World Institute for Development Economics Research

December 1999 No. 2/99

WIDER - Past, Inequality is Rising Present, and Future by Giovanni Andrea Cornia fter four and a half years at UNU/WIDER, on 1 January 2000 I will be returning to Florence and the InnocentiA Research Centre of UNICEF as well as to teach development economics at the University of Florence. The Institute that I joined in August 1995 was a mixture of long-standing academic prestige and short-term (but potentially damaging) problems. The latter included declining funding, poor relations with the host country and donor community, and limited contact with the policy- making and UN communities. Most of all, UNU/WIDER needed to rejuvenate its research agenda by focusing on Professor Anthony Atkinson presenting the epochal changes that started in the late 1980s. the 1999 WIDER Annual Lecture in Oslo any countries are experiencing an increase in These problems need to be seen in the context of the hard income inequality. This phenomenon, and its work of my two predecessors, a first rate local staff and the Mcauses, was the subject of the 1999 WIDER Annual many scholars - from over 80 countries - who participated in Lecture entitled ‘Is Rising Income Inequality building the Institute’s research in the first ten years of its Inevitable? A Critique of the Transatlantic life. During that time, UNU/WIDER earned a good Consensus’, given by Professor Anthony Atkinson, reputation for its research standards, particularly in the fields Warden of Nuffield College, Oxford University. of famine, trade and unorthodox macroeconomics. Professor Atkinson is an authority on income Recent Years inequality and its measurement. He summarises the main themes of his lecture on pages 3 to 4 of this With this valuable inheritance in mind, and conscious of issue of Angle. the problems, we concentrated our efforts on creating a new research agenda, improving research management and The Lecture, delivered on 1 November 1999 in Oslo increasing the policy impact of UNU/WIDER research. Norway, was sponsored by the Royal Ministry for Foreign Affairs of Norway and hosted by the Centre Much of the ‘old’ research agenda - especially poverty and for Development and Environment (SUM), unequal international relations - remains valid and must be University of Oslo. Dr Desmond McNeill, Director of pursued with renewed vigour. Rural poverty remains SUM, opened the lecture and Norway’s State resilient, basic social services still reach too few people, and Secretary for International Development and Human Africa continues to be marginalised. Rights, Dr Leiv Lunde, gave the welcoming address. But new problems have emerged. The number of humani- Professor Giovanni Andrea Cornia, Director of UNU/ tarian emergencies has risen alarmingly over the last WIDER chaired the meeting. A large audience decade, and conflict prevention as well as the attended the Lecture, which was reported in the reconstruction of war-torn societies are controversial. local media. Furthermore, the widespread failure of the transition to a UNU/WIDER thanks Dr Lunde, Dr McNeill, the market economy in Eastern Europe and the former Soviet Ministry, and SUM for enabling this event to take Union is both unexpected and largely unexplained. And so place. (continued on page 2)

The United Nations University too is the surge in inequality seen in mists from UNCTAD, ILO, the IMF, realism is in order. Sustaining these the last two decades. In turn, World Bank, IADB, ECLAC, UN results requires hard work (including globalization can create instability, secretariat, UNDP, ECA, and AERC - recruiting a steady flow of and is taking place in a global to name just a few. For instance, the scholars, especially from the less regulatory vacuum. The benefits of much-cited 1998 Annual Lecture by privileged countries), imagination and information technology remain Professor Joseph Stiglitz did much to a bit of luck - like the great elusive, and its impact on work is promote our research within the empires, institutions rise and fall! The unclear. These issues are therefore World Bank. research focus must also keep up with featured in the Institute’s new a rapidly changing world. UNU/ Second, our new publication research agenda. WIDER must do even more to series - the Policy Briefs - is targeted enhance its policy impact and Since 1995-6, UNU/WIDER has aimed at decision-makers. The brief on broaden the reach of its output by to increase the core of its complex humanitarian emergencies organising a greater share of resident scholars so as to have the circulates widely and has been cited activities outside Finland. critical mass of researchers - and the by the UN secretary general. Third, fruits of interaction - found in we reduced the time to prepare Finally, if policy and advocacy are to university economics departments. Our research is now more cost-effective with earlier deadlines for completion. Previously, it often took up to 5 or 6 years to complete a research project and disseminate its findings - thus limiting its policy impact. Now the aim is to contain research within a biennium by more actively supervising its progress – without sacrificing its quality. Reducing low-priority expenditures, cost sharing with sponsors, flexible contract arrangements and the elimi- nation of a few support-staff positions have increased the cost- effectiveness of our research. These savings went into expanding the Andrea Cornia with participants of the ‘Rising Inequality’ project in June 1999 research and training programme, increasing the number of resident research for publication, and early be emphasized, then organising joint research staff, and launching new results are available via the web policy seminars and research activities - the Mini-Sabbatical, Short- (www.wider.unu.edu). These dissemination with other influential Visits and International Internship efforts, and early dissemination to the actors is one way forward. Some of programmes, as well as the international media, have made us these efforts can be shared with UNU. prestigious Annual Lecture, and the more visible to policy-makers. Closer contacts should also be made Public Lectures. These endeavours with the NGO community which has have generated much goodwill among The Future considerable strength in mobilising donors – the numbers of which rose international public opinion on key fourfold between 1995 and the end of UNU/WIDER’s main assets are a development issues. 1999. core endowment, an independent Board, and strong ‘reputational I have enjoyed my years at UNU/ The Institute’s size, limited outreach capital’. These assets, together with WIDER. I leave feeling proud of capacity and geographical remote- the hard work of its staff and having served as its Director, and I ness have traditionally limited its network, have enabled us to further am confident that the Institute will policy impact. My tenure as Director sharpen the Institute’s reputation for continue to play its role in the saw new initiatives in this area, but analytical rigour, independence and research community, UNU and the much remains to be done. First, progressiveness - features that are global development debate. social scientists from international not all that common among research organisations with policy influence centres in national and international Professor Giovanni Andrea Cornia and outreach capacity are now institutions. was Director of UNU/WIDER from involved in our research. Every year, August 1995 to December 1999. He since 1996, the Institute has counted I am therefore optimistic about the is now Special Adviser to the Deputy on the contribution of some 30 econo- Institute’s future. That said, some Executive Director of UNICEF.

2 Is Rising Income Inequality Inevitable? by Anthony Atkinson

ncome inequality is rising in a large number of industrialised countries.I The phenomenon first attracted attention in the United States, where inequality began to rise in the 1970s, but the increase in the United Kingdom is even greater. The figure shows data on the Gini coeffi- cient - the most widely used measure of income inequality. This varies between 0 when everyone has the same income to 100 per cent when one person has all the income. In the UK case, the Gini coefficient rose by some 10 percentage points from around 23 per cent in 1977 to 33 per cent in 1990 (concepts and definitions are discussed in more detail in the full text of the lecture available at www.wider.unu.edu). However, the experience is not uniform across the OECD - the extent and timing of the increase has varied across countries. Income inequality has increased sharply in New Zealand, and has risen in Germany and the Netherlands, but France shows little upward trend in the inequality of disposable income. This variety of country experiences suggests that policy matters. The Transatlantic especially imports from low-wage It is best to describe changes in Consensus developing countries - weaken the inequality in terms of ‘episodes’ demand for unskilled labour in the when inequality rose or fell, rather There is a widely held belief that developed world. to talk of ‘trends’. Thus in the UK rising income inequality is case, there has not been a continu- inevitable; technological change and However, the Transatlantic ous upward trend. Rather, the UK the globalization of world trade are Consensus is open to question. The experienced an episode of rising the most frequently cited culprits. rise in inequality is neither universal inequality from 1977 to 1989, but This view is common on both sides nor of the same extent across from 1990 onwards inequality of the Atlantic, particularly in key countries. Where there has been a showed little trend (see figure). The policy-making institutions. The rise, it has not happened at the same 1990s do not look like the 1980s ‘Transatlantic Consensus’ holds that time. Moreover, in some countries in the US and the UK. Therefore, to increased inequality in the United the rise in inequality takes the form describe recent experience as an States and high unemployment in of steps - increases followed by inexorable trend is potentially Continental Europe are due to a shift plateaux - rather than a continuing misleading - in particular it leads too in demand from unskilled workers to trend. This indicates that the world readily to explanations which focus skilled workers, whether due to is working in more complex ways than on technology and trade, and too technology, trade or both. For some those described in simple little on policy. economists rising inequality is driven technological and trade explanations. by the revolution in information Indeed the models themselves are too technology. For others, trade - simple. For instance, separating

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3 (continued from page 3) workers into just two categories - generosity (or not) of unemployment an alternative story which sees the skilled and unskilled - reflects the benefits. rise in inequality in market incomes industrial economy of the nineteenth as the product of changing social How far has fiscal redistribution century, rather than that of the norms resulting in a shift away from offset any rise in inequality in century now ending. Rather, there is a redistributive pay norm to one market incomes? Canada provides an a continuum of earnings reflecting a where market forces dominate. illuminating contrast with the UK. In continuum of skills. Moreover, the Social conventions in the labour Canada, the Gini coefficient for models of the Transatlantic market have changed within market income rose by some 5 Consensus see wage-differentials as countries, and these have spilled out percentage points over 1980 to 1994, nothing more than the outcome of into other spheres, most notably in whereas that for disposable income supply and demand - thereby national tax and benefit systems. But did not show a significant increase. ignoring the role of conventions and the fact that the driving force is In the UK, however, the income social norms. social in origin - rather than trade taxation system became less or technology - means that there is More insightful economic theories progressive after 1984 and benefit more scope for political leadership. draw upon the work of sociologists levels and coverage were reduced. Social norms can be influenced by to argue that supply and demand Thus inequality in disposable policy decisions, and thus rising only place limits on possible wage income rose much more strongly inequality is not inevitable. differentials, while social forces than that in market income. determine where wages actually lie between those limits. These models Such differences in outcomes Key Conclusions also indicate that support within suggest that national governments society can at times shift away from do have room to manoeuvre. While Income inequality has pay norms - for example the the pressure of international fiscal increased sharply in adoption of performance-related pay competition is often cited as limiting the scope for income redistribution some, but not all, OECD in the public sector can affect countries private-sector wage setting - by government, this is far from self- evident, as I argue in the 1999 UNU/ leading to widening wage Trade and technology are differentials. WIDER Annual Lecture. Workers who perceive that taxes are overemphasised as Redistribution Can Offset lower in other states may react, not determinants of earnings Market Inequality by migrating, but by demanding inequality (through the political system) lower What people are paid in the market taxes at home. This, rather than trade Social norms are crucial place is not the only factor determin- or technology, may be the most determinants of income ing the distribution of income. important restriction on the inequality Market outcomes are significantly freedom of national governments to modified by income taxation and by carry out social protection. Progressive taxation and social transfers financed out of the Changing social norms regarding transfers can offset rising government budget. pay - a potential cause of rising inequality in market To see this, let us suppose for the inequality in market incomes - may outcomes moment that the Transatlantic also lead societies to shift away Consensus is right about the cause from fiscal redistribution. Tax and Policy can influence of rising inequality. If demand has benefit policy thus reinforces, social norms - thus rising rather than moderates, rising shifted away from unskilled workers inequality is not inevitable in economies with very flexible market inequality. labour, then progressive income Rising Inequality is Not taxation should moderate the impact Editors Note: This article is a on income inequality - the Gini Inevitable summary of the main arguments of coefficient of disposable income The Transatlantic Consensus sees the 1999 WIDER Annual Lecture would rise less than that of market rising inequality as the product of delivered on 1 November 1999 in incomes. Outcomes would differ exogenous, inevitable events with an Oslo by Professor Atkinson. The full across countries depending on the emphasis on technology and trade - text of the lecture is available degree of progression of national including trade with the developing on UNU/WIDER’s web site income-tax systems. Outcomes will world. There is nothing to be done (www.wider.unu.edu). The lecture also vary depending on national about rising market inequality. It is is also available as a UNU/ variations in the importance of pure supply and demand. WIDER publication (see page 15 non-wage income sources in total for details of how to order our But in this Lecture I have described household income, and the publications). BY INVITATION Global Inequality by Richard Jolly

he gap between rich and poor - the rich as well as the poor. of investment according to OECD. nations is now at its highest ever Many of the poorest countries level.T OECD Research by Angus Too Few Transfers remain highly unattractive to private Maddison shows that differences in The growth of global inequality capital, notwithstanding their per capita income between the should surprise none of us. The longer-term development potential. richest and poorest countries were present international system lacks Moreover, protectionism in the only just above 3 to 1 in 1820 (with almost all of the mechanisms that industrial countries - especially in income measured in dollars and at exist within the developed world to agriculture which affects the export constant prices). The gap grew over support marginalised groups and prospects of the poorest countries the 19th century: slowly at first, and offset inequality between regions. Aid - hinders efforts to close the global then more rapidly until 1913. transfers could fulfil this role, as they income gap. Other constraints Inequality between nations did under the Marshall Plan when, for include the concentration of continued to grow over the four years, some 2 per cent of US GNP scientific and technological twentieth century, accelerating over the last forty years. The ratio of the Photo by F. Mattioli, FAO average GNP per capita (1987 prices) of the richest countries with a fifth of the world’s population, to the GNP per capita of the poorest countries with a fifth of the world’s popula- tion, grew from 30 to 1 in 1960 to 60 to 1 in 1990, and to 74 to 1 at present. The OECD projects that the gap will grow even larger. The figure (on page 6) shows the dramatic difference in national fortunes. Today, more than 80 developing and transition countries have per capita incomes lower than ten or more years ago. Twenty have per capita incomes lower than in 1960. These 80 countries contain some 1.2 billion Global inequality is associated with hunger: children in Bhutan people, nearly a quarter of the world’s population. was transferred each year to Europe. research on the problems of Aid was also important in the early industrial countries, the long-term Global inequality has largely slipped growth of South Korea and Taiwan. shift in the terms of trade against from view over the last two decades. But at barely 0.2 per cent of global commodity producers, and Yet the conclusions of the income, aid cannot achieve its the deterrent to investment posed International Commission chaired by potential. by corruption. the former Canadian Prime Minister Lester Pearson in 1969 are still valid: It is true that private capital flows Closing the Gap “The widening gap between the have grown rapidly. But private developed and the developing capital flows to developing countries How can global inequality be countries has become the central are skewed towards a few Asian reduced? International transfers problem of our times”. Global economies. Just 12 developing have a role – but the primary inequality exacerbates political countries account for 80 per cent of long-run solution must be instability in poor nations, investment flows from the industrial accelerated rates of pro-poor encourages migration to the rich world to the developing world. The growth by developing countries world, damages the environment and developing world as a whole has themselves. All the least developed facilitates the spread of diseases relied on foreign savings to only a countries need to reach a minimum such as HIV/AIDS and TB. Global very limited extent: 1.5 per cent in long run annual growth rate of 3 per inequality therefore affects everyone terms of GDP and 6 per cent in terms cent per capita - a target set out in (continued on page 6) (continued from page 5)

UNDP’s 1996 Human Development The OECD, the IMF and the World There is no shortage of ideas about Report. Growth must also be Bank now pay more attention to what to do and how it could be done. pro-poor and directed to poverty reduction. This is to be The challenge is political rather than human development. This requires greatly welcomed. But given the technical. When Nobel Laureate Jan large-scale investment in primary existence of enormous inequality on Tinbergen made the case for education and basic health care. But a global scale, these institutions international transfers he concluded national efforts alone will be need to do more. As a practical step, that “.. the idealists of today are insufficient. International action to they should be asked to monitor the often the realists of tomorrow”. We close the gap is crucial. The decline global gaps between the industrial should heed his words. in Official Development Assistance countries and the main regional (ODA) must be reversed and the groups of developing countries, and decline in the share of ODA going to report regularly on the progress of the 43 poorest and least developed the less developed countries in Dr Richard Jolly is Principal countries must be halted and achieving the 3 per cent per capita Co-ordinator of the Human reversed. More must be done to growth target. Development Report and Special encourage private investment in the Many people find it difficult to Adviser to the Administrator, United poorest countries as well. imagine a return to real growth in aid Nations Development Programme. flows - public opinion appears to be Further information on UNDP and against it. But UNDP recently and its work can be found at vigorously restated the strong case More than 80 developing www.undp.org. Summaries of - both in principle and in practice - in the 1999 Human Development and transition countries favour of international support for Report can be found at have per capita incomes global public goods. If the OECD www.undp.org/hdro. countries removed perverse lower than ten or more subsidies which damage the For details of the new UNU/ years ago. Twenty have environment then up to $ 600 billion WIDER database on inequality see per capita incomes lower per year could be released for page 12 of this issue of Angle, or go to our website www.wider.unu. than in 1960. investment in global environmental protection and for human development in poor countries.

