Sunday, 14 January 2007

The Dodo Nation

“At last the Dodo said, `EVERYBODY has won, and ALL must have prizes.'

`But who is to give the prizes?' quite a chorus of voices asked.”

- Lewis Carroll, Alice in Wonderland

“I have always been astonished at the number of well-meaning socialists, whose aspirations I admire, who continue to fall for the erroneous view that controls and direct allocations are an appropriate answer to inequality.”

- Jagdish Bhagwati, In Defense of Globalisation

Part I - Equity: The Rhetoric

Economic development is the product of the co-evolution of technology, the physical and social environment, and economic institutions. Often, this co-evolution is directly influenced by decision-makers’ deliberate actions based on their concepts of what is justifiable. Much of human history - both the pleasant and ugly sides of it - is shaped by these concepts. Most of the time, these concepts take the broad forms of religion and ideology; often intermingled with notions of ethnicity and nationality.

And in these forms, the notion of equity is often a crucial aspect of consideration. For most, equity alludes to the virtue of fairness and justice. It is this allusion that dictate much of the development policies in many countries, ours included.

But what is equity? An issue very close to heart, I intend to offer a brief summary of my personal exploration into this question in a two-parter blog-entry. This first entry will focus on the rhetoric of the issue.

Personally, the best way to begin is by analysing the two radically different concepts of equality, namely Equality of Opportunity and Equality of Outcome.

Equality of opportunity emphasises on the freedom to pursue one’s private interest or vocation without arbitrary restrictions based on irrelevant personal characteristics. No arbitrary obstacles should prevent people from achieving those public positions which their talents fit and their values lead them to seek. Birth, nationality, colour, religion, sex or any other equivalent characteristics should not determine the public opportunities that are open to a person – only talent and achievement.

In contrast, while equality of opportunity stresses on the need to begin the race of life at the same time, equality of outcome focuses on the need for all to finish the race at the same time regardless of effort and action.

An example that I find most illustrative to distinguish both concepts is through the proverb of fishing - Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. Equality of opportunity focuses on the importance of giving the man the opportunity to fish by teaching him. Whether he feed himself through effort and hard-work is his own choice and responsibility. In contrast, equality of outcome focuses on feeding the man at the end of it all, regardless if he works for it or not. One values independence and freedom of choice, while the other promotes dependency and passive fatalism.

Three of Many Reasons

Personally, I revere the concept of equality of opportunity and abhor the concept of equality of outcome. The reasons are manifold, but this is not the avenue to explore them. I will however attempt to provide 3 brief objective reasons based on some simple economics concepts.

1) Moral Hazard
As alluded to earlier, emphasis on outcome promotes dependency and to a certain extent, complacency. If you consider your livelihood or welfare is an entitlement, you would have very little incentive to work hard and strive for better things, even if you could intrinsically do so. Similarly, if you know you could do better and work harder but will not be rewarded any better than someone who do worse and work less, there will be a perverse incentive for you not to do your best. Under this environment, mediocrity, not excellence, is encouraged.

2) Adverse Selection
Under a scenario of equality of outcome, inevitably there will be those who will be better off and those who will be worse off relative to their talents and potentials. Forced allocation will result in a perverse incentive for those with greater potential to leave the system, and thus leaving only average and below average behind. This is essentially a variation of the classic economics (and Nobel Prize winning) problem popularly known as the Akerlof’s Market for Lemons. To illustrate the problem, consider a scenario of a company which pays its employees equal pay regardless of performance. For the high-performers, they will have very little incentive to stay on in the company given that other companies will pay higher for their talents. Thus, those who stay will be average performers at the very best. This problem is clearly recognisable in real life (brain-drain anyone?), and amplified to the macro-level, it is a severe developmental problem for any emerging nation.

3) Severe Inefficiency
The biggest intellectual objection of equality of outcome, in all its guises (such as direct allocation of wealth, control of ownership, distortion of employment pattern and discriminatory access to business and education) is that the concept is the very anti-thesis of efficient resource allocation, the cornerstone of economics principle. It goes against how market should function, and how a nation’s development and progress is achieved through efficient exploitation of comparative advantage and specialisation of labour. A hyperbolic analogy would illustrate this point.

Imagine that there is a football team, a double badminton pair and two gymnasts, summing up to a total of 15 sport-persons. Now imagine an ambitious policy-maker, pre-occupied with what he thinks is an equitable policy, implement a policy forcing equal distribution of sport-persons in each sport. So now, we have only 5 footballers, 2 badminton players and 3 footballers who are forced to play badminton, and 2 gymnasts and 3 ex-footballers-gymnasts-wannabes. What are the consequences of this direct control? Firstly, there will be more people than needed in badminton and gymnastic, making the ex-footballers quite redundant. And assuming that they are more talented in and passionate about football, they will never quite make excellent badminton players or gymnasts. Secondly, and more direly, due to this social reengineering exercise, the entire football team collapse, leaving the remaining players neither here nor there.

Absurd? Superimpose this example with certain real life employment and ownership policies, quota and protectionism arrangements, and you will realise it is not as ludicrous.

History, Controlled Experiments and Amartya Sen

Normally, concepts and hypotheses pertaining to social institutions and development are impossible to be tested in a way normally accepted in the realm of natural sciences; we cannot really generate competing artificial and experimental scenarios to examine which concept of equality would lead to greater economic welfare and progress. But sometimes, history has a way of setting pretty close controlled environment for such experiment to take place. The best example is the case of West and East Germany, with the former ran by democratic policies that emphasise on the importance of equal opportunity and the latter ran by communist principle that stresses on equality of outcome. And then there are South and North Korea, Finland and Estonia, and, older communist China and the current market-driven China. And the verdict?

That was rhetorical.

The issue of what is equitable is a tricky one. That said, I find it very difficult to argue against the notion that everyone should be given the freedom and opportunity to explore his or her potential to the fullest regardless of race, creed, gender or age. Nor is it easy to accept the concept of having social policies that obstruct effort and hard-work from being rewarded equally due to the same arbitrary characteristics.

In any case, ideas that I have casually introduced here have been explored probably since the beginning of recorded history by many great thinkers of our time. For greater appreciation, I recