights, the protection of the vulnerable and the special needs of Africa.

Particularly influential was the codification of the Declaration's development related objectives, which emerged in the summer of 2001 as the now familiar eight Millennium Development Goals (MDGs), to be realised by 2015.

As the-then UN Secretary-General Kofi Annan later described them, the MDGs were a remarkable effort in international coordination. They established common ground among competitive development agencies, inspired concerted action by international organisations and national governments, and offered an opportunity for citizens to insist that governments focus on the "we the peoples" they claimed to represent. In short, they transformed the agenda of world leaders.

Fourteen years later, the MDG record has been mixed. Some goals, such as halving the proportion of people living in extreme poverty, have been met at the global level, but none have been fulfilled in all countries. Others, such as universal access to primary education, are unlikely to be achieved by 2015.

However, while the accomplishment of these goals would have been an impressive achievement, even taken together, they do not represent a complete or comprehensive vision of human development. They were constrained by what the member states could agree upon in 2000 and, in particular, they lacked a vision of equitable development.

As the international community thinks about the set of goals that will follow the MDGs, it is time to address that shortcoming by adding the goal of "eliminating extreme inequality" to the original eight.

Every country has a distinct political economy that shapes the extent and effects of inequalities; each requires separate assessment. The marked differences in the extent and nature of inequality across countries demonstrate that inequality is not just determined by economic forces; it is shaped by politics and policies.

Full equality is not the goal. Some economic inequalities may be conducive to economic growth. Other inequalities may not be worth addressing because doing so infringes on cherished liberties.

While the precise point at which inequalities turn harmful may differ from country to country, once inequality becomes extreme, harmful social, economic and political effects become evident. Extreme inequalities tend to hamper economic growth and undermine both political equality and social stability. Because inequalities have cumulative economic, social and political effects, each of these contributing factors requires separate and concerted attention.

Economists of widely differing philosophical outlooks agree that inequalities of incomes and assets have harmful economic effects. Increasing inequalities, with top-heavy income distributions, lessen aggregate demand (the rich tend to spend a smaller fraction of their income than the poor), which can slow economic growth. The attempt of monetary authorities to offset these effects can contribute to credit bubbles, and these bubbles in turn lead to economic instability.

That is why inequality is often associated with economic instability. In this perspective, it is no surprise that inequality reached high levels before the Great Recession of 2008 and before the Great Depression of the 1930s. Recent International Monetary Fund (IMF) research shows that high inequality is associated with shorter growth cycles.

Much of the inequality observed around the world is associated with rent-seeking (for example, the exercise of monopoly power), and such inequality manifestly undermines economic efficiency. But perhaps the worse dimension of inequality is inequality of opportunity, which is both the cause and consequence of inequality of outcomes, and causes economic inefficiency and reduced development, as large numbers of individuals are not able to live up to their potential. Countries with high inequality tend to invest less in public goods, such as infrastructure, technology and education, which contribute to long-term economic prosperity and growth.

Reducing inequality, on the other hand, has clear economic and social benefits. It strengthens people's sense that society is fair; improves social cohesion and mobility, making it more likely that more citizens live up to their potential and broadens support for growth initiatives. Policies that aim for growth but ignore inequality may ultimately be self-defeating, whereas policies that decrease inequality by, for example, boosting employment and education, have beneficial effects on the human capital that modern economies increasingly need.

Gaps between the rich and the poor are partly the result of economic forces, but equally, or even more, they are the result of public policy choices, such as taxation, the level of the minimum wage and the amount invested in healthcare and education. This is why countries whose economic circumstances are otherwise similar can have markedly different levels of inequality.

These inequalities, in turn, affect policymaking, because even democratically elected officials respond more attentively to the views of affluent constituents than they do to the views of poor people. The more that wealth is allowed unrestricted roles in funding elections, the more likely it is that economic inequality will get translated into political inequality.

As noted, extreme inequalities undermine not only economic stability, but also social and political stability. There is, however, no simple causal relation between economic inequality and social stability, as measured by crime or civil violence.

