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UNECE Seminar Policies for Achieving the Millennium Development Goals in the UNECE Region Reducing extreme income disparities

(Geneva, 2-3 October 2003)

Statement by Mrs. Brigita Schmögnerová,
Executive Secretary

Ladies and Gentlemen:

I would like to welcome you to the UNECE Seminar on “Policies for Achieving the Millennium Development Goals in the UNECE Region with a focus on reducing extreme income disparities and poverty”. I hope we will have two days of productive discussions on these issues which represent an important dimension of policies at both international and national levels.

This seminar will discuss two linked but not identical issues: poverty and extreme income disparities. Poverty does not necessarily imply extreme income disparities and vice versa. On the other hand, the elasticity of poverty to growth depends on inequitable income distribution.

Poverty is widely recognised as a “public bad”. There is no identical understanding or “general wisdom” of extreme income disparities.

At the Millennium Summit in 2000 Governments made a political commitment to reduce extreme poverty. No wide political commitment nor international consensus on reducing extreme income disparities exist. What has been achieved – at the Social Summit in Copenhagen – is that a commitment has been made by Governments and international organisations to include the social dimension into discussions of macroeconomic policies and structural adjustment programmes. However, this commitment does not explicitly include solving inequality problems. On the other hand, income disparity is more frequently addressed publicly. The Financial Times of 19 September 2003 reproduced a chart on the ratio of CEO pay to average pay showing that in the last 20 years this ratio in the United States rose from 42 times to over 1000 times. One could argue that pay has become a big focus in the post-ENRON world. I would like to quote the head of the United States’ new accounting regulator, William Mc Donough, who said that “executive pay should be adjusted to the benefit of the shareholders and other stakeholders such as workers and the community”.

Poverty is measured in absolute terms (such as extreme poverty defined as income/consumption less than one US$ per day) or in relative terms (such as income below 60% of the median income in a country). Income disparity is a relative measure and allows for better cross-country comparisons. At the same time we should be aware that comparisons of this kind do not reflect how much poverty or inequality is acceptable in a society. The acceptance varies depending on various factors.

The objectives of the seminar are threefold (1) to identify gaps in theory, (2) to formulate policy recommendations, and (3) to feed into the Economic Survey of Europe, the flagship publication of the UNECE.

As I noted, there is no international understanding of more equitable income distribution nor of higher equity, of which more equal income distribution represents one important element. (Equity in addition includes equitable access to education, health, employment, justice, etc.). There is no international target agreed upon in terms of reduction of extreme income disparity. Is this a failure of theory or of politicians, or both?

Why should we care about extreme income disparities? Is theory on efficiency and equity up-to-date? The newly appointed World Bank chief economist, Mr. Bourguignon, attracted attention at the development conference three years ago by his argument that there is no trade-off between equity and efficiency in developing countries and that reducing inequality could promote growth. Is this valid and if so, is it valid at the same time for transition economies? Such questions may help to identify gaps in theory and move the theory on.

Poverty and extreme income disparities emerged out of transition, and tend to persist in some less advanced transition economies. Key factors of increased income disparities and poverty increase in the early stages of transition included errors in privatization (unequal access to state assets), hyperinflation, devaluation, banking crises, transition recession but also military conflicts. In the later stages of transition, key factors included sharp wage differentiation, unemployment, underdeveloped social protection and other targeted policies, corruption, etc. In 1999, 100 million people in Eastern Europe and the CIS were living on less than two US$ per day, a threefold increase compared to 1990. The situation is especially worrisome in the CIS-7: Armenia, Azerbaijan, Georgia, Kyrgyzstan, Republic of Moldova, Tajikistan and Uzbekistan.

Poverty in relative terms has also increased in some of the most developed economies in the region. Poverty in the EU in recent years decreased on average, but it is a challenge to the European social model and its modernisation. The formulation of policy recommendations taking into account that “one size does not fit all” is therefore relevant for both advanced and less advanced UNECE members.

What policies ensure reduction of poverty and extreme non-equitable income distribution?

Are macroeconomic policies towards fiscal discipline, and low debt burden, low inflation, stable currency, etc., efficient enough to prevent high income disparities and increase of poverty?

Are growth policies efficient enough to reduce poverty? Is there any evidence that growth by itself reduces income disparities? This is not in general proved. We have economies with strong growth and with increasing incidence of poverty (surely in relative terms) and increasing income disparities. I am strongly convinced – and it is becoming widely recognised – that there is a need for a pro-poor growth policy and a need for targeted policies that would address poverty and extreme income disparities.

As market fails to ensure poverty reduction and fails to ensure a size of inequality acceptable in society, there is a need for government intervention, for a government pro-poor growth policy and pro-equity policy. The latest innovation in understanding pro-poor growth and pro-equity growth is the role of the business sector and civil society.

What is pro-poor and pro-equity growth policy? We face “greening” and “engendering” macroeconomic policies. Are we to reformulate macroeconomic policies that would take into consideration poverty reduction and non-equitable income distribution? This is a view of EC-ESA (Executive Committee on Economic and Social Affairs) which in 2001 produced an interesting paper: The Social Dimension of Macroeconomic Policy.

The fight against poverty has gained important momentum with the Millennium Declaration and the Monterrey Consensus adopted in March 2002. But while there is consensus on the target to “halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day” (target 1 of the MDGs), there is less agreement on how to achieve this goal.

A key term is “pro-poor growth”. This means that growth per se is only a necessary but not a sufficient condition for reducing poverty and inequality.

There is a long list of targeted policies that address poverty and extreme income disparities.

We have some in-house experience with social-housing policies and energy-pricing policies that address access to housing and energy while avoiding energy subsidies, property rights policy for poverty reduction, SME policies targeted towards women and youth – as the two groups most often affected by poverty and with low incomes – and policies towards the older generation.

When promoting targeted policies we do not want to diminish the role of growth policies or to destroy growth neither do we intend to promote sharp increase of social expenditure. The effectiveness and efficiency of targeted policies are therefore the key to avoiding the negative consequences of “tax and spend policies”. Michel Camdessus in a foreword to the IMF publication “Economic Policy and Equity”, 1999, edited by Vito Tanzi, Ke-Young Chu and Sangio Gupta, called for “a second generation of reforms” to complete the transformation of the state’s role in economy.

In globalization we have to respond to new challenges: in a world of increased interdependence we face greater competition, greater threats of insecurity, etc. Will not pro-poor and pro-equity growth policies be in contradiction to a higher competitiveness? If yes, so what? There is growing evidence that addressing key factors of inequitable income distribution and poverty like unequal access to education, health care, job opportunities, low pay, and so on, do not contradict the target of increased competitiveness. There is now greater consensus (Monterrey’s consensus) that to address poverty at the international level we need free and fair international trade. We have also to avoid new divides like the digital divide which should be addressed both at the national and international level; we have to address underprovision of global public goods, etc. Will greater international consensus be reached on issues like enforcement of minimal labour standards, social norms for more equitable income distribution, etc.? We should continue the dialogue and involve more the business sector and civil society, as well as governments and international organisations.

There is, of course, no simple and universal blueprint to overcome poverty and extreme income disparities. Strategies need to be tailored to the specific conditions in each country. We should also recall that progress in economic development is strongly dependent on the quality of the institutions of a country. Economic theory, however, provides little guidance as to the specific details of institutional arrangements that could support pro-poor economic development. The specific choice of institutions reflects political and social preferences, cultural traditions and a process of learning-by-doing.

It is also of prime importance that there be a strong political will to implement the required economic and social reforms, including the improvement of governance, the fight against corruption and the creation of transparent and efficient markets.

There is also, of course, an important role for international cooperation in fostering an environment conducive to the catching-up processes. The Millennium Declaration emphasizes the need to “Develop a global partnership for development”. This involves among other things more generous development assistance, but notably the lowering of distorting tariffs and subsidies that restrict market access for the exports of poor countries. The collapse of the world trade talks in Cancun shows that the more advanced countries are not yet prepared to suffer from associated adjustment costs.

The diverse topics that are on the agenda of this seminar are just a small example of the manifold dimensions of poverty, extreme income disparities and poverty reduction policies. I hope very much that the presentations and discussions today and tomorrow will help to improve our knowledge and understanding of poverty and income disparities in the UNECE region and thus contribute to the design of more effective policies to improve the social dimension of economic developments.

Thank you for your attention.