CDE Taking Poverty & Inequality Seriously Op-eds (Part 1)

TAKING POVERTY AND INEQUALITY SERIOUSLY (PART 1) High rates of poverty, unemployment and inequality threaten South Africa’s future and are patently unjust.

Other developing countries, like India and Brazil, for example, face similar challenges. They all need to think hard about priorities and how to create fairer, more inclusive and more prosperous societies. In a series of op-eds, CDE’s Ann Bernstein argues that ameliorating poverty and a broad commitment to the principles of equal opportunity are important, but developing countries should have a bigger, bolder approach. They should focus on creating the fastest possible expansion of opportunities for the poor.

OP-EDS

TABLE OF CONTENTS Don’t compensate the poor for their exclusion – focus on inclusion

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How to achieve social justice through equality?

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Governments court failure by not improving the lives and opportunities of the poor

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Don’t compensate the poor for their exclusion – focus on inclusion

By Ann Bernstein, 14 August 2017

When the history of the late 20th and early 21st centuries is written, its most striking feature will be the remarkable fact that this period witnessed the fastest decline in poverty for the largest number of people in the history of humanity.

In 2010, the Millennium Development Goal of halving global poverty rates by 2015 was attained. This was five years faster than anticipated when the goals were developed. In 1990, some 1.9-billion people (or 43% of the world’s population) had incomes of less than $1 a day; by 2010, there were 1.2-billion people (21% of a larger global population) living below a slightly higher poverty line of $1.25 a day.

The main cause of this astonishing improvement in human welfare was economic growth. The economies of the three regions of the world that are home to the vast majority of the world’s poor had all grown rapidly: at 8% per year in East Asia, 7% in South Asia, and 5% in Africa. This era of global economic growth saw the first fall in global inequality of household income since the early 19th century.

Not withstanding this vast reduction in global poverty, more and more attention is devoted to issues of inequality by policy-makers and opinion leaders across the world. One reason is that, while inequality has fallen if one looks at humanity as a whole and between countries of the Global North and the emerging economies of the Global South, inequality has risen within many countries, developed and developing. The political salience of rising inequality in the developed world, along with the outsized role of developed world priorities, continue to influence the way political and economic issues are shaped in all countries. In this context, the issue of inequality has become increasingly important in framing policy debate in developing countries too.

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It is, however, strange that rising inequality in North America and Europe should be a more significant determinant of global debates about how to tackle poverty in the developing world than the remarkable fact that poverty rates have fallen from 90% to 10% in China in the last 40 years. That income inequality may have risen in China seems considerably less relevant than the reality that hundreds of millions of Chinese people are now living vastly more prosperous lives.

Despite the scale of poverty reduction across the world, many people remain in desperate circumstances. Poverty in middle-income countries remains unacceptably high: 68% of Indians live on less than $1.25 per day, along with 55% of Indonesians, 37% of Filipinos and 33% of South Africans.

Large numbers of people also live just above the poverty line and are vulnerable to falling back as many are starting to do in Brazil and South Africa as their respective political and economic crises unfold.

Too often, the response to poverty in countries like India, Mexico, Brazil, South Africa and elsewhere has the wrong emphasis. Governments focus on increasing grants and other redistributive programmes rather than on growing their economies.

Of course, societies should provide direct assistance to poor people, but we should not exaggerate the impact of these efforts. Most forms of redistributive intervention do no more than ameliorate poverty without changing people’s prospects meaningfully.

Consider, in this regard, Brazil’s Bolsa Familia: a successful programme which can only ever have a limited impact on improving beneficiaries’ chances to escape poverty and move into the middle class.

Bolsa Familia provides benefits to every Brazilian family that has at least one child and earns less

than about $45 per month. In 2013, approximately 13-million families benefited from the programme (about 52-million people or 28% of Brazil’s population).

In spite of its large size, the programme costs about 0.5% of the country’s GDP because the value of the grants is small. For the same reason, it only reduces the proportion of the population that is poor by just over 1.5 percentage points.

The programme’s impact on education, healthcare and other human capital improvements has been small or non-existent, and it does little to help poor Brazilians become more employable, entrepreneurial or productive. These are all outcomes that more effective, anti-poverty interventions should seek to achieve. As it stands, Bolsa Familia is not, as one review of it notes, “an opportunity-generation programme”.

Another good example of a programme that serves only to ameliorate poverty is India’s public distribution system (PDS), which distributes rice and wheat through fair-price shops at subsidised rates for families officially classified as below the poverty line. These families are issued ration cards with which they can make purchases through the PDS. If a family’s total income rises even marginally above the baseline that determines poverty, it cannot legitimately get a ration card and cannot access the PDS. Apart from the dependency that this feeding scheme encourages, it is also a breeding ground for corruption. Food that is supposed to help the poor is channelled to members of the middle class, while corrupt officials siphon off resources designed to fight poverty at an alarming rate.

