WIDER Angle
“Reflections on Launching Three Books about Poverty, Inequality, and Economic Growth”
Ashley S. Timmer and C. Peter Timmer[1] and Ashley S. Timmer*
It is always exciting to be present when new and provocative ideas are launched, especially when they are in the concrete form of books addressed to the scholarly and policy communities. The intersecting themes of poverty, inequality and economic growth are at the top of the policy agenda in Washington, especially under the mantra of “pro-poor growth,” so it was no coincidence that the launch site for these three books from WIDER was the World Bank. But there was also a heady sense of challenging the “Washington Consensus” in its den, because the three responsible editors of the books, Giovanni Andrea Cornia, Anthony Shorrocks, and Roelph van der Hoeven, each attacked the bias in Washington toward economic growth as the primary vehicle for reducing poverty, at the expense of ambitious approaches to dealing with inequality.
This attack resonates with Nancy Birdsall, President of the Center for Global Development, someone who has devoted much of her career to studying inequality and its impact on economic growth and povertyIn organizing the policy agenda proposed by these three volumes, it is useful to stress two definitional points (Birdsall, 2001). From that perspective sShe would stress two substantive points to organize the agenda. First, is the distinction First is the distinction is between “constructive” inequality—which provides the needed incentives to move resources to their most efficient uses-- and “destructive” inequality—which generates envy and socially unproductive redistribution. This distinction complicates analyticals and empirical investigations: s. N, because it argues that notnot only is the relationship between inequality and other variables of interest--, such as economic growth and poverty reduction--, not linear, it even likely changes sign over its full range. In his chapter in the Cornia volume, Michael Carter makes the same distinctionplea (Carter, 2004). Second
The seSepoint is Second, it is that it is important to understand is the distinction between inequality in outcomes, which are inevitable and (to some extent) desirable for their incentive effects, and inequality in opportunities or capabilities, which societies should strive to make as equal as possible if they are to reach their fullest potential, a point Nancy (Birdsall stresses, 2001). It is an empirical question whether it is easier to measure inputs to inequality or the resulting unequal outputs, but what society wants in the realm of equality should be clear from the start.
Analytical interest linking these topics dates back a long way. One of the main objectives of Food Policy Analysis, for example, published for the World Bank more than two decades agoKuznets (1955), is of course the best-known early scholar was to link posit Both definitional points help frame the research agenda that seeks to understand thea relationship between economic growth to poverty reductionand inequality (Timmer, Falcon and Pearson, 1983). The current incarnation of that interest, at least in the development policy community, is falls under the mantra of “pro-poor growth.” Development Alternatives, Inc. (DAI) has just finished a manual on pro-poor growth for USAID practitioners in the field. The World Bank is conducting a study on “operationalizing pro-poor growth., in” In collaboration with the British, French and German aid agencies., 14 Ccountry studies have been contracted for this project to learn what works and does not work at the operational level in producing economic growth that reaches the poor. USAID has also commissioned manual on pro-poor growth for practitioners in the field. Thus the current Washington Consensus, if you will, is at least an appreciation that the distributive path of growth is not pre-determined. The three volumes just launched by WIDER should help all of the country study authors as they draft their reports be important voices in shaping this new agenda.
In linking the work presented in these three volumes to the ongoing research efforts on pro-poor growth, it is useful to make two general points.It is already clear that future research must break new ground in several directions. First, much of the research in the future must be at the country,(or even sub-national, or regional), level. There are clearly diminishing returns to further global studies using cross-section data sets if the goal is to understand “what to do.”how policy choices can impact inequality and poverty. Economic historians understand the country-specific institutional changes needed to sustain economic development, but they see country specificity through a very long-term lens of path dependency. At the same time, policy advisors are impressed by the uniqueness of the day-to-day constraints on policy making; many of these constraints are political. Of course, everyone understands that tThere are underlying commonalities to the development process, and that the degrees of freedom on basic macro and trade policies are not large if rapid economic growth is the goal. But the degrees of freedom are not nil (one size does NOT not fit all, and the options l…) and they hinge crucially on the existing (and potential) economic institutions the country has. This institutional variance is much wider (no pun intended…) than many in Washington want to recognize.
