Revisiting the debate on inequality and economic



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Revisiting the debate on inequality and development

François Bourguignon ——————————————————————————————————————————————— 655
REP 125 (5) septembre-octobre 2015
Document téléchargé depuis www.cairn.info - Biblio SHS - - 193.54.110.35 - 26/04/2016 h. © Dalloz

rest of the economy. However, estimating this additional return is a difficult task.
As taxation is needed to finance those equity-enhancing policies that seek to equalize access to human capital accumulation, the issue arises of the form it should take and, in particular, its progressivity. A policy often recommended in developed and developing countries is that tax systems should involve broad bases and low tax rates to generate the necessary receipts while minimizing distortions.
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This seems somewhat contradictory, given what we know from optimal taxation theory. It is true that this theory is based on social welfare functions where individual weights decline with the level of income. However, generalizing the social welfare function to make it consistent with the above definition of equity clearly makes things more complicated. If only opportunities mattered, and not income, then the case for progressivity would fall apart. However, because no material deprivation is one of the two equity principles, equity definitely implies different welfare weights for deprived people and others and, thus, some progressivity of the tax system.
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With regard to opportunities, the progressivity of the tax needed to finance the correction of the inequality of opportunities will depend on the joint distribution of income—or, more precisely, the individual abilities that, together with opportunities, determine individual incomes—and opportunities. Yet, given the limited existing empirical knowledge of the distribution of opportunities, it is difficult to say much about this.
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These considerations on the degree of progressivity of taxes to finance a more equal distribution of opportunities must not hide that, in many countries, there are some regressive patterns in public spending, the removal of which would have little effect on work or risk-taking incentives. Examples include recovering the cost of higher education for children from well-off families, while granting scholarships to students coming from more modest households, substituting food or energy subsidies with targeted cash transfers, cutting top pensions in case of a deficit in a pay-as-you-go pension system, and soon. These measures free resources at the expense of the upper part of the income distribution, which can be mobilized to improve opportunities at the bottom of the distribution by spending on education,
health, infrastructure, credit to SMEs, and so on.
Until now, the link between income redistribution and opportunities has been seen as going from raising revenue to finance public spending targeted at dynamically equalizing opportunities. However, more directly, current income inequality generates future inequalities of opportunity. A low current income in a family prevents precautionary savings that would protect it from falling into a poverty trap in the future, and limit opportunities for children. The current distribution of income among households is a clear. See for instance OECD [2010].
23. For example, the charitable conservative specification of the optimal tax model in
Atkinson [1990].
24. Cast in terms of the familiar Mirrlees [1971] model, the introduction of opportunities in the optimal redistribution model could be seen as equivalent to making the distribution of abilities partly endogenous. Tax receipts could be used either to reduce poverty or to increase the potential earnings of people in the bottom part of the ability distribution ——— Revisiting the Debate on Inequality and Economic Development
REP 125 (5) septembre-octobre 2015
Document téléchargé depuis www.cairn.info - Biblio SHS - - 193.54.110.35 - 26/04/2016 h. © Dalloz

determinant of the inequality of opportunities faced by children. For instance, the Human Opportunity Index developed by Paes de Barros et al.
[2009] is based partly upon the probability that a child will reach some specific grade in school, which depends, inter alia upon the per capita income in the family. Thus, equalizing the income distribution would automatically increase this Human Opportunity Index.
Another channel through which the inequality of income affects the inequality of opportunities is the concentration of political power in the hands of a few elite and, possibly, through low-quality institutions. Is there any evidence of such a link from income concentration to political power concentration It is difficult to say because of the obvious two-way causality between these two phenomena and the vicious circle they create.
An interesting attempt was made by Chong and Gradstein [2007] to disentangle this causality relationship between income inequality and the quality of institutions using time series analyses and Granger causality techniques on a panel of developing countries. Not surprisingly, they found that causality goes in both directions. However, it turns out to be much stronger in the direction of income inequality causing weak institutions than the other way around. This kind of cross-country analysis is never fully convincing,
especially in this case where causality tests are based on the time series properties of variables with typically little time variation. In addition, the imprecision of the data on the various dimensions of institutional quality and income inequality is likely to bias any regression estimates. In this respect, it is worth stressing that the true level of inequality inmost developing countries is likely to be severely underestimated, because top incomes are underrepresented and/or under-reported in standard household surveys. Yet, it maybe precisely at that level that the vicious circle of weak institutions and high inequality operates.
If we add to these links between the distribution of incomes and that of opportunities the direct cost of social tensions arising from excessive income inequality in terms of economic efficiency and possibly economic growth, it is clear that an exclusive focus on opportunities to analyze the link between inequality and development would miss an important part of the issue. In this regard, the WDR 2006 may not have insisted enough on the complementarity between the various types of inequality, including income inequality. Whereto from here?
The WDR 2006 was an important step in the policy-oriented analysis of the relationship between inequality and development. Even though it may not have put enough emphasis on the strict income dimension of that relationship, it contributed to broadening the scope of the analysis, integrating into it the deep insights provided by recent theoretical work in this area.
Theory shows that, through different channels and under different forms,
inequality has the capacity to hinder development. However, empirical evi-

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