What kind of inequality matters most? The case for unfairness.

August 16, 2012 8 By admin

In this guest post, Oxfam’s new head of research Ricardo Fuentes (I really must update my blurb to the right) reflects on a recent discussion on inequalityRicardo Fuentes-Nieva.

When I attend a round table and I leave with more questions than answers, I know it was a good one. I recently attended a meeting in London on “Inequality, Children’s Development and the post-2015 Debate” organized by UNICEF, Save the Children and Young Lives. It was ambitious, and it got me thinking.

Not too long ago, during the 1980s, inequality was an unspeakable word in many a policy circle. The bitter ideological battle between the West and the Soviet Union played a part in this. Ronald Reagan and Margaret Thatcher vowed to defend freedom against totalitarianism and to disregard the “politics of envy”. Income inequality in developed countries rose substantially in those years yet the consensus among policymakers was something like: “inequality doesn’t really matter, as long as all boats are lifted. In fact, it creates incentives and promotes growth”.

inequality cartoonThis situation started to change in the early 1990s– the Soviet Union had collapsed years before and Fukuyama had proclaimed the “end of history” or the victory of Western democracy.  The ideological enemy disappeared. Moreover, an increase in computer power and major improvements in data –especially data collection at the household level – allowed researchers to study the changes in income inequality.  Academics started thinking again on the negative effects of inequality: ideas on the role of elite capture, tax rules and investment were developed if not fully endorsed.

The policy debate, however, was lagging. The economic growth-centric view eschewing inequality remained strong at least until 2000.  The role of globalization and growth in inequality was hotly contested. The debate turned ferocious. Those arguing that “growth is good for the poor” – and there were plenty- claimed that income inequality was not relevant as long as the poor benefited. For instance, Ravallion and Chen from the World Bank defined “pro-poor growth” as “growth that reduces poverty” regardless of what happened to the incomes of the rich.

We have come a long way in this debate. Inequality matters and few would say otherwise (not counting Mitt Romney, but that’s another story). Even the World Bank, with the World Development Report 2006 Equity and Development, dramatically changed its position. There is also more information on the mechanisms. A recent debate in The Economist summarizes the thinking on how inequality matters. Some of the reasons cited are:

• “In unequal societies—even those that have mature democratic institutions—the rich spend a lot of money trying to shape ‘rules of the game’ in their favour.” K. Sonin
• “People’s well-being may directly depend on inequality, for example, because they view a highly unequal society as unfair” D. Acemoglu
• “Those with greater wealth provide to their children resources and thus opportunities that the less wealthy cannot, and this may make it more difficult for society to achieve equality of opportunity.” D Acemoglu.
• And “Inequality impacts politics. Economic power tends to beget political power even in democratic and pluralistic societies.” D Acemoglu. This is also one of the central arguments of Joe Stiglitz’s new book The Price of Inequality.

There are also plenty of new sources of information and methodologies shedding light on inequality (look here; here; here, here for a few of them). But the explosion of information and understanding has not been used systematically. In the maelstrom of new data, ideas and methods, we have forgotten to ask the old question: Inequality of what?

Which brings me to the point of fairness. Not long ago, a situation in which the richest 1 % of a country capture 93% of additional income US inequalitywould not raise eyebrows as long as the average gain was positive – in fact, it would be desirable as it was lifting all boats. This is what happened in the US between 2009 and 2010. People, rightly, no longer accept that dynamic today.

One of the major drawbacks of the early-2000s “pro-poor growth” approach by the World Bank was that they completely neglected the issue of fairness – they wouldn’t see anything wrong in the example above.  Yet the insights of behavioural economics show that people care not about absolute gains, but what we consider fair. In a famous result (also known as the Ultimatum Game) people often reject unfair deals even when they lose from doing so (see a longer explanation here and here). The relationship between happiness and income inequality differs across countries and societies, but this is partly explained by whether people consider inequality the result of a fair process – the perceived social mobility, for instance (Emma Samman at ODI is working on this). A recent paper shows that people higher up in the social ladder are more selfish and less capable of empathy – suggesting that inequality hampers their sense of fairness.

Current debates focus too much on the perfect measure or issues of definition. Yet progress in evidence and ideas allows us to slow down and ask fundamental questions. It is in the context of fairness that future discussions about inequality and policy should be framed. Conversations about justice are no longer the exclusive realm of philosophers – new information, vast sources of new data and a realization that unfairness is important will allow us to discuss and move forward after the MDGs.

For the post-2015 discussion, if inequality is to be central to the debate, then we need to respond to these questions. What is the measure of inequality (outcome, opportunity, capabilities) that better reflects our perception of unfairness? Is the international community well suited to take up that discussion and suggest a minimum standard of fairness? How does this relate to the human rights system? It is telling that UNICEF, Save the Children and Young Lives convened the meeting that launched this discussion, as few would disagree with the blatant unfairness of early disadvantages in life.

Finally, another element that should be explored in the post-2015 context is inequality and political power. This is much harder to measure, but is the root of long-term laws and regulations that set the rules of the wider game. We have seen enough of wealthy groups rigging the system in their favour (think bank bailouts anywhere) and perpetuating the large gaps in standards of living between the haves and the have-nots – and getting away with it.  Equality/inequality of power lies at the heart of almost everything that matters in development. Maybe that’s the place to start.

Other blogposts about the round table by IDS, Alex Cobham and Young Lives

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