6 Transition’s Social Costs by Vladimir Mikhalev

he transition to a market small group consists of the managerial, and professional middle economy in Eastern Europe and nomenklatura, enterprise managers class has grown rapidly - despite the theT Former Soviet Union (FSU) has and younger professionals who widespread perception that there is been associated with increased have adjusted to the new situation. no middle class in post-communist inequality and social stratification. societies. The available data suggest Rising income inequality has been Living standards have fallen for the that about 6 per cent of Russians associated with profound changes majority of people, unemployment belong to the ‘rich’ or upper class, in social structures. Socialist and poverty are high, the distribution and 29 per cent to the middle class. societies were stratified into ‘status of assets and earnings has changed Despite the rise of the new elite and groups’ in which social capital rather radically, and social benefits have the middle-class, the most numerous than economic capital - and social fallen. The social distance between group consists of blue-collar networks rather than market power - the ‘winners’ and ‘losers’ of the workers, farmers, and state-sector determined a person’s status. These reforms has widened dramatically. employees. In Russia, this group status groups have been replaced by The UNU/WIDER project on ‘Income accounts for 65 per cent of the new social classes in the transition Distribution and Social Structure population. About 8 per cent of this to a market economy. People’s during the Transition’ analyses trends group consist of the most socially prospects in life are now largely in social stratification and their causes deprived and marginalized people determined by their possession of with the aim of improving social policy in the transition countries. Photo UNICEF Finland Social structures have been deeply affected by macroeconomic and social-sector reforms. Differences in transition strategies across countries - and thus differences in the duration and length of recessions and inflation episodes - are important determinants of changes in social stratification. Social polarisation was further intensified by privatization - which shifted assets towards the wealthy - and by the rise in earnings inequality associated with changes in labour markets. Moreover, the collapse of the state created an administrative vacuum leading to the erosion of the social security system and a worsening situation for Abandoned child born to an HIV positive mother in Kaliningrad, Russia society’s most vulnerable people. assets, goods and income opportu- who are in long-term poverty - their Social Inequality has nities. Change has been widespread, number has risen in the transition. Risen Steeply but it is not yet complete. Post- The FSU countries have seen communist economies remain mixed In summary, there are some common inequality climb to levels systems in which markets coexist trends across countries. But the comparable to Latin America. In with limited redistribution through UNU/WIDER study also highlights Bulgaria, Russia and the other FSU the state. Mutual self-help also significant differences. Thus, the countries, poverty now engulfs a underpins the informal safety net. slowly reforming economies of the FSU now have very high inequality third and, in some cases, half the This new pattern of social stratifica- and social polarisation. Central population. Unemployment is a tion is becoming clearer, although Europe’s transition countries have significant cause of poverty. there are serious methodological and shown smaller increases in income Moreover, many pensioners are poor data problems in estimating its size. inequality; their successful reforms together with many children living in First, there is a new elite - the resulted in the early resumption of large and single-parent families. In product of emerging capitalism. economic growth. contrast, a new elite has arisen. This Second, the new commercial,

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7 Inequality is Higher in FSU Changes in Income Inequality than in Central Europe in FSU and Eastern Europe To deepen our understanding of these contrasting experiences, the UNU/ WIDER study selected seven countries as case studies: Czech Republic, Kyrgyzstan, Poland, Romania, Russia, Ukraine, and Uzbekistan. These differ in their initial conditions, reform strategies, income-distribution patterns and evolving social structures. Six of the seven countries can be viewed as pairs; they have very similar initial conditions, but followed different reform strategies and/or exhibit different macroeconomic and social outcomes. These pairs are: Russia and the Ukraine; Poland and the Czech Republic; Uzbekistan and Kyrgyzstan. The project’s findings confirm that the Central European countries did not experience extreme social polarisation. The gap between the elite and the rest of society - and the size of the severely deprived group - is less than in the FSU. Many professional workers, especially the young, have successfully entered the market economy. In contrast, an extremely wealthy and powerful economic elite Source: UNU/WIDER World Income Inequality Database has emerged in Russia and some other FSU countries; this is coupled with the impoverishment and deprivation of many of the population. An extremely Social Polarisation in Transition Economies skewed income and asset distribution impedes the formation of a middle class Recession, inflation and privatization have increased - losers from transition largely inequality outnumber the small and heterogene- ous group of winners. New social classes have replaced old status groups Social Polarisation must be A new elite and a middle class have emerged alongside Reduced the socially deprived Social polarisation in the FSU has large Central Europe shows much less social stratification economic costs. Not surprisingly, than the FSU corruption and crime in the FSU is more widespread than in Central Europe Social polarisation holds back economic prosperity where inequality has risen by less. Thus, a more active social policy - promoting better livelihoods and more investment in human capital - could have large economic returns. But there Dr Vladimir Mikhalev is a UNU/WIDER Senior Research Fellow, and directs is also a need for more effective public the Institute’s project on ‘Income Distribution and Social Structure during transfers and income redistribution the Transition’. Details of this, and other UNU/WIDER projects, are available policies to alleviate and reduce on the web site (www.wider.unu.edu). poverty. Social cohesion cannot be ignored.