Second, there is important research to be done on the distributive foundations of economic growth, especially with attention to the from the methodological perspective of “behavioral political economy. of income distribution”and the behavioral foundations thereof. The three books just launched stress the two-way connection between economic growth and income distribution. But the distributive dimensions of economic growth go deeper than simultaneous causation and, as noted above, are mediated at the country or regional level. .
Two aspects ofare this problem are worth highlighting here, because we see that they Exploring the different institutional contexts that link in which inequality and growth derive their relationship will be central to a full understanding of the relationship between them..
In particular, a future research agenda must pay new attention to First is the relationship linkages between inequality and the politics of economic policy. It is entirely plausible that without political-economy feedback loops, growth-maximizing policies may generate the greatest growth at the upper ends of the distribution. But the historical record suggests that—perhaps with the exception of the United States in recent decades—even reasonably wide-spread rapid growth will generate political crises if the very wealthy are allowed to visibly increase their lead too much. The policies resulting from the backlash may end up not only slowing growth, but making the poor worse off in absolute terms. Further, the instability of such episodes may exacerbate the distributive impacts, because to the extent that the lower ends of the distribution are more vulnerableility to economic risks. is most evident at the lower ends of the distribution.
An important component of this research will be how to measuringe income inequality in ways that resonate are congruent with the political process. For this, a it is likely to be necessary to focus on income gaps rather than income distribution will be crucial(who has ever heard a politician refer to a Gini coefficient, much less the Watts Index?). There has been virtually no serious analysis done of income gaps by development economists, although income gaps are the “stock in trade”offor economic historians interested in long-run trends in income distribution (admittedly in large part because distribution data do not exist, but income gaps can be approximated).
The reason that iIncome gaps are important correlates with the politicsal issues of distribution for is very much a behavioral reasonsquestion. In the political economy of growth, perceptions of inequality and other-regarding behavior are the central mechanisms through which economic trends translate into political issues, as Ravi (Kanbur argued in an earlier WIDER Angle, 2003; Frank, 1985 200?). Gaps measure the distance between rich and poor, a distance that is often highly visible in the face of salient where conspicuous consumption is rampant. The globalization debate itself demonstrates the salience of relative outcomes over absolute ones, not only because of distributionalequity concerns but because relative income seems to beis more tangible than absolute income. How individuals perceive well-being, and government beliefs about those perceptions, are central to understanding the importance of distributive questions. In particular, rapid growth that raises everyone’s absolute incomes, but also exacerbates inequality, is surprisingly problematic in terms of political stability. Even highly unequal but distributively stable societies seem to fare better,. These phenomena suggesting that both relative position and positional change have to be taken into account. Economists in particular have been slow to investigate how increased structural volatility and economic change generate disutility.
The political economy of growth depends highly on distributive outcomes--such as income--but exploring the distribution of inputs to economic well-being should be even more revealing about the underlying relationships between economic growth and inequality. In particular, the variance of transactions costs and institutional structures that mediate economic outcomes, though usually ignored, may prove central to understanding distributive patterns. Perhaps the current neglect by researchers of of income gaps these phenomena is because growing gaps and distributive change during the development process seem almost mathematically inevitable: income gaps grow in absolute terms even when growth is evenly distributed across income groups. But that reality does not make the growing gaps irrelevant, especially to politicians who must confront the anger of a middle class that feels left out, or labor unions that see their share of the pie dwindling. Asian countriesPolicy makers, in turn, , for example, have found need to various ways to “manage” growing income gaps with political initiatives. In Asia, for example, tThis political "management" has taken various forms, from autocratic repression in Indonesia, to open racial preferences in Malaysia, to populist rhetoric in Thailand, and to extreme agricultural protection in Korea (Timmer, 2004). The challenge is to identify the political options that do more good than harm to long-run growth and equity.
TWhile t mays, in the first instance, highly the. But, Second, studying the distribution of the inputs to economic well-being mayshould be revealing. Although there has been some discussion of this in the context of building human capital and capabilities, there is a real possibility that In particular, the variance of transactions costs, though usually ignored, iswill be critical to distributive outcomes. Although tThe development community now sees transaction costs as a key limiting factor limitingto development and growth, but but the analysis rarely addresses how these costs are differentially distributed or differentially binding across groups or economic activities. Similarly, although there is renewed has been a much-needed upswing in attention to economic institutions and their role in development, the way these institutions are shaped across sectors, across groups, and especially across income classes, seems critical to understanding how the inputs of well-being are mapped into the outputs. We would argue that an important component of the distribution of outputs is partially driven by the differential functioning of these economic institutions. Further, with the increasing demand for decentralization of government services and oversight, regional disparities in governance canmay drive the spatial character of development and of distribution. It is easy to construct a model of “immiserizing growth” in such circumstances..
