August wonkwar 3: Martin Ravallion v Ricardo Fuentes on inequality

August 29, 2012 6 By admin

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.