Equity for prosperity

Why this theme — the scope

Economic science is, and always has been, an inquiry into the wealth of societies. Economists look at economic stability and sustainable growth at local, national and international levels. They study the market, but also the state, and they analyse economic growth but also the distribution of wealth and income. Distributional issues speak to the important concepts of equality and equity.

While equality refers to equal rights and equal treatment, the so-called 'level playing field', equity is about creating equal outcomes for people of different backgrounds. Equality does not, by definition, guarantee equity. Affirmative action may be necessary to achieve equal outcomes.

Equity matters

To care about the equity of outcomes has moral and economic grounds. Economists focus on the latter, distinguishing static and dynamic explanations for why equity should be our concern.

The static explanation: redistributing income from rich to poor is efficient because it increases welfare. Most people are inequality-averse and prefer outcomes that support the worst off. Extra money in the hands of a poor person has more significant value than the same amount in the hands of a wealthy fellow citizen.

The dynamic explanation: inequality may undermine future economic growth by limiting groups' ability to invest and engage in productive or protective activities. Many households need help to afford the upfront investment to insulate a home or install solar panels; many smallholder farmers in Africa cannot afford fertiliser or improved seeds. Excessive inequality can reduce social cohesion, increase crime rates, harm health, and put public-goods provision at risk. Societal discontent manifests as the Occupy movement, Yellow Jackets demonstrations, and unexpected election outcomes.

A cause-effect relationship

Unequally distributed wealth and income are a cause and a consequence of economic performance. This negatively affects welfare directly and indirectly, through weak incentives to invest and cooperate. Yet many economists believe moderate within-country inequality is desirable — hard work should pay off, and rewards should be just and fair. Promoting equity for increased welfare involves balancing multiple considerations:

Multiple dimensions — lack of equity simultaneously affects income, wealth, health, living conditions, education, and social and cultural capital. These are typically correlated and clustered.

Multiple layers — equity can be studied at intra-household level, neighbourhood level (the Dutch 'krachtwijken'), urban-rural level (Randstad versus hinterland), or international level (industrialised vs low-income agriculture-based countries).

Intergenerational spillovers — patterns of poverty and inequality are produced and reproduced across generations.

How we engage — our work

What does Economics and Business science contribute to advance equity and economic performance? In short, the discipline establishes the foundations for sound policy-making — training new generations of students and conducting research that improves our understanding of equity in connection with policymaking.

Economists analyse equality and equity using multiple methods. Operational concepts measure inequality (Gini index, decile dispersion ratio) — enabling documentation of differences across space and time. Statistical analyses reveal the complex relationship between inequality and its underlying causes, often rooted in historical context, natural endowments, institutional context, trade, and technological change.

Two types of evaluation studies assist policy-making:

• Ex-post evaluation quantifies the impact of specific interventions — e.g., policies on housing affordability for young adults, or measuring consequences of increased energy costs.
• Ex-ante models develop simulation models that predict the impact of comprehensive policy reforms — including reforms for which no actual data exists. The CPB's GAMMA dynamic general equilibrium model is one such example.

What to expect — our contribution and impact

Economics as a social science delivers on the basis of 'to measure is to know'. Research separates facts from fiction, opinions, and beliefs. At the international level, economists study development assistance, trade reforms, Fair Trade practices, and rent distribution in global value chains. At the national level, the efficiency and equity implications of welfare-state reforms — from allowances and taxes to universal basic income. Data disaggregation enables research on equal access to education, healthcare, and other public services, and on gaps in life expectancy between social groups.

Addressing social fractures

Less economic stability and increased inequalities in past decades challenge Western societies to address resulting social fractures. The one-time-fix-all solution does not apply. We must consider diverging developments like the huge increase in GDP, the unequal distribution of income growth, and the transformation of the job market due to technological innovation.

Equity is not about removing all inequalities — some can even be favourable to all, think of people with outstanding talent. Likely so, there must be incentives and rewards. At the same time, we must acknowledge where, why, and to what extent people struggle to live life. Willingness to serve society and understanding its importance for overall well-being count on a system that includes all citizens.