Equity to reduce poverty

The central message of the World Development Report (WDR) 2006 of the World Bank, titled Equity and Development, is extremely relevant to Indonesia, where almost 50 percent of the population of 220 million live on less than US$2 a day and 62 million people are so deeply mired in absolute poverty that they are virtually untouched by the development process.

The annual report virtually abandons the trickle-down theory of development traditionally held by the World Bank, and instead recommends the promotion of equal opportunities for the poor by broadening access to justice, health care, education, jobs, credit, secure land rights and economic infrastructure such as roads, power, water, sanitation and telecommunications.

The new concept essentially boils down to the economics of population quality.

The report, issued last week to coincide with the annual meetings of the World Bank and the International Monetary Fund, suggests that developing countries correct persistent inequalities in opportunities by leveling the economic and political playing fields, investing more in people, promoting fairness in financial, labor and commodity markets, and expanding access to justice.

The report, based on case studies in numerous developing countries, cautions that equity is not the same as equality of income, but is rather the quest for a situation in which opportunities are equal, where personal effort and initiative -- not family background, caste, race or gender -- account for the differences between people's economic achievements.

The WDR 2006 complements the conclusions of the WDR 2004 on the poor's access to public services and the WDR 2005 on the improvement of the investment climate. But its central message, which is strikingly different from the Bank's traditional stance, will still go a long way toward improving the reputation of the World Bank as the "spokesman" for the poor.

Credit for this should go to the new president of the Bank, Paul Wolfowitz.

When U.S. President George W. Bush nominated Wolfowitz, then deputy secretary of defense, to succeed James Wolfensohn as the president of the World Bank last April, Wolfowitz was strongly criticized by non-American shareholders in the Bank. There was concern that President Bush intended to make the multilateral development agency an instrument of U.S. foreign policy.

However, as the central message of the WDR 2006 demonstrates, Wolfowitz has succeeded in walking the fine line between reconciling the real and powerful global economic and political clout of the G-7 nations -- the Bank's controlling shareholders -- with the equally powerful moral arguments of a development institution dedicated to fighting poverty and improving living standards in developing nations.

The report also serves to reject allegations by many NGOs that the World Bank is merely the vanguard of the "Washington policy consensus" on market-oriented reforms such as trade and investment liberalization, deregulation, privatization, floating exchange rates, fiscal discipline and property rights.

The WDR 2006 maintains, through well-documented development success stories in several countries, that growth-led development with its trickle-down effect is not sufficient to reduce poverty. On the other hand, poverty cannot be reduced without growth because economic growth is always one of the two forces behind poverty reduction, with the other force being the one that determines the distribution of income among the population.

The problem is how to strike a good balancing act between the two pillars of development strategy: A good investment climate (all those factors responsible for growth, entrepreneurship and investment) and the empowerment or human development, which is really about empowering the poorest people in society.

Higher growth will bring about more opportunities, but better distribution of those opportunities to the poorest people will generate faster growth. This means that equity must be sought because it is a vital complement for economic development and growth.

The report sees the poorest people in society not as the recipients of charity (trickle down), but rather as people with enormous potential to contribute to the development of their countries.

As such, the World Bank sees retargeting and refocusing public subsidies and policies toward the poorest people -- what the Indonesian government is now doing with its huge fuel subsidy -- as a very sensible investment.