The Hindu Business Line : World Development Report 2006 — Refreshing emphasis on equity for growth

The emphasis that the World Development Report 2006 places on equality between and within countries shows that concern with equality has become an important part of the agenda of economic development. It also shows that a neo-conservative like Paul Wolfowitz can actually usher in a new missionary zeal to the top job at the Bank. For the equity revolution to succeed, however, the message has to permeate Bank's bureaucracy, still committed to virtues of the market, and a minimalist state, says S. Venkitaramanan.

THE World Development Reports (WDRs) have been issued every year over the last 28 years. Successive issues have concentrated on specific topics, such as infrastructure, governance, the role of the state, and so on. The WDRs have uniformly been noted for their valuable and authoritative collections of data as well as detailed analyses of inter-country comparisons and global trends.

The latest WDR 2006 too continues this tradition. It bears the imprint of the world's leading intellectuals, including Dr Amartya Kumar Sen, who have assisted the authors with their inputs.

It is relevant to reflect on the coincidence that, along with the Human Development Report 2005, which appeared recently, published by the UNDP, the WDR also focuses on the issue of inequality. The emphasis that the WDR 2006 places on equality between and within countries shows that concern with equality has become important in the agenda of economic development.

Conventional wisdom has it that the "missionaries" of the World Bank regard per capita GDP growth as a dominant objective. A conflict is perceived to exist between the pursuit of welfare goals, as such, and economic growth. This apparent conflict derives some support from the works of renowned academic economists, such as Arthur Lewis and Simon Kuznets. Kuznets, a Nobel Prize winner, had explored the concept that as incomes rise, inequality also tends to rise, a conclusion contested recently by some experts.

The common perception is that whatever the validity of these theories, rising incomes are often accompanied by greater inequality. Conversely, the argument was that insistence on attainment of greater equality may be counter-productive to growth.

This is precisely where the WDR comes out with a strikingly revolutionary concept — revolutionary from the point of view of orthodox practitioners of development. WDR 2006 emphasises that equity and growth are complementary, not contradictory in nature. Equity increases — in the sense of reduction of inequality — can, in fact, directly contribute to increased economic efficiency and growth.

It is because of this reversal of conventional wisdom that some observers have been citing the WDR as an instance of "unlikely revolutionaries in the World Bank". It is necessary to view this in the context of the elevation of a well-known neo-conservative, Mr Paul D. Wolfowitz, as the new President of the World Bank. He was not in the least expected to make such radical departures in development policies, especially in the direction of favouring equity over growth. But, whether by design or accident, the WDR 2006 has come out under his aegis.

Perhaps it is as well to point out that the WDR must have been in the works well before Mr Wolfowitz appeared on the scene. But he could have stymied it. That he did not, shows that neo-conservatives like McNamara and Wolfowitz can actually usher in a new missionary zeal to their job at the Bank.

Quite characteristically, both in the case of McNamara and now Wolfowitz, they seem to bring to their job an unexpected evangelical zeal for repairing the world's greatest injustices — poverty and deprivation.

Turning to WDR itself, the report has done a competent job of surveying the literature and discussions on the complex issue of equity vs. efficiency. In fact, it has done too competent a job, in the sense that the report is almost a philosophical treatise on the vexed issue of equity vs efficiency.

It has the makings of an academic research paper, with its intriguingly elaborate discussions on complex theoretical issues, on the very definition of equity, its various dimensions and its impact on growth.

Granted, however, that the report is frank enough to admit that measurement of inequality is clouded by technological arguments, especially in regard to the use of data regarding consumption. But the WDR makes its own best judgment on the data sources and goes by nationally accepted research sources. Obviously, comparisons across countries are especially complicated because of data problems.

"Equity" in the words of Mr Wolfowitz, who has written the Foreword, is defined in terms of two principles. The first is equal opportunities — that a person's life achievements should be defined by his or her talents and efforts rather than by pre-determined circumstances, such as race, gender, social or family background. The second principle is that of avoidance of deprivation in outcomes, particularly in health, education and consumption levels.

Mr Wolfowitz stresses that, to many, equity is important in its own right. In addition, the report presents evidence that a broad sharing of economic and political opportunities implied in improved equity is also instrumental for economic growth and development.

Greater equity can thus lead to a fuller and more efficient use of a nation's resources. Under a conservative President like Paul Wolfowitz, the Bank is restating principles that egalitarians have long held dear and been criticised for!

The report states that focus on equity should be a central concern in the design and implementation of policy for development and growth. This insight needs to be integrated into both analytical and operational work on core areas of development design, including the role and functioning of markets.

In specific terms, the report calls for the role of public action, which involves the state apparatus inevitably in expanding the opportunity sets of those who, in the absence of policy interventions, have the least resources, voice and capabilities. It should do so in a manner that respects and enhances individual liberty as well as the role of markets in allocating resources.

Here is where the rub comes. For instance, as the state intervenes with affirmative action — to cite only one instance of possible interventions in education and employment — it does abridge the rights of some individuals, who are by either race or caste, not entitled to the benefits of such actions.

Intervention in favour of equity for some may sometimes abridge the rights of others. There is also the case of inequality in endowment of assets, such as land. Is expropriation of land rights the remedy for this lack of equity? The report comes out against such extreme steps, pointing out that expropriation of existing assets may lead to counterproductive disincentives.

Similarly, excessive taxation with a view to funding expenditure for redressing the rights of the deprived may also be counterproductive as it may discourage investment.

Ultimately, the question of balancing considerations of equity and growth is squarely in the realm of politics. The WDR concedes that political governance does not fall within the comparative advantage of the Bank. But that is a confession with a difference.

Many of the Bank's innumerable suggestions, including those mentioned in the latest report, necessarily touch on political issues. Till recently, the Bank has been rather aggressive in pursuing policy changes that may have strong political overtones, ignoring equity.

While the new emphasis on equity may make the Bank's politics a bit more palatable to aid recipients, it remains doubtful how far the conflict between equity and efficiency can be resolved in practical terms without upsetting the calcul0us of financial returns.

While the discussion on equity vs efficiency may sound academic, it is not actually so. Insofar as practical policy-making goes, it is very relevant. Everyday, the policy-makers in a developing country are faced by the choice of equity vs efficiency.

It is one thing for the President of the World Bank to declare that equity has to have a stronger place in the agenda of development. It is another matter for the governments of countries to take this up in their political programmes.

It is a different matter whether the Bank's conservative economists — the fiscal purists, the mature enthusiasts, will allow space for the proper balancing of equity and growth.

It is ironic that Paul Wolfowitz, one of the architects of Mr George Bush's Iraq policy, should be propounding the doctrine of equity as having a pride of place compared to efficiency. In fact, he is arguing that equity aids efficiency. WDR 2006 is the triumph of revolution headed by counter-revolutionaries to the limited extent it declares the primacy of equity. For the revolution to succeed, however, the message has to permeate the whole bureaucracy of the Bank, still committed to virtues of the market, and a minimalist state. It is to be hoped that the revolution heralded by the WDR will be a more sustainable one, leading to benefits all round.

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