2006world development report

Equity and Development

Overview

2006world development report

Equity and Development

The World Bank

Washington, D.C.

Overview

2006world development report

Equity and Development

©2005 The International Bank for Reconstruction and Development / The World Bank1818 H Street, NWWashington, DC 20433Telephone: 202-473-1000Internet: www.worldbank.orgE-mail: feedback@worldbank.org

All rights reserved

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This document summarizes the World Development Report 2006, a copublication of the WorldBank and Oxford University Press. It is a product of the staff of the International Bank forReconstruction and Development / The World Bank. The findings, interpretations, and conclu-sions expressed in this paper do not necessarily reflect the views of the Executive Directors ofThe World Bank or the governments they represent.

The World Bank does not guarantee the accuracy of the data included in this work. Theboundaries, colors, denominations, and other information shown on any map in this work donot imply any judgment on the part of The World Bank concerning the legal status of any ter-ritory or the endorsement or acceptance of such boundaries.

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Cover image: Dream of a Sunday Afternoon in Alameda Park 1947–48 (fresco) by Diego Rivera.The mural is located in Museo Mural Diego Rivera, Mexico City. Reproduction is authorized by the Instituto Nacional de Bellas Artes y Literatura–Mexico. Copyright © Photograph byFrancisco Kochen.

ISBN-10: 0-8213-6412-XISBN-13: 978-0-8213-6412-3

Overview

1 Introduction

Inequity within and across countries

focus 1 on Palanpur

2 Inequity within countries: individuals and groups

3 Equity from a global perspective

focus 2 on empowerment

Why does equity matter?

4 Equity and well-being

5 Inequality and investment

focus 3 on Spain

6 Equity, institutions, and the development process

focus 4 on Indonesia

Part II

Part I

Contents of the World Development Report 2006

Leveling the economic and political playing fields

7 Human capacities

8 Justice, land, and infrastructure

focus 5 on taxation

9 Markets and the macroeconomy

focus 6 on regional inequality

10 Achieving greater global equity

focus 7 on drug access

Epilogue

Bibliographic note

Endnotes

References

Selected Indicators

Measuring equity

Selected world development indicators

Index

Part III

vi WORLD DEVELOPMENT REPORT 2006

We live in a world of extraordinary inequalities in opportunity, both within and across coun-tries. Even the basic opportunity for life itself is disparately distributed: whereas less than half of1 percent of children born in Sweden die before their first birthday, nearly 15 percent of all chil-dren born in Mozambique fail to reach that milestone. Within El Salvador, the infant mortalityrate is 2 percent for children of educated mothers but 10 percent for those whose mothers haveno schooling. In Eritrea, immunization coverage is close to 100 percent for children in the rich-est fifth of the population but only 50 percent for the bottom fifth.

These children cannot be blamed for the circumstances into which they were born, yet theirlives—and their ability to contribute to the development of their nations—are powerfullyshaped by them. That is why the World Development Report 2006, the 28th in this annual series,focuses on the role of equity in the process of development. Equity is defined in terms of twobasic principles. The first is equal opportunity: a person’s life achievements should be deter-mined primarily by his or her talents and efforts, rather than by predetermined circumstancessuch as race, gender, social and family background, or country of birth. The second principle isthe avoidance of deprivation in outcomes, particularly in health, education, and consumptionlevels.

For many, if not most, people, equity is intrinsically important as a development goal in itsown right. But this Report goes further, by presenting evidence that a broad sharing of eco-nomic and political opportunities is also instrumental for economic growth and development.

Broadening opportunities strongly supports the first pillar of the Bank’s development strat-egy, namely, improving the investment climate for everyone. The interdependence of the eco-nomic and political dimensions of development also reinforces the importance of the secondstrategic pillar, empowerment. This Report shows that the two pillars are not independent fromeach other in supporting development but instead reinforce each other. It is my hope that thisReport will influence strongly the way that we and our development partners understand,design, and implement development policies.

Paul D. WolfowitzPresidentThe World Bank

Foreword

This Report has been prepared by a core team led by Francisco H.G. Ferreira and Michael Wal-ton, and comprising Tamar Manuelyan Atinc, Abhijit Banerjee, Peter Lanjouw, Marta Menén-dez, Berk Özler, Giovanna Prennushi,Vijayendra Rao, James Robinson, and Michael Woolcock.Important additional contributions were made by Anthony Bebbington, Stijn Claessens, Mar-garet Ellen Grosh, Karla Hoff, Jean O. Lanjouw, Xubei Lou, Ana Revenga, Caroline Sage, MarkSundberg, and Peter Timmer. The team was assisted by Maria Caridad Araujo, Andrew Beath,Ximena del Carpio, Celine Ferre, Thomas Haven, Claudio E. Montenegro, and Jeffery C. Tan-ner. The work was conducted under the general guidance of François Bourguignon.

Extensive and excellent advice was received from Anthony B. Atkinson, Angus Deaton, NailaKabeer, Martin Ravallion and Amartya Sen, to whom the team is grateful without implication.Many others inside and outside the World Bank also provided helpful comments; their namesare listed in the Bibliographical Note. The Development Data Group contributed to the dataappendix and was responsible for the Selected World Development Indicators. Much of thebackground research was supported by a multidonor programmatic trust fund, the Knowledgefor Change Program, funded by Canada, the European Community, Finland, Norway, Sweden,Switzerland, and the United Kingdom.

The team undertook a wide range of consultations for this Report, which included work-shops in Amsterdam, Beirut, Berlin, Cairo, Dakar, Geneva, Helsinki, Hyderabad, London,Milan, Nairobi, New Delhi, Oslo, Ottawa, Paris, Rio de Janeiro, Stockholm, Tokyo, Venice, andWashington, D.C.; videoconferences with sites in Bogota, Buenos Aires, Mexico City and Tokyo,and an on-line discussion of the draft Report. The team wishes to thank participants in theseworkshops, videoconferences, and discussions, which included researchers, government offi-cials, and staff of nongovernmental and private-sector organizations.

Rebecca Sugui served as executive assistant to the team, Ofelia Valladolid as program assis-tant, Madhur Arora and Jason Victor as team assistants. Evangeline Santo Domingo served asresource management assistant.

Bruce Ross-Larson was the principal editor. Book design, editing, and production werecoordinated by the World Bank’s Office of the Publisher under the supervision of Susan Gra-ham, Nancy Lammers, and Janet Sasser.

Acknowledgments

Consider two South African children born onthe same day in 2000. Nthabiseng is black,born to a poor family in a rural area in theEastern Cape province, about 700 kilometersfrom Cape Town. Her mother had no formalschooling. Pieter is white, born to a wealthyfamily in Cape Town. His mother completeda college education at the nearby prestigiousStellenbosch University.

On the day of their birth, Nthabiseng andPieter could hardly be held responsible fortheir family circumstances: their race, theirparents’ income and education, their urbanor rural location, or indeed their sex. Yetstatistics suggest that those predeterminedbackground variables will make a major dif-ference for the lives they lead. Nthabisenghas a 7.2 percent chance of dying in the firstyear of her life, more than twice Pieter’s 3percent. Pieter can look forward to 68 yearsof life, Nthabiseng to 50. Pieter can expect tocomplete 12 years of formal schooling,Nthabiseng less than 1 year.1 Nthabiseng islikely to be considerably poorer than Pieterthroughout her life.2 Growing up, she is lesslikely to have access to clean water and sani-tation, or to good schools. So the opportuni-ties these two children face to reach their fullhuman potential are vastly different fromthe outset, through no fault of their own.

Such disparities in opportunity translateinto different abilities to contribute toSouth Africa’s development. Nthabiseng’shealth at birth may have been poorer, owingto the poorer nutrition of her mother dur-ing her pregnancy. By virtue of their gendersocialization, their geographic location, andtheir access to schools, Pieter is much morelikely to acquire an education that willenable him to put his innate talents to fulluse. Even if at age 25, and despite the odds,Nthabiseng manages to come up with a

great business idea (such as an innovationto increase agricultural production), shewould find it much harder to persuade abank to lend her money at a reasonableinterest rate. Pieter, having a similarlybright idea (say, on how to design animproved version of promising software),would likely find it easier to obtain credit,with both a college diploma and quite pos-sibly some collateral. With the transition todemocracy in South Africa, Nthabiseng isable to vote and thus indirectly shape thepolicy of her government, somethingdenied to blacks under apartheid. But thelegacy of apartheid’s unequal opportunitiesand political power will remain for sometime to come. It is a long road from such a(fundamental) political change to changesin economic and social conditions.

