Economic development as equalization of opportunities

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

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∑

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

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

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

5
Language
• Circumstances are those aspects of a
person’s environment that influence
outcomes & are beyond his control
• The typology is the partition of the pop’n
into types, where all individuals of a type
have similar circumstances
• With a type, outcomes will differ because of
differential effort

6
Example: The distribution of income
by type, defined as level of parent’s
education in Austria (2005)

7
Contrast with Denmark and Hungary:

8
Some calculations for Uganda

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

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

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.

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

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

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

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

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)”

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

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.

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.

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%!

23
In other words, growth in France was much more
egalitarian than in the US. I don’t have the growth
figures for the bottom of income distribution in these

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.

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
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 Norway’s 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.

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

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.

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

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

Economic development as equalization of opportunities

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