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Revised version of a paper presented at a conference on Asset Distribution, Poverty, and Economic Growth: Theory, Empirical Evidence, and Policy Implications, organized by the Brazilian Ministry of Land Reform in conjunction with the Economic Development Institute and the Development Research Group of the World Bank, Brasilia, July 14-17, 1998. Useful comments were received from Sanjeev Gupta and Howell Zee. Discussions with Nancy Birdsall and Gerd Schwartz were helpful.
Because they were writing about industrial countries, the social norms that Lester and Atkinson had in mind related to issues of labor organization, existence of unions and so on. In this paper, I bring in norms particularly, but not exclusively, important in developing countries.
Incidentally, this arrangement is conceptually similar to that for the use of money in Islamic countries where the payment of a fixed interest is forbidden.
For example, in Korea, labor unions have accepted the fact that restructuring by enterprises will require some lay off of workers and have accepted reductions in real wages so that fewer workers need to lose their jobs.
The role of professional matchmakers in traditional societies is in fact that of finding spouses from similar backgrounds.
In fact, recent writing on income distribution in developing countries has highlighted the importance of the initial distribution of assets.
In Great Britain, the House of Lords is filled with individuals who have inherited their positions. Great Britain may be removing this inherited privilege soon.
Even in advanced societies such as the United States, these positional rents may be important in particular activities (dentists, doctors, lawyers), where the children of well established professionals have an easier time to follow the parents’ steps.
In some sense, our hypothesis bears some resemblance to Mancur Olson’s hypothesis about the role of special interest groups in the economy. See Olson (1982).
One reason why safety nets are required in modern economies is that modernization tends to destroy the traditional safety nets. In Japan and Korea income distribution, as measured by Gini Coefficients, had been relatively good (about 0.34) in part because of the traditional safety nets that insured life employment and that required family members to assist other members that ran into difficulties. The current crisis is likely to modify these traditions and especially life employment, thus leading to a worsening of the income distribution and forcing the government to develop more formal, explicit safety nets.
However, even human capital can lose value in the movement from place to place when specific certifications or residency requirements have created some positional rents for those already established in one place. Think of the many doctors or other professionals who emigrated to Israel from Russia and could not exercise the profession they had been trained to do. Of course, an easy explanation of this situation is to assume that, on the average, those who move to other countries have a training that is not as good as the average training of the professionals in the country of destination. However, in some cases, this is a convenient rather than a valid explanation.
For example, inequities vis-à-vis women or particular ethnic groups can be reduced by giving them more access to education or even to health services.
It is known that the share of labor in national income rises with the growth of income. In very advanced countries, the share of capital may again show some increase because of the growing share of national income going to pension funds.
See also Guitian (1998) for evidence that price stability brings a better distribution of income.
Some misdirection of spending may reflect regional political power. Some regions may end up with disproportionate shares of spending.
It is a known fact that in some countries, doctors working in public hospitals and thus receiving a government salary spend most of their energy and often a good share of their working hours in private practices. School teachers may be ill prepared or often absent.
Unfortunately, data are available for limited numbers of developing countries. Still, they indicate that the share of wages in national income is much higher in industrial countries.
Wealth will also provide access to political power and political power often brings higher income.
Many economists tend to identify human capital with formal education but, while education is very important, human capital is a much broader concept. In the United States and in other industrial countries, some of the highest incomes received by individuals with high human capital are not returns to education.
High educational levels were given as the main reason why the countries of Southeast Asia that grew fast had also good income distributions.
Because primary education benefits a larger share of the population than higher levels of education, it is obvious that primary education should receive the greatest attention.
See the incomes received by some professional athletes, entertainers, actors. These individuals often do not have much formal education and come from less privileged groups.
Incidentally, the $8 billion compensation for the lawyers will make individuals who are already well to do very rich, while it will make poorer the final contributors to that payment, the smokers, who tend to be low income individuals. The implications for income distribution are obvious.