The O C T O B E R 2 0 0 8 PREMnotes N U M B E R 125

Breaking Out of Inequality Traps: Political Economy Considerations

Verena Fritz, Roy Katayama, and Kenneth Simler

This Note is based on presentations and comments by , Frances Stewart, Léonard Wantchékon, and Nancy Birdsall (chair) at the 2008 PREM Conference session on “Political Economy of Inequality: Implications for Inclusive Growth,” and focuses on actions that the World Bank may pursue to promote more inclusive growth.

Inequality is a growing concern in both de- important to clarify the type of inequality that veloping and developed countries, and in we are discussing. Typically, we talk about countries with growing economies as well as the inequality of outcomes such as welfare those that are stagnating. There is consider- (for example, per capita consumption). But able agreement that high levels of inequality, considering that outcomes are dependent which preclude large segments of society on a number of factors, including exogenous from participating at their full potential, can circumstances, individual effort, and avail- undermine growth and political stability. If able opportunities, it has been argued that the instability escalates to serious conflict, it would be better to focus on the equitable further negative repercussions for both access to the resources necessary to improve growth and poverty can arise, potentially one’s well-being rather than the equality of reversing years of development. outcomes per se. As emphasized in the World To explore the linkages between inequal- Development Report 2006: Inequality and Devel- ity and the political economy constraints to opment, reducing the “inequality of opportu- inclusive growth, this 2008 PREM Conference nities,” possibly through the “redistribution session focused on the following questions: of influence, advantage, or subsidies away • Does inequality affect the quality of eco- from dominant groups,” may be an appro- nomic and political institutions? priate policy objective for poverty reduction, • What political conditions are conducive especially because equity-enhancing redistri- to effectively addressing high levels of butions can often be efficiency increasing. inequality? Granted, this is not an easy task. • What role can the World Bank play in It is also important to distinguish verti- these sensitive political issues? cal inequalities (between individuals) from horizontal inequalities (between groups). Inequality of what? Horizontal inequalities—for example, in Since inequality is multidimensional with wages or service provision—may be rooted economic, social, and political aspects and in discrimination by gender, race, or some can have many different interpretations, it is other group identity. When these differences

FROM THE POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK are perceived as unjust, such inequality can that a private school is superior to provoke resentment and increase the poten- that of public schools. Rich families opt to tial for conflict. enroll their children in the private schools, Furthermore, horizontal inequalities and poor families send their children to the can be self-perpetuating. For instance, when inferior public schools as they cannot afford women are denied the right to vote, their abil- the private schools, and nor can they bor- ity to tackle gender inequality is diminished. row money easily. Also suppose that political Despite the fact that the between-group com- influence in funding decisions for public ponent in inequality decompositions rarely schools is a function of wealth; that is, the accounts for more than 15 percent of total rich possess greater political power in such inequality, Ravi Kanbur (2006) points out decisions. Since the rich do not directly ben- that addressing between-group inequalities is efit from the public schools in this case, they important, in particular when the horizontal could very well advocate for a small budget inequalities tend to preserve the structure of for public schools and keep public educa- overall inequalities. tional quality low, thereby perpetuating the Significant inequalities can undermine cycle (Bourguignon et al. 2007). the quality of institutions important for As the example above illustrates, the development. Inequalities in political influ- forces that preserve a low-level equilibrium ence may result in a suboptimal allocation of are often political in nature. Groups that have resources and a smaller pool of investors and enjoyed advantages in the past are likely to innovators—compromising efficiency and resist policies that would increase their tax weakening . High inequal- burden or introduce greater competition for ity is associated with lower poverty reduction opportunities in education or higher-level from growth, for instance, due to discrimina- jobs—and such groups often have consider- tion and exclusion (World Bank 2005). able political clout. Or simply because of deep-rooted historical discrimination, de jure Inequality traps and de facto antidiscriminatory practices may In an inequality trap, the structure of inequal- differ considerably. ities contributes to stabilizing a welfare distri- bution over time such that the rich stay rich Democracy does not and the poor stay poor. Although an alterna- guarantee lower inequality tive distribution might exist where society as Perhaps surprisingly, having a democratic a whole is better off and inequality is lower, system or transitioning to such a political shifting to it can be difficult as a number of regime does not necessarily mean that the factors may be interacting to maintain the issue of inequality will be tackled. Possible status quo. For instance, the vested interests reasons are, among others, elite capture of of groups benefitting under the status quo, political institutions, corruption and poor differential accumulation of assets, asym- governance, lack of political commitment metries in social capital, and discrimination to equity- and efficiency-enhancing reforms, may perpetuate group inequalities and create opposition from groups that risk substantial barriers to equality-enhancing reforms. Al- losses, fragmentation of the majority, and though one could design a number of policy deeply rooted historical discrimination. interventions for reducing inequalities, their Even in democratic societies, political adoption and implementation often pose the power is often not equally distributed and biggest challenges. elite capture of political institutions and To illustrate the concept of an inequality decision-making processes can occur. Araujo trap, let’s suppose that wages in a society are et al. (2008) provide evidence that in more determined by the quality of schooling and unequal communities of Ecuador, Social