India’s Mahatma Gandhi National Rural Employment Guarantee Act is another intervention that promises much but delivers little to change the prospects of the rural poor. It is supposed to guarantee 100 days of low-wage work a year to anybody in rural India who needs it. Despite being cast as a game changer, funding is below 0.3% of GDP and the programme has been marked largely by its non-performance in states where it was supposed to make the most difference.

As a result, its impact on reducing poverty has been minimal. There are no plans to use the scheme to improve infrastructure in poor areas, add to the skills of beneficiaries, or provide people with opportunities to move out of poverty.

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The Indian experience suggests that providing poor people with nominal public employment opportunities on a “right to work” basis does not do very much to improve their welfare and does even less to transform poor people’s access to new prospects through which they could pull themselves out of poverty. Similar limitations beset the Expanded Public Works Programme (EPWP) in South Africa. The programme aims to create six-million “employment opportunities” over five years, but it does little to get anyone out of poverty: the “opportunities” are temporary, provide little if any training and offer no prospect of future employment.

More generally, redistributive policies can reduce poverty, but it is not always clear that they do so in ways that empower beneficiaries or lead to meaningful social and economic inclusion.

Many “experts”, in talking or thinking about development, seem to assume the helplessness of the poor and believe that they can achieve little without assistance. They are wrong. Across the developing world, experience and research have shown that poverty is a condition, not a characteristic of people.

Those who live in poverty are as hard-working and enterprising as those who are better off. What they lack principally are opportunities. Given the opportunity to succeed, most will. Policies that expand access to routes out of poverty are most likely to facilitate rapid improvement in poor people’s prospects. This is the most plausible way for developing countries like South Africa to become more prosperous, inclusive and just. Harvard’s Ricardo Hausmann put it another way: he said in South Africa we compensate the poor for their exclusion instead of focusing on more effective methods of inclusion.

Failing to recognise the agency of poor people, and seeing them instead as the objects of well-intentioned policies, the generosity of which becomes a dominant part of policy debate, is a mistake. This paternalistic approach can violate the essential assumption of democracies, which is that all people have equal rights and dignity. Indian sociologist Dipankar Gupta is harsh in his criticism of the complacency that lulls policy-makers into being satisfied “if those on the other side are a little less sick and a little less starved.

That such people remain dependent on hand-outs

and subsidies and hence never truly become citizens does not darken the mood of those who plan for the poor.”

How, then, should we think about these challenges?

Developing countries should aim to put as many poor families as possible on a path leading out of poverty and into the middle class. This means that countries like South Africa should not prioritise policies whose principal effect is to ameliorate poverty rather than end it. Helping the poor cope with poverty a little better may be necessary, especially in the most unequal and poor countries, but policy-makers’ goals need to be more ambitious. They should aim to permanently change the circumstances of millions of poor families for the better. In addition, they should be held

to account for this by their societies and electorates.

Moving millions of people out of poverty and into the middle class has important implications for priorities.

For the next few decades, middle-income countries must place cities, the acceleration of urban economies and the creation of formal sector jobs at the heart of the anti-poverty agenda. Some redistribution of income is necessary in most developing countries (and the more unequal they are, the more redistribution may be required) but redistributive policies must not be the dominant response to poverty: they should be effective and affordable but without undermining the key focus on growing the economy and expanding opportunities for the poor.

How to achieve social justice through equality?

By Ann Bernstein, 28 August 2017

One of the most revolutionary ideas in the history of humanity is that all people are created equal. This notion of innate human equality has been interpreted in different ways with divergent implications for policy-makers. One set of ideas revolves around the gap between the vision of universal equality and the reality of vast inequalities. Attempts to achieve “equality of outcomes” have been catastrophic failures. In response, some have advocated the more modest goal of equality of opportunity. This, too, is unworkable if taken literally.

While upholding the ideal of equality of opportunity, societies should emphasize a different goal: the fastest possible expansion of opportunities for the poor.

Historically, most societies have failed to offer all their members equal opportunities to live prosperous lives.

It is only comparatively recently that this has even been deemed desirable. Before this, large groups of people (slaves, black people, members of lower castes, women, religious minorities) in most societies were thought to be undeserving of equal rights, dignity and opportunity.

