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Inequality: A Threat to Economic and Social Development?

Otaviano Canuto

April 19, 2012

As Prepared for Delivery

Good afternoon everyone and welcome to our event today on Inequality. I would like to mention that this event is being both webstreamed and also transmitted live via Twitter. Thanks very much for joining us.

I will take this opportunity to announce a new publication “Inequality in Focus”, the first issue in a series to inform the public policy debate on equity, inequality of opportunity and socioeconomic mobility. I encourage you to pick up a copy if you have not already, you may find it online.

Let me start by saying that inequality has come back to the center of the development agenda in the post-crisis world. Wealth inequality is seen by many as the most serious challenge facing both developing and developed nations, as highlighted this year at the World Economic Forum in Davos.

Inequality is a concern for OECD countries that have seen increases in income disparities, including countries known to be relatively egalitarian, like Sweden, Finland and Denmark. It is also a concern in the UK and the US.

In the Arab world, social unrest is, in part, a reflection of deep injustices that provide little opportunity and hope to the youth. In Chile, students rioted and brought down a Minister of Education, protesting about sharp differences in quality and affordability of education. In general, in Latin America inequality seems to be going down but it is still at very high levels.

Among the BRICs, strong growth led to sharp reductions in poverty, but only Brazil has been able to reduce income inequality during the last decade. The reduction in inequality in Brazil has been steady, attributed partly to rising income of the poor, and partly to aggressive social programs. On the other hand, in  China, less poverty has been accompanied by increasing inequality. And in similar fashion, evidence points to an increase in inequality, albeit smaller, in India.

Debates over inequality, and the role governments should play in that context, has polarized political and economic debates across the world. How much should inequality matter or weigh in policy making? Are there tradeoffs between equity and efficiency (or growth), and if so, how should policymakers address them?

Some degree of inequality can create the right incentives for investments and productive risk taking – but how much of inequality is “too much” for a society?

Consensus on whether governments should try to redistribute wealth or income is elusive and probably unattainable. But income inequality arising from differences in opportunities is commonly perceived as unfair – most societies consider a situation where children have different chances to succeed in life based on their gender, ethnicity, parental characteristics or where they were born, to be not only morally wrong but also an obstacle to economic progress.

To some, equality of opportunity is about creating a level playing field that would engender a more equitable distribution of income; to others, it is about creating a society where individual effort and talent, as opposed to circumstances one is born into, determines outcomes in life. But most countries can agree on the principle of equality of opportunity as a framework to identify concrete policy objectives.

Inequalities of income and opportunities are related in complex ways. For instance, Alan Krueger has recently remarked that growing income inequality in the U.S. might be generating inequality in opportunities, which could further increase inequality in the future and compromise growth and rise in living standards. If children born to parents with lower income, education or other disadvantageous circumstances have fewer opportunities, poverty and inequality are likely to be perpetuated across generations and economic progress is hampered because of wasted human potential and distorted incentives.

In this context, we welcome the opportunity to reflect on the challenge that different countries face regarding inequality. What has happened to inequality? How important are the inequality challenges, and what can be done? To discuss and reflect on these questions, we are fortunate to have a very distinguished panel today. Very briefly, let me introduce our speakers:

  • Kaushik Basu is the Chief Economic Adviser, Ministry of Finance, from the Government of India. He is also Professor of Economics and the C. Marks Professor of International Studies at Cornell University, and a Fellow of the Econometric Society. In May 2008 he was awarded one of India’s highest civilian awards, the Padma Bhushan, by the President of India.
  • Andrea Brandolini is the head of the Economic Structure and Labour Market Division in the Department for Structural Economic Analysis of the Bank of Italy. He was chair of the Commission for the Revision of the Methodology for the Estimation of Absolute Poverty created by the Italian statistical office, and was a member of the Commission of Inquiry on Labour Conditions in Italy.
  • Ricardo Paes de Barros, Secretary of the Office of Strategic Action for the Secretariat for Strategic Affairs of the Brazilian Presidency. Dr. Paes de Barros is a recognized world leader on issues related to social inequality, education, poverty, labor market in Brazil as well as in Latin America. Dr. Paes de Barros has received many awards throughout his career (member of the Brazilian Academy of Sciences).

I will turn now to our speakers, to pose a few questions. I will ask if you could please keep your remarks to 10 minutes so we can be sure to allow time at the end for Q&A with our audience members.

Q for Basu: Could you please tell us what have been the recent trends in income inequality in India? And what are the main policy concerns related to inequality?

Q for Brandolini: We are interested in a European perspective on the issue of inequality. What are the implications of the crisis in the Euro Zone and the issuing reforms in some of its member countries for welfare state and future inequality?

Q for Paes de Barros: We are interested to know about the main factors behind the drastic drop in inequality in Brazil in the last 15 years. What has been the role of changes in labor markets (drop in skill premiums), expansion of access to education, and cash transfer programs? What are the challenges for the future, especially in expanding equality of opportunities?