8 Conflict Prevention: Tackling Horizontal Inequalities by Frances Stewart he number of humanitarian with causation working both ways - resources and social access. In every emergencies has been from conflict to low incomes and from one of the case studies, there were escalatingT since the early 1990s. low incomes to conflict. But the most sharp group differences in political Between the early 1980s and the mid- important element seems to be power - usually at every level, 1990s, humanitarian crises rose from horizontal inequality, i.e. inequality ranging from the top leaders around 25 a year to around 70, with among groups in economic, social including the cabinet, to the military, an increasing number of deaths from and political access and resources. the civil service, the police, and so fighting, famine and disease, as well on. But these political differences Groups are generally differentiated as mass displacement. These were in turn associated with sharp along cultural dimensions, for humanitarian crises are mainly the economic and social differences; in example religion (Northern Ireland), result of internal wars. They are to Cambodia and El Salvador land was tribe (Rwanda and Burundi), clan be found in all parts of the world: in distributed very unequally among (Somalia and Afghanistan), but Asia (for example Afghanistan and groups. In many countries, sometimes class (Cambodia and Sri Lanka), in Africa (Sierra Leone, educational access was sharply El Salvador) or region. Group and Somalia - to name just two), in differentiated - including Rwanda, Latin America (for Photo Yugoslavia/Lemoyne, UNICEF Burundi, and Kosovo. instance Colombia) and, of In each case, policies of course, the Balkans. Not deliberate exclusion from only do these wars cause access to education were huge suffering as a result adopted in order to of the fighting and prevent identified groups the consequent human progressing economi- flight, but they are also a cally and politically. major cause of underdevel- These horizontal inequali- opment and poverty. ties are a major cause of Indeed, eight out of ten of war, especially when they the countries with the are consistent along a lowest income per capita number of dimensions have been at war in and when they are the recent past, or are widening. so today. In the interna- Policies to prevent con- tional community’s fight flict must address these against world poverty - horizontal inequalities, now the central War in the former Yugoslavia left many homeless people ensuring inclusive and objective of the World differences arise in part from balanced participation not only in Bank and the UK’s Department for genuine cultural differences that political power, but also in the International Development - the have developed historically. But they economic and social spheres. The prevention of such wars needs to be are accentuated, and sometimes need to reduce horizontal giventhe highest priority. created, by ambitious leaders who inequalities should be a prime A recent UNU/WIDER research wish to use such differences as ways criterion of aid in all conflict-prone programme ‘The Wave of of mobilising people to fight, to countries, and should also inform the Emergencies of the Last Decade’ has further their own ambitions. The policy debate with governments in explored the economic and social Balkans presents many clear such countries. Yet at present, causes of civil wars, alongside the examples. Yet ethnic or religious neither political conditionality (which more accepted political and cultural differences do not cause conflict insists on majoritarian democracy, factors. The study - which includes unless they are associated with which can exclude minority groups) a dozen case studies - confirms that differences in access to political nor economic and social it is the interaction of economic and power, economic assets and conditionality as practised by the social factors with political and incomes, as well as social access (to IMF and the World Bank, cultural divisions that leads to education and health services, for incorporates considerations of large-scale conflict. Low and example) and social indicators. horizontal inequality. The IMF and stagnant per capita incomes are the World Bank give priority to Political power is clearly important, predisposing factors - in fact over economic efficiency and poverty particularly as it is usually an half of the least developed countries reduction in their policies - these will instrument for acquiring economic have been subject to major conflicts, only coincidentally improve (continued on page 10)

9 (continued from page 9)

horizontal inequality. The same is true UN Secretary-General cites of the unregulated market, widely UNU/WIDER’s Conflict Research promoted by the international Photo by Pekka Elomaa community. Explicit policies are needed to correct horizontal inequalities. “A recent study A few countries with sharp completed by the horizontal inequalities have recognised the need to take United Nations corrective action to sustain political University shows stability; Malaysia is a prime that countries example. The New Economic Policy that are afflicted introduced in the 1970s effectively corrected much of the imbalance by war typically between Malays and Chinese and also suffer from probably prevented ethnic conflict. inequality among Today, South Africa is recognising the need for such an approach, but domestic social has so far only partially implemented groups” it. But elsewhere, the need to reduce horizontal inequality should be a central aspect of policy towards conflict-prone countries. These UN Secretary-General Kofi Annan with Giovanni Andrea Cornia during his visit to include all low-income countries UNU/WIDER in August 1997 (because of their high propensity to this, rather than poverty, that seems conflict), any country which has n his report to the Fifty-fourth to be the critical factor. The experienced significant violent Session of the General Assembly, I inequality may be based on conflict over the last thirty years, and UN Secretary-General, Kofi Annan, ethnicity, religion, national identity any country where horizontal discussed the importance of under- or economic class, but it tends to be inequalities are evidently high. standing the causes of conflict as a first step to successful prevention: reflected in unequal access to Professor Frances Stewart is the political power that too often Director of Queen Elizabeth “The causes of war are inherently forecloses paths to peaceful change. House, Oxford University and a co- more difficult to explain than those of Economic decline is also strongly editor of the volumes resulting natural events. Social behaviour is not associated with violent conflict, not from the research project on ‘The subject to physical laws in the same least because the politics of a Wave of Emergencies of the Last way as cyclones or earthquakes; shrinking economy are inherently Decade’, with Professors E. Wayne people make their own more conflictual than those of Nafziger and Raimo Väyrynen. history, often violently and sometimes economic growth. In some instances Policy Brief No.2 summarises the inexplicably. Causality is therefore the impact of radical market-orientated main findings. Policy Briefs are complex and multi-dimensional, and economic reforms and structural available free of charge (see page it differs, often fundamentally, from adjustment programmes imposed 15 for ordering instructions or war to war. without compensating social policies visit www.wider.unu.edu). We can, however, identify some can undermine political stability. conditions that increase the More generally, weak Governments - probability of war. In recent years and, of course, so-called failed States poor countries have been far more - have little capacity to stop the likely to become embroiled in armed eruption and spread of violence that conflicts than rich ones. Yet poverty better organized and more legitimate per se appears not to be the decisive Governments could have prevented factor; most poor countries live in or contained”. peace most of the time. Source: United Nations ‘Report of the A recent study completed by the Secretary-General on the Work of the United Nations University shows that Organization’, General Assembly, countries that are afflicted by war Official Records, Fifty-fourth Session, typically also suffer from inequality Supplement No. 1 (A/54/1), among domestic social groups. It is paragraphs 15-18, page 2.

