1. Economic development as equalization of opportunities John E. Roemer Yale University

2. 1 How to measure economic development? Classically, as GDP per capita The normative justification: Individual Welfare = income Social welfare is the sum or average of incomes: Can be criticized in at least two ways: o welfare is linear in income, which ignores the urgency of some needs over others yi 1 N yi

3. 2 o social welfare is utilitarian, and reflects no concern for inequality

4. 3 A technological justification? You might say: GDP per capita is not intended as a welfare measure but as a measure of industrial capacity. But economic development must mean the advance of human society; it cannot be a technological concept. A productive technology run by slaves all of whose product goes to a small elite should not be considered a highly developed economy. So I insist the justification of an index of econ development be corollary to a concept of social welfare

5. 4 Equality of opportunity The distribution of the social objective (here income) should be independent of circumstances beyond the control of individuals, but may reflect actions that are within their control Leveling the playing field metaphor means compensating persons for the effect on their achievments which reflect disadvantages beyond their control. The troughs in the playing field are these disadvantages

6. 5 Language Circumstances are those aspects of a persons environment that influence outcomes & are beyond his control The typology is the partition of the popn into types, where all individuals of a type have similar circumstances With a type, outcomes will differ because of differential effort

7. 6 Example: The distribution of income by type, defined as level of parents education in Austria (2005)

8. 7 Contrast with Denmark and Hungary:

9. 8 Some calculations for Uganda

10. 9

11. 10

12. 11 Inequality of opportunity in Brazil This figure presents the cdfs of types 1,2, and 3: the red is white-male-urban, the blue is white-female- urban, and the green is white-male-rural. In particular, white-female-urban types are better off than white male rural types. Indeed the white-male - rural cdf is quite a distance from the other two. 2000 4000 6000 8000 10000 12000 Net market income 0.2 0.4 0.6 0.8 1.0 quantile

13. 12 Next, I plot the cdfs of types 9, 10, 11. These are exactly the same as the ones above, except for mixed heads of household. We see exactly the same story as above: 2000 4000 6000 8000 10000 12000 Net market income 0.2 0.4 0.6 0.8 1.0 quantile

14. 13 Next, I put these two plots on the same set of axes. Now we see very clearly that the every white head-of- household types very clearly dominates every mixed head-of-household type. The white types 1,2,3 are the three on the bottom and the mixed are the three on the top of the figure.

15. 14 I believe this presents a pretty striking view of the inequality of opportunity in Brazil with respect to being of white or mixed race. Next, I add the black story. I compute the CDFs for black urban male hh, black urban female hh , and black rural male mm. The order is the same as for mixed and whites. I now add these three cdfs, in YELLOW, to the graph of the previous six: 2000 4000 6000 8000 10000 12000 Net market income 0.2 0.4 0.6 0.8 1.0 quantile

16. 15 This is interesting. We see that the black and mixed urban male hh have almost identical CDFs of income. The same is true for the black and mixed urban female hh. But the black rural male hh are better off than the mixed rural male hh! So there appears to be little 2000 4000 6000 8000 10000 12000 Net market income 0.2 0.4 0.6 0.8 1.0 quantile

17. 16 discrimination against blacks in particular; but whites have better opportunities than either blacks or mixed.

18. 17 Economic development is equity World Development Report 2006 : Equity and Development . An excellent report. But suffers confusion of implicitly assuming that development is measured by GDP per cap, and counterposing this with equity conceived of as EOp

19. 18 Some quotations from WDR 2006: Greater equity is thus doubly good for poverty reduction: through potential beneficial effects on aggregate long-run development and through greater opportunities for poorer groups within any society (p.2) If the opportunities faced by children like N. are so much more limited than those faced by children like P. or S., and if this hurts development progress in the aggregate, then public action has a legitimate role in seeking to broaden opportunities.(p.3)

20. 19 Third, the dichotomy between policies for growth and policies specifically aimed at equity is false (p.10)

21. 20 Growth versus equality of opportunity The conventional dynamic measure of economic development is growth of GDP per capita. In its place, I propose growth of the average income of the most disadvantaged type. One might think that growth of income of the most disadvantaged type correlates well with growth of GDP per capita. But this is not so. We need only look at the United States during the past 20 or so years to see this.

22. 21 We see that real GDP per capita in the US has grown 85% in the period 1975-2009, while median household income has grown about 15%. The growth in the US has been sharply biased towards the most advantaged households.

23. 22 Indeed, let us compare the US and France. During the period 1975-2006 average income in France grew by only 27%, far less than the US growth. But now exclude the incomes of the top 1% of households in both countries. In the US the income of the bottom 99% grew by only 17.9%, while the incomes of the bottom 99% in France grew by 26.4%!

24. 23 In other words, growth in France was much more egalitarian than in the US. I dont have the growth figures for the bottom of income distribution in these

25. 24 countries, but we see that the top 1% made out like bandits in the US, but not in France. In fact, in the US, the real income growth went to the top 0.1% of households. Indeed, the top 1% of hh in the US took in 20.9% of total income, while the top 0.1% took in half of that : 10.3% of total income. From these Lorenz curves, we see that the bottom 50% of households in the US own about 4% of the total wealth. If we look at financial wealth which excludes housing, the main form in which the middle class holds wealth, then the bottom 50% own about 1% of financial wealth. Indeed, the top 10% own about 80% of financial wealth.

26. 25 This is the main characteristic of a class society. Let us compare the distribution of wealth in the US to various other countries. Here are some Lorenz curves:

27. 26

28. 27 We see that the US has by far the most inegalitarian wealth distribution among these countries. Japan and, remarkably, China, have the most egalitarian distributions. Wealth, however, is building up in a very unequal way in China, and the Lorenz curve for 2013 would probably look much less egalitarian than this one does. India has a more typical Lorenz curve for a poor capitalist country very inegalitarian. Although Norways Lorenz curve is quite inegalitarian, one must recall that the welfare state, which is large in Norway, provides the security for ordinary households that only private wealth can provide in a laissez-faire capitalist economy like the US.

29. 28 Conclusions Equality of opportunity is an ethic which instructs us to raise the economic position of those who are most disadvantaged by circumstances beyond their control in a society. A fairly accurate why of identifying this group is by looking at the education and income of the parents of the individuals. The most disadvantaged adults, in a class society, are very closely correlated with those whose parents were poor and / or had poor education. Development policies should focus on raising the economic positions of this group. This means: *focusing on raising primary-school completion rates, not on tertiary education, which benefits

30. 29 almost always only the most advantaged in developing countries *focusing on universal access to health care, especially with an emphasis on diseases that affect the poor (malaria, contagious disease) *provision of clean water and adequate housing for the most disadvantaged *income-support for poor families to enable them to send their children to school and not to work *special emphasis on the education of girls *state programs to counteract predatory private credit markets which are the only ones the poor have access to in most countries *financing transfers to the poor through sharply progressive taxation of the rich.

31. 30 The opposition to these policies will come from the rich and advantaged middle class. One of the most pernicious ideas that has gained prominence in the last 30 years is that high tax rates on the rich will discourage innovation and development. This is simply a Big Lie. Piketty, Saez, and Stanchekova have recently computed that the optimal marginal income tax rate on the top 1% of households in the US is over 80%! But the highest marginal tax rate has fallen from 91% under Eisenhower and JF Kennedy to 35% under G.W. Bush and B. Obama! This fall in top rates is due to successful conservative political action, not to economic rationality. The reason taxes paid by the rich are low in most developing countries is not due to economic

32. 31 rationality, but due to the fact that the wealthy control the political mechanism.