LDCs Inequality: A Lack of Redistributive Capacity?

♠ Posted by Emmanuel in at 1/04/2011 11:13:00 AM
Martin Ravallion of the World Bank should be familiar to those interested in development studies as one of those who've waded into the highly contested area of poverty and inequality measurement. On the overwhelmingly optimistic side, you have the likes of Xavier Sala-i-Martin of Columbia University. On the more pessimistic side, you have Ravallion's World Bank colleague Branko Milanovic as well as Sala-i-Martin's fellow Columbia academics Thomas Pogge and Sanjay Reddy. Ravallion lies somewhere in between, though he tends to be on the more upbeat side of neutral IMHO. (I've looked at this debate in one of the first posts I made for this blog; it is in need of updating to be honest in light of more recent PPP weights.)

In a recent issue of the online Journal of Globalization and Development, Ravallion has a new paper out detailing a less-studied facet of inequality. Namely, are developing countries more inequitable because their redistributive capacity is less? In other words, inequality is attributed to an inability to make richer folks pay their share. This can be due to any number of things: there aren't really that many wealthy folks; it's hard to identify the wealthy; the wealthy have a relatively lower tax burden; or the wealthy are able to make those less well-off shoulder more in taxes if made necessary by, say, IMF fiscal balance conditionalities.

The conclusion Ravallion ultimately draws is that economic growth is necessary for building the aforementioned capacity to redistribute wealth. Here is the abstract:
Development aid and policy discussions often assume that poorer countries have less internal capacity for redistribution in favor of their poorest citizens. The assumption is tested for 90 developing countries. Most countries fall into one of two groups: those with little or no realistic prospect of addressing extreme poverty through redistribution from the “rich” and those that would appear to have ample scope for such redistribution. Economic growth tends to move countries from the first group to the second. Thus the appropriate balance between growth and redistribution strategies can be seen to depend on the level of economic development.
And here are the main policy implications:
This inquiry offers support for focusing development aid on poorer countries—on the grounds that they have less scope for addressing poverty internally. The emphasis often given to the role of economic growth for poverty reduction in poor countries can also claim support from these findings, given that they cast doubt on the feasibility of redistribution from the rich to the poor as a poverty-reduction strategy in poor countries. While the poorest countries appear to have weak capacity for attacking poverty through income redistribution—given the sheer weight of poverty and thinness of the rich strata in their starting distribution—with sufficient economic growth the tax rates on the rich required for covering the poverty gap start to fall rapidly. So it makes sense for the relative emphasis on growth versus redistribution, and the reliance on external aid, to change with the level of economic development.
It's interesting stuff even if I'm not entirely sure what to make of it just yet. Some might even identify a fiscal spin on "trickle down" theory.