2 PREMNOTE OCTOBER 2008 Fund projects with benefits exclusively for zero-sum game, and made the prospects of the poor (for example, latrines) are less likely higher incomes and social mobility credible. to be chosen by the community, suggesting Within this context, democratization suc- that political power is positively correlated ceeded following Franco’s death in 1975, and with socioeconomic status. In other cases, progressive and redistributive policies were the minority group cannot win the neces- adopted, improving access to infrastructure sary support for reforms, or the majority is and education, health, and social services fragmented (for example, voting along eth- (World Bank 2005). nic lines or other subgroups of the deprived Our knowledge about how to promote majority). Also, the incentives of politicians changes out of inequality traps is still limited. may not necessarily be aligned with those of A survey of the literature provides mixed society as a whole. results as to which political reforms work, After all, what are the electoral and other where, when, and why. Lacking an empirical incentives that politicians face? In an effort consensus, we are not in a position to recom- to secure votes and support, politicians often mend particular political reforms for the sake resort to clientelism at the expense of seeking of greater equity. Moreover, there are limits to provide public goods. If politicians choose on how much the World Bank can advocate policies based more on their short-term po- for particular political reforms. litical appeal rather than on the growth or However, as a first step, we have some poverty reduction impacts, it may be difficult insights into the political conditions that to break out of an inequality trap. The lack may offer a window of opportunity for of political commitment to equity-enhancing reform. Frances Stewart has classified the reforms tends to preserve the status quo. political conditions under which equity-en- Furthermore, weak governance can hancing reforms have been adopted in the undermine the implementation of reforms past (box 1). or programs that require a well functioning We also know of the various types of eq- bureaucracy. Benjamin Olken (2006) recently uity-enhancing policies that countries have examined the welfare effects of corruption implemented in the past. Frances Stewart in a subsidized rice distribution program categorized equity-enhancing policies as (1) in Indonesia. He estimated that about one integration, (2) direct, or (3) indirect policies. fifth of the rice disappeared and found that Integration policies strive to promote unity “corruption was sufficiently large to turn an and greater societal integration. Direct poli- otherwise welfare-enhancing program into a cies redistribute opportunities and benefits program that may have been welfare-reduc- in favor of particular groups. Affirmative ing on net.” action is an example. Indirect policies, while

Is there a way out? As François Bourguignon explained in his Box 1: Political Conditions for Equity- presentation, getting out of an inequality trap Enhancing Reform requires a redistribution of elite privileges, • Mobilization of deprived majority (South Africa, which produces winners and losers in the Fiji) process. In principle, if there is an aggre- gate gain, that is, an expansion of the pie • Protest by the minority (United States) resulting from this redistribution, even the • Agreed need for political stability (Nigeria) short-term losers could be better off in the • Ideology of universal rights (India) long run. In Spain, economic transformation • External pressures (Northern Ireland) and growth in the 1960s and 1970s defused social conflict, broke down perceptions of a Source: Frances Stewart’s presentation.

