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Special report: development
Why equality was the best policy
The international community is still feeling the effects of Europe's colonisation of the New World, reports Heather Stewart Sunday September 25, 2005 The Observer When Christopher Columbus stumbled across America in 1492, he opened the way to a centuries-long struggle between the European powers to control and dominate the New World, from the frozen north of Canada to the fertile plains of Argentina.
But for the authors of a sweeping new report from the World Bank, the triumphant arrival of Columbus also inaugurated a real-life economic experiment, whose lessons are still relevant today.
The authors of the World Development Report use a wealth of examples from across the globe and through the centuries, to prove that in general, fairer economies are more successful. Inequality is not only unfair - it also wastes resources and stifles economic progress. The Spaniards who colonised South America, with its gold and silver deposits and large indigenous population, were able to impose punitive taxes, slave labour, and political institutions that kept power in the hands of a wealthy few. Though enormously lucrative in the short term, this approach squandered resources, fostered political instability and handicapped the region's economies.
In North America, meanwhile, where there was a sparse native population that refused to submit to slavery and no lucrative gold reserves to exploit, resources had to be divided more equally in order to keep the European settlers alive and happy. In Virginia, for example, by 1619 the Virginia Company had created 'a relatively egalitarian society, with representative institutions giving even the poorest colonists access to the law and some political representation'. That meant that even the poorest had a stake in the country's success: and it worked, laying the foundations for what would become the world's richest, most successful economy.
'As in Latin America, there was a synergy between economic and political institutions, but this time it was virtuous, not vicious.'
Research suggests that 'good' institutions - those that divide resources relatively equally, and guarantee property rights - are more important in explaining the economic success or failure of a country than its geographical position, or whether it is ridden with diseases. 'Most of the gap between rich and poor countries today is due to differences in institutions.' Giving the poor a fair share in the economy is therefore the best recipe for success.
Francisco Ferreira, the report's lead author, says this lesson has immediate relevance for today's developing countries. An increase in the gap between rich and poor is sometimes excused as an inevitable by-product of economic development, the price developing countries have to pay to climb out of poverty. But Ferreira says that's simply wrong: leaders who sit and wait for the mythical 'trickle-down effect' to pour wealth through the economy will fail.
'We hope this report will change the perception that people often have that the poor are almost charity cases, and the rest of the country generates growth,' he said. 'You shouldn't see those people as an ocean of unskilled labour. You should see them as a pool of potentially skilled individuals. Think how many brilliant inventors there could be in sub-Saharan Africa or in the slums of Latin America.'
'Some people tend to think of an alternative, between policies to redistribute, and policies to grow, and there's no such thing. There's a whole set of policies that can help growth by redistributing.'
A jog through European history since the Middle Ages also supports the argument of Ferreira and his colleagues. In Britain, they argue that the industrial revolution only gave way to sustained long-term growth when mass democracy arrived in the 19th century. That helped to pave the way for more widely available education, and allowed more of Britain's population a share in its economic success.
China's extraordinary emergence as an economic powerhouse - GDP per capital has quadrupled over the past 25 years - is also held up as an illustration of the importance of equity in supporting growth. Under Deng Xiaoping's leadership, in the 1980s, economic decision-making was decentralised to local governments and individual businesses and farmers, as the failures of post-war central planning became clear.
Although the political stranglehold of the Communist Party over China has not relaxed, Ferreira says opening markets and spreading wealth more widely has been crucial.
'We actually see China, particularly in the early 1980s, as an example of what we argue for here: a combination of equity and markets.'
In many parts of the world, that combination is a long way off - and so, as a result, is sustained economic development. Those who are excluded, because markets don't work properly, or the legal system doesn't protect them, can fall into 'inequality traps', held back by their ethnic group, income level or sex, and unable to improve their own prospects or contribute to their country's expansion.
'With imperfect markets, inequalities in power and wealth translate into unequal opportunities, leading to wasted productive potential and to an inefficient allocation of resources.'
Poor rural villagers in India pay rates of interest four times as high as their richer neighbours, for example. Ferreira and his colleagues say part of the difference reflects the higher risk of lending to people with fewer assets; but much of it results from the fact that the credit market doesn't work properly. Many villagers pay interest rates of 100 per cent.
That means that instead of being directed by the 'invisible hand' of the market towards the most useful investments, resources are poured into the projects of the rich - and wasted. 'Because the poor cannot borrow, the non-poor cannot lend as much as they would like to. And because the non-poor cannot lend, it makes sense for them to keep investing in their own firms, even when the returns are low.'
The report is littered with shocking examples of the inequalities in income, opportunities and life chances faced by people within individual countries, and between one part of the world and another - and the resources that are wasted as a result.
A black boy born to a poor family in South Africa is twice as likely to die in his first year as a white boy born to educated parents. And he is likely to live to just 50, against 68 for his white counterpart. In Uttar Pradesh, in northern India, 60 per cent of women have to ask their husband's permission before leaving the house. In Ecuador, the educational level of children as young as six has been found to depend on their parents' educational level, perpetuating inequities through generations.
Ferreira and his colleagues are not suggesting this rag-bag of wrongs can be righted overnight, but they do argue that sharing wealth and opportunity more equally is a good first step to achieving long-term economic progress. They want developing-country governments, rich donor countries, and their own colleagues at the World Bank, to try looking at the world through an 'equity lens'. It's a peaceful, patient and pro-market revolution. It's a long-haul,' Ferreira says.
ยท World Development Report 2006 - 'Equity and Development', World Bank: available at www.worldbank.org |
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