What are inequality traps and how can the international community help countries with inequality to progress toward more equitable and efficient societies? This introductory chapter to the book ‘Institutional Pathways to Equity’ contends that addressing inequality traps requires understanding the causal forces, be they economic, political, or social, which shape a society’s inequalities. It recommends that the international community shift its focus toward providing incentives for internal actors to change the structures and institutions that sustain inequality and the self-reinforcing mechanisms that generate inequality traps.
Inequality is a politically significant factor in the development process. Beyond the normative concerns of ensuring fairness and moral justice, there is also a positive case for addressing inequalities in society. Namely, pervasive inequality can reduce economic growth and obstruct poverty reduction and political participation. Yet, evidence suggests that inequality is often persistent across groups over time and can be self-reinforcing. To address inequality, societies must deal with relationships of inequality, but the scope for doing so is restricted because of the relationships of inequality. These situations are known as inequality traps.
Escaping inequality traps requires understanding the structures and institutionalised behaviours that perpetuate inequality specific to particular settings. Inequality traps are arrangements that become fixed with time and are reproduced through every day practices. They have political, economic, and socio-cultural features that are often interlocking. That some countries manage to move out of situations of embedded inequality does not diminish the importance of the concept of the inequality trap or the challenge they pose. Slow movement out of inequality is a significant cause for concern for two reasons:
- Even where an initial position is a self-reinforcing equilibrium, either exogenous influences or internal processes can change the parameters of the equilibrium over time.
- Equilibriums may be self-reinforcing over the medium term but over the long term are self-undermining.
Current development practice for facilitating change falls into two camps. The first promotes a technocratic approach that emphasises the pursuit of an ideal aggregate social welfare. The second focuses exclusively on the internal political economy of inequality, ignoring the potential impact of external actors and shocks. A more useful approach is a compromise of the two in which historically formed inequalities are crystallised in formal and informal institutions whose structures and behaviours can be changed through some kind of external or internal agency.
Using this new framework requires a coherent approach to policy design. Actors interested in fostering a transition toward a more equitable and more efficient society should take the following into account:
- The diagnostic challenge has shifted – beyond analysing the costs and character of existing inequalities, further work is needed to identify and understand the causal forces sustaining the current situation.
- Policy change needs to be designed and implemented in ways that will shift the political equilibrium – recognising that not all situations will benefit from external interventions, and in some cases, external agencies may only succeed in shifting the society to a different distorted equilibrium.
- Dictating domestic policy from outside typically fails, but external incentives can support internal agents to shift the social contract for the better.