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The fact that it is now increasingly accepted that all people should have equal opportunities, and any deviation from this seen as morally and politically unjustifiable, reflects deep and hopefully irreversible changes in human society. It does not however mean that equality of opportunity has been attained. This is despite the commitment of many states to building societies in which only talent and effort determine socio-economic outcomes and where birth, nationality, race and sex play no meaningful role.

The vision of a society in which opportunities are equally distributed has often been preferred as an alternative to another vision: one in which everyone is equal and state redistributive policies ensure equal allocation of assets and opportunities. This approach envisages radical change premised on a far-reaching idea of equality in which what is prized is not just equal opportunities, but equality of outcomes. This approach takes for granted the proposition that any form of inequality, in income or wealth is illegitimate and undesirable. From this point of view, there may

be many sources of inequality, but none is morally justifiable and all must be eliminated.

Popular as the vision of complete equality may be in some quarters, there is much to criticise about it. Many would argue that it is unjust for a society to reward everyone equally, irrespective of their differing abilities and skills, how hard they work, or how much risk they are prepared to take. Any society that rewarded everyone equally would confront a massive free-rider problem because it would be impossible to offer incentives for people to acquire skills, work hard, or take risks. As a result, such a society would be less prosperous and its economy less dynamic, leaving everyone worse off. Finally, achieving complete equality would require considerable violence to implement and this would need to occur at regular intervals to prevent any form of inequality re-appearing. Nonetheless, whatever its deficiencies, the call for greater equality of outcomes is often politically attractive.

Opponents of this approach, frequently talk of equalising opportunities as opposed to outcomes.

This certainly sounds appealing. However, if one takes the idea of equality of opportunity seriously, and seeks to design a policy programme on that basis, the resulting policies are ultimately as implausible and unachievable. American economist, Tyler Cowen, argues that “on inspection, equality of opportunity has many of the same problems as equality of outcomes”. Even John Rawls, leading philosopher of social democracy, believed that achieving equality of opportunity would probably be even more difficult than achieving equality of outcomes.

The principal reason for scepticism about the attainability of equality of opportunity is that it is a never ending quest. There are near-infinite reasons why some people’s opportunities might be inhibited relative to others and addressing these inhibiting factors would take at least as much intervention by government as would ensuring equal outcomes.

Unequal access to quality education is a crucial driver of unequal opportunities. No society has ever achieved equal access to equally good education because there are so many factors at work undermining this goal, desirable as it is. Unequal access to housing, health care and electricity create unequal opportunities. Unequal inheritance of wealth

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affects the distribution of opportunities. Unequal intergenerational transmission of social and human capital to children (because some parents have had more or better education that others, or because they have better jobs, or spend more time reading to their children or because they are members of more extensive social networks, etc) is another important source of inequality of opportunity.

Achieving true equality of opportunity would require such deep and impractical changes to social institutions and cultural norms that it is simply impossible. Indeed, if a society sought to address all of the potential sources of inequality of opportunity, it would quickly be paralysed.

Equal outcomes and equal opportunities are both politically and morally powerful ways of conceiving social justice, but if both are equally impractical and unachievable, what is left?

CDE would argue that the practical goal to which middle-income societies should commit themselves, and to which policy-makers should apply their energies, is the maximum possible expansion of opportunities for the poor. As professor Cowen argues, “it is not clear why equality of opportunity should be the priority, rather than raising opportunity by some absolute amount as much as possible”.

To meet the challenges they face and move beyond the limitations imposed by the politics of inequality, middle-income countries like South Africa should look at their challenges through a different policy lens. They need to focus on opportunities first. They must adopt a new policy orientation centred on the expansion of opportunities that poor people can access.

What does this mean for the way governments should think about their task?

Such an approach needs to prioritise outcomes rather than intentions or inputs. It is irrelevant whether governments or other actors intervened with good intentions and ambitious wish lists: what counts are results. If the outcomes of such efforts only ameliorate poverty or generate opportunities only or mainly for those who are already better off, then it is fair to say that a society is not serious about steadily eliminating widespread poverty.

The orientation of policy makers must be incremental and pragmatic. Any intervention to get people onto a path out of poverty is positive, but there has to be a relentless focus on ensuring that the first step on that path is not the last, and that, instead, everyone has a chance to keep moving up the income ladder to eventually reach middle-class status.

opportunities for millions of people to get out of poverty. The fact is that without growth there is no opportunity. Without markets, entrepreneurs and privately owned firms, little economic growth or employment will take place: the private sector accounts for 90% of the world’s employment, according to the World Bank.

