Economic Growth

Is leadership the key to tackling inequality?

A girl sits on rocks during the summer solstice at the Kokino megalithic observatory, June 20, 2012. The 3,800-year-old observatory was discovered in 2001 in the northwestern town of Kumanovo, 70 km (43 miles) north from Skopje, and is ranked as the fourth oldest observatory in the world, according to NASA. REUTERS/Ognen Teofilovski (MACEDONIA - Tags: SOCIETY ENVIRONMENT)

A girl sits on rocks. Image: REUTERS/Ognen Teofilovski

Sri Mulyani Indrawati
Minister of Finance, Ministry of Finance of Indonesia
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Economic Progress

Inequality is a problem all countries face, whether they are poor, rich, or in-between. Some inequality can be a temporary byproduct of economic growth when not everyone is moving at the same speed and at the same time. But when the majority of people suffer economic and social stagnation, inequality poses a real threat to the progress of individuals and whole countries.

This is why high and persistent inequality is not only morally wrong, but also a symptom of a broken society. It can lead to entrenched poverty, stifled growth, and social conflict. This is also why the goals of the World Bank are not just to end poverty but also to promote shared prosperity.

The inequality discussion often centers on the income gap. But there are other aspects of inequality that are equally important.

Source: Oxfam, data from Credit Suisse.

The first is inequality of opportunity, which comes at a high cost and with serious implications. It means that children start off with a disadvantage from the day they are born. For example, recent evidence from my own country,Indonesia, shows that about one-third of all inequality today is due to circumstances which people are born into.

In fact, in many areas, if a child is born a girl — say, in a rural area — and if her parents are poor, or belong to a marginalized group or ethnicity, she will have fewer opportunities and is more likely to be poor. Limited opportunity restricts economic mobility, perpetuates poverty across generations, and can repress growth by limiting the potential of large groups. This is why we help countries to provide basic services that are reaching all people, particularly the poorest 40% of the population.

The second issue critical to addressing inequality is exclusion, both real and perceived. In the Middle East and some parts of Eastern Europe for example, people are less satisfied and more pessimistic about their future even compared to regions with similar levels of income inequality, suggesting widespread perception of worsening economic mobility, a growing sense of unfairness, and lack of social justice. This is why our development assistance in the region goes beyond classic “aid’’ and aims at building a new social contract, while promoting inclusive growth and job creation. In Tunisia, for example, our work supports the goals of the transition following the Arab Spring.

So what works best to address inequality? It requires the right mix of good policies, good governance, and good institutions. Countries as different as Ukraine, Indonesia, Peru, Egypt, and Ethiopia have asked us to work with them in these areas. Often this means removing obstacles, like untargeted and wasteful energy subsidies, inefficient public spending or poor service delivery.

But possibly the most important issue to address inequality is good leadership. To start with, leaders need to understand that promoting growth while sharing prosperity makes both economic and political sense. Closing gendergaps, for example, could increase growth in Brazil by 14% and in Egypt by an impressive 25%. Similar benefits can be found if the needs of children and youth are met, most importantly, through access to good health services and education.

Ultimately the world’s leaders need to be willing to challenge the status quo and tackle the common challenges of limited capacity, corruption, lack of accountability, and elite capture.

Addressing inequality will require leaders who are prepared to make necessary but sometimes unpopular decisions that can take time to show effect. It comes down to leaders who have the courage and political will to measure their success not by how a small margin of cronies and well-connected groups are doing but by how the lives of the majority are improving.

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