10 Public Events entering dangerous waters without policies of developing countries, in the map and compass that particular for members of Africa’s co-ordinated global action could CFA Franc Zone. Other effects of provide. In particular the poorest EMU include its impact on world developing countries have little commodity prices - an issue of influence in the global management especial importance to low-income of crises, and suffer unduly from its countries which are dependent upon effects. Thus, Mr Ricupero primary commodity exports. These concluded that policies and were just some of the issues measures of a purely national discussed in a stimulating and lively character will do little to address debate. problems originating at the global level. Recent Support to EMU and the World WIDER Economy Sponsorship of the 1999 Annual Lecture by the Royal Ministry for he introduction of the single Foreign Affairs of Norway, Rubens Ricupero currency (euro) will affect facilitated by Dr Leiv Lunde economicT integration and social Crisis of Development (State Secretary for International conditions in Europe as well as the Development and Human or Crisis of Globalized functioning of the international Rights), is a result of recent Markets? financial system - and thus efforts to expand Nordic support conditions in developing and to UNU/WIDER. These efforts he Asian economic crisis transition economies. These and aim to promote co-operation and of1997-1998 - the effects of other effects of the European increase the Institute’s visibility, whichT spread to Latin America and Monetary Union were discussed on as well as the impact of its re- Russia - started as a financial crisis, 11 November 1999 at a UNU/WIDER search, among scholars and but quickly took on larger meeting on ‘EMU and the World policymakers in the region. On 1 dimensions. It disrupted interna- Economy’. November the Royal Ministry tional trade, caused serious The topic was addressed by a provided an opportunity for recession, and had major social costs. distinguished panel consisting of Professor Giovanni Andrea The challenge posed by such crises, Esko Aho, Member of the Cornia and Professor Matti and the wider issues raised by Finnish Parliament, Tommaso Pohjola to present UNU/ instability in global markets, were Padoa-Schioppa, Member of the WIDER’s work and research addressed by Mr Rubens Ricupero, Executive Board of the European programme to a special seminar UNTAD secretary-general at a Central Bank, György Surányi, attended by key persons in UNU/WIDER public lecture entitled President of the National Bank of Norway working on development ‘Crisis of Development or Crisis of Hungary, and Charles Wyplosz, issues. Globalized Markets?’ on 1 Septem- Professor of Economics, University In December, the Finnish ber 1999. of Geneva. The meeting was chaired Ministry for Foreign Affairs made Mr Ricupero emphasised the need by Giovanni Andrea Cornia, a financial contribution in to replace current ad hoc responses Director of UNU/WIDER. The event support of four projects: EMU to crisis with more co-ordinated was held in conjunction with the and its Impact on Europe and the actions. At present, adjustment to UNU/WIDER project meeting on Developing Countries; New crisis relies on measures such as ‘EMU and its Impact on Europe and Roles and Functions for the UN steep interest rate increases and the Developing Countries’. and the Bretton Woods import compression - thus Professor Wyplosz is project Institutions; The Social Impact generating recession - and not director. of Privatization and Regulation enough on creating a virtuous circle EMU offers major opportunities, but of Utilities in Latin America; and of export expansion, economic also challenges, for macroeco- Globalization and the Obstacles growth, and increased import nomic management in EMU members to the Successful Integration demand. as well as in Europe’s transition of Small Vulnerable Economies. Mr Ricupero maintained that in many economies. EMU also has profound ways the global economy is implications for the exchange-rate

11 Launch of the World Income Inequality Database

n November 1999, UNU/WIDER WIID collects and stores Data’. Any users intending to use and UNDP officially launched the information on income inequality for the WIID for cross-section analysis WorldI Income Inequality Database industrialized, developing and should first examine the data (WIID). The WIID can be accessed transition countries in an easily closely in order to satisfy and downloaded from both retrievable, exportable and themselves as to the national UNU/WIDER and UNDP’s web sites analysable format. It expands and comparability of their chosen data. (www.wider.unu.edu/wiid/wiid.htm improves upon the 1997 database The WIID is particularly suitable for or www.undp.org/poverty/initia- constructed by Klaus Deininger and analysing changes in inequality tives/wider/wiid.htm). Lyn Squire of the World Bank; the within countries and over time. WIID has almost double the The WIID is an output of the project Analysis using the WIID shows a number of observations in the on ‘Rising Income Inequality And widespread rise in income Deininger-Squire database. The data Poverty Reduction: Are They inequality since the early 1980s. can be readily graphed and easily Compatible?’ which is directed by These conclusions - and many analysed in statistical packages. Professor Giovanni Andrea Cornia. others that can be drawn from the The project is jointly sponsored by The WIID contains some 4600 data database - are highly relevant to the UNU/WIDER and UNDP’s Division points, of which 4582 have Gini current policy debate on inequality for Social Development and coefficients and 1586 are also and poverty reduction. Indeed, the Poverty Elimination, and also available as quintile, decile, or other rise in income inequality poses a receives funding from the forms of grouped income severe challenge to the poverty Government of Sweden (Sida). distribution. The observations come reduction targets adopted by the from 149 countries, with good international community, and may Professor Cornia directed the WIID time-series coverage for most also jeopardise economic growth, initiative, and UNU/WIDER regions with the exception of social cohesion and governance. In researcher, Sampsa Kiiski, collated Sub-Saharan Africa, the Middle East launching the WIID, both UNU/ the data and constructed the and North Africa. As the data points WIDER and UNDP hope that the database together with its originate from different sources and data will help stimulate debate on documentation. Tony Addison, Juha refer to a variety of income and inequality, its causes, and its effects. Honkkila, and Renato Paniccià population concepts, sample sizes contributed to the development of and statistical methods, they have the WIID, and valuable suggestions been scrutinised one by one and were made by participants at the July assigned to two broad categories: 1999 project meeting. ‘Reliable Data’ and ‘Less Reliable