Interventions need to focus on, and have the ability to go to scale. Experimentation is good, as are pilot projects, but interventions need to be assessed by a hard question. Can this approach work effectively and affordably for many millions in countries with limited resources and capacity? The goal needs to be mass movement out of multi-generational poverty and the progressive creation of an increasingly middle class society. Generally, this is achieved not through isolated projects – whatever their scale – but by reforms that permit and encourage millions of incremental changes across society and throughout the economy. Policy needs to facilitate this evolution, and small, ad hoc interventions and projects will seldom achieve much on their own. Well-functioning economies, the establishment of many thousands of firms and competitive markets are the only way to make this happen.

Governments have a vital role to play by ensuring that the conditions are in place for strong enterprise led growth and by alleviating the constraints that hinder firms from creating jobs. Countries need competitive markets and businesses – large, small, domestic and international – need to be placed at the heart of the development and the anti-poverty narrative if there is to be any chance of further successes in the battle against poverty.

Too frequently, development agencies, governments, politicians and media who profess commitment to pro-poor policies are distrustful of the private sector. They see large companies and especially multi-nationals as operating against the interests of poor people, indeed against the national interest.

This negatively affects the prospects of opening

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Increased economic freedom, the rule of law and other basic freedoms and rights are positively correlated with faster economic growth and can empower poor people in multiple and sometimes unexpected ways, so that they can find paths out of deprivation.

Societies like South Africa’s should aim to dramatically accelerate the expansion of opportunities for the poor and simultaneously increase the chances of poor people being able to take advantage of these opportunities successfully. This will require fast, labour-intensive economic growth, quality education and training, support for those moving closer to cities, and within cities, reliable, affordable transport to the hubs of economic dynamism.

Governments court failure by not improving the lives and opportunities of the poor

By Ann Bernstein, 26 September 2017

In this series of op eds, the Centre for Development and Enterprise makes the case for a new way of conceiving how policy-makers should think about the goals of development. In societies characterised by poverty, unemployment and inequality the CDE approach upholds the ideal of equality of opportunity while arguing that societies should emphasize a slightly different ambition. Proposing as a goal the fastest possible expansion of opportunities for the poor, we argue that in an imperfect world, this is the best possible approach. Instead of programmes that ameliorate poverty we should focus more attention on eradicating it; focus less on inequality and more on how to expand dramatically the opportunities available to poor people.

The argument for focusing on the expansion of opportunities for the poor rests, ultimately, on pragmatic grounds. The pursuit of equality of wealth and income has historically led to very poor (and sometimes horrific) outcomes. Besides, from the point of view of long-term prosperity, it is undesirable because the structure of incentives created leads to much lower growth. For these reasons, some have proposed a goal of equality of opportunity (rather than of outcome). This ideal conforms with our deepest ideas about justice, but the practical challenges here are no less serious. The vast range of social, economic, political and cultural factors that shape access to opportunities, means that trying to equalise opportunity is at least as implausible a goal as the pursuit of equality itself, and may be even more unachievable.

It is self-evident that, just because neither full equality of income nor full equality of opportunity can be attained, it does not follow that societies should not seek to reduce inequalities in either sphere. And it is for this reason that the aim of accelerating the expansion

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of opportunities for the poor is proposed as a more coherent, practical and attainable goal than either of the alternatives.

Expanding opportunities for poor people as the key policy framework can be applied to a number of important areas of economic and social policy.

Let’s start with the pursuit of the fastest possible, most labour-intensive economic growth. Rapid employment growth – especially if the jobs are in the formal sector – is the critical vehicle for reducing the most powerful constraints on poor people’s opportunities. Job rich growth was the dynamic that explains the single most important fact about global development of the late 20th and early 21st centuries: the rapid decline in the proportion of the world’s people living in poverty. So rapid was this, that the Millennium Development Goal of halving poverty by 2015 that was set in 1990, was achieved five years early.

Impressive as this has been, far too many people still live in poverty. And far too many people live just above the poverty line, always at risk of slipping back. In seeking to deal with large scale poverty, governments often seek solutions that have the effect of compensating people for their exclusion rather than pushing for the labour-intensive economic growth that would include them. Redistributive interventions of this sort may ameliorate poverty, but do very little to empower individuals to move out of poverty. Doing that requires a relentless focus on expanding employment.

This dynamic is well-captured by the World Bank, which has argued that: “Jobs are the cornerstone of economic and social development. Indeed, development happens through jobs. People work their way out of poverty and hardship through better

livelihoods. Economies grow as people get better at what they do, as they move from farms to firms, and as more productive jobs are created and less productive ones disappear. Societies flourish as jobs bring together people from different ethnic and social backgrounds, and nurture a sense of opportunity.