As striking as the differences in lifechances are between Pieter and Nthabisengin South Africa, they are dwarfed by thedisparities between average South Africansand citizens of more developed countries.Consider the cards dealt to Sven—born onthat same day to an average Swedishhousehold. His chances of dying in thefirst year of life are very small (0.3 percent)and he can expect to live to the age of 80, 12years longer than Pieter, and 30 years morethan Nthabiseng. He is likely to complete11.4 years of schooling—5 years more thanthe average South African. These differencesin the quantity of schooling are com-pounded by differences in quality: in theeighth grade, Sven can expect to obtain ascore of 500 on an internationally compara-ble math test, while the average SouthAfrican student will get a score of only264—more than two standard deviationsbelow the Organisation for Economic Co-operation and Development (OECD) median.

Overview

Nthabiseng most likely will never reach thatgrade and so will not take the test.3

These differences in life chances acrossnationality, race, gender, and social groupswill strike many readers as fundamentallyunfair. They are also likely to lead to wastedhuman potential and thus to missed devel-opment opportunities. That is why WorldDevelopment Report 2006 analyzes the rela-tionship between equity and development.

By equity we mean that individualsshould have equal opportunities to pursue alife of their choosing and be spared fromextreme deprivation in outcomes. The mainmessage is that equity is complementary, insome fundamental respects, to the pursuitof long-term prosperity. Institutions andpolicies that promote a level playing field—where all members of society have similarchances to become socially active, politicallyinfluential, and economically productive—contribute to sustainable growth and devel-opment. Greater equity is thus doubly goodfor poverty reduction: through potentialbeneficial effects on aggregate long-rundevelopment and through greater opportu-nities for poorer groups within any society.

The complementarities between equityand prosperity arise for two broad sets ofreasons. First, there are many market fail-ures in developing countries, notably in themarkets for credit, insurance, land, andhuman capital. As a result, resources maynot flow where returns are highest. Forexample, some highly capable children, likeNthabiseng, may fail to complete primaryschooling, while others, who are less able,may finish university. Farmers may workharder on plots they own than on thosethey sharecrop. Some efficient developing-country producers of agricultural com-modities and textiles are shut out of someOECD markets, and poor unskilled workershave highly restricted opportunities tomigrate to work in richer countries.

When markets are missing or imperfect,the distributions of wealth and power affectthe allocation of investment opportunities.Correcting the market failures is the idealresponse; where this is not feasible, or fartoo costly, some forms of redistribution—of access to services, assets, or politicalinfluence—can increase economic efficiency.

The second set of reasons why equity andlong-term prosperity can be complementaryarises from the fact that high levels ofeconomic and political inequality tend tolead to economic institutions and socialarrangements that systematically favor theinterests of those with more influence. Suchinequitable institutions can generate eco-nomic costs. When personal and propertyrights are enforced only selectively, whenbudgetary allocations benefit mainly thepolitically influential, and when the distri-bution of public services favors the wealthy,both middle and poorer groups end up withunexploited talent. Society, as a whole, isthen likely to be more inefficient and to missout on opportunities for innovation andinvestment. At the global level, when devel-oping countries have little or no voice inglobal governance, the rules can be inappro-priate and costly for poorer countries.

These adverse effects of unequal opportu-nities and political power on development areall the more damaging because economic,political, and social inequalities tend to repro-duce themselves over time and across genera-tions. We call such phenomena “inequalitytraps.” Disadvantaged children from familiesat the bottom of the wealth distribution donot have the same opportunities as childrenfrom wealthier families to receive qualityeducation. So these disadvantaged childrencan expect to earn less as adults. Because thepoor have less voice in the political process,they—like their parents—will be less able toinfluence spending decisions to improvepublic schools for their children. And thecycle of underachievement continues.

The distribution of wealth is closely corre-lated with social distinctions that stratify peo-ple, communities, and nations into groupsthat dominate and those that are dominated.These patterns of domination persist becauseeconomic and social differences are rein-forced by the overt and covert use of power.Elites protect their interests in subtle ways, byexclusionary practices in marriage and kin-ship systems, for instance, and in ways thatare less subtle, such as aggressive politicalmanipulation or the explicit use of violence.

Such overlapping political, social, cultural,and economic inequalities stifle mobility.They are hard to break because they are so

2 WORLD DEVELOPMENT REPORT 2006

closely tied to the ordinary business of life.They are perpetuated by the elite, and ofteninternalized by the marginalized or oppressedgroups, making it difficult for the poor tofind their way out of poverty. Inequality trapscan thus be rather stable, tending to persistover generations.

The report documents the persistence ofthese inequality traps by highlighting theinteraction between different forms of in-equality. It presents evidence that the inequal-ity of opportunity that arises is wasteful andinimical to sustainable development andpoverty reduction. It also derives policyimplications that center on the broad conceptof leveling the playing field—both politicallyand economically and in the domestic andthe global arenas. If the opportunities facedby children like Nthabiseng are so muchmore limited than those faced by children likePieter or Sven, and if this hurts developmentprogress in the aggregate, then public actionhas a legitimate role in seeking to broaden theopportunities of those who face the mostlimited choices.

Three considerations are important atthe outset. First, while more even playingfields are likely to lead to lower observedinequalities in educational attainment,health status, and incomes, the policy aim isnot equality in outcomes. Indeed, even withgenuine equality of opportunities, one wouldalways expect to observe some differences inoutcomes owing to differences in preferences,talents, effort, and luck.4 This is consistentwith the important role of income differencesin providing incentives to invest in educationand physical capital, to work, and to takerisks. Of course outcomes matter, but we areconcerned with them mainly for their influ-ence on absolute deprivation and their role inshaping opportunities.

Second, a concern with equality of oppor-tunity implies that public action should focuson the distributions of assets, economicopportunities, and political voice, rather thandirectly on inequality in incomes. Policies cancontribute to the move from an “inequalitytrap” to a virtuous circle of equity and growthby leveling the playing field—through greaterinvestment in the human resources of thepoorest; greater and more equal access topublic services and information; guarantees

on property rights for all; and greater fair-ness in markets. But policies to level the eco-nomic playing field face big challenges.There is unequal capacity to influence thepolicy agenda: the interests of the disenfran-chised may never be voiced or represented.And when policies challenge privileges,powerful groups may seek to block reforms.Thus, equitable policies are more likely to besuccessful when leveling the economic play-ing field is accompanied by similar efforts tolevel the domestic political playing field andintroduce greater fairness in global gover-nance.

Third, there may be various short-run,policy-level tradeoffs between equity and effi-ciency. These are well recognized and exten-sively documented. The point is that the(often implicit) cost-benefit calculus thatpolicymakers use to assess the merits of vari-ous policies too often ignores the long-term,hard-to-measure but real benefits of greaterequity. Greater equity implies more efficienteconomic functioning, reduced conflict,greater trust, and better institutions, withdynamic benefits for investment and growth.To the extent that such benefits are ignored,policymakers may end up choosing too littleequity.

By the same token, however, those inter-ested in greater equity must not ignore theshort-term tradeoffs. If individual incen-tives are blunted by income redistributionschemes that tax investment and produc-tion too steeply, the result will be less inno-vation, less investment, and less growth.The history of the twentieth century is lit-tered with examples of ill-designed policiespursued in the name of equity that seriouslyharmed—rather than spurred—growthprocesses by ignoring individual incentives.A balance must be sought, taking intoaccount both the immediate costs to indi-vidual incentives and the long-term benefitsof cohesive societies, with inclusive institu-tions and broad opportunities.

While careful assessment of policy designin local contexts is always important, equityconsiderations need to be brought squarelyinto the center of both diagnosis and policy.This is not intended as a new framework. Itmeans integrating and extending existingframeworks: equity is central both to the

Overview 3

investment environment and to the agendaof empowerment, working through theimpact on institutions and specific policydesigns. Some may value equity for its ownsake, others primarily for its instrumentalrole in reducing absolute poverty, the WorldBank’s mission.

This report recognizes the intrinsic valueof equity but aims primarily to documenthow a focus on equity matters for long-rundevelopment. It has three parts.

• Part I considers the evidence on inequal-ity of opportunity, within and acrosscountries. Some attempts to quantifyinequality of opportunity are reviewedbut, more generally, we rely on evidenceof highly unequal outcomes acrossgroups defined by predetermined cir-cumstances—such as gender, race, fam-ily background, or country of birth—asmarkers for unequal opportunities.