12 UNU/WIDER 2000 - 2001 Research Programme

he December 1999 session of the Insurance against Poverty. differentials in both developed and UNU Council approved UNU/ People in developing countries face developing countries. However, IT’s WIDER’sT research programme for the many risks. They can partially insure effects depend on labour-market next biennium. This followed the each other through mutual support institutions which differ significantly recommendations of the 15th but most people cannot obtain across countries. This project will session of the UNU/WIDER Board, formal insurance. The incomplete examine IT’s impact on job creation held in June 1999 (see WIDER insurance market therefore limits and destruction in developed and Angle, August 1999). The growth, and poverty reduction. The developing countries, and the effect programme contains eleven project will evaluate alternatives in of labour-market institutions. priority projects under five themes. widening insurance provision for Property Rights Regimes, Implementation is contingent upon households, especially the poorest. Micro-economic Incentives, and the recruitment of project directors Refugees, International Illegal Development. A clear property and funding. Migration and Poverty. Poverty, rights regime facilitates investment Transition violence, and ‘ethnic cleansing’ now and growth. Private property is drive millions of people from their often thought to be the best system. Privatization, Unemployment and homes. Much of this migration takes But this is not always the case when Welfare in China. China has place through illegal channels, markets are imperfect and achieved fast growth and poverty leading to the exploitation of institutions are weak (for example reduction. But unemployment and refugees. This project aims to regulation). This project will income inequality have risen, and the document the extent of this evaluate alternative property rights current privatisation and restructur- phenomenon, to assess its regimes at different development ing will exacerbate these problems in economic and social impact on stages. the short term. The viability of the sending and receiving countries, and ‘Chinese road to the market’ is to develop humane policy National and Global increasingly questioned. This project recommendations. Governance will assess the issues. New Fiscal Policies for Growth Globalization and the Obstacles to Sub-Saharan Africa and Poverty Reduction. Many the Successful Integration of Small Vulnerable Economies. Many of the Institutional Capabilities, Reform developing countries are character- obstacles to the meaningful Ownership and Development in ised by weak fiscal institutions, participation of vulnerable develop- SSA. Policies continue to be insufficient public spending ing economies in the international donor-driven despite attempts to on priority investments and the system are domestic in origin, but increase local ‘ownership’. This instability associated with repeated external factors beyond the control problem, and institutional fiscal crises. This project examines of these countries have an important weaknesses, limit growth in SSA. The public expenditure management, role as well. This project analyses project will analyse institutional taxation, and macro-fiscal policy in these factors and develops policies constraints and identify ways to order to increase their focus on that address both domestic promote ownership and state growth and poverty reduction . obstaclesand external constraints. capabilities. International Financial and Growth Issues Why Some Countries Avoid Institutional, Poverty and Conflicts while Others Fail: the Distributive Issues Financial Contagion: How Does it Impact of Public Expenditures. For The Social Impact of the Spread, How Can it be Stopped? The each country in conflict there are Privatization and Regulation of financial turbulence in East Asia in many others with similar Utilities in Latin America. This 1997 shows that international characteristics that are at peace. This region has now undertaken financial markets can be excessively project aims to understand why this extensive privatization. But volatile and can spread disturbances is the case. Special attention will be insufficient attention has been paid between countries. This project will given to the role of discrimination in to regulating privatized enterprises analyse contagion’s causes, and will public spending and public in the public interest. The project identify suitable policies. employment in causing conflict, the importance of other causes, and the will assess how privatization and Information Technology, Employ- role of the state in promoting regulation can be improved, ment and the Future of Work. There social stability. particularly in the light of is much concern that the IT experience elsewhere. revolution is reducing jobs for the unskilled and widening wage

13 News and Events Project Meetings Staff Movements Professor Richard Auty, Project 2000 Director for ‘Environmental, Export Ms Nina Penttinen joined the and Human Development Problems 19-21 May, Helsinki, ‘Globalization Institute on 8 November for a four in Natural Resource-based Growth and the Obstacles to the Successful month period as a part-time Models’, completed his assignment Integration of Small Vulnerable temporary assistant to help with the on 31 December and has returned to Economies’ Project Director, work on the physical inventory of Lancaster University. the UNU/WIDER Library. Dr. S. Mansoob Murshed. Professor Robert McIntyre, Project Dr Laixiang Sun, International Director for the project on ‘Transition 22-23 September (tentative) Institute for Applied Systems from Below: The Role of the New ‘Information Technology, Employ- Analysis, has been appointed as a Private Sector’ completed his ment and the Future of Work’, Research Fellow/Project Director for assignment on 31 December. He is Project Director, Professor ‘Property Rights Regimes, now with UNDP, Bratislava. Matti Pohjola. Microeconomic Incentives and Professor Giovanni Andrea Cornia, 6-7 October (tentative) ‘The Social Development’ starting in January 2000. Director, completed his assignment Impact of the Privatization and (and secondment period from Regulation of Utilities in Latin Professor Catherine Waddams- UNICEF) on 31 December. He has America’, Project Co-Directors, Dr Price, University of Warwick, is returned to UNICEF (outposted to Cecilia Ugaz and Professor expected to join in January 2000 as Florence) to take up the position of Catherine Waddams-Price. an External Project Co-Director for Senior Adviser to the Deputy ‘The Impact of Privatization and the Executive Director of UNICEF. 17-18 November (tentative) ‘New Regulation of Utilities and Social Fiscal Policies for Growth and Tony Addison Services in Latin America’. Professor was Poverty Reduction’, Project promoted to the position of Senior Director, Professor Tony Addison. Mr Eyob Zere Asbu and Mr Philippe Research Fellow, effective LeBillon, left the Institute at the end 1 December. of October and November, Board Meeting Matti Pohjola respectively, on completion of their Professor , Principal 19-20 June, Helsinki, UNU/WIDER, internships under the project on Academic Officer, has been 16th session. ‘Underdevelopment, Transition and appointed by the Rector to serve as Reconstruction in SSA’. Director, a.i. of WIDER and as such Lecture Series Officer-in-Charge until such a time Professor Yung Chul Park, resigned as the new Director is appointed and UNU/WIDER research staff teach a as External Project Director for the assumes her/his position. range of courses at the University of project on ‘Financial Contagion’, Helsinki and the Helsinki School effective 28 November. of Economics and Business Administration as well as at institutions outside Finland. These courses are offered to full-time registered students in the respective universities. Forthcoming courses

IT and Economic Growth at UNU/ INTECH in Maasticht, The Netherlands (1-3 February 2000), Professor Matti Pohjola.

