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August 29, 2012

August wonkwar 3: Martin Ravallion v Ricardo Fuentes on inequality

August 29, 2012
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August was wonkwar month here on the blog, with an epic exchange on private v public provision of education, featuring Kevin RavallionWatkins v Justin Sandefur. Then I got all cranky about a new paper on NGOs and development. And now a third, and final, exchange (much the most polite) as World Bank poverty guru Martin Ravallion (right) responds to Ricardo Fuentes’ recent post on inequality (and Ricardo responds to his response). First, Martin’s piece:

Equity and development: Oxfam versus the World Bank? Maybe not
I was pleased to read that Ricardo Fuentes, the new head of research at Oxfam, views equity as important for better development outcomes. Ricardo contrasts his views with those of the World Bank, and singles me out as a key protagonist. But Ricardo over-simplifies and even misrepresents my views, and the debate more broadly.

Ricardo characterizes what he sees as the old view that inequality is unimportant. He rejects the view that “income inequality is not relevant as long as the poor benefit.” My own work on pro-poor growth is cited as an example of this view.

It is true that I think that concerns about poverty–broadly defined–trump inequality as a characterization of overall development goals. But that does not mean that inequality is unimportant. As I have said often, along with other researchers, how much growth reduces poverty–how pro-poor it is–depends crucially on the initial inequality and what happens to inequality during the growth process. See, for example, this paper of mine from 12 years ago. As I wrote in the title of one paper, “Inequality is Bad for the Poor” (paraphrasing the title of a paper that Ricardo refers to, “Growth is Good for the Poor,” by colleagues in the Bank’s research department; believe it or not, debate is commonplace within the World Bank). In fact this idea goes back to my research in the 1990s.

To say, as Ricardo does, that “one of the major drawbacks of the early-2000s pro-poor growth approach of the World Bank was that they completely neglected the issue of fairness” is simply ludicrous. Since the 1990s it has been recognized that inequality– “fairness” if you wish–is highly relevant to progress against poverty.

Ricardo sees a change in attitudes to equity since 2000 or so, toward an emphasis on equity. According to him, “Even the World Bank, with its World Development Report 2006: Equity and Development, dramatically changed its position.” This is begrudging praise of sorts. But wait: the WDR was also making an instrumental case for equity, as a means of promoting better development outcomes, including more inclusive growth and (hence) poverty reduction. So the WDR might equally well be represented as saying that inequality is only relevant if it is good for development. Maybe Ricardo’s praise is unwarranted.

I readily grant that, prior to the 2006 WDR, the Bank (along with virtually the entire community of development economists) had not given nearly enough emphasis to the costs of inequality. Actually, that is still true. The 2006 WDR marked an important change, based on prior research, though there is more work to do. But it remains true that the WDR was also about the instrumental value of equity.

More recent evidence has re-affirmed that certain kinds of inequality are particularly harmful to pro-poor growth–both in generating less growth and in making that growth less poverty-reducing. My paper “Why Don’t we See Poverty Convergence?” argues that poverty itself may well be the key aspect of initial inequality that impedes poverty reduction. Thus we are now starting to understand how poverty can self-perpetuate, even with seemingly sound economic policies. 

In the end, I really don’t think there is that much disagreement. Maybe we should move the discussion toward how we can actually attain our shared goals of a world free of poverty. Sustainably promoting relevant dimensions of equity will be crucial, as will efficiency-enhancing reforms. More on both please from Oxfam’s well-intentioned new head of research.

Ricardo Fuentes-NievaResponse from Ricardo Fuentes (left)
I am very pleased to read Martin Ravallion’s response to my blog post on inequality. Martin has of course been a key player in many intellectual debates on poverty, growth inequality and numerous other issues.

But his work, important as it is, is not the focus of my post. True, I cited his (and S Chen’s) definition of pro-poor growth [“By definition, “pro-poor growth” is growth that reduces poverty (Ravallion and Chen, 2003)”], because it has been very influential within and outside the World Bank. But the point I was making in citing their definition is the following: between 2009 and 2010 the richest 1 % in the US captured 93% of additional income. Let’s assume that the other 7 % was evenly distributed among the rest of the population (so that the poor also experienced a small increase in incomes and income poverty falls). This situation would be considered pro-poor under the above definition – but it also seems clearly unfair. This is where the definition is lacking. This dynamic is becoming unacceptable – as we can see from the Occupy movement and other public demonstrations as well as from higher echelons of power (for instance, in some of President Obama’s speeches.)

I agree that our disagreement is not major. If I should point to one difference, it is that I think that issues related to inequality are important in themselves, not only for their impact on poverty reduction. That’s where fairness comes in – we need more research on the direct effects of inequality on well being. Moreover, contrary to what Martin implies, I think that the WDR 2006 and the recent work of the World Bank on inequality of opportunity indeed deserve unqualified praise. It is true that the WDR 2006 didn’t develop the arguments about the intrinsic value of equity but they clearly raised them in page 7 of the Overview.

The World Bank will be an important voice when we try to answer the question “inequality of what?” It is great to see the World Bank working more on these topics. We shall doubtless engage in more discussions about this in the future.

