What to do about Inequality, Shrinking Wages and the perils of PPPs? A conversation with Kaushik Basu, World Bank chief economist

March 10, 2015

     By Duncan Green     

Along with a bunch of policy wonks from NGOs and thinktanks, I had an exchange with World Bank chief economist Kaushik Basu this week. Rules of Cornell University Professor of Economics Kaushik Basuengagement were that the meeting  was off the record, but I was allowed to blog as long as the Bank saw a draft to make sure I wasn’t about to get him the sack. In the end, however, the Bank asked for only one minor change to my first draft (clarifying his views on PPPs).

Kaushik had a similar session with us back in 2012, soon after he took up his position, and this time both echoed similar themes (e.g. a very Indian take on the basic right to food), and added some new ones. He brings an Indian sensibility to the job – strong on rights, the lives of poor people, and a scepticism about the inefficiencies of state provision (eg India’s Public Distribution System for basic foodstuffs), plus a fascination with IT and the role of the private sector. His predecessor, Justin Lin, had a more Chinese take, stressing industrial policy. Both have provided valuable counterpoints to the anglosaxon individualism of traditional Bank economics.

From my point of view the most striking discussions were on inequality, labour and Public Private Partnerships.

On inequality, Kaushik acknowledged that the topic has become much more prominent in debates over the last two years, partly due to Pikettymania. ‘Post Piketty, there has been a lot of discussion on whether Inequality is getting worse or not. For me, that part of debate is not that important, because Inequality is already too great.’

He is particularly exercised (‘A great injustice’) by inequality at birth (‘you really can’t justify it by saying babies are either hard working or lazy!’). He is trying to develop an at-birth gini coefficient, which could be interesting. But he is fairly timid on what to do about it – the standard Bank recipes of improved healthcare and education (although he insists they should be free at the point of use) and a ‘little less inequality at the start of life, where taxation can play a little bit of a role’.’An Inheritance tax makes sense – it’s a plain notion of justice. That is one kind of taxation I can get behind.’

What about the guys on the bus?

What about the guys on the bus?

Around the time Kaushik joined the Bank, it adopted a ‘shared prosperity’ goal, to ‘increase per capita real household income or consumption of the bottom 40 percent of each country’s population’. Critics, including Oxfam, were pretty underwhelmed by this as it seemed to dodge issues of extreme wealth concentration (and political capture) by elites. Kaushik defended it, though, partly arguing that it was as far as the Bank could go on this issue, but also pointing out that it’s pretty easy to work out from the growth figures for the bottom 40% and the economy as a whole, whether poor people’s slice of the pie is growing or note, and arguing that the great virtue of the goal is that (unlike absolute poverty targets of $X per day) it applies to rich and poor countries alike.

I would argue that given how inequality has now become a mainstream topic, the Bank ought now to be able to make a sharper comparison with the incomes of the top 1 or even 0.1% , which is perhaps the most important story on inequality right now. But Kaushik didn’t answer my question on inequality leading to political capture – maybe that’s just too politically tricky for the Bank to address. However he did acknowledge that the Bank has ‘been a bit slow’ in identifying and promoting policies to address inequality (as Nora Lustig is doing, for example). On gender inequality, he wants to make the Bank’s biannual ‘Women, Business and the Law’ report much higher profile – it covers issues like access to finance.

On labour, he said ‘The declining share of labour’s income does worry me. Multiple crises over the last 7-8 years have at their base a tectonic shift in the structure of global market. The regulation v deregulation argument doesn’t tackle that problem. The real challenge is that you can’t stop the march of machinery that is a) displacing labour and b) linking up labour in distant lands’ (which is a good thing). He argues that we have to identify other ‘pools of cash’ (taxation, natural resource revenues) and use them as compensation for the declining share of wages, both because it is the right thing to do, and in order to prevent social and political disorder.

On Public Private Partnerships, he stressed his desire to increase private sector involvement in helping developing countries progress, but said this was public private partnershipnot at all the same thing as uncritical support for PPPs. ‘The way PPPs are done worries me a lot. These are two very different creatures being brought together in a single cage and one can just gobble up the other. The private sector is often much smarter at writing the contracts, so the taxpayer carries the can when bankruptcy occurs. We have to be acutely aware of this – I have heard many private sector companies say there is nothing as good as a deal with the public sector!’

But Kaushik believes that while PPPs done in a cavalier fashion can do damage, that is no reason to abandon them. Instead, donors have to work hard to design the contracts better to make sure that the risks and burdens are shared equitably between the two Ps of the PPPs.

I hope the Bank is listening, because despite the evidence of their flaws in areas such as health or agriculture, PPPs are very expensive and seem to be ‘gobbling up’ an increasing slice of its cash right now (and where the Bank leads, other donors tend to follow).