French positions

While the World Bank is now publishing its 2007 World Development Report devoted to youth, which will be analyzed in the weeks to come, the Notes du Jeudi (Thursday Notes) re-examine the 2006 edition, which focused on “Equity”. This is a way of emphasizing a document of great importance because, while the theme of poverty had already been dealt with in the 1990 and 2000 reports, the subject is considerably altered by the approach in terms of “equity”.

This Note is based on the critical reading of the report made by the Réseau IMPACT and published by the Ministry of Foreign Affairs in the collection “Partenariats” (Partnerships) of the Direction générale de la Coopération internationale et du Développement (General Directorate for International Cooperation and Development). [1]

The 2006 World Development Report was the first part of a group of three reports written under the leadership of the Chief Economist, appointed to the “DEC” (development economics) Vice-Presidency of the World Bank in 2004, François Bourguignon. This first report, by dealing with the subject of the link between growth and equity, uses an approach long defended by this renowned French researcher.

I. The Report does not Give Up the Liberal Perspective

It would be a mistake to see in the report any kind of break with the Bank’s liberal conception. In that respect, the report is part of the institution’s continuity of thought. On the other hand, the introduction of the subject of equity as a factor of development noticeably enlarges the field of factors that have to be present for the satisfactory operation of the market.

I - 1 — The Liberal Foundation of the Report

The report aims at bringing to light situations of “inequity”. According to this concept, there are persons who would have sufficient human capacities to create wealth but they are unable to do so because of lack of “opportunities”, for example, lack of access to credit, health, literacy, or ways to make social and political demands, etc. This situation, which is more or less equivalent to what is called “inequality of opportunities”, restrains the development of a country. It is not a question of equality of results: individual freedom and responsibility are neither denied nor minimized. This clear distinction between equity and equality (of results) does not prevent there being, in certain passages of the report, a persistent ambiguity between the two concepts.

The report does not question the role of the free movement of goods, capital and persons for creating wealth. The liberalization of trade, investments and migration remains the inescapable determinant of economic development. Policies that stimulate the world economy will purvey more equity than public development aid, thus illustrating the slogan “help, not aid”. The report refers, moreover, to the “commitment to development index” of the Center for Global Development, which evaluates the different policies of the developed countries that are supposed to contribute to development. [2]

If equity is viewed under the angle of improving the living conditions of the population, it is done so only insofar as this improvement is a factor of growth. Moreover, the relation between equity and the Millennium Development Goals is dealt with only very marginally in one area, comparing school enrollments of boys and girls.

I - 2 — Equity as a Factor of Development

The report is based on the observation, illustrated with numerous examples, of growing inequalities in several areas, within developing countries (internal inequalities) as much as between countries (international inequalities). The report attributes part of the cause of these inequalities to inequities. That begins with life expectancy, for which access to drinking water, hygiene, and education for women, counts for more, according to the authors, than income differences. Concerning education, international inequalities - outside of China and India - are growing more quickly than inside countries, the converse of income differences, which have been widening within countries, above all.

The 2006 report, by introducing equity, strengthens the approach that considers poverty to be not purely monetary and takes into account influence capacity, that is, access to power, information, and the banking system without, however, establishing a hierarchy between these different categories. This derives from the standard dichotomy between dealing with macroeconomic problems and social policies. Having done this, since the inequities are inequalities considered unacceptable and counter-productive, the report enters the ethical domain. It focuses on judging certain situations, with all the difficulty entailed by such an undertaking: since values vary from one time period to another and one place to another, there is no universal definition of unacceptable inequalities.

The report has the courage to say that, though it is costly in the short term, equity must be considered as a necessary condition of development in the long term. For example, on the political level, unequal and authoritarian regimes can go hand in hand with sustained economic growth for a certain amount of time, but these two realities are incompatible over a long period.

I - 3 — A Non-Dogmatic Approach

The report not only expands the factors of development, but it takes into account the complexity and diversity of each country’s situation by abstaining from decreeing a theory that is applicable regardless of the context. Concerning outside intervention, it recognizes, in line with the 1998 report “Assessing Aid”, the validity of the concept of selectivity of aid according to “good governance” and the exemplary value of “good practices”. But it also advocates, which is a newer approach for the Bank, the targeting of aid on countries with structural handicaps.

The report abstains thus from decreeing a general law on the relations between growth and inequalities, even if it assumes to detect “inequality traps” that increase the inequalities from one generation to the next. Relying on the contention concerning the negative effects of inequalities on growth, it cites numerous examples, but these have a more illustrative value than demonstrative.

II - Remedies for the Inequities

II - 1 — The Legitimation of Public Intervention

Interventions of public authority are, for the Bank, not only legitimate, but necessary for creating a market or correcting the asymmetries of the market. Nevertheless, on the macroeconomic level, these policies must not, for all that, justify monetary and fiscal laxity.

