8.

Policy issues: the scope and limits of policy to affect within-country inequality

8.1 National policy issues for addressing within-country inequality

As described in previous sections, the world is an unequal place. Income and wealth inequality between and within
countries is still quite large and pervasive and, in a substantial number of countries, inequality has been on the rise.
Unequal distribution of assets translates into unequal opportunities.
By adopting the Sustainable Development Goals (SDGs) in, countries worldwide committed to make the world a
fairer place. The international community committed to eradicating poverty and hunger and achieving healthy lives,
quality education, gender equity, and sustainable development.
Societies have different means to change inequality of both opportunities and outcomes. Some of the actions should
focus on improving the conditions of the poor, the vulnerable, and the socially excluded. That is, on increasing the
assetsin particular, human capital-- the opportunities, and living standards of those at the bottom of the social
ladder . A second set of policies should be geared at supporting the growth and sustainability of a strong middle class
Finally, given the largeand in many countries increasing concentration of income and wealth at the top, policies
should be aimed at curbing the excesses of concentration of income and wealth among the rich

Building assets and enhancing opportunities of poor people, and promoting social inclusion
Increasing the assets that individuals have, the way that they can make use of them, and the returns they obtain is a
central aspect to improve the distribution of productive opportunities. a framework, based on the assets approach, to
organize the discussion around the different types of instruments of redistribution available to policymakers. As
shown, policies can contribute to redistribute productive opportunities via the provision of public goods and services
(that is, before the market, or ex ante), as well as by enhancing access to markets.
Policies that can impact redistribution: the asset based approach
Policies can affect inequality through various mechanisms.
In the short run, the income- generating capacity of individuals (and their related contribution to aggregate growth) is
determined by the assets that households have and the opportunities that they have to exploit these assets, given
market conditions
We can think about assets in terms of three elements: the stock of assets that people possess, the rate at which
these assets are used to generate income, and their returnssuch as wages or interest rates. The public provision of
goods and services allows individuals to increase their stock of assets, such as in terms of human capital (for
example in the form of health, education, or skills) or physical capital, (such as machinery, seeds, or land). These
policies can help equalize opportunities across individuals, independently of their initial circumstances.
Other policies have the potential to improve the distribution of economic opportunities, increasing households ability
to exploit their assets, such as policies that implement land reform, policies that aim to improve access to markets,
and policies to strengthen labor markets in order to promote employment.

Minimum wage and other labor policies can affect labor market income directly and indirectly, through their effect on
the amount of labor supplied, and demanded.
Two other elements are necessary to look at policies that can bring about a reduction in inequality. The (market)
income that households generate based on their assets (their stock of assets, how intensively they are used, and the
returns obtained) is complemented by the transfers that households receive, which can be private orthe focus of
our interestpublic.

Public transfers include the benefits provided by the government that complement individuals income such as
conditional cash transfer programs, pensions, unemployment insurance.
Building human capital starts within the household.
as important to building the human capital of the poor are programs that serve to increase the demand of
households for health and education services. Actions to increase demand include improvements in the quality and
availability of social services and compensation of the poor through direct transfers for the complementary costs
(e.g., transportation, school materials, and so on) as well as the opportunity cost of the time that household members
spend in school or in health facilities. They also include giving parents additional incentives to invest in the education
and health of their children.

The impact of Conditional Cash Transfer (CCT) programs

Conditional cash transfer programs, or CCTs, provide cash benefits to poor households as long as specific
conditions, such as regarding school attendance and health/nutrition checkups, are met. Typically, these programs
have two main purposes: the alleviation of poverty in the short term, facilitated through the cash transfer component;
and the reduction of poverty over the longer term, by incentivizing the accumulation of human capital
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534 Why could CCT programs be having a low impact on addressing long- term constraints? The answer might lie
in the underlying assumptions. CCTs are designed under some key implicit assumptions: i) co- responsibility
(conditionality) is effectively enforced; ii) the selection of beneficiaries is based on objective indicators and free of
manipulation;

iii) the quality of services providededucation and healthis high enough to affect the beneficiaries productive
capacity in the future; and

iv) the economy will generate quality employment opportunities for the beneficiaries when they enter the labor
market (UNDP, 2010). These assumptions do not always hold in reality. Considering these constraints can make
CCTsand other instrumentsmore effective in breaking the cycle of poverty.

