ZOLLO: Today we're going to begin our discussion related to the global trends in sustainability and particularly we will focus on social aspects of sustainability and we will do so with the help of my dear friend and esteemed colleague, Eliana La Ferrara who will share with us not only her own invaluable experience as a scholar, but also her own view and the general consensus view I guess, of economists, particularly macro economists, on these themes. Would you like to give us maybe a snapshot of the current view related to global trends on inequality, social inequality? LAFERRARA: Sure, well first of all we need to distinguish between absolute and relative inequality and to see the distinction consider a very simple example: take two people, one earns one thousand dollars, the other ten thousand, and then double the incomes of this two people. The ratio between the two will stay the same so we say that relative inequality has stayed the same, but the absolute inequality which is the distance in the income between these individuals has gone up, so absolute inequality has increased. And which notion we use when we look at trends, depends on whether we are more concerned about, you know, the standards of living in absolute levels or the relative position of individuals that might matter for example for social conflict or social cohesion in a society. So maybe what we can do to give a snapshot or a picture of the trends, now is to talk about relative inequality which is what a lot of the profession has been concerned with lately. So we can consider two different trends. The first is the trend of inequality between countries, and this has increased sharply until 1960, then it tapered off and it started increasing again until about 2000. After 2000 it's been decreasing quite sharply again. And a big role in this decrease, especially if we weigh the measures by population, is played by income growth in China and in India. Things are different if we look at inequality within country, and within-country inequality in developing countries has increased in the 80s and the 90s and factors that contributed to this were the fall of communism, as well as macroeconomic crises in Latin America for example, but then it has declined in the 2000s. On the contrary within-country inequality in developed countries has been increasing since the 80s and increases have been quite pronounced in countries like the UK, the US, Germany as well as Sweden, while other countries in continental Europe like France or Norway have managed to keep this rise in check. Now it's true that in most OECD countries today, the big gap between the rich and the poor is at its highest level in 30 years. So the situation is indeed a big concern for policymakers. ZOLLO: So these trends are quite concerning of course, Eliana, particularly those related to internal inequality; within-country inequality. What would you say are some of the consequences of these trends for poverty reduction? LAFERRARA: Yes, generally countries that see a reduction in inequality also see a reduction in poverty, and Martin Ravallion, an economist and Georgetown University, has looked at how income growth affects poverty depending on whether this growth is accompanied by inequality reduction or not. He finds that in developing countries that grow while experiencing a fall in inequality, the poverty rate goes down by about 1.3 percentage points per year, while in developing countries that grow when experiencing an increase in inequality, the poverty rate only decreases by about 0.4 percentage points per year. And these are big differences when we look at, we talk about growth rates. Now even if inequality does not rise or fall during a period of growth, just a high initial level of inequality means less progress against absolute poverty. Why? The intuition is that the more unequal the original distribution, the smaller the share of income that is accruing to the poor. Under this lie the recent trend of increasing inequality is particularly worrisome as it means less progress towards poverty reduction. Also, while industrialized countries can rely on a number of policies to tackle inequality, poor countries often have weak fiscal and institutional capacity to tackle inequality through redistributive schemes, and the weakness of educational systems in poor countries is, for example, one of the key problems, because differences in human capital accumulation are one of the key sources of inequality among people. And this brings us to the link between education and social mobility. ZOLLO: So social mobility is clearly a key potential remedy for poverty reduction and the reduction of social inequalities in general, so how would you see not only the trends, but also eventually the policy implications, to enhance? LAFERRARA: Yes, even in societies that are traditionally regarded as highly mobile like the U.S., there are serious concerns about decreased mobility in recent times. Raj Chetty, who is a Harvard economist, has done some very interesting research on this, and he shows that the rates of absolute income mobility – that is the fraction of children who earn more than their parents – has fallen from about 90 percent in 1942, only 50 percent in 1980. And two phenomena caused this trend: one is lower GDP growth rates, and the other is greater inequality in the distribution of growth. Now, colleges in the U.S. system, but also in other countries, play a big role. Why? Well, the number of children from low-income families that are enrolled in college rises over time because of general progress, but the share of students who attend selective or Ivy League colleges is pretty stable, it doesn't really improve. And this means that it's harder to enter colleges that would most successfully reduce the gap between high and low income families. This acknowledgement has led to recent innovative programs that provide information to disadvantaged students, and tackle their aspirations to help them apply to selective colleges that would give them better prospects of upward mobility. Now, this is pretty much what's going on in industrialized countries. The situation is a little different in developing countries. Here, the biggest source of upward mobility is the shift in occupations from farm to non-farm sectors and so the private sector plays a big role in guaranteeing and fostering upward mobility. For example in Africa, investments in education or transition to better paying jobs are concentrated in areas that have undertaken a structural transformation, from agricultural dependence to manufacturing and services. Latin America has a bit of a different story. Here, governments have invested a lot of resources in expanding educational coverage, but intergenerational mobility continues to be low. And the main reasons are related to the low quality of education. For example, average achievement in terms of testable knowledge is low. If you look at 14 to 15 year-olds, almost 50 percent of them do not reach a minimum level of reading comprehension, according to recent evidence. There are also compositional effects as the rich gather into schools that are different from the schools attended by the poor, and so education doesn't really increase social mobility, it just reproduces the current social order. So to sum up, I would say that these recent trends in inequality call attention to the importance of counteracting policies. These policies should aim at generating upward social mobility for the lowest segments of the population, through education financing, through training and through adequate labor market opportunities, so growth of the private sector is crucial in order to guarantee that this higher human capital and the skills acquired translate into higher income and jobs. ZOLLO: And there would be a place where, for example, the role of the private sector from multinational companies for example, in developing countries, might be particularly important because they could not only provide education for their own employees, local employees, but also for the suppliers, distributors, for the entire supply chain in developing countries, therefore directly influencing the capacities for entrepreneurial activity, for managerial activities as well. So this is quite interesting, I think it's an open question, how the policymakers in developing countries for example, could stimulate this type of role from multinational companies. LAFERRARA: Absolutely, I agree. I think it's a great area, both for policy experimentation and for research because it's challenging to understand all the linkages from, you know, the presence of the multinationals to all the sectors, all the providers in the supply chains that are involved, and the benefits to the local communities where their branches are located. ZOLLO: Very good. Thank you so much for your input. LAFERRARA: My pleasure. ZOLLO: This has been really a source of a lot of food for thought, and for reflection. So we'll see how we will be able to tackle maybe some of these issues both research-wise as well as in terms of managerial practice and policy practice.