• Part II asks why equity matters. It dis-cusses the two channels of impact (theeffects of unequal opportunities whenmarkets are imperfect, and the conse-quences of inequity for the quality ofinstitutions a society develops) as well asintrinsic motives.

• Part III asks how public action can levelthe political and economic playing fields.In the domestic arena, it makes the casefor investing in people, expanding accessto justice, land, and infrastructure, andpromoting fairness in markets. In theinternational arena, it considers levelingthe playing field in the functioning ofglobal markets and the rules that governthem—and the complementary provi-sion of aid to help poor countries andpoor people build greater endowments.

The remainder of this overview provides asummary of the principal findings.

Inequity within and across nationsFrom an equity perspective, the distribu-tion of opportunities matters more thanthe distribution of outcomes. But opportu-nities, which are potentials rather thanactuals, are harder to observe and measurethan outcomes.

Within-country inequities have many dimensionsDirect quantification of inequality ofopportunity is difficult, but one analysis ofBrazil provides an illustration (chapter 2).Earnings inequality in 1996 was dividedinto one share attributable to four predeter-mined circumstances that lie beyond thecontrol of individuals—race, region ofbirth, parental education, and paternaloccupation at birth—and a residual share.These four circumstances account foraround one-quarter of overall differences inearnings between workers. Arguably, otherdeterminants of opportunity are equallypredetermined at birth but not included inthis set—for example, gender, familywealth, or the quality of primary schools.Because such variables are not included inthe inequality “decomposition,” the resultshere can be seen as lower-bound estimatesof inequality of opportunity in Brazil.

Unfortunately, predetermined (and thusmorally irrelevant) circumstances deter-mine much more than just future earnings.Education and health are of intrinsic valueand affect the capacity of individuals toengage in economic, social, and politicallife. Yet children face substantially differentopportunities to learn and to lead healthylives in almost all populations, dependingon asset ownership, geographic location, orparental education, among others. Considerhow access to a basic package of immuniza-tion services differs for the rich and thepoor across countries (figure 1).

There is substantial inequality in accessbetween, for example, Egypt, where almosteveryone is covered (on the left), and Chad,where more than 40 percent of children areexcluded (on the right). Yet the disparitiescan be as large within some countries as theyare across all nations in the sample. InEritrea, for instance, the richest fifth enjoysalmost complete coverage, but almost half ofall children in the poorest fifth are excluded.

Significant gender differences also per-sist in many parts of the world. In parts ofEast and South Asia, notably in certain areasin rural China and northwest India, theopportunity to life itself can depend on onesingle predetermined characteristic: sex.These regions have significantly more boy

4 WORLD DEVELOPMENT REPORT 2006

infants than girls, in part because of sex-selective abortion and differential care afterbirth. And in many (though not all) parts ofthe world, more boys than girls attendschool. The hundreds of millions of dis-abled children across the developing worldalso face very different opportunities thantheir able-bodied peers.

These inequities are usually associatedwith differences in an individual’s “agency”—the socioeconomically, culturally, and polit-ically determined ability to shape the worldaround oneself. Such differences createbiases in the institutions and rules in favorof more powerful and privileged groups.This is seen in realities as diverse as the lowchances for mobility of scheduled castes ina village in rural India and the frequentepisodes of discrimination against theQuichua people in Ecuador. Persistent dif-ferences in power and status between

groups can become internalized into behav-iors, aspirations, and preferences that alsoperpetuate inequalities.

Inequalities of opportunity are alsotransmitted across generations. The chil-dren of poorer and lower-status parentsface inferior chances in education, health,incomes, and status. This starts early. InEcuador, three-year-old children from allsocioeconomic groups have similar testscores for vocabulary recognition and areclose to a standard international referencepopulation. But by the time they are five, allhave faltered relative to the internationalreference group, except for those in therichest groups and with the highest levels ofparental education (figure 2). Such pro-nounced differences in vocabulary recogni-tion between children whose parents had 0to 5 years of schooling and those whoseparents had 12 or more years are likely to

Overview 5

Percentage not covered

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40

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Figure 1 Wealth matters for the immunization of children

Source: Authors’ own calculations from Demographic Health Survey (DHS) dataNote: * indicates that the poorest quintile have higher access to childhood immunization services than the wealthiest quintile.The continuous orange line represents the overall percentage of children without access to a basic immunization package in each country,while the endpoints indicate the percentages for the top and the bottom quintile of the asset ownership distribution.

carry over to their performance once theyenter primary school, and will likely persistthereafter. Intergenerational immobility isalso observed in rich countries: new evi-dence from the United States (where themyth of equal opportunity is strong) findshigh levels of persistence of socioeconomicstatus across generations: recent estimatessuggest that it would take five generationsfor a family that earned half the nationalaverage income to reach the average.5

Immobility is particularly pronounced forlow-income African Americans.

Global inequities are massiveIf unequal opportunities are large withinmany countries, they are truly staggering ona global scale. Chapter 3 shows that cross-country differences begin with the opportu-nity for life itself: while 7 of every 1,000American babies die in the first year of theirlives, 126 of every 1,000 Malian babies do.Babies who survive, not only in Mali but inmuch of Africa and in the poorer countriesof Asia and Latin America, are at muchgreater nutritional risk than their counter-parts in rich countries. And if they go toschool—more than 400 million adults indeveloping countries never did—theirschools are substantially worse than thoseattended by children in Europe, Japan, orthe United States. Given lower school qual-

ity, undernutrition, and the earnings a childcan generate by working instead of study-ing, many children leave school early. Theaverage person born between 1975 and1979 in Sub-Saharan Africa has only 5.4years of schooling. In South Asia, the figurerises to 6.3 years; in OECD countries, it is13.4 years.

With such differences in education andhealth, compounded by large disparities inaccess to infrastructure and other publicservices, it is not surprising that opportuni-ties for the consumption of private goodsdiffer vastly between rich and poor coun-tries. Mean annual consumption expendi-tures range from Purchasing Power Parity(PPP) $279 in Nigeria to PPP $17,232 inLuxembourg. This means that the averagecitizen in Luxembourg enjoys monetaryresources 62 times higher than the averageNigerian. While the average Nigerian mayfind it difficult to afford adequately nutri-tious meals every day, the average citizen ofLuxembourg need not worry too muchabout buying the latest generation cellphone on the market. Because of the muchgreater restrictions on the movement ofpeople between countries than withincountries, these inequalities in outcomesamong countries are likely to be much moreclosely associated with inequalities inopportunities than within countries.

Global inequality trends have varied.Between 1960 and 1980 there was a pro-nounced decline in the inequality in lifeexpectancy across countries, driven bymajor increases in the poorest countries inthe world (figure 3). This welcome develop-ment was due to the global spread of healthtechnology and to major public healthefforts in some of the world’s highest mor-tality areas. Since 1990, however, HIV/AIDS(predominantly in many African countries)and a rise in mortality rates in transitioneconomies (largely in Eastern Europe andCentral Asia) have set back some of the ear-lier gains. Because of the AIDS crisis, lifeexpectancy at birth has fallen dramaticallyin some of the world’s poorest countries,sharply increasing the differences betweenthem and richer societies.

Inequality in access to schooling has alsobeen falling around the world, within most

6 WORLD DEVELOPMENT REPORT 2006

40 60 7050

100

90

80

70

60

110

Wealthiest 25%

Median score Median score

Poorest 25th%

40 60 7050Age in months Age in months

Wealthiest and poorest quartiles Maternal education

100

90

80

70

60

110

12 or more years

0–5 years

Figure 2 Opportunities are determined early Cognitive development for children ages three to five in Ecuador differs markedly across familybackgrounds

Source: Paxson and Schady (2005).Note: Median values of the test of vocabulary recognition (TVIP) score (a measure of vocabulary recognition in Spanish,standardized against an international norm) are plotted against the child’s age in months. The medians by exact monthof age were smoothed by estimating fan regressions of the median score on age (in months), using a bandwidth of 3.

0

0.05

2000

1990

1960

Population-weighted internationaldistribution of life expectancy, 1960–2000

27 39 51 63Years

75 87

Figure 3 Life expectancy improved andbecame more equal—until the onsetof the AIDS crisis

Source: Schady (2005).

countries as well as across them, as averageschooling levels rise in the vast majority ofcountries. This too is a welcome develop-ment, although concerns over the quality ofschooling provide reasons for guardingagainst complacency.