OCTOBER 2008 PREMNOTE 3 not explicitly targeting any group in particu- Box 2: Impact Evaluation of “Good lar, tend to benefit certain (disadvantaged) Policies” on Electoral Appeal in Benin groups. Examples of indirect policies are progressive taxes, antidiscrimination laws, Léonard Wantchékon investigated the roles of ex- and universal access to services. pert information and public deliberation on voter be- A basic policy option in poor- and havior in Benin. By enlisting the top four candidates high-inequality environments where there for the 2006 presidential election and randomly selecting villages into control and experimental are many gaps in services is to promote the groups, he was able to show that broad-based poli- universalization of public services and to cies are viable substitutes for traditional clentelist attempt to improve the minimum quality campaign strategies. of such services. Such indirect policies may Evaluation design: (1) A conference was held where improve nonincome poverty measures in the top four candidates discussed policy options the short term and facilitate greater oppor- with experts. (2) Policy messages were designed tunities in the long term. Although targeted based on conference proceedings (for example, interventions may reduce inequality more, free primary education and free medical coverage indirect policies are more likely to be politi- for children with malaria). (3) In treatment villages, cally palatable. teams campaigned using these messages that As a second step, we can consider what promised broad-based policies. In control villages, would make indirect approaches to enhancing teams monitored campaign activities. the equality of opportunities more attractive Findings: Voter turnout, trust in the candidate, and as platforms for politicians. Since any reform likelihood to vote for the candidate were greater that changes the distribution of opportunities when campaigns were based on well designed will produce winners and losers, the question broad-based policies. becomes: how do we get the short-term los- Source: Léonard Wantchékon’s presentation. ers with strong political influence to believe that they can be better off in the long term? If information about intertemporal tradeoffs relevance to constituents—were more effec- is credible and convincing to potential short- tive than traditional clientelist approaches term losers, it may be possible to break out (box 2). of the inequality trap. However, this is not a trivial task, both in terms of the analytical What role for the World Bank challenge and of building trust and convic- and other external agents? tion among stakeholders. Despite the political sensitivities associated One way of going about this is to try to with many equality-enhancing reforms, the align the electoral incentives that politicians panel offered several ways in which the face more closely with the broad collective World Bank and other external agents can and longer-term interests of citizens. If politi- contribute: cians believe that a campaign based on clien- • Provide technical assistance on the distri- telism is superior to one focusing on broad- butional impact analysis of reforms, and based policies, we would see clientelism encourage wide public dissemination of prevail. However, even where clientelism is results to stimulate open debate. quite entrenched, there is the potential for • Promote more equitable and antidiscrimi- shifting toward sounder and more broad- natory practices, and set norms for poli- based campaign platforms and policies. In cies to decrease horizontal inequalities. a recent experimental impact evaluation of • Support information campaigns that voting behavior in Benin, political campaigns may improve public deliberation, and with broad-based policy platforms—includ- provide policy makers with sound policy ing enough specificity to highlight their advice with which they may design better

4 PREMNOTE OCTOBER 2008 policies and build stronger substantive Olken, Benjamin. 2006. “Corruption and the platforms that move away from clientelist Costs of Redistribution: Micro Evidence practices. from Indonesia.” Journal of Public Econom- • Identify the specific nature of the political ics 90(4–5): 853–79. economy constraints that tend to perpetu- Stewart, Frances, ed. 2008. Horizontal In- ate low-level equilibrium. equalities and Conflict: Understanding Group Violence in Multiethnic Societies. Basing- Further Reading stoke: Palgrave. Araujo, M. Caridad, Francisco H.G. Ferreira, Wantchékon, Léonard. 2007. “Expert Infor- Peter Lanjouw, and Berk Özler. 2008. “Lo- mation, Public Deliberation, and Elec- cal Inequality and Project Choice: Theory toral Support for “Good” Governance: and Evidence from Ecuador.” Journal of Experimental Evidence from Benin.” Public 92(5): 1022–46. Conference presentation. Available at: François Bourguignon, Francisco H. G. Fer- http://siteresources.worldbank.org/ reira, and Michael Walton. 2007. “Equity, INTPREMNET/Resources/489836- Efficient and Inequality Traps: A Research 1208790894283/Wantchekon_Benin_ Agenda.” Journal of 2008.pdf. 5(2): 235–56. World Bank. 2005. World Development Report Kanbur, Ravi. 2006. “The Policy Significance 2006: Equity and Development. New York: of Inequality Decompositions.” Journal of Oxford University Press. Economic Inequality 4(3): 367–74.

OCTOBER 2008 PREMNOTE 5 This note series is intended to summarize good practices and key policy findings on PREM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank. PREMnotes are widely distributed to Bank staff and are also available on the PREM Web site (http://www.worldbank.org/prem). If you are interested in writing a PREMnote, email your idea to Madjiguene Seck at [email protected]. For additional copies of this PREMnote please contact the PREM Advisory Service at x87736. PREMnotes are edited and laid out by Grammarians, Inc. Prepared for World Bank staff