Neither form of violence correlates with Gini indices or Palma ratios (the top 10 percent of the population's share of Gross National Income [GNI] divided by the poorest 40 percent of the population's share of GNI). There are, however, substantial links between violence and "horizontal inequalities" that combine economic stratification with race, ethnicity, religion or region. When the poor are from one race, ethnicity, religion or region, and the rich are from another, a lethal, destabilising dynamic often emerges.

Drawing on 123 national surveys in 61 developing countries, one study carefully documents the effects of inequalities in assets among ethnicities. For a typical country with average values on all the variables accounting for violence, the probability of civil conflict in a given year is 2.3pc.

If the level of horizontal asset inequality among ethnic groups is increased to the ninety-fifth percentile (and the other variables remain at their average values), the probability of conflict increases to 6.1pc - more than a twofold increase. A similar comparison focused on differences in income among religious groups shows an increase from 2.9pc to 7.2pc - again more than twofold. Another study using similar methods finds regional disparities in wealth to be correlated with an especially high risk of conflict onset in sub-Saharan Africa.

Just as discussions of poverty and poverty reduction expanded from a single-minded focus on income to many other dimensions of deprivation - including health and the environment - so too did they evolve in the case of inequality. Indeed, in most countries it appears that inequalities in wealth exceed those in income.

Especially in countries without adequate public health systems, a Palma ratio reflecting health status would almost surely show even greater inequalities than a Palma ratio for income. A Palma ratio based on exposures to environmental hazards would likely demonstrate a similar trend.

One of the most pernicious forms of inequality relates to inequality of opportunity, reflected in a lack of socioeconomic mobility, condemning those born into the bottom of the economic pyramid to almost surely remain there. The fact that those born into the bottom of the economic pyramid are condemned to never reach their potential reinforces the correlation between inequality and slower long-term economic growth.

That these dimensions of inequality are related suggests that focusing on one dimension at a time may underestimate the true magnitude of societal inequalities and provide an inadequate basis for policy. For example, health inequality is both a cause and consequence of income inequality.

Inequalities in education are a primary determinant of inequalities in income and opportunity. In turn, when there are distinct social patterns of these multiple inequalities, the consequences for society (including social instability) are increased.

We propose "Goal Nine" - be added to revisions and updates of the original eight: Eliminate extreme inequality at the national level in every country. For this goal, we propose the target of reducing extreme income inequalities in all countries such that the post-tax income of the top 10pc is no more than the post-transfer income of the bottom 40 percent.

There is a growing consensus that the best indicator for these targets is the Palma ratio, which effectively focuses on extremes of inequality - the ratio of incomes at the very top to those at the bottom. In many countries around the world, it is changes in these extremes that are most noticeable and most invidious, while the share of income in the middle is relatively stable.

All countries should focus on their "extreme" inequalities; that is, the inequalities that do most harm to equitable and sustainable economic growth and that undermine social and political stability. A Palma ratio of one is an ideal reached in only a few countries.

For example, countries in Scandinavia, with Palma ratios at one or less, do not seem to suffer from the liabilities associated with extreme inequalities. Indeed, in some accounts they seem to benefit from a positive "equality multiplier" across the various aspects of their socioeconomic development, making them efficient and flexible, as well as equitable and stable.

But countries differ not just in how unequal they are now, but also in their culture, tolerance of inequality of various kinds and capacity for social change. Hence, the more important target is the second one: a national dialogue by 2020 on what should be done to address the inequalities of most relevance to the particular country.

Such a dialogue would draw attention to the policies in each country that exacerbate inequality (for example, deficiencies in the education system, the legal system or the tax and transfer system); those that simultaneously distort the economy and contribute to economic, political and social instability; and those that might most easily be altered.

Indeed, there are many dimensions to inequality - some with more invidious effects than others - and many ways to measure these inequalities. One thing is certain, however: sustainable development cannot be achieved while ignoring extreme disparities. It is imperative that the post-MDG agenda have as one of its central pillars a focus on inequality.

Michael Doyle, Professor of Interna-Tional Affairs At Columbia University, United States, and Joseph Stiglitz, Nobel Laureate and Professor of Economics At the Same University. Including Inequality in the Upcoming Global Development Goals Is Essential, the Scholars Argue.

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