536 Box 3.3: The impact of Cash Transfer (CCT) programs on (gender) inequality
Cash transfer programs have been adopted and practiced in several countries in Latin America Asia and in
African countries such as Zambia, South Africa, Ethiopia and Tanzania In such countries, cash transfers have
played an important role in reducing income inequality through the transfer of resources from higher income
households to lower income households via the tax system, and in addressing poverty, vulnerability, and
development challenges
Moreover, evidence indicates that where transfers are paid directly to women as in Latin America such transfers
have potential to increase womens power to make decisions on household expenditure, and providing them with
financial security, self-esteem and social status (Ellis, 2008; DFID, 2011). This means that transfers paid to women
can potentially increase their control over household resources they have and have implications for womens
empowerment.
Shifting Social Norms
The ability of policies to expand opportunities can be hindered if deeply rooted social norms, such as those related
to racial or gender discriminationare not taken into account.
Consider the case of women representation in the political arena. Low representation of women in national
parliaments is associated with entrenched beliefs about the ability of women to perform effectively in the political
sphere. This lack of female representation, in turn has been linked with unfavorable effects on corruption and the
introduction of inclusive policies.
The adoption of certain norms is more elastic to a higher level of development. Some norms are more persistent,
including those based on religious or philosophical principles.
Poor people tend to have lower access to infrastructure and are more likely to experience the impact of
environmental degradation . Thus, efforts to improve living conditions at the local level, from investment in water and
sanitation to neighborhood improvement programs and environmental clean-ups can particularly benefit the poor.
Policies that improve access to market opportunities for the poor encompass a wide range of areas. These go from
the provision of infrastructure, such as in the form of roads to connect remote and underserved regions,
transportation. They also include addressing market failures more directly, such as in the credit market. Overall,
improving access to markets, as other strategies to tackle inequality, implies increasing the bargaining power of the
poor.
Social capital, rooted in social norms and networks, is an important asset for individuals to exit poverty. It can be
promoted by backing existing networks of poor people and providing links to broader markets, public institutions and
organizations.
8.1.2 Building a strong and resilient middle-class
Middle classes flourish with labor-intensive economic growth. The growth of jobs and labor incomes has two main
sources: accumulation of resources, that is, investment; and efficiency, how well resources are put o use, which is
largely driven by technological innovation. Private investment can be promoted by reducing risk through stable kscal
and monetary policy, healthy knancial systems, and reliable and transparent business environments.
Microenterprises and small businesses are frequently more at risk of being subject to bureaucratic badgering and
unequal treatment favoring the well-connected. Measures that reduce the sources of market failures can contribute to
the effective participation of these enterprises in the market.

8.1.3 Curbing the excesses of income and wealth concentration at the top

Evidence of the highand in many countries growingconcentration of income and wealth at the top have led to
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consider boundaries on market outcomes for the rich.
There are three main channels that could be used to curb incomes and wealth at the top. The two most typical
involve taxation: increase the progressivity of the tax system and apply high inheritance taxes and taxes on gifts for
the rich. A third measure is more unconventional: adopt a code of practice for pay. This approach can be taken
even further through punishing those who do not abide. As an example of the latter, in December 2016, the city of
Portland in the USA adopted a tax penalty on corporations that pay their CEOs more than 100 times what they pay
typical workers.

Second, opening markets in advanced countries for agricultural products and promoting freer trade or extending
benefits of preferential agreements can help boost developing countries exports, improve access to modern
technology, and encourage private capital inflows.

Third, multilateral institutions can assist countries in the design of sound policies, and through their lending program
and policy dialogue influence the policies and allocation of resources by individual countries to better target the poor,
set appropriate boundaries in market outcomes, and curb excesses of income concentration and wealth
accumulation at the top.
Ch. 3.6: Can aid help reduce inequality?
Foreign aid could help mitigate inequality within recipient countries if two critical conditions were met. Donors would
have to allocate aid in line with their rhetoric on pro-poor growth, by targeting the most disadvantaged population
groups. At the same time, the authorities in the recipient countries would have to ensure that aid actually reaches the
poor. Both conditions are likely to be violated at least to some extent. From the literature on aid allocation across
recipient countries, it is well known that donors pursue a mix of motives, being motivated partly by developmental
concerns and partly by commercial and political self-interest
Ch.3.7: Trade, Trade Policy, and Inequality
International trade theory suggests several channels through which openness to international trade would affect
within-country inequality. The most well-known channel is the Stolper-Samuelson mechanism derived from the
Hecksher-Ohlin trade model. This channel can however not explain the rise in wage inequality between skilled and
unskilled workers in countries such as the United States that coincided with trade reforms implemented in many
developing countries during the 1980s and 1990s (Pavcnik 2011). While the Stolper-Samuelson mechanism
suggests that increased relative demand for skilled labor in skilled-labor-abundant countries occurs as a result of
shifts in relative demand for skilled labor across industries, what mainly happened in the United States and other
developed countries was an increase in relative demand for skilled labor within industries.

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