While our primary concern is withinequality of opportunities, the large dif-ferences in income or consumption acrosscountries surely affect the life chances facedby children born today in those differentnations. Trends in life expectancy at birthand years of schooling were converging, atleast until 1990, but a different pictureemerges for income and consumption.While the recent trends depend greatly onthe specific concept chosen (discussed ingreat detail in chapter 3), global incomeinequality has steadily increased over thelong run until the onset of rapid economicgrowth in China and India in the 1980s(figure 4).

It is possible to decompose totalinequality across individuals in the worldinto differences among countries and dif-ferences within countries. Between-coun-try differences were relatively small early inthe nineteenth century, but they came toaccount for a larger part of total inequalitytoward the end of the twentieth century. IfChina and India are excluded, globalinequalities have continued to rise, owingto the continuing divergence betweenmost other low-income countries and richcountries.

Why does equity matter for development?Why do these persistent inequalities—both within and across countries—matter?The first reason is that the interconnec-tions and resilience of these inequalitiesimply that some groups have consistentlyinferior opportunities—economic, social,and political—than their fellow citizens.Most people feel that such egregious dis-parities violate a sense of fairness, particu-larly when the individuals affected can dolittle about them (chapter 4). This is con-sistent with the teachings of much politi-cal philosophy and with the internationalsystem of human rights. The core moraland ethical teachings of the world’s lead-ing religions include a concern for equity,although many have also been sources ofinequities and historically have been linkedto unequal power structures. There is alsoexperimental evidence suggesting thatmany—but not all—people behave inways consistent with a concern for fair-ness, in addition to caring about how theyfare individually.

Important as these intrinsic reasons arefor caring about inequality of opportunitiesand unfair processes, the primary focus ofthis report is on the instrumental relation-ship between equity and development, withparticular emphasis on two channels: theeffects of unequal opportunities when mar-kets are imperfect, and the consequences ofinequity for the quality of institutions asociety develops.6

With imperfect markets, inequalities inpower and wealth translate into unequalopportunities, leading to wasted productivepotential and to an inefficient allocation ofresources. Markets often work imperfectlyin many countries, whether because ofintrinsic failures—such as those associatedwith asymmetric information—or becauseof policy-imposed distortions. Microeco-nomic case studies suggest that an ineffi-cient allocation of resources across produc-tive alternatives is often associated withdifferences in wealth or status (chapter 5).

If capital markets worked perfectly, therewould be no relation between investment

Overview 7

Mean log deviation1

0.8

0.6

0.4

0.2

019921980197019601950192919101890187018501820

0.33

0.50

0.83

0.33

0.36

0.69

0.05

0.37

0.42

Global inequality

Within-country inequality

Between-country inequality

Figure 4 A long-run diverging trend in incomeinequality begins to reverse because of growth in China and India

Source: Authors’ manipulation of data from Bourguignon and Mor-risson (2002).

and the distribution of wealth: anyone witha profitable investment opportunity wouldbe able to either borrow money to financeit, or to sell equity in a firm set up to under-take it. But capital markets in just aboutevery country (developed and developing)are very far from perfect: credit is rationedacross prospective clients, and interest ratesdiffer considerably across borrowers, andbetween lenders and borrowers, in waysthat cannot be linked to default risk orother economic factors affecting expectedreturns to lenders. For example, interestrates decline with loan size in Kerala andTamil Nadu in India, and across tradinggroups in Kenya and Zimbabwe, in ways notexplained by risk differences.7 In Mexico,returns to capital are much higher for thesmallest informal sector firms than forlarger ones.

Land markets also have imperfectionsassociated with a lack of clear titling, histo-ries of concentrated land ownership, andimperfect rental markets. In Ghana, lowersecurity of tenure among women leads toan inefficiently low frequency of land fal-lowing and, hence, to progressive declinesin land productivity.

The market for human capital is alsoimperfect, because parents make decisions on

behalf of their children and because theexpected returns to investment are influencedby location, contacts, and discrimination—on grounds of gender, caste, religion, orrace. Discrimination and stereotyping—mechanisms for the reproduction of inequal-ity between groups—have been found tolower the self-esteem, effort, and perform-ance of individuals in the groups discrimi-nated against. This reduces their potential forindividual growth and their ability to con-tribute to the economy.

Striking evidence of the impact ofstereotyping on performance comes from arecent experiment in India. Children fromdifferent castes were asked to complete sim-ple exercises, such as solving a maze, withreal monetary incentives contingent on per-formance. The key result of the experimentis that low-caste children perform on parwith high-caste children when their caste isnot publicly announced by the experi-menter but significantly worse when it ismade public (figure 5). If a similar inhibi-tion of talent occurs in the real world, thisimplies a loss of potential output owing tosocial stereotyping.

Economic and political inequalities areassociated with impaired institutionaldevelopment. The second channel throughwhich inequity affects long-run processesof development is the shaping of economicand political institutions (chapter 6). Insti-tutions determine the incentives and con-straints people face and provide the contextin which markets function. Different sets ofinstitutions are the outcome of complexhistorical processes that reflect the interestsand structure of political influence ofdifferent individuals and groups in a soci-ety. From this perspective, market im-perfections may arise not by accident butbecause they distribute income or power inparticular ways. In this view, there will besocial conflict over the institutions ofsociety and incentives for people who con-trol power to shape institutions in waysthat benefit them.

The central argument here is thatunequal power leads to the formation ofinstitutions that perpetuate inequalities inpower, status, and wealth—and that typi-

8 WORLD DEVELOPMENT REPORT 2006

8

6

4

2

0Caste

notannounced

Castenot

announced

Casteannounced

Casteannounced

Casteannounced

andsegregated

High casteLow caste

Piece rate Tournament

Average number of mazes solved, by caste,in five experimental treatments

Figure 5 Children’s performance differs when theircaste is made salient

Source: Hoff and Pandey (2004).Note: The figure depicts the number of mazes correctly completedby low-caste and high-caste children from a set of Indian villagesin a number of different experiments. The difference between thefirst two and the last three columns refers to payouts: whetherchildren are paid per correct maze completed (piece rate) or onlyif they complete the most mazes (tournament).

cally are also bad for the investment, inno-vation, and risk-taking that underpinlong-term growth. Good economic insti-tutions are equitable in a fundamentalway: to prosper, a society must createincentives for the vast majority of thepopulation to invest and innovate. Butsuch an equitable set of economic institu-tions can emerge only when the distribu-tion of power is not highly unequal and insituations in which there are constraintson the exercise of power by officeholders.Basic patterns in cross-country data andhistorical narratives support the view thatcountries moving onto institutional pathsthat promoted sustained prosperity did sobecause the balance of political influenceand power became more equitable.

One example comes from a comparisonof the early institutions and of the long-term development paths of Europeancolonies in North and South America. Theabundance of unskilled labor prevalent inthe South American colonies—where eithernative Americans or imported Africanslaves were available in large numbers—combined with the technology of miningand large plantation agriculture to providethe economic base for hierarchical andextractive societies, in which land owner-ship and political power were highly con-centrated. In North America, by contrast,similar attempts to introduce hierarchicalstructures were foiled by the scarcity oflabor—except where agro-climatic condi-tions made slavery economically feasible,such as in the southern region of the UnitedStates. Competition for free labor in thenorthern areas of North America led to thedevelopment of less unequal land owner-ship patterns, a faster expansion of the fran-chise, and rapid increases in literacy andbasic education. The resulting economicand political institutions persisted overtime, with positive consequences for long-run economic development.

Leveling the economic and political playing fieldsSo a portion of the economic and politicalinequalities we observe around the world isattributable to unequal opportunities. This

inequality is objectionable on both intrinsicand instrumental grounds. It contributes toeconomic inefficiency, political conflict, andinstitutional frailty. What are the implica-tions for policy, and do they give rise to anagenda that is different from the povertyreduction agenda already embraced by theWorld Bank, other multilateral institutions,and many governments?

We argue that an equity lens enhancesthe poverty reduction agenda. The poorgenerally have less voice, less income, andless access to services than most other peo-ple. When societies become more equitablein ways that lead to greater opportunities forall, the poor stand to benefit from a “doubledividend.” First, expanded opportunitiesbenefit the poor directly, through greaterparticipation in the development process.Second, the development process itself maybecome more successful and resilient asgreater equity leads to better institutions,more effective conflict management, and abetter use of all potential resources in soci-ety, including those of the poor. Resultingincreases in economic growth rates in poorcountries will, in turn, contribute to areduction in global inequities.