The Economics of Development (Advanced Course) at the University of Helsinki, 14 March - 20 April 2000. Main building, lecture room 6. Lecturers, Tony Addison and Mansoob Murshed. Participants in the project on ‘Group Behaviour and Development’ , September 1999

14 UNU/WIDER Publications New Titles August - December 1999

The 1999 WIDER Relevance of the 1870-1914 RIP23 A Land Cursed by Its Wealth? Annual Lecture Experience for Today’s Developing Angola’s War Economy 1975-99, Economies, Ronald Findlay and Philippe Le Billon, October 1999 free of charge Mats Lundahl, July 1999 RIP24 Demobilization, Land and WAL3 Is Rising Income Inequality WP163 On the Regulation of Household Livelihoods: Lessons Inevitable? A Critique of the Telecommunications Markets, from Ethiopia, Daniel Ayalew, Transatlantic Consensus, Anthony Manfred J. Holler, August 1999 Stefan Dercon and Pramila Krishnan, December 1999. B. Atkinson, November 1999, WP164 Kyrgyzstan: A Case Study sponsored by the Royal Ministry of of Social Stratification, Vladimir Foreign Affairs of Norway Mikhalev and Georges Heinrich, World Development September 1999 Studies WP165 A Macroeconomic Model of a Developing Country Endowed with WIDER USD 12.00 / FIM 45.00 a Natural Resource, S. Mansoob Publications Murshed, September 1999 WDS13 Aspects of Transition, Publications such as the edited by Harriet Matejka and WP166Development Discontin- Research for Action uities: Leaders and Intermediaries Mihály Simai, August 1999 series, Working Papers, in Producers’ Associations, Tito Policy Briefs, WDS14 The Evolutionary Dynamics Bianchi, October 1999 of China’s Small- and Medium- Newsletters, and the Sized Enterprises in the 1990s, WP167 Natural Resources and Public Lectures are Laixiang Sun, Edward X. Gu and Economic Growth: A Nordic available on the web site Perspective on the Dutch Disease Robert J. McIntyre, October 1999 , www.wider.unu.edu. Thorvaldur Gylfason, October 1999 WDS15 Global Scenarios and Books are available from Policies on Forest Transitions and WP168 Guinea-Bissau: War, the publishers and their Carbon Fluxes, edited by Matti Palo, Reconstruction and Reform, Jens December 1999 Kovsted and Finn Tarp, November outlets at the list price 1999 plus handling and mailing Research for Action costs. WP169 The IMF Model and USD 8.00 / FIM 30.00 Resource-Abundant Transition Please address your Economies: Kazakhstan and orders for UNU/WIDER RFA49 The Role of Small and Uzbekistan, Richard M. Auty, publications to Ms Tuula Medium Enterprises in Transition: November 1999 Growth and Entrepreneurship, Haarla at the address Robert J. McIntyre, August 1999 WP170 Regulation of Social given on page 16 or send Services in LDCs: What are the your order via e-mail to RFA50 Systemic Capital and Local Issues at Stake?, Cecilia Ugaz, [email protected]. Government in SME Growth: The December 1999 Case of Hungary with Russian Payment by: USD bank Implications, Bruno Dallago, WP171 Rebuilding Rural Liveli- draft payable to UNU/ hoods and Social Capital: October 1999 WIDER; credit card Mozambique’s Experience, Clara de RFA51 Communist and Transitory Sousa, December 1999 (Amex, Eurocard, Income Distribution and Social MasterCard, OK, Visa); Structure in the Czech Republic, Jirí Research in Progress and in FIM/euro or USD Vecerník, December 1999 to the Institute’s bank free of charge Working Papers account (please ask for RIP22 Selecting Priorities for details). An invoice will USD 5.00 / FIM 20.00 Poverty Reduction and Human be provided on request. Development: The Case of Ethiopia, WP162 Resource-Led Growth – A Arne Bigsten, August 1999 Long-Term Perspective: The

15 New Books

UNU/WIDER was established by the UNU as its first research and training centre and started work in Helsinki, Finland, in 1985. Through its research and related activities, UNU/WIDER seeks to raise unconven- tional and frontier issues and to provide insights and policy advice aimed at improving the economic and social development of the poorest nations. WIDER Angle is the newsletter of the World Institute for Development Economics Research of the United Nations University (UNU/WIDER). Published twice a year, the newsletter focuses on the Institute’s research activities. It is distributed free of charge. The newsletter is also available on our website at: www.wider.unu.edu. Editorial contents by Tony Addison, (e-mail: [email protected]). Design and layout by Ara Kazandjian, (e-mail: China and the Global Economy since 1840, by Lu Aiguo, [email protected]). Macmillan Press Ltd, UK; and St. Martin’s Press, Inc., USA, UNU/WIDER 1999, 223 p. ISBN 0-333-77721-2 hb (Macmillan Press), UNU/INTECH Helsinki UNU/INRA Maastricht Finland Accra and ISBN 0-312-22628-4 hb (St. Martin’s Press) Netherlands Ghana

This is a study of the long-run evolution of the relationship UNU UNU/ILA Headquarters UNU/IAS Amman Tokyo, Japan Tokyo between China and the world economy. The book presents Jordan Japan an original interpretation of the country’s socio-economic UNU/INWEH UNU/BIOLAC processes in the past 150 years, focusing on China’s Caracas Ontario UNU/IIST Venezuela interaction with the expanding capitalist world economy. The Canada Macau author argues that the general thrust of China’s quest for development or ‘modernization’ has been to catch up with the wealthy nations of the West, and goes on to explain the UNU/WIDER changing paths and outcomes. The book proceeds Katajanokanlaituri 6 B chronologically from China’s mid-nineteenth-century 00160 Helsinki, Finland Tel. (+358-9) 6159911 incorporation into the world economy, starting from a Fax (+358-9) 61599333 semi-colonial state to the Maoist state-led industrialization Telex 123455 unuei fi after 1949, and to the post-Mao liberalization. By carefully E-mail [email protected] Website www.wider.unu.edu examining the patterns of development in these three major periods of the nation’s history, it addresses fundamental For further information on the Institute’s activities, please contact: issues pertaining to the making of modern China. This Mr Ara Kazandjian, rigorously argued book will be a timely and much debated tel. (+358-9) 61599210, contribution to understanding the ‘rise of China’. e-mail [email protected]. Books are available from the publishers and their outlets. Printed at Oy Nord Print Ab Finland, 2000 ISSN 1230-9544

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