6 comments

  1. This debate is highly interesting, but a focus on vertical inequality in the poorest countries is misplaced. As I argue in http://www.fragilestates.org/2012/04/16/inequality-fragile-states-and-the-new-mdgs/ and
    http://www.fragilestates.org/2012/03/12/horizontal-versus-vertical-social-cohesion-why-the-differences-matter/ , the real issue is horizontal inequities–the differences between groups, regions, etc. What these countries need most are 1) stronger “horizontal social cohesion” (the complex cultural, psychological and social glue that ties people together) and 2) stronger institutions. Both matter more to the poor than an attempt to engineer certain types of growth.

  2. This is indeed a very interesting debate.However it might be more useful to policy makers to focus the analysis of current American inequality (the richest 1% percent which captured 93% of additional income, according to Ricardo Fuentes)on why, and how,inequality which used to be an issue for the developing world, is now permeating and eroding American Democracy and what used to be the Middle Class Belt supporting it.

  3. The head of research for Oxfam, Ricardo Fuentes wrote:

    “evenly distributed …(so that the poor also experienced a small increase in incomes and income poverty falls).”

    May I ask why I should assume income poverty falls as a result of a rise in income?

    Does that not confuse income and profit?

    Economic prosperity, of yourself or anyone else, clearly depends on assets, debts, relevant prices, and consumption need. We could also mention shared assets and shared debt.

    But even absolute income poverty on its own depends on relevant prices and needs.

    Similarly, Dr Ravallion, now acting Chief Economist at the World Bank, has claimed to have “absolute poverty measures for the developing world” by looking at spending statistics (mixed with in a minority of cases income) adjusted for CPI inflation.

    Why?

    He has not estimated either prices for the poor or what they needed. So why would anyone think he has measured consumption poverty (ie shortfall from what people need to consume), let alone economic poverty? He does not even know consumption amount, in the ordinary sense of that word (if they want to help the poor or anyone else economists might consider using the more accurate term “spending” rather than the misleading “consumption”).

    To give one example about need, as I said in 2003:

    Falling birth rates mean rising food needs per person. The FAO adjust for that in their global monitoring but the World Bank do not.

    The divergence between MDG indicators on poverty and hunger may be due in part to this discrepancy.

    In the past Dr Ravallion has erroneously implied that a) I did not know his method and b) I believed the $1.25 a day is not adjusted for inflation at all – despite my having specifically referred to food prices or prices for the poor.

    http://aidwatchers.com/2009/10/the-perils-of-not-knowing-that-you-don%E2%80%99t-know-2/#comment-6836

    http://economix.blogs.nytimes.com/2009/10/02/in-defense-of-forecasting/#comment-53109

    http://gulzar05.blogspot.co.uk/2009/10/poverty-reduction-in-india-china-and.html?showComment=1256466176306#c4741172020664106022

    Dr Ravallion has also said he has used the most appropriate available inflation statistics.

    Best does not entail adequate.

    So that is irrelevant unless he can show why he should infer adequacy levels from spending.

    Even though some work has been done by Deaton and Dupriez on the 2005 international price comparison data to look specifically at items bought by the poor, the work did not look at prices the poor actually faced for those items – and we do not know those item prices for previous years. So we don’t really know what the poor who bought things actually received.

    It is also the case that for the latest global update, Chen and Ravallion have looked at food price changes for a few years at the end of the period.

    But they are claiming to have absolute poverty measures going back thirty years, while not knowing about prices faced by the poor or any changes in need, leaving aside looking at assets or debts.

    Why?

    Last year I asked Mr Green, then head of research for Oxfam, whether he thought there were risks in inferring poverty from spending. I gave some detail he asked for.

    Is it wise to make policy on the basis of outcome statistics like this?

    http://www.oxfamblogs.org/fp2p/?p=6619#comment-61380

    Other references:

    http://www.mattberkley.com

    http://www.parliament.uk/documents/lords-committees/economic-affairs/DevelopmentAid/FINALevidencevolumedevaid.pdf ,
    page 62 and following.

  4. I have challenged Dr Ravallion to explain his method, and he has not replied.

    I wrote,

    “[Chen and Ravallion] are claiming to have absolute poverty measures going back thirty years, while not knowing about prices faced by the poor or any changes in need, leaving aside looking at assets or debts.

    Why?”

  5. Martin Ravallion does not know much economics. He is essentially an idiot savant. Thanks God, they have replaced him at the World Bank by someone who can think–Kaushik Basu.

  6. Professor Basu has been given an opportunity:

    Future data use at the Bank

    Submitted by Matt Berkley on Wed, 2012-10-10 15:43.

    Dear Professor Basu,

    Perhaps I might ask similar questions on your own approaches to data.

    A first two could be the following:

    Will the Bank make clear to recipients of statements about global poverty whether it has estimated food needs per person?

    The FAO, in contrast to the Bank, made such estimates from the start of MDG monitoring, to adjust survey data (from the same surveys used by the Bank) for increasing food need per person as birth rates fell. The discrepancy may provide a partial explanation for the difference in reported MDG indicator trends.

    Secondly, will the Bank make clear to recipients, including politicians, of statements on global poverty since 1990 whether it has estimates for initial prices faced by the poor?

    Thank you.

    Yours sincerely,

    Matt Berkley.

    http://blogs.worldbank.org/developmenttalk/perspective-from-a-new-world-bank-chief-economist#comments

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