One manifestation of the greater partic-ipation of the poor in economic growth isthe fact that the growth elasticity ofpoverty reduction falls with greater incomeinequality. In other words, the impact of(the same amount of) growth on povertyreduction is significantly greater when ini-tial income inequality is lower. On average,for countries with low levels of incomeinequality, a 1 percentage point growth inmean incomes leads to about a 4 percent-age-point reduction in the incidence of $1per day poverty. That power falls to close tozero in countries with high incomeinequality.8 Policies that lead to greaterequity thus lead to lower poverty—directlythrough expanding the opportunities ofthe poor and indirectly through higher lev-els of sustained development.

An equity lens adds three new—or atleast often neglected—perspectives to devel-opment policymaking:

• First, the best policies for povertyreduction could involve redistributions

Overview 9

of influence, advantage, or subsidiesaway from dominant groups. Highlyunequally distributed wealth associatedwith unduly concentrated politicalpower can prevent institutions fromenforcing broad-based personal andproperty rights, and lead to skewed pro-visioning of services and functioning ofmarkets. This is unlikely to changeunless voice and influence, and publicresources, shift away from the domi-nant group toward those with feweropportunities.9

• Second, while such equity-enhancingredistributions (of power, or access togovernment spending and markets) canoften be efficiency-increasing, possibletradeoffs need to be assessed in thedesign of policy. At some point, highertax rates to finance spending on moreschools for the poorest will create somuch disincentive to effort or invest-ment (depending on how the taxes areraised), that one should stop raisingthem. When making a policy choicealong such tradeoffs, the full value of thebenefits from equity enhancementshould be considered. If greater spend-ing on schools for lower-caste childrenmeans that, over the long term, stereo-typing will decline in society, with atten-dant increases in performance that areadditional to the specific gains fromgreater schooling today, these gainsshould not be ignored.

• Third, the dichotomy between policiesfor growth and policies specificallyaimed at equity is false. The distributionof opportunities and the growth processare jointly determined. Policies that affectone will affect the other. This does notmean that each policy needs to takeequity into account individually: forexample, the best way to deal withinequitable effects of a particular tradereform is not always through fine-tuningtrade policy itself (which might make itmore susceptible to capture) but throughcomplementary policies for safety nets,labor mobility, and education. The over-all package and the fairness of the under-lying process are what matter.

The analysis of development experienceclearly shows the centrality of overall politi-cal conditions—supporting the emphasison governance and empowerment in recentyears. However, it is neither the mandatenor the comparative advantage of theWorld Bank to engage in advice on issues ofpolitical design. In turning to policy impli-cations, we focus instead on the core areasof development policy, while recognizingthat policy design needs to take account ofthe broader social and political context, andthat accountability mechanisms influencedevelopment effectiveness.

Because economic policies are deter-mined within a sociopolitical reality, howpolicies are designed, introduced, orreformed matters as much as which specificpolicies are proposed. Policy reforms thatresult in losses for a particular group will beresisted by that group. If the group is pow-erful, it will usually subvert the reform. Thesustainability of reforms, therefore, maydepend on making information about itsdistributional consequences publicly avail-able and, perhaps, forming coalitions ofmiddle and poorer groups that stand togain from them to “empower,” directly orindirectly, relatively disadvantaged mem-bers of society.

How policies are implemented has atechnical aspect as well. Just as we empha-size that the full long-term benefits of redis-tributions need to be taken into accountwhen making policy choices, so must alltheir costs. A focus on equity does notchange the facts that asset expropriations—even in instances of historical grievances—may have adverse consequences for subse-quent investment, that high marginal taxrates create disincentives to work, or thatinflationary financing of budget deficitstends to lead to regressive implicit taxation,economic disorganization, and reducedinvestment and growth. In short, a focus onequity must not be an excuse for poor eco-nomic policy.

The report discusses the role of publicaction in leveling the economic and politi-cal playing field under four main headings.Three of the headings concern domesticpolicies: investing in human capacities;expanding access to justice, land, and infra-

10 WORLD DEVELOPMENT REPORT 2006

structure; and promoting fairness in mar-kets. The fourth turns to policies for greaterglobal equity, in terms of access to markets,resource flows, and governance.

Throughout the discussion, the reportweighs a desire to be specific and practicalagainst the fact that the best specific policymix is a function of country context. Theeducational challenges facing Sudan aredifferent from those facing Egypt. Theoptimal sequencing of reform in the publicsectors of Latvia and Bolivia are unlikely tobe the same. The capacity for implement-ing health finance reform in China andLesotho are also different. So the detailed,specific policy advice always needs to bedeveloped at the country—or even subna-tional—level. Everything that is said belowtherefore retains some level of generalityand should be interpreted accordingly, andcautiously.

Human capacitiesEarly childhood development. In manydeveloping countries, the actions of thestate in providing services magnify—ratherthan attenuate—inequalities at birth. Aguiding principle is to shape public actionso that the acquisition of human capacitiesis not driven by circumstances of theirbirth, although it can reflect people’s prefer-ences, tastes, and talents.

Because differences in cognitive devel-opment start to widen from a very earlyage (see figure 2), early childhood develop-ment initiatives can be central to moreequal opportunities. Evidence supports theview that investing in early childhood haslarge impacts on children’s health andreadiness to learn and can bring importanteconomic returns later in life—oftengreater than investments in formal educa-tion and training.

An experiment in Jamaica focused onundersized children (ages 9 to 24 months)and found that they suffered from lowerlevels of cognitive development than thoseof normal height. Nutritional supplementsand a program of regular exposure to men-tal stimulation, helped offset this disadvan-tage. After 24 months, kids who receivedboth better nutrition and more stimulationhad virtually caught up developmentally

with children who started life at a normalheight (figure 6). This illustrates how deci-sive and well-designed public action cansubstantially reduce the opportunity gapsbetween those least privileged and the soci-etal norm. Investing in the neediest peopleearly in their childhoods can help level theplaying field.

Schooling. The process continues through-out the school system. Actions to equalizeopportunities in formal education need toensure that all children acquire at least abasic level of skills necessary to participatein society and in today’s global economy.Even in such middle-income countries asColombia, Morocco, and the Philippines,most children completing basic educationlack an adequate level of achievement, asmeasured by internationally comparabletest scores (chapters 2 and 7).

Access to schooling matters—especiallyin very poor countries—but, in many coun-tries, it is only a small part of the problem.Greater access needs to be complemented bysupply-side policies (to raise quality) anddemand-side policies (to correct for the pos-sibility that parents may underinvest in theeducation of their children for various rea-sons). There are no magic bullets for this, butincreasing teachers’ incentives, enhancingthe basic quality of the school’s physicalinfrastructure, and researching and imple-menting teaching methods to increase thelearning performance of students who do

Overview 11

85

110Development quotient

Baseline 6 12Months

18 24

105

100

95

90Control group

Nutritional supplement

Stimulation

Stimulation and nutritional supplementChildren of normalheight

Figure 6 Catching up through early interventions

Source: Grantham-McGregor and others (1991).Note: The development quotient is an index of progress on four behavioral and cognitive indicators of childhooddevelopment. Number of months refers to the time after entry into the program—generally at an age of nine months.

not do well when left to their own devices aresome of the suggestions on the supply side.

On the demand side, there is now a con-siderable body of evidence showing thatscholarships conditional on attendance havesignificant impacts. Such transfers work incountries from Bangladesh to Brazil, with theimpacts often greater for girls. There are alsopromising approaches to bring in excludedgroups—as in the Vidin model of reachingRoma in Bulgaria—and to bring up those leftbehind through remedial education—as inthe Balsakhi program using young women aspara-teachers in 20 cities in India. As arguedin World Development Report 2004, devel-oping the accountability of schools andteachers to students, parents, and the broadercommunity can help ensure effective serviceprovider behavior.

Health. Two areas stand out in reducinginequity and tackling economic distortionsin the provision of health services. First,there are many cases when the benefits spillover beyond the direct beneficiary in arange of areas of service provision: forimmunization, for water and sanitation,and for information on hygiene and childcare. Public assurance of provisioningmakes sense in these areas. Demand-sidesubsidies to provide incentives for maternaland child health increase use, offsettingpossible information problems as in Mex-ico’s Oportunidades program.

