Why is the World Bank not walking their talk on inequality?

It’s an important week for the World Bank. A few days ago its president Jim Kim revealed a new strategy to end poverty and boost shared prosperity. A new internal structure to match those ambitions is expected. The new strategy highlights the role of inequality in hampering progress. It says:

“Progress in building shared prosperity is incompatible with increasing inequality; high levels of inequality are likely to constrain the rise in prosperity for the bottom 40 percent. Inclusion encompasses policies to promote equality of opportunity by improving the access of poor and disadvantaged people to education, health, infrastructure, financial services, and productive assets.”

This is a most welcome inclusion.

Missing out inequality

And yet the World Bank is not making the reduction of inequality one of its goals. It’s an odd choice. Some people have argued that inequality is a real problem both intrinsically and instrumentally. Take these paragraphs, for example, recently written by Jaime Saavedra, a senior World Bank official: 

“High inequality is for many of us morally unacceptable and a symptom of a broken social contract. High inequality can lead to social conflict and instability which might result in lower economic standards for everyone. High inequality is in many cases a reflection that everyone does not have the same chances in life, that some have access to basic economic, social and human rights and others not, that opportunities are related to where you were born, who your parents are, or your race or gender.

Moreover, no country has transited to high income status with very high levels of inequality, and countries with the highest living standards have, in general, lower levels of inequality than low income countries. So there are many reasons why reducing inequality is a valid development objective by itself.”

These assertions are supported by evidence. High income inequality is associated with lower social mobility - a fact that has been called “The Great Gatsby Curve.” And changes in the share of income going to the top 1 percent are closely associated with reduction in the marginal top tax rate. Research at the World Bank has shown that “[c]ountries with a higher degree of income inequality are also characterized by greater inequality of opportunity.”

The paradox is that the arguments and evidence against inequality often comes from the World Bank itself. For instance, Kaushik Basu, the Chief Economist at the World Bank, recently gave an interview where he said “ [W]e need to think about this increasing gap within each country because it will create political tension of a type that we don’t want to see.”

Mind the gap

Yet the new strategy does not propose concrete actions to reduce the gap between the poorest and the richest. What’s going on? The World Bank has the arguments, the evidence and the senior understanding of the problem, and yet they argue that inequality should not be a development goal in itself?

The World Bank argues that the reason not to include inequality as a development goal is the following:

“The reason why the income growth of the bottom 40 percent (or any other indicator that allows monitoring welfare improvements of those in the bottom part of the distribution), is preferable as a goal is because an increase in this indicator is unambiguously desirable in any country in any circumstance, at any time.”

This is their justification and it’s wrong for one simple reason. There are two broad possible outcomes when income growth for every part of the distribution is positive: First, income of the bottom 40 percent grows faster than the top end of the distribution (in which case the gap closes) – this is, I agree, unambiguously good. The second outcome, however, is not so good: if the income growth in the bottom is positive but smaller than growth at the other extreme, inequality increases – this is not “unambiguously desirable” (or rather, it is if and only if we consider development and well-being as determined only by income).

The well-being and opportunities of the poorest are directly affected by how much wealth is concentrated in the top end of the distribution. It’s not an issue of envy. It is an issue that high levels of inequality distort the political process and redistribute power and, yes, opportunities. High income inequality allows the hoarding of opportunities by the privileged and limits those who are less so. Focusing on the progress of the bottom 40 percent while ignoring the gap between them and the rest of the distribution ignores these facts.

Talking about “Shared prosperity” is a big step for progress for the Bank, but it is not enough - just as pro-poor growth was not enough. Time and time again we have heard the story of all boats rising , but time and time again, the vessels of the poorest are left behind. The World Bank has provided solid analysis on why inequality is a massive development problem. So, why is the Bank reluctant to include inequality reduction as an objective? They know the facts and the arguments in favor of tackling growing disparities – they frequently generate them.  It is time for the World Bank to go the final step and make the reduction of inequality an explicit goal.

This entry posted 10 October 2013, by Ricardo Fuentes-Nieva, Head of Research, OxfamGB.

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