On the microeconomic level, the report innovates in relation to the standard argument about the vicious circles of State intervention. According to the report, the risks of politically influential actors misusing public policies to their benefit is not reason to condemn governmental measures, but calls for additional measures. The construction of an effective and equitable market economy thus demands, step by step, a multiplicity of public policies at every level, with the intervention of multiple factors. In any event, they are long and complex processes.

The report also recognizes that any liberalization of the economy, internal or external, creates winners and losers. Contrary to the traditional assumption according to which the winners are more productive and thus it is equitable that they make a profit, the report advocates safety nets against poverty for non-competitive producers. But there again, the report abstains from generalizing about the type of public measures to take because of the diversity of cases.

II - 2 — Unexploited Growth Opportunities

The report recognizes that the response is not one-to-one. The economic argument that the poorest, if they had the possibilities, would invest in productive activities at high profits is far from being verified in all situations studied. In some cases, targeting the middle classes can be more effective for economic growth. Since the targeting of all categories that need to be supported is impossible, and a too narrow targeting of the most deprived risks being rejected by the majority of the population, the report favors a “wide targeting” centered on the middle classes but extending beyond to categories of non-extreme poverty. However, it is recognized that this conception of distribution is very ambitious because, in most cases, it is the upper middle classes that benefit the most from opportunities for productive activities.

The report leaves the realm of pure economic constraint by pointing to several factors contributing to inequities that cannot be resolved by simple measures in favor of the deprived. Good governance and accountability of the authorities are necessary but not sufficient: when the imperfections of the market draw their sources, at least partially, from power that is too concentrated, it is necessary to aim at a more equal distribution of power. Discrimination due to inequalities of birth can also call for corrective measures in the short term. The report confines itself, however, to citing specific actions, individually convincing, incidentally (nutritional supplements for babies in Jamaica to ensure normal cognitive development of the children, grants linked to the regularity of school attendance by girls in Bangladesh and Brazil, minimal assurance of health for everyone in Colombia and Vietnam, etc.). But these could easily turn out to be insufficient in relation to more ambitious and longer-term policies such as land redistribution, attitude changes, gradual expansion of socialization of incomes, etc.

II - 3 - The International Dimension of Inequity

The report puts forward the opinion, something new for the Bank, that the failures of developing countries also have their source, and even maybe their principal source, in international inequalities and the policies of the dominant economies that, in fact, undermine the principles of liberalism. It proposes several remedies.

a) Increase in public resources in poor countries is one, whether that be from increased and higher quality international aid, more extensive debt relief that is not followed by new indebtedness or even new modes of public or private financing.

b) Of greater significance for the report is correcting the asymmetries of world markets:

  The developing countries suffer from a liberalization of trade that mixes tariff and non-tariff barriers. [3] According to the report, this situation is reinforced by the freezing of the Doha round and the proliferation of bilateral and regional agreements that lead to the erosion of the non-discrimination principle and make global negotiations, in which the poorest countries are in a better position to negotiate, more difficult.
  The stumbling block of intellectual property rights (the example studied concerns pharmaceutical products) could be overcome by giving the developing countries authorization to import or produce generic molecules when the research costs are already supported by the markets of the wealthy countries.
  The desirable diversification of capital flows [4] is mentioned, but without any solutions being advanced.
  Finally, migration is given a major role in the international management of equitable development, in certain conditions, among which is the development of temporary host systems in the wealthy countries.

c) The strengthening of equity in world governance should be pursued in several ways:

  Without using the expression, the report deals with supplying world public goods, based on the principle of a joint, but differentiated responsibility. It treats this question by advocating the move from a “corrective” justice to a “distributive” justice (international human rights, sharing of scientific benefits, etc.).
  The report criticizes inequalities of power in international negotiations.
  The mechanisms of applying international agreements should be strengthened.

  International organizations should be strengthened.

The great interest of the report is that it builds a compromise, in terms of the fight against poverty, between the supporters of the priority of economic growth and the supporters of the priority of redistribution. The two are necessary within the context of a “redistributive growth”. The recognition by the Bank’s report of a more complex process at work in development and its refusal of one-of-a-kind solutions contrasts sharply with the more standard doctrines traditionally recommended.

The operational expression of these theses within the World Bank has yet to be established, whether this be in working out second generation strategic frameworks for the fight against poverty, planning projects, supporting public policies or consequences in terms of governance. This is why the Ministry of Foreign Affairs and the High Council on International Cooperation have decided to explore the subject of the difficulty of implementing the principle of equity during a conference planned for the end of 2007, while proposing to the World Bank that it join them. There will be a follow-up in a future Note du jeudi.