Second, insurance markets for cata-strophic health problems are beset with fail-ures. (Here “catastrophic” is in relation to thecapacity of the household to deal with thedirect costs and the loss in earnings.) The tra-ditional supply-side model of relying on pub-lic hospitals works badly, especially for poorand excluded groups. What can work better ispublic provisioning or regulation that pro-vides some insurance for all. Examplesinclude risk pooling in Colombia, healthcards in Indonesia and Vietnam, and Thai-land’s “30-baht” universal coverage scheme.As with education, these interventions needto be combined with incentives for providersto be responsive to all groups.

Risk management. Social protection sys-tems shape opportunities by providing peo-

ple with a safety net. In addition to ill health,macroeconomic crises, industrial restructur-ing, weather, and natural disasters can con-strain investment and innovation. The poor,with the lowest capacity to manage shocks,generally are the least well covered by risk-management structures, although in mostcountries many among the non-poor riskfalling into poverty. Broader social protec-tion systems can help prevent today’sinequalities—sometimes generated by badluck—from becoming entrenched and lead-ing to tomorrow’s inequities. Just as safetynets can spur households to engage in riskieractivities that can yield higher returns, theycan also help complement reforms that pro-duce losers.

Safety nets typically target three groups:the working poor, people viewed as unable towork or for whom work is undesirable, andspecial vulnerable groups. If safety nets aredesigned in a manner appropriate to the localrealities on the ground in each country, indi-vidual targeted interventions in these threecategories can be combined to provide aneffectively universal public insurance system.In such a system, each household that suffersa negative shock, and falls below some prede-termined threshold of living standards,would qualify for some form of state support.

Taxes for equity. Successful interventions tolevel the playing field require adequateresources. The main aim of good tax policy isto mobilize sufficient funding, while distort-ing incentives and compromising growth aslittle as possible. Because taxes impose effi-ciency costs by altering individual choicesbetween labor and leisure and consumptionand savings, most developing countries arelikely to be best served by avoiding high mar-ginal taxes on income and relying on a broadbase, especially for taxes on consumption.Public spending should play the primary rolein actively furthering equity. Nevertheless,there is some scope for making the overall taxsystem moderately progressive without largeefficiency costs. Societies that desire such anoutcome can consider simple exemptions forbasic foodstuffs, and an expanded role forproperty taxation, for example.

While the capacity of the tax administra-tion and the structure of the economy influ-

12 WORLD DEVELOPMENT REPORT 2006

ence the ability to raise revenues, the qualityof institutions and the nature of the socialcompact are also critical. When citizens canrely on services actually being provided, theylikely are more willing to be taxed. Con-versely, a corrupt or kleptocratic state engen-ders little citizen trust in authority and littleincentive to cooperate. As a general rule, amore legitimate and representative state maybe a prerequisite to an adequate tax system,even as the notion of adequacy varies fromcountry to country.

Justice, land, and infrastructureThe development of human capacities willnot broaden opportunities if some peopleface unfair returns on those capacities andunequal protection of their rights, and haveunequal access to complementary factors ofproduction.

Building equitable justice systems. Justicesystems can do much to level the playingfield in the political, economic, and socio-cultural domains, but they can also rein-force existing inequalities. The report paysattention to both codified law and the waysin which the law is applied and enforced inpractice. Legal institutions can uphold thepolitical rights of citizens and curb the cap-ture of the state by the elite. They can equal-ize economic opportunities by protectingproperty rights for all and ensuring nondis-crimination in the market. They underpinand reflect the rules of the game in societyand thus are central to fair process—and tothe broad-based property rights and un-biased dispute resolution mechanisms soimportant for investment.

The law can also accelerate shifts innorms, and justice systems can serve as aprogressive force for change in the socialdomain by challenging inequitable prac-tices. For example, the U.S. Civil Rights Actof 1964 and Medicare in 1965 enforced thedesegregation of hospitals and led to largereductions in infant mortality for AfricanAmericans. Affirmative action programshave also been shown to reduce group-based differences in earnings and educa-tion. But they can become politicallyentrenched and limited to helping the bet-ter-off among disadvantaged groups.

Equity in laws and fairness in their imple-mentation involve striking a balance betweenstrengthening the independence of justicesystems and increasing accountability—especially to counter the risk that the pow-erful and wealthy might corrupt, influence,or ignore the law. Measures to make thelegal system more accessible—mobilecourts, legal aid, and working with custom-ary institutions—all help reduce the barri-ers that excluded groups face. Customaryinstitutions raise complex issues and mayincorporate inequities (for example, withrespect to gender), but they are too impor-tant to be ignored. South Africa is an exam-ple of a country that is pursuing a policythat balances recognition of customarypractices with the rights and responsibilitiesin state law.

Toward greater equity in access to land.Broader access to land does not necessarilyhave to come through ownership (chapter 8).Instead, improving the functioning of landmarkets and providing greater security oftenure for poorer groups may be a morefruitful area for policy—as in rural Thailandand in urban Peru. Redistributive landreform can make sense in some circum-stances in which land inequalities are extremeand the institutional context allows fordesigns that effectively redistribute land tosmaller farms and support this with comple-mentary services, without large transitionalcosts. But this can be difficult, and tradeoffsmay be large when property rights have ahigh degree of legitimacy.

Expropriating land (with compensation)is probably the most disruptive redistributioninstrument. Divesting state lands and recu-perating illegal settlements, possibly inexchange for titling a portion of the settle-ment, may be two cost-effective alternatives.Market or community-based approaches thatallow community members to obtain subsi-dized credit for land rentals or purchasesaccording to the willing-buyer-willing-sellerprinciple, as in Brazil and South Africa,appear promising. A land tax can be a usefulcomplement, generating revenues to pur-chase land to redistribute or encouragingredistribution by disproportionately taxinglarge or underused plots.

Overview 13

Providing infrastructure equitably. Access toinfrastructure—roads, electricity, water,sanitation, telecoms—is typically highly un-equal across groups. For many people indeveloping countries, lack of access toaffordable infrastructure services means liv-ing in isolation from markets and servicesand having intermittent or no supply ofpower or water for productive activities anddaily existence. This often results in a signifi-cant curtailment of economic opportunities.

While the public sector will in manycases remain the main source of funds forinfrastructure investments aimed at broad-ening opportunities for those who have thefewest, the efficiency of the private sectorcan also be harnessed. Although utility pri-vatizations have often been attacked forhaving unequal effects, the evidence indi-cates a more complex reality. Privatizationsin Latin America typically led to expansionsin access to services, particularly in electric-ity and telecommunications. In some cases,however, postprivatization increases inprices more than outweighed gains fromquality and coverage, leading to widespreadpopular discontent.

Privatizations are therefore a classic caseof a policy that may or may not make sense,depending on the local context. If the publicsystem is highly corrupt or inefficient, andone expects postprivatization regulatorycapacity to be adequate, it can be a usefultool. In other cases, poorly designed privati-zations may be captured, transferring pub-lic assets, at excessively low prices, into pri-vate hands.

Experience suggests that whether infra-structure services are provided by privateoperators or public utilities seems lessimportant for equity than the structure ofincentives facing providers and howaccountable these providers are to the gen-eral public. We argue that policymakers canimprove the equitable provision of infra-structure services by focusing on expand-ing affordable access for poor people andpoor areas—which often means workingwith informal providers and targetingsubsidies—and strengthening the gover-nance of the sector through the greateraccountability of providers and thestronger voice of beneficiaries.

Markets and the macroeconomyMarkets are central to shaping the potentialfor people to convert their assets into out-comes. When market transactions are influ-enced by the wealth or status of participants,they are both inequitable and inefficient—and can also influence the incentives fordifferent groups to expand their assets(chapter 9).

Financial markets. Captured banking sys-tems exchange favors: market power is pro-tected for a few large banks, which then lendfavorably to a few selected enterprises, whichmay not be those with the highest expectedrisk-adjusted returns. This may lie behind across-country association between greaterfinancial depth and lower income inequal-ity. Achieving more equal access to financeby broadening financial systems thus canhelp productive firms that were previouslybeyond the reach of formal finance.

These relations are only suggestive, how-ever, so the report draws on case studiesfrom middle-income economies, such asthe Republic of Korea, Malaysia, Mexico,and the Russian Federation, and poorereconomies, including Indonesia and Pak-istan, to provide more concrete evidence.These studies suggest an apparent paradox.Societies with extensive inequalities inpower and wealth, weak institutions, andcontrolled financial systems typically sufferfrom narrow financial sectors that are ori-ented to the influential and hide weak assetquality. Opening the financial system wouldseem to be an obvious solution. Liberaliza-tion, however, has also often been capturedby the influential or wealthy, in countriesranging from Mexico (in the early 1990s) totransition economies such as the CzechRepublic and Russia.

Gradual deepening and broadening thusneeds to be combined with stronger horizon-tal accountability (in regulatory structures),greater openness to societal accountability,and, where feasible, external commitmentdevices (such as the entry of Central Euro-pean and Baltic states to the EuropeanUnion). Programs targeted to the poor—such as microcredit schemes—can help butare no substitute for the overall broadening ofaccess.

14 WORLD DEVELOPMENT REPORT 2006

Labor markets. Leveling the playing field inlabor markets consists of seeking the right(country-specific) balance between flexibilityand protection to provide more equal accessto equal employment conditions to as manyworkers as possible. Many countries havefairly extensive regulations and provisions forformal sector workers, and far fewer for “out-siders” in the unregulated (and often less safe)informal sector. There is usually a degree ofvoluntary movement between the sectors,and great diversity within the informal sectoritself, ranging from microentrepreneurs andsome of the self-employed with incomesabove formal sector workers to many withmuch worse employment conditions. Thismix leads to inadequate protection for poorerworkers, while regulations for formal workerscan reduce the flexibility of employment andoften are a poor deal for the workers them-selves, such as when job-related social secu-rity systems are inefficient.

Two broad labor market approaches arerelevant for equity. First, interventions inthe labor market should ensure effectiveapplication of the core labor standardsacross the whole market, implying no slaveor indentured work, no dangerous forms ofchild labor, and no discrimination. Workersshould be free to assemble and form associ-ations, and their unions should be free tohave an active role in bargaining. Second, inall areas the policy mix needs to be assessedin ways that balance protection (for allworkers) with allowances for the restructur-ing so central to dynamic growth andemployment creation.

Worker security is often provided by vari-ous excessively stringent forms of employ-ment protection legislation, which, in generalmake it costly to hire and, in some cases,make it even costlier to hire unskilled, young,and female workers—exactly those the lawsseek to protect. For many countries, less dis-tortionary and more inclusive policy alterna-tives are available, which may make the play-ing field more even in labor markets. Thesealternatives include unemployment insur-ance schemes (more likely in middle-incomecountries) and low-wage employmentschemes (ideally with an employment guar-antee), which can be applied successfully evenin poor countries or states.

Product markets. There is substantial het-erogeneity in the effects of opening a coun-try’s product markets to trade, at least in theshort to medium term. This can be due togeographic location, as illustrated by thevarying impact of trade liberalization inMexico (figure 7). This illustrates theimportance of interactions between domes-tic product markets and patterns of infra-structure provision. There are also oftenstrong interactions with skills in the labormarket. In many countries, opening totrade (often coinciding with opening to for-eign direct investment) has been associatedwith rising inequality in earnings in the pasttwo decades. This is especially so for mid-dle-income countries, notably in LatinAmerica. Opening to trade often boosts thepremium on skills as firms modernize theirproduction processes (skill-biased technicalchange, in the jargon of economists). This isbad for equity if the institutional contextrestricts the capacity of workers to shift intonew work—or limits future cohorts’ accessto education.

Macroeconomic stability. This report arguesthat there are two-way relationships betweeninequitable institutions and macroeconomiccrises, with mostly bad effects for equity and

Overview 15

Changes inhousehold welfare

> 5 percent4–5 percent2–4 percent0–2 percent

Figure 7 Better to be close to economic opportunitiesChanges in household welfare in Mexico, following trade liberalization in the 1990s

Source: Nicita (2004).

long-run growth. Weak and captured institu-tions are associated with a greater propensityfor countries to experience macroeconomiccrises. When crises occur, they can be costlyfor the poor, who have weaker instrumentsto manage shocks. In addition, crisis resolu-tion is often regressive, through a variety ofmechanisms (most of them not captured intraditional household survey instruments):declines in the labor share, at least for formalworkers; capital gains for those who get theirmoney out; and fiscal workouts that bail outthe influential at substantial cost. Suchbailouts must be paid for through somecombination of higher taxes and lowerspending. Because taxes are typically propor-tional and spending is often progressive atthe margin (notably in Latin America), thecost of bailouts is borne disproportionatelyby poorer groups. High inflation has alsobeen found to be both bad for growth andregressive in its impact.

A concern for equity would lead, in gen-eral, to a highly prudent stance on macroeco-nomic management and financial regulation.Populist macroeconomic policy, sooner orlater, is bad for equity and bad for growth.Policy design can increase equity through thepursuit of countercyclical fiscal policy, build-ing safety nets before a crisis, reducing riskylending, and supporting only smaller deposi-tors in bailouts. But, as in other policy areas,these responses need to be underpinned byinstitutional designs that combine greaterinstitutional freedom from political influence(such as independent central banks and auto-nomous financial regulatory agencies) withgreater information and debate in society.

The global arenaOne predetermined circumstance that mostpowerfully determines a person’s opportuni-ties for leading a healthy and productive life ishis or her country of birth. Global inequitiesare massive. Reducing them will depend pri-marily on domestic policies in poor countriesthrough their impact on growth and develop-ment. But global action can change externalconditions and affect the impact of domesticpolicies. In this sense, global and domesticactions are complementary.

We live in an integrated world in whichpeople, goods, ideas, and capital flow across

countries. Indeed, most policy advice given topoor countries over the last several decades—including that by the World Bank—hasemphasized the advantages of participatingin the global economy. But global markets arefar from equitable, and the rules governingtheir functioning have a disproportionatelynegative effect on developing countries(chapter 10). These rules are the outcome ofcomplex negotiating processes in whichdeveloping countries have less voice. More-over, even if markets worked equitably,unequal endowments would limit the abilityof poor countries to benefit from globalopportunities. Leveling the global economicand political playing fields thus requires moreequitable rules for the functioning of globalmarkets, more effective participation of poorcountries in global rule-setting processes, andmore actions to help build and maintain theendowments of poor countries and poorpeople.

The report documents some of the manyinequities in the functioning of global mar-kets for labor, goods, ideas, and capital.Unskilled workers from poor countries, whocould earn higher returns in rich countries,face great hurdles in migrating. Developing-country producers face obstacles in sellingagricultural products, manufactured goods,and services in developed countries. Patentprotection restricts access to innovations(particularly drugs) for poor countries, whilenew research is strongly oriented to thediseases of richer societies. Rich-countryinvestors often get better deals in debt crises.In most cases, more equitable rules wouldbring benefits to developed- and developing-country citizens. Benefits vary across marketsand countries, with those from greater legalmigration likely to be greatest (and to accruedirectly to migrants) and those from tradelikely to accrue mostly to middle-incomerather than the least developed countries.

The report discusses options to reduceinequities in the functioning of global mar-kets, including the following: allowing greatertemporary migration into OECD countries,achieving ambitious trade liberalizationunder the Doha Round, allowing poor coun-tries to use generic drugs, and developingfinancial standards more appropriate todeveloping countries.

16 WORLD DEVELOPMENT REPORT 2006

The international laws that govern globalmarkets are the product of complex negotia-tions. In some cases, as for human rightscovenants, the processes generating the lawsare perceived to be fair. In other cases,processes and outcomes are perceived asunfair, even though the formal regulationsare equitable. Within the World Trade Orga-nization (WTO), for example, each countryhas a vote and each can block proceedings.Even so, WTO processes are at times per-ceived as unfair because of the underlyingpower imbalance between strong commercialinterests and the public interest, in bothdeveloped and developing countries. Theseimbalances manifest themselves, for instance,in the number of staff employed in Genevaby different WTO members. More effectiverepresentation of poor countries in globalinstitutions would help improve processesand may lead to more equitable rules.

The impact of reducing imperfections inglobal markets varies by country. The largerand fast-growing developing countries standto benefit significantly from freer globaltrade, migration, and capital flows, helpingthem sustain fast growth (while equitabledomestic policies both help underpin long-run growth and the broad internal sharing ofthis growth). Countries left behind in theglobal economy stand to benefit much lessfrom global markets in the short run and willcontinue to rely on aid. For them, globalaction that helps compensate for unequalendowments is truly essential. Action to buildendowments is primarily domestic, throughpublic investments in human development,infrastructure and governance structures. Butglobal action can support domestic policiesthrough resource transfers in the form of aid,which is not offset by debt repayments, andinvestments in global public goods, particu-larly global commons.

Aid levels need to be bolstered in line withthe commitments rich countries made at the2002 Monterrey Conference and concreteplans should be made to reach the target of

devoting 0.7 percent of gross national incometo aid. Larger volumes of aid will only help,however, if aid is effective in alleviating con-straints and spurring development in therecipient countries. Greater effectiveness canbe achieved by emphasizing results, movingaway from ex ante conditionality, and pro-gressively shifting design and managementfrom donors to recipients. Aid should not beundermined by debt, for debt reduction thatis not financed by additional resources canactually undercut effective aid programs.Innovative mechanisms to expand develop-ment assistance should be explored, includ-ing global taxes and private contributions.

Equity and developmentBringing equity to the center of developmentbuilds on and integrates the major emphasesin development thinking of the past 10 to 20years—on markets, on human development,on governance, and on empowerment. It isnoteworthy that this year equity is the focus ofboth this World Development Report and theHuman Development Report of the UnitedNations Development Programme. The pleafor a more level playing field in both the pol-itics and the economies of developing coun-tries serves to integrate the World Bank’stwin pillars of building an institutional cli-mate conducive to investment and empow-ering the poor. By ensuring that institutionsenforce personal, political, and propertyrights for all, including those currentlyexcluded, countries will be able to draw onmuch larger pools of investors and innova-tors, and be much more effective in provid-ing services to all their citizens. Greaterequity can, over the long term, underpinfaster growth. This can be helped by greaterfairness in the global arena, not least throughthe international community’s meeting itscommitments made at Monterrey. Fastergrowth and human development in poorercountries are essential to reducing globalinequity and to reaching the MillenniumDevelopment Goals.

Overview 17

Endnotes1. The infant mortality rates are computed separately at the

province level only, and do not take into account racial, gender, orother social differences. The life expectancy statistics are for raceand gender groups, and do not take regional or income differencesinto account. The real differences between typical individuals withthe listed characteristics are therefore likely to be understated. Inaddition, Nthabiseng’s life expectancy could be much lower if shewere to become infected with HIV/AIDS, as are many young SouthAfrican women. Data come from Day and Hedberg (2004). Pre-dicted years of schooling rely on disaggregated information—byprovince, sex, race, rural-urban location, consumption expenditurequintile, and mother’s education—from the Labor Force Surveyand the Income and Expenditure Survey for 2000, which were car-ried out by the South Africa Statistics Office.

2. Predicted monthly consumption expenditures in 2000 forpersons with those characteristics were Rand 119 ($45 adjusted forpurchasing power parity) for Nthabiseng and Rand 3,662 ($1,370)for Pieter. The average white male with a highly educated mother,who lives in Cape Town and is in the top 20 percent of the distribu-tion happens to be in the ninety-ninth percentile of the overallincome distribution. Data come from the Labor Force Survey andthe Income and Expenditure Survey for 2000.

3. There are also income, consumption, and other differences:Sven can expect to earn $833 a month compared with the SouthAfrican mean of $207 (Nthabiseng will have $44 a month). If Svenhad been even luckier, and had been born at the same rank in Swe-den’s income distribution as Pieter occupied in South Africa, hisexpected monthly earnings would climb to $2,203. Sven will be ableto visit any country on a whim, whereas Nthabiseng and Pieter canexpect to spend hours waiting for a visa, which they may or maynot obtain.

4. In some cases, such as China’s decollectivization of agricul-ture in the late 1970s, a reform may lead to more efficiency, broaderopportunities, and yet greater (intrarural) income inequality.China’s experience—and the decompression of wages in a numberof transition economies in Europe and Central Asia—is a goodillustration of a more general point: because equity refers to fairprocesses and equal opportunities, it cannot be inferred fromincome distributions alone. Greater fairness will generally lead tolower income inequality, but not always. And not all policies thatreduce inequality increase equity.

5. Mazumder (2004).6. Other interactions between unequal opportunities and social

conditions are also of societal concern, including links betweeninequality and crime, and between inequality and health. Wereview them briefly in the report, but focus on the channels of moredirect significance to equity.

7. There may be many sound economic reasons for these risk-adjusted interest rates to vary, including fixed administrative loancosts, greater informational asymmetries, and the like. The point isthat this affects poorer groups more, in ways unrelated to theirinvestment opportunities, thus leading to both greater inefficiencyand the perpetuation of inequalities.

8. These averages are based on actual episodes and refer to thetotal growth elasticity of poverty reduction, inclusive of anychanges in inequality. “Low” and “high” inequality refers to a Gini

poverty to growth, assuming no change in the Lorenz curve, showsa similar decline, but not to zero (see chapter 4).

9. While equity-enhancing redistribution will usually be fromricher groups to poorer groups, it could happen that “good” redis-tributions will be to groups that are not poor, especially those in themiddle. This will depend on the nature of the market failure. Forexample, the initial beneficiaries of a less-captured financial systemmay be small and medium entrepreneurs. Benefits to the poor willoccur when enhanced access to financial services among middle-class entrepreneurs translates into faster growth and job creation.

ReferencesThe word processed describes informally reproduced works that

may not be commonly available through libraries.

Bourguignon, Francois, and Christian Morrisson. 2002. “Inequalityamong World Citizens: 1820–1992.” American Economic Review92(4):727–44.

Day, Candy, and Calle Hedberg. 2004. “Health Indicators.” SouthAfrican Health Review 2003(4):349–420.

Grantham-McGregor, S. M., C. Powell, S. P. Walker, and J. H.Himes. 1991. “Nutritional Supplementation, Psychosocial Stim-ulation, and Mental Development of Stunted Children: TheJamaican Study.” The Lancet 338(8758):1–5.

Hoff, Karla, and Priyanka Pandey. 2004. “Belief Systems andDurable Inequalities: An Experimental Investigation of IndianCaste.” Washington, D.C.: World Bank Policy Research WorkingPaper Series 2875.

Mazumder, Bhakshar. 2004. “Earnings Mobility in the UD.” InSamuel Bowles, Herbert Gintis, and Melissa Osborne, eds.,Unequal Chances: Family Background and Economic Success.Princeton, N.J.: Princeton University Press.

Nicita, Alessandro. 2004. “Who Benefited from Trade Liberalizationin Mexico? Measuring the Effects on Household Welfare.” Wash-ington, D.C.: World Bank Policy Research Working Paper Series3265.

Paxson, Cristina H., and Norbert Schady. 2005. “Cognitive Devel-opment among Young Children in Ecuador: The Roles ofWealth, Health, and Parenting.” World Bank Policy ResearchWorking Paper Series 3605. Washington, D.C.

Schady, Norbert. 2005. “Changes in the Global Distribution of LifeExpectancy and Education.” World Bank. Washington, D.C.Processed.

18 WORLD DEVELOPMENT REPORT 2006

Inequalities in incomes, in health, and in educational outcomes have long been a stark fact of lifein many developing countries. When such inequalities in outcomes arise from unequal opportu-nities, there are both intrinsic and instrumental grounds for concern. Because inequalities in

opportunity are often accompanied by profound differences in influence, power, and social status—whether at the level of individuals or groups—they have a tendency to persist. And because it leadsto an inefficient use of resources and to less effective institutions, inequity is inimical to long-termdevelopment. It follows that there is a legitimate role for public action in the promotion of fairnessand in the pursuit of equity, provided such action is cognizant of the primacy of individual freedoms,and of the role of markets in allocating resources.

World Development Report 2006 presents evidence on the inequality of opportunity, within and acrosscountries, and illustrates the mechanisms through which it impairs development. The Report advocatestaking explicit account of equity in determining development priorities: public action should aim toexpand the opportunities of those who, in the absence of policy interventions, have the least resources,voice, and capabilities. Domestically, it makes the case for investing in people, expanding access to jus-tice, land, and infrastructure, and promoting fairness in markets. Internationally, the Report considersthe functioning of global markets and the rules that govern them, as well as the complementary pro-vision of aid to help poor countries and poor people build greater endowments. Drawing on the WorldBank’s 60 years of development experience, the World Development Report 2006 is essential readingfor understanding how greater equity can reduce poverty, enhance economic growth, advance devel-opment, and deliver increased opportunities to the poorest groups in our societies.

ISBN 0-8213-6412-X