A clear example grows out of then example may be useful. Clearly, there is a consensus in the development profession that credit markets are a central institution for growth. From new Basel standards to the boom in support for micro-credit programs, there has been demand at every level tofor reduceing credit market failures and alleviateing credit rationing and risk. But In particular, iin countries with poorly functioning credit markets—and even in those with well-functioning ones--,the costs are not uniformly distributed.there are distributional dimensions to these failures and risks. For example, where credit markets function poorly, often ccertain ethnic groups, by accessing credit through transnational ethnic networks, have come to dominate capital-intensive activities (Fisman, 2003; Ramachandran XX). These groups are in effect side-stepping the formal institutions in favor of those that reduce their transactions costs, and in doing so reduce the cost of capital and gain economic advantage. The implications for the distribution of income are clear, but easy to imagine, and yet there is almost no research to show how these processes drive regional and national distributive outcomes. These processes thenof courselikely feed into the throughinto thepolitical economy dynamics discussed above, questias wealth becomes concentrated among identifiable groups.Further, with the increasing demand for decentralization of government services and oversight, regional disparities in governance may drive the spatial character of development and of distribution. It is easy to construct a model of “immizerizing growth” in such circumstances.
Finally, the development profession needs to explore the role of perception and other-regarding behavior as a central mechanism in the political economy of growth Kanbur, 2003). The globalization debate demonstrates the salience of relative outcomes over absolute ones. How individuals perceive well-being, and government beliefs about those perceptions, are central to understanding the importance of distributive questions. In particular, rapid growth that raises everyone’s absolute incomes, but also exacerbates inequality, is surprisingly problematic in terms of political stability. Even highly unequal but distributively stable societies seem to fare better. These phenomena suggest that both relative position and positional change have to be taken into account. Economists in particular have been slow to investigate how increased structural volatility and economic change generate disutility.
These themes are part of a broader economic context, in which some of the connections between growth and distribution have already been well established, and the editors of the three volumes just launched should be congratulated for bringing together in an accessible fashion so much of this research. Among the recognized challenges for growth are the absence of a healthy middle class of consumers, limited human capital development, and bias towards urban and industrial areas at the expense of the rural economy. From the reverse perspective, debate remains as to the impact of growth on distributive outcomes. New research identifying growth strategies that are “pro-poor” will help enrich the aggregate record and perhaps reveal more subtle patterns linking growth with distributive changes.
In the endW, e argue that what is needed as a next step is an exploration of these less understood micro- and meso- level foundations for of the macro-level , two-way links relationship between economic growth and inequality. These processes foundations are obscured by reliance on invisible in cross-section data that pools highly disparate countries, but even country-level Gini statistics and quantified indices of policy measures probably obscure as much as they reveal. Understanding group- and location-specific trends and institutions should help pinpoint the mechanisms and processes that underlie the macro empirical relationships.
* Respectively, Senior Research Scholar, Center for Global Development, Washington, DC, and Director of the Program in Applied Economics, Social Science Research Council, New York. Peter Timmer delivered an early version of these the comments at the WIDER book launch on April 14, 2004. Previously, he was on the faculties of Stanford, Cornell and Harvard Universities, and served as Dean of the Graduate School of International Relations and Pacific Studies at the University of California, San Diego.
References
Birdsall, Nancy. 2001. “Why Inequality Matters: Some Economic Issues.” Ethics and International Affairs. Vol. 15, no. 2, Carnegie Council on Ethics and International Affairs, Washington, DC.
Carter, Michael. 2004. Landownership Inequality and the Income Distribution Consequences of Economic Growth,” in Cornia (2004), pp. 57-80.
Cornia, Giovanni Andrea, ed. 2004. Inequality, Growth, and Poverty in an Era of Liberalization and Globalization, Oxford University Press for UNU/WIDER.
Raymond J. Fisman. (2003.) "Ethnic Ties and the Provision of Credit: Relationship-Level Evidence from African Firms", Advances in Economic Analysis & Policy: Vol. 3: No. 1, Article 4.