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April 3, 2014

The link between Income Inequality and Public Services is stronger than I realized (thanks to Emma Seery for putting me straight)

April 3, 2014
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Oxfam has been banging on to good effect recently about extreme global inequality in income and wealth. Over many years, we have also been making the case Indian hospital registrationfor universal health and education. It turns out the link between the two is stronger than I’d realized, according to ‘Working for the Many: Public Services fight Inequality’, a new paper published today.

We normally discuss inequality before and after tax (eg it’s progressive taxation that really brings Europe’s inequality down). But recent work published by the OECD and World Bank has put a monetary value on the ‘virtual income’ provided by public services. This produces some startling findings on inequality.

‘Public services mitigate the impact of skewed income distribution, and redistribute by putting ‘virtual income’ into everyone’s pockets. For the poorest, those on meagre salaries, though, this ‘virtual income’ can be as much as – or even more than – their actual income. On average, in OECD countries, public services are worth the equivalent of a huge 76 per cent of the post-tax income of the poorest group, and just 14 per cent of the richest. It is in the context of huge disparities of income that we see the true equalizing power of public services.

The ‘virtual income’ provided by public services reduces income inequality in OECD countries by an average of 20 per cent, and by between 10 and 20 per cent in six Latin American countries (Argentina, Bolivia, Brazil, Mexico and Uruguay – see graph). Evidence from the IMF, Asia, and more than 70 developing and transition countries shows the same underlying patterns in the world’s poorest countries: public services tackle inequality the world over.

Latin American redistributionIn Mexico, and even in Brazil with its award-winning Bolsa Familia cash-transfer scheme, education and healthcare make double the contribution to reducing economic inequality that tax and benefits make alone. But regressive taxation in many Latin American countries, including Brazil, is undermining the potential to combat inequality through fiscal redistribution, and preventing even greater investment in health and education.

This evidence underlines a double imperative for governments: to ensure progressive taxation that can redistribute once when collected and again when spent on inequality-busting public services.’

And seen through the eyes of inequality and redistribution, the private v public debate becomes even starker:

‘Far from being a magical solution to providing universal access to health and education services, private provision of services skews their benefit towards the richest. Amongst the poorest 60 per cent of Indian women, the majority turn to public sector facilities to give birth, whilst the majority of those in the top 40 per cent give birth in a private facility. In three of the best performing Asian countries that have met or are close to meeting Universal Health Coverage – Sri Lanka, Malaysia and Hong Kong – the private sector is serving the richest far more than the poorest. Fortunately, in these cases the public sector has compensated.

Services must be free at point of delivery to reach their inequality-busting potential. Health user fees cause 150 million people around the world to suffer financial catastrophe each year. For the poorest 20 per cent of families in Pakistan, sending all children to a private low-fee school would cost approximately 127 per cent of that household’s income. The trend is the same in Malawi and in rural India.

Whereas public services provide everyone with ‘virtual income’, fighting inequality by putting more in the pockets of the poorest; user fees and private services have the opposite effect. Fees take more away from the actual income of poor people, and private services benefit the richest first and foremost. This is the wrong medicine for the inequality epidemic.’

Smart and important work by Emma Seery and colleagues.

8 comments

  1. Smart and important work indeed. Key counter-arguments against today’s ‘austerity’ in the UK and elsewhere.

  2. Hi Duncan. This is really very interesting. Seeing the “virtual money” created by services provides a more useful comparison to social protection than many other measures.

    That said, your point on the Bolsa Familia in Brazil reflects the distorted picture of social protection in many developing countries created by the global obsession with one specific social protection tool: conditional cash transfers. Social protection has a major impact on inequality in countries like Brazil, but the Bolsa Familia is actually a small part of the picture. For some evidence see this article on “Bolsa UnFAMILIAr” (http://bit.ly/1cd2r59), evidence of impacts of pensions (less sexy) on inequality here (http://bit.ly/1paMQd9 (p. 6)). Analysis by the International Social Security Association here (http://bit.ly/OeFw4r – p. 40) gives a much clearer idea of the bigger picture. Pensions, health and education have a major impact on inequality compared to the relatively small impact of Bolsa Familia.

    Please! Let’s try and focus on the impact of social protection systems as a whole, not just ones that are best branded and strongly publicised by development banks!

  3. Sooooo – when you measure public goods and service at their market value, you find that distributing those goods and services equally or progressively across the population reduces measured net inequality.

    Sorry, but this is a mechanical relationship, no? Redistribution, of any form (cash or `in-kind’) reduces inequality by construction, so…. I’m waiting for the punchline. This, if anything, is just a different (perhaps better) way of measuring net inequality.

    Here are the truly interesting questions: what does public provision do to address structural (i.e. gross) inequality and when does it have a comparative advantage in fighting poverty and improving overall outcomes over, say, cash transfers.

  4. This is very welcome support for what I knew intuitively – heightened by living in ‘public service’ heaven (Switzerland)where I can travel anywhere (on time) in my canton on public transport for a price less than the UK (even before contemplating PPP)!

    The other side of private provision is, of course, it loosens the social contract that makes universal provision so attractive; and, therefore, ought to be resisted for this, as well as its wholly unproven ‘efficiencies’ (on which comparing Swiss and UK railways immediately comes to mind as a counter example)!

  5. This basic point is really important.

    But one of the shortcomings of much of this work is that it assumes the value of public services is what is spent on them. Unfortunately this is not a good indicator.

    What is also evident by country studies is that much of the public services investment is captured by higher income groups… eg pensions in Brazil

  6. Very interesting blog today. It states the obvious that is often forgotten in the debate… To be correct though it would be better to say that it is the public FUNDING of universal social services that makes the equalizing difference, while your blog seems to suggest that it is the public PROVISION of these services that makes this difference. It is true that in some countries (maybe most?) private provision equals private funding and this indeed would not have any equalizing effect. But in some countries social services are provided by private providers but still funded from public funds (e.g. education in Sweden).

  7. Would it be possible to get the references? I’m afraid they got lost into the html version of the article.

    Thanks

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