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World Bank focuses on inequality

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13th-May-2017       
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Jomo Kwame Sundaram and Anis Chowdhury :
The 17 Sustainable Development Goals (SDGs) - collectively drafted and then officially agreed to, at the highest level, by all Member States of the United Nations in September 2015 - involves specific targets to be achieved mainly by 2030. The Agenda seeks to "leave no-one behind" and claims roots in universal human rights. Thus, addressing inequalities and discrimination is central to the SDGs. Poverty and Shared Prosperity 2016: Taking on Inequality is the World Bank's first annual report tracking progress towards the two key SDGs on poverty and inequality.
Annual reporting on poverty, inequality
This particular report evaluates progress towards reducing extreme poverty to 3% of the global population and sustaining per capita income growth of the bottom 40% of the population faster than the national average. According to the Bank, with global economic growth slowing, reduction of income inequality will be necessary to ending poverty and enhancing shared prosperity.
The report focuses on inequality, which was generally neglected until fairly recently by most international organizations other than the UN itself. It provides some useful analyses of inequality, including discussion of its causes. However, it does not explain its claim of a modest partial reversal of previously growing inequality in the years 2008-2013 which it examines.
However, the report's policy recommendations are surprisingly limited, perhaps because it neither analyses nor proposes measures to address wealth inequality, which is much greater than and greatly influences income inequality. Although it recognizes that increasing minimum wages and formalizing employment can contribute to reducing income inequalities, it does not talk about the determinants of wages, working conditions and employment. It also has nothing to say about land reform - an important factor contributing to shared prosperity in East Asia, China, Vietnam, Japan, Korea and Taiwan.
Its discussion of fiscal consolidation's impact on inequality is misleading, even claiming, "European Union (EU) countries have embarked on comprehensive fiscal consolidations based on clear equity considerations in response to the 2008-09 financial crisis". This implies that fiscal consolidation yields long-run equity gains at the cost of short-run pains which can be cushioned by safety-net measures - a finding contrary to International Monetary Fund (IMF) research findings!
Instead of the more conventional inequality measures such as the Gini coefficient or the more innovative Atkinson index, the World Bank has promoted "boosting the bottom 40 percent". Yet, in much of its discussion, the report abandons this indicator in favour of the Gini index. Nevertheless, the report dwells on its "shared prosperity premium", defined as the difference between the increased income of the bottom 40% and the growth in mean income.
Meanwhile, the World Bank's Doing Business Report 2017 implies labour market regulations adversely impact inequality, even though it admits that they can "reduce the risk of job loss and support equity and social cohesion". Yet, the report promotes fixed term contracts with minimal benefits and severance pay requirements.
The Bank's Doing Business Report 2017 also implies that lower business regulation results in lower inequality. It claims this on the basis of negative associations between Gini coefficients and scores for starting a business and resolving insolvency. However, curiously, it does not discuss the association between other Doing Business scores, e.g., paying tax or getting credit, etc., and the Gini index.
About two-thirds of the 83 countries analysed had a shared prosperity premium during 2008-2013, a period characterized by asset price collapses and sharply increased youth unemployment in many OECD economies. This unrepresentative sample is uneven among regions, and surprisingly, even some large rich countries such as Japan, South Korea and Canada are missing.
Recognizing that the shared prosperity premium is generally low, the report concedes that "the goal of ending poverty by 2030 cannot be reached at current levels of economic growth" and that "reduction of inequality will be key to reaching the poverty goal".
The global Gini index has declined since the 1990s due to rapidly rising incomes in China and India, while within-country inequality has generally increased. More optimistically, the Bank notes that Gini coefficients fell in five of seven world regions during 2008-2013 despite or perhaps because of much slower growth. The report notes that the "progress is all the more significant given that it has taken place in a period marked by the global financial crisis of 2008-09". As others have noted, the 2008 financial crisis and the subsequent Great Recession may have only temporarily reversed growing inequality.
After very impressive growth for a decade, the Greek economy went into recession in 2008-2009, together with other European countries. With severe austerity measures imposed by the EU and the IMF as bailout conditions, Greece fell into a full-blown depression with various adverse income and distributional impacts.
The report finds that the greatest increase of inequality during 2008-2013 occurred in Greece, where the mean household income of the bottom 40% shrunk by an average of 10% annually. Fortunately, as the Bank notes, some measures - such as lump sum transfers, introduced in 2014 for low-income families and the vulnerable, along with 'emergency' property taxes - "prevented additional surges in inequality".
Brazil is the most significant of its five "best performers" in narrowing income inequality, with its Gini coefficient falling from 0.63 in 1989 to 0.51 in 2014. The report attributes four-fifths of the decline in inequality in 2003-2013 to "labor market dynamics" and social program expansion. Alarmingly, the new government has threatened to end regular minimum wage increases and to limit social program expenditure.
"Labor market dynamics" - deemed far more important by other analysts - include regular minimum wage increases, formalization of unprotected workers and strengthened collective bargaining rights. Social pensions and other social program benefits account for much more of the decline in inequality than the much touted Bolsa Familia.
The report makes recommendations on six "high-impact strategies": early childhood development, universal health coverage, universal access to quality education, cash transfers to the poor, rural infrastructure and progressive taxation. While certainly not objectionable, the recommendations do not always draw on and could easily have been made without the preceding analysis.
(Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007. Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008-2015 in New York and Bangkok).

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