French positions

Prospects for 2030

Readers of the Notes du jeudi (Thursday Notes) have been made aware of the question of inequalities as a factor of the world situation by Note nº64, which presented the World Bank’s 2006 World Development Report devoted to the triangular relation between growth, reduction of poverty and reduction of inequalities. [1] The Bank’s analyses on this subject find a new illustration in the prospective report that it devotes to the long-term prospects of the world economy.

The title of this Note is borrowed from Chapter 3 of the World Bank’s 2007 annual report on economic prospects by 2030, entitled “Income Distribution, Inequality and those Left Behind”. The report contributes to the growing awareness of this theme’s importance, since inequalities are only increasing in the world. It offers an explanation of this tendency and attempts to discern its long-term consequences.

I - A Subject of Increasing Importance

The link between growth, poverty and inequalities is increasingly documented, by empirical research work. The interest shown by the World Bank in this subject underlines its importance while stimulating debate. But the Bank redefines the subject by choosing to use the term “shared growth” rather than the traditional one of “pro-poor growth”. [2] This semantic shift marks the priority given to the reduction of poverty rather than the reduction of inequalities. The two approaches intersect in part, however, insofar as the Bank demonstrates that, in some situations, too many inequalities prevent growth from reducing poverty as much as it should, thus from being “shared”.

Thus the World Bank’s Independent Evaluation Group (IEG) has recently produced an analysis of the effectiveness of the Bank’s policies in relation to poverty reduction. [3] The main observation is that, while growth is indeed necessary, certain forms of growth reduce poverty more effectively than others: those that create employment in areas affected by poverty and at qualification levels that make it possible for impoverished populations to access them. On the other hand, according to the study, strategies that aim only to stimulate growth in an overall way run the risk of being oblivious to the possibilities of reducing poverty more effectively.

In other words, it is not a question of opposing the objectives of growth to the objectives of reducing poverty and inequalities or of simplifying the relation between them by asserting that growth is the only solution for reducing poverty. There is indeed a complex relation between growth, poverty and inequalities that deserves to be studied seriously. Operational measures can then be inferred from that study.

II - Inequalities Are Going to Continue to Increase from Now to 2030

Any prospective study is based on data and the use of models, about which one can discuss both the hypotheses and the validity. The figures, tendencies, and proposed analyses aim at assisting the study and not at predicting the future. It is nevertheless interesting to note that the researchers of CEPII (Centre d’études prospectives et d’informations internationales - Center for Prospective Research and International Information) stated, during a presentation of their own similar work based on different models, that their results are not radically different from the conclusions reached by the World Bank.

The Bank’s report takes into account different forms of inequality, between countries and within countries, while confirming that the latter have experienced a clear increase since the 1980s. Has this “intra-country” increase been more than the decrease in inequalities between countries? Despite the accumulation of empirical research by country, the report is unable to bring the debate to a close. From this point of view, the publication of a work on five African countries should be mentioned. It demonstrates the “extent of the inequalities in resources and living conditions” and undermines the cliché on the “traditional redistribution that would come to limit inequalities”. [4]

The twenty-year prospect outlined by the Bank’s researchers is of sustained growth in every region of the world, with fewer people in poverty. Consequently, the significant fact would be the emergence of a large “middle class” (defined as having incomes between the average income of Brazil and that of Italy). From 7.6% of the world population (3.4% in the wealthy countries and 4.2% in the others), this group would grow to 16% by 2030 (1% in the wealthy countries and 15% in the others). For all that, their portion of the income would remain unchanged (around 14%) because the wealthy populations (with incomes higher than Italy’s average income) would likely double (from 10 to 20%) and represent 70% of total income. The projections are the most negative for Africa. Living conditions will noticeably deteriorate compared to other regions of the world, since Africa will represent more than half of the world’s poorest populations as opposed to 30% today.

It is likely that population groups described as “middle class” will become a political force, at the national and maybe international levels, and will seek to influence decisions in their favor, for better education and health systems and for more policies of openness.

From this analysis it is hypothesized that there could be a lasting increase in internal inequalities, at the risk of affecting the influence of growth on the reduction of poverty, increasing exclusion and producing, in return, opposition to globalization. The report estimates that more than 2/3 of the low and medium income countries (more than 80% of the population of the developing countries) would experience an increase in inequalities.

III - Origin and Nature of Inequalities

The report analyzes how the relation between inequalities, growth and poverty is established. When the initial level of inequalities is low, an increase in growth of 1% entails a more than proportional reduction of poverty. On the other hand, where there is significant inequality (for example, in Lesotho or Haiti), growth can have no effect on the reduction of poverty. As a result, policies that encourage an “equitable” distribution of income can allow economies to better exploit the increase in growth to reduce poverty.

The essential factor for reducing inequalities in the next thirty years is, according report’s authors, the way that investment in training will succeed in developing a person’s potential, in particular by allowing him or her to leave agriculture and take on manufacturing or service jobs. For all that, less qualified people will remain whose situation, if it is not dealt with through satisfactory measures, could strengthen inequalities. In any case, there are economic factors (type of growth, creation of non-agricultural employment that is accessible to poor populations) that are going to strongly determine the level of inequalities. From these quite variable situations and combinations, the report tries to create two large categories: countries with initially low levels of inequality and rapid growth will have a tendency to experience increased inequalities while countries with initially high levels of inequality and slower growth could see inequalities diminish.

As for those that will be “left behind”, the poor in 2030, just like today, will not have primary education, will work in the agricultural sector and will live in rural areas. But for all that, circumstances could vary considerably from one country to another: access to education will not guarantee an exit from poverty everywhere in the same way, agricultural incomes might not be lower than incomes in other sectors, etc.

The first major inequality will separate those who depend on poorly paid agricultural activities from those who have succeeded in gaining industrial or service jobs. There will be a second one between skilled and unskilled workers, with an increased gap in pay in most countries in highly volatile and insecure labor markets. This phenomenon will be of more importance in the developing countries than in the developed ones. The report fears that, in a quarter of a century, the great majority of the labor force will be either under-skilled or unskilled. This prognostication can be compared with that made for France by the Centre d’analyse stratégique (Strategic Analysis Center) in a recent report on occupations in our country in ten years. The Center’s Director explains that “in the next ten years, we are going to witness a bipolarized labor market with high skilled jobs, on the one hand, and a significant number of less skilled jobs, notably in service jobs”. [5] In the poor countries, it is likely that “the so-called informal sector will still occupy the largest part of the population for a long time”. [6]

Such inequalities give rise to the fear, according to the report, that there could be an increase in tensions (migration, demands, conflicts, etc.) that could limit the effects of growth and slow down the globalization process without, however, calling it into question. These tensions are not inevitable. International and national public policies can correct these tendencies: international aid is considered to be “pro-poor”. The same is true of the expected trade agreements from the continuation of the Doha cycle. At the national level, there are measures that are both favorable to growth and to equity objectives: more numerous middle classes means more tax revenues to invest in education and for regulation of labor markets, for example.

The report also brings up environmental risks in the same terms. They are very serious and insufficiently taking them into account, as with inequalities, can lead to great risks. On the other hand, a knowledgeable expectation based on such prospects, as well as national and multilateral public interventions that confront presently under-estimated realities, can allow better management of the next wave of globalization, to repeat the sub-title of the report.

Although it has benefited from renewed attention, the link between growth, poverty and inequality is still insufficiently taken into account in development assistance policies. That is why the Haut Conseil de la Coopération internationale (High Council for International Cooperation) has undertaken to organize in November 2007, with the support of the Ministry of Foreign Affairs and the AFD and with the cooperation of the World Bank, a conference on the difficulties encountered in the implementation of the principle of equity. This work will be based in particular on the analysis of concrete cases of “inequity” carried out by the Bank.