Equity and economic policy

It is generally accepted in modern-day societies that extreme inequality of income, wealth or opportunity is unfair and that efforts should be made to raise incomes of the poorer members of society. While this principle may be ambiguous, there is never the less little agreement on what constitutes a fair distribution of income, and herein lies the challenge for policy makers.{{more}} Despite widespread growth in both developed and developing countries over the past decade, evidence gathered by international financial institutions suggests that income gaps have actually widened during the period. This trend has invariably heightened concerns about the treatment of equity inn the formulation of economic policy and poses the question as to whether equity and economic growth can indeed be complementary or must there be a trade off between the two. Different societies have different perception of what is equitable and it is these cultural and social norms that will shape the policies which are adopted to promote equity.

Some societies (and I believe this would include SVG) view equity as a worthy goal in and of itself because of its moral implications and its intimate link with fairness and social justice. Policies that promote equity can help directly and indirectly to reduce poverty. Where incomes are evenly distributed, fewer individuals fall below the poverty line. Equity- enhancing policies, particularly investment in human capital e.g. education, can in the long run boost economic growth which in turn has been shown to alleviate poverty. Income inequality varies greatly from region to region; it is greatest in Latin America and sub Saharan Africa and lowest in Eastern Europe where incomes have tended to be more evenly distributed. Other regions fall between the two extremes.

Much of the debate about income distribution has centered on wage earnings, but wages are only part of the story. The distribution of wealth- and by implication, capital income- is more concentrated than labour income. In Africa and Latin America, unequal ownership of land has been identified as an important factor in the overall distribution of income. Furthermore, in recent years there has been a shift from labour to capital income (including income from self-employment) in many countries. In transition economies, the shift has been due primarily to the privatization of state assets. In SVG we may yet see a shift from labour to capital income if a decision is taken to privatize some state assets, with citizens both local and in the Diaspora owning a portion thereof.

Fiscal Policy-taxation and spending- is a government’s most direct tool for redistributing income in both the short and long run. It is widely acceptable that policy makers should focus on developing a broadly based, efficient and easily administered tax system with moderate marginal rates. An important subsidiary issue is how to distribute the burden of taxation so that the system is fair and just. The expenditure side of the budget offers better opportunities than the tax (revenue) side for redistributing income. The link between income distribution and social spending, especially spending on health and education, through which the government can influence the formation and distribution of human capital, is particularly strong with public investment in human capital being an efficient way of reducing income inequality over the long run. Economic

theory suggests that public expenditure should replace private expenditure only when it yields higher social benefits.

Expenditure on health and education can improve the existing pattern of income distribution, depending to a large extent on the allocation of expenditure on various economic sectors. Studies show that spending on basic health care and primary education is far more effective in reaching the poor than spending on higher education or hospital based curative care. Studies also show that in countries without some form of pooling of health risks, serious illnesses are the single most important factor driving families to poverty.

It seems clear from the foregoing discussion that equity and growth can be complementary. Some policies that promote equity, particularly investment in human capital, can boost growth in the long run, alleviate extreme poverty and increase social cohesion. However, when equity and growth do not go hand in hand government intervention would be desirable to bring about a redistribution of income and this can be done through the expenditure side of the budget.