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# _4. Policy and Research Implications_

The thesis of this paper is that inequality of opportunity, which has gained prominence in modern normative thinking about social justice, is also a highly relevant concept for understanding the positive links between distribution and efficiency. Wealth inequalities (combined with market imperfections), inequalities in power, and status differences have all been shown to lead to inefficiency, in a number of different contexts. It has also been argued, prominently and plausibly, that large inequalities in power and wealth can lead to institutional characteristics that are associated with lower subsequent growth.

The broad implication for public action is that the effects of any policy on the distribution of opportunities will in general have an impact on aggregate efficiency, which needs to be taken into account in any assessment or evaluation of the policy. In some cases, the impact may be direct, and relatively simple to measure. Building a road that connects a poor and geographically isolated area to markets may increase profit margins on sales of its produce and lower the costs of consumption goods in (possibly) measurable ways. In many other cases, however, measuring the efficiency gain from redistributing opportunities is much harder. How does one quantify the savings from ethnic conflicts avoided by a (hypothetically) successful integration or affirmative action program? How long must one wait until the full benefits of educating girls today shows up in their children’s opportunities in the future?

We return to these measurement and long-term evaluation challenges below. Conceptually, however, the general point is that if highly unequal opportunities generate inefficiencies, then reductions in these inequalities may well be efficient. Ignoring the _full_ long-run benefits (costs) of any reductions (increases) in inequality of opportunity will therefore generally result in an under-provision of efficient redistribution.<sup>13</sup> The World Development Report 2006 discusses implications of this general point in considerable detail, and for a variety of policy areas. The lasting impact of early childhood nutrition and mental development on subsequent opportunities implies that the pay-offs to investment in early human development programs are likely to be large. The imperfections of insurance markets imply that the existence of appropriate social security systems can enable efficient (but riskier) investment decisions to be made. Complementarity between infrastructure and private capital often argues for an expansion of access to the poorest groups. Market rules and institutions are often skewed towards more powerful groups, sometimes generating substantial inefficiency in resource allocation.

> 13 The term ‘efficient redistribution’ has been used before. In one prominent discussion, Bowles and Gintis (1996) argued that a number of “asset-based” redistributions – including of property rights over firms to workers; over houses to tenants; of school vouchers to parents; and of parental income streams to children – would increase efficiency, by transferring residual rights of control over assets to those whose actions more directly affect asset use or maintenance. While there are very substantial differences between their detailed proposals and the World Development Report’s, there is also one basic broad similarity: both emphasize the potential for asset redistributions than enhance, rather than attenuate, productive incentives. Both approaches suggest that equity can and should be pursued in a market-friendly manner, with potentially large efficiency gains.