Jobs are thus transformational – they can transform what we earn, what we do and even who we are.”

The importance of employment means that the principal goal of policy-makers in developing countries like South Africa should be to ensure that everyone who wants to work has the opportunity to do so. To do this, countries that want to grow quickly need to invest in building the right kinds of institutions, and must adopt the right kinds of policies so that firms thrive but are also forced to compete and therefore innovate. Countries also need to recognise a reality some may find unpalatable: that the jobs they need must be suited to the workforce they have today, not the highly skilled one they hope to have in the future.

In many countries, highly regulated labour markets make it difficult for the economy to generate a rapid expansion of formal sector jobs. Workers are pushed out of the labour market altogether or forced into the informal economy, where opportunities to get ahead are much more challenging. And, limiting the creation of low-skill, low-wage jobs harms poor people most: permitting low, entry-level wages is an important way to generate new opportunities, which then lead to improvements and progress towards ending poverty.

No-one thinks that “sweat shop” jobs ought to be the high point of developing countries’ ambitions. These jobs are low-skilled, low-waged and are sometimes offered in unsafe and unhygienic conditions. However, apart from finding oil, labour-intensive exportoriented activities – especially in manufacturing – are the one tried-and-true method for developing countries to escape poverty. They are the vehicle for prosperity, and the principal source of opportunities for hundreds of millions of people.

If formal sector jobs are the one key to opportunity expansion for the poor, the other is the building of cities that work much better for the poor. These goals are tightly wound together because, for obvious reasons, mass formal sector employment can only happen in large, dense human settlements, i.e. cities.

The link between prosperity and high levels of urbanisation is one of the strongest correlations in

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the social sciences, with the relationship rooted in the all but magical effect that dense agglomerations of firms, workers and consumers has on productivity.

Historically, countries with higher levels of urbanisation have enjoyed greater prosperity.

There is, however, nothing inevitable about urbanisation and the achievement of greater prosperity. The existence and growth of poor megacities – urbanisation without industrialisation – has cast doubts on this relationship, especially for many cities in Africa. As Harvard’s Ed Glaeser puts it, the ‘demons of density must be dealt with: congestion, crime, disease, unaffordable land and housing prices’ if cities are to deliver on their enormous potential.

Part of the problem here is that there are too many “reluctant urbanisers” – governments, politicians and leaders from civil society who think that cities shouldn’t grow and that the poor should not urbanise.

This is a huge mistake, and one that will be leave future generations much worse off than they might otherwise be. Much more sensible would be investment in urbanisation and urban growth. This requires cities that plan for expansion: addressing growing demands for infrastructure and services, planning ahead for incremental affordable housing settlements, schools and clinics, ensuring that the business environment in cities is attractive and secure, ensuring that the urban workforce has the desired mix of skills, and harnessing the technology needed to participate in the global economy. National governments need to recognise the importance of cities as well: investment decisions must take account of increased urbanisation, and national policy priorities need to catch up with the increasing reality of urban led societies.

Cities need to plan ahead especially with respect to delivery of basic services and infrastructure tailored to inevitable demand from firms and households. These pressing realities have profound implications for the national allocation of resources and incentives for cities to expand their economies.

The political implications are also profound: powers and revenue needs to be decentralised to increasingly important urban centres. Large cities need greater accountability and authority for many functions from transport to skills to labour markets. Investment in infrastructure including affordable public transport is

vital for successful, cities of hope for the poor. Cities must be able to reap the benefits of growth as that will create the proper incentive structure needed to foster the pursuit of economic growth that is also more inclusive.

Pursuing policies that lead to accelerated employment growth in rapidly growing cities is a recipe for inclusion and developmental success. This should be coupled with an approach that places competitive firms at the centre of national development, operating

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in an environment where a capable state knows how to regulate and encourage the dynamism of markets.

Together all of this could lead to a rapid expansion of opportunities for poor people enabling more and more people to move out of poverty and into a more middle-class life.

Improving the lives of the poor, and expanding dramatically the set of opportunities to which they have access – should be the core goal of a successful government. Anything else is a recipe for failure.

CDE BOARD L Dippenaar (chairman), A Bernstein (executive director), A Ball, C Coovadia, B Figaji, R Khoza, M Le Roux, S Maseko, I Mkhabela, S Nkosi, W Nkuhlu, S Ridley, A Sangqu, M Teke, S Zibi Published in April 2018 by The Centre for Development and Enterprise 5 Eton Road, Parktown, Johannesburg 2193, South Africa | PO Box 72445, Parkview, 2122, South Africa Tel +27 11 482 5140 | info@cde.org.za | www.cde.org.za