What does inclusiveness in access to assets have to do with sustainable development?

In important ways, high levels of inequality and deprivation can be harmful to efficiency and growth. The presence or absence of inclusiveness in institutions and in access to assets tends to have long-lasting effects (box 3.10).

Economic forces that create differences in income and wealth serve a positive function by creating incentives to allocate resources efficiently. But poverty and inequality can be harmful through other important mechanisms; at the macro level, damage can be done in the political process. Institutions and government policies are essential for assets to thrive, through the rule of law and macroeconomic stability. An equitable distribution can facilitate the emergence of institutions to negotiate change and thus help adopt and implement good policies-particularly to address externalities and public goods. At the micro level, sharp differences in income and wealth are also costly. Imperfections such as those found in capital markets may allow individual potential to be wasted when individuals are very poor. Examples are when a talented child goes uneducated (chapter 7), or a worker stays with an employer, or with an asset with low yields only because she cannot finance migration or a job search (chapter 4).³⁶ Another example is when agricultural potential is wasted because of distorted and highly concentrated land-ownership and contracting problems.³⁷

Inequality in land assets has been found to be harmful to growth.³⁸ Good institutions appear to facilitate long-term growth, and more egalitarian societies appear to have better institutions. Furthermore, good institutions work in part directly, and in part through schooling and openness.³⁹

An ambitious quantitative study tested the role of inclusiveness and institutions using a 500-year perspective.⁴⁰ For colonized countries (not limited to the Americas), a major break in power structures and institutions happened under colonization. Those that were richer and more densely populated in 1500 (before colonization) are poorer now. This reversal of fortune came about because colonizers in richer, more densely populated areas could force a large supply of labor to work in mines or plantations. Under these extractive institutions, political power was more concentrated. The lower quality of these institutions for growth reveals itself after 1700, when asset creation became important, rewarding coun-tries that had institutions better suited for savings and investment.

Long-lasting harmful effects of institutions that concentrate ownership are also found in a recent study of India.⁴¹ The British colonization in India lasted for 200 years. Where they implemented a landlord-based revenue system (by implication, with concentrated property rights), yields were higher than in areas where they implemented cultivator-owned rights. In post-independence India, the landlord-based revenue system was abolished, so only the historic traces of the institutions remain. Yields have grown significantly faster in the areas where, historically, cultivators themselves had property rights. The differences proved to be particularly important from the 1960s onward, as districts with smallholders benefited more from the green revolution, with significantly higher application of fertilizer, high-yield varieties, and irrigation. Districts that historically had smallholder institutions also had higher investments in human capital.

The proposition that ownership matters is supported also in other studies. Before 1977 sharecropping contracts in West Bengal, India, generally involved 50 percent output shares to the tenant for the approximately 2 million sharecroppers in the state. In 1977 a new administration gave high priority to a law giving security of tenure to tenants. The reform increased most tenants' share of output from 50 percent to 75 percent. In the decade after this reform, West Bengal broke through: Annual growth in the production of food grains rose from 0.4 percent to 5.1 percent, while that for all of India rose only from 1.9 percent to 3.1 percent. The tenancy reform program explains about 30 percent of the added growth.⁴² Tenancy reform in urban slums in Brazil seem to also have unleashed growth potential and improvements in the urban environment (see box 6.6).

At early stages of development, owners of land may benefit from booms more than others (so ensuring broad-based land ownership and smallholder agriculture is likely to be more effective in reducing poverty-see chapter 5).⁴³ In a similar way, owners may be best positioned to benefit when a community performs better, as when schools and roads are in good repair. For this reason, having narrowly based ownership and many citizens without land or secure tenure can be an impediment to forward-looking and constructive collective action, whether for environmental protection or for other purposes.⁴⁴

The cited studies show how greater inclusiveness in access to assets-or lower inequality-can assist in making development more sustainable. One mechanism is direct and micro-economic: Ownership matters, and access to assets can help a poor family realize its potential. Another is political: A person with land or a house is more likely to support institutions protecting assets (rule of law and secure property rights, for instance) than a person without a house or hope of having one. So insecure property rights-with costly policy swings where shifting groups expropriate each other's assets-are less likely if access to assets is broad and inclusive.

In figure 3.3, the observation was made that protective institutions-such as the rule of law-are typically stronger in high-income countries. It was also noted that there are causal effects in both directions: Not only can protective institutions allow assets to thrive and incomes to grow, but a society strengthens its institutional capacity as incomes grow. In a similar way, there will be causality both ways between inequality and good institutions. Countries with greater inequality have a weaker rule of law (and lower incomes). The key point of this section is that highly unequal access to assets can be punishing to asset creation, preservation, and improvements in well-being if institutions are not rock solid. Groups without assets see themselves as unsupported by property rights, and are thus less supportive of property rights politically. This undermines support for the evolution of institutions that enable growth and sustainable development.

A narrowly based elite is often concerned about the risks of more inclusive political empowerment. One concern is that they might be expropriated. Just as unequal access to assets can be an obstacle to the emergence of good institutions, improperly designed and balanced, redistribution of existing assets can also be harmful to the emergence of good institutions. If a person without assets is more likely to support expropriation of assets, then a group that has lost through expropriation is also likely to become less respectful of the law and property. It should be clear that it will be easier to improve inclusiveness through access to new types of assets (as when land for agriculture replaces the importance of natural resources-minerals, forests, fisheries; or when education replaces muscle power, etc.) and through the expansion of assets that come from the growth process. Redistributive measures must be designed and balanced to avoid undermining the emergence of good institutions that enable people and assets to thrive.

The studies cited in this chapter represent, but do not exhaust, a still-young literature on the deeper institutional preconditions for economic growth. Important questions are whether institutions are everything, whether policies-in part determined by institutions-have separate and important effects, and finally whether high inequality itself is a major and important obstacle to sound institutions. At a practical level, there are many points of agreement: A key element in the success of East Asian economies was a focus on shared growth, inclusive schooling, and how this served to give political stability and investor confidence (box 7.10, Malaysia). An important element in political discourse in Western Europe and North America in the 20th century has been "to give everyone a stake in society," supporting policies to strengthen social safety nets, to subsidize general education, and to make home ownership more inclusive. Finally, policies that are frequently pursued-wasteful protectionism, unsustainable macropolicies, a bloated public sector-are best understood as short-term redistributive games that are costly in the long run. These games are played at greatest cost in nations with poor institutions, giving them low ability to negotiate and to commit to mutually beneficial change.⁴⁵