Equality and Efficiency: What history teaches us about the trade-offs
untuk memacu pertumbuhan, haruskah negara sedang berkembang menerapkan kebijakan yang membuat pemerataan pendapatan menjadi lebih buruk? Apakah negara yang menerapkan pro-growth strategies cenderung memilih kebijakan pembangunan yang memperbesar jurang antara si kaya dengan si miskin?
To promote growth, must a developing country adopt policies that make incomes more unequal? Do countries that adopt pro-growth strategies tend to choose policies that widen the gap between rich and poor within the country?
History and common sense say “no” to the first question about trade-offs. It has never been true that the only way to improve efficiency and raise GDP per capita is to accept greater inequality, and what we know about the political process says that no country must accept such a choice today (at least not yet). On the second question, history suggests an intriguing long-run evolution. In the earliest phases of economic development, the countries achieving greater growth were indeed those choosing institutions that rewarded rich groups. Yet midway through the evolution—around the year 1800 for the North Atlantic region—the countries leading the growth race became those that implemented more egalitarian (and pro-growth) policies, a choice that was always available and still is available today.
The task of judging whether policy choices must trade, or have chosen to trade, between equality and efficiency is complicated by the role of national luck and by the multiplicity of policy options. Prosperity and equality come more easily for countries having a lucky historical geography, in the form of natural resources, safer disease environments, previously open spaces, and distance from war zones. This is one reason it has been hard to distill policy lessons from the growth and inequality outcomes we observe around the globe.
Which policy levers?
The other complicating factor prolonging debate over policy trade-offs is that there are so many levers that the political process push or pull in choosing policies and institutions. With so many forces operating at once, it is not surprising that the debate over a trade-off between equality and efficiency has continued for so long. Some have emphasized policies that can raise efficiency and GDP by redistributing in favor of the rich, while others have emphasized policies that raise efficiency and GDP by favoring the poor.
The classic mechanism that supposedly linked inequality to growth related to savings rates. Keynes, Kaldor and others believed that the rich had a higher marginal propensity to save, so that redistributing from poor to rich would raise national savings and the growth rate.
The opposing view was put most clearly in the 1970s, led by the World Bank book Redistribution with Growth (Chenery, Ahluwalia, et al., with a fresh revisiting of the same issues and ideas in the World Development Report 2006). That pioneering study identified several policy levers that governments could use to raise both the growth rate and the share going to the poor. The list of egalitarian policy options included one direct form of redistribution, namely rural land reform, later given the softer name “access to infrastructure and land.” Aside from that, the featured egalitarian growth options were, and are, available using these policy tools:
* human investments for those who are credit-constrained, especially children and the poor;
* lifting credit constraints for the poor and small enterprises; and
* fair competition in all markets.
A political reality check
What we know about the political process rejects the first version of the trade-off question, the one asserting that policymakers must trade away some equality to get more efficiency. Ask yourself: What countries do you know that have exhausted all opportunities to promote both growth and equality? Even the European welfare states, which have pressed relatively hard to equalize incomes, still sacrifice both efficiency and equity by protecting agricultural landholders at the expense of food purchasers and general taxpayers.
They also protect senior high-paid workers at the expense of younger job entrants. Similarly, the United States protects agricultural landholders while raising the cost of food, and it subsidizes (civilian) medical care only for those residents who have already survived to the age of 65, at the expense of public care for the young and the poor. Developing countries have passed up even more policy opportunities to promote growth through the policies listed above. In economics jargon, no country’s government has ever reached the policy possibility frontier by exhausting every chance to improve both equality and efficiency.
SEVEN POLICIES FOR DEVELOPING
|1||Deny tax funding that would make primary education affordable for the poor|
|2||Deny tax funding that would give equal education to girls|
|3||Bias education subsidies in favor of university students at the expense of primary school students|
|4||Bias health subsidies toward high-budget care for the elderly and well-off, at the expense of preventative and out-patient care for the young and the poor|
|5||Protect agriculture against competition, with the gains inevitably going to landowners|
|6||Protect an industrial sector against competition, creating industry rents that accrue to the privileged|
|7||Over-protect senior workers against dismissals, leading to lower hiring of new workers|
Hints from long-run history
To judge the softer idea that countries tend to choose between equality and efficiency, even if they don’t need to, we should turn to some hints from history. Economic history has begun to reveal a long run-pattern of policy choices. Before about 1800, the policy and institutional changes that most advanced growth in the North Atlantic region were ones that did raise inequality. A key to the emergence of Northwest Europe as a world leader was the royal granting of more secure property rights to merchants and creditors. This was the world that Adam Smith saw, when emphasizing private freedoms as the key to progress. Thus growth appeared in places that experienced rising inequality, as the merchants and investors prospered. The same securing of private property rights, raising efficiency at the expense of equality, has proved crucial in countries that are restoring order in the world’s worst war zones, and in China’s industrial reforms of the late 1980s and early 1990s.
But as the North Atlantic economy grew and became more skill-intensive after about 1800, the leader countries came to be those that fostered the accumulation of human capital and had distributed land more equally. American history fits this mold, even though the United States has always been a country resisting progressive social transfers to the poor. This country advanced by being a pioneer in tax-funded primary schooling, and by distributing new lands relatively equally.
On the equality-efficiency trade-off, many have misread British history. One often hears the view that Britain’s growth suffered in the welfare state era between the 1940s and 1970s, in contrast to an acceleration of growth during the inegalitarian Industrial Revolution era (traditionally put at 1760-1830). There are several things wrong with this common view. Over all of British history, the best growth rate was in that income-leveling era of the welfare state, between the 1940s and the 1970s. In the earlier era of rising inequality during (and before) the Industrial Revolution, growth rates were slower and did not accelerate at all. In fact, Britain’s policies in that era were anti-growth, such as the Corn Laws and special taxes on business contracts and industrial goods.
Thus the only historical settings in which countries clearly tended to choose efficiency at the expense of equality were those early phases when property rights were first being secured. The long subsequent history features growth under more egalitarian policies.
Econometrics cannot decide
A recent econometric literature has tried valiantly to see if countries tend to choose between efficiency and equality in recent times, by regressing the level or growth of GDP per capita on the level or growth of inequality, while controlling for other things. This literature has hit some limits, even though it reveals some suggestive patterns.
While the scientific standard of these studies is high, the tests have a basic limitation: Inequality is not a policy variable, so its movements offer no guide to what policy has done. Rather it is an outcome of everything that affects the economy, not just the policies that governments implement.
That said, the econometric literature has indeed suggested some interesting patterns. One is that growth may be badly served by sudden changes in inequality in either direction (Banerjee and Duflo 2003). Another is that growth may be helped by letting the gap between rich and middle get wider, but would be damaged by a wider gap between middle and poor (Voitchovsky 2005).
Finding the fingerprints of anti-poor anti-growth policies
The fact that no country has ever exhausted its policy options for egalitarian growth alerts us to a new way to search for policies serving both equality and efficiency. We need only find cases where the unequal sharing of political power has caused countries to adopt inefficient and inegalitarian policies. The procedure is straightforward: studying the specifics of a country’s policies, just find cases where the Redistribution with Growth prescriptions have not been followed. Such discoveries are not difficult for developing countries, either today or in the past. Just look for fingerprints like those illustrated in the accompanying box, and reverse those policies to serve both equality and efficiency.
Peter H. Lindert is Distinguished Professor of Economics at the University of California—Davis, and a Research Associate of the National Bureau of Economic Research.
Banerjee, Abhijit and Esther Duflo. 2003. “Inequality and Growth: What Can the Data Say?” Journal of Economic Growth 8 (September): 267-299.
Chenery, Hollis, Montek Ahluwalia et al. 1974. Redistribution with Growth. New York: Oxford University Press for the World Bank.
Lindert, Peter H. 2003. “Voice and Growth: Was Churchill Right?” Journal of Economic History 63, 2 (June): 315-350.
Voitchovsky, Sarah. 2005. “Does the Profile of Income Inequality Matter for Economic Growth?” Journal of Economic Growth 10: 273-296.
World Bank. 2005. World Development Report 2006: Equity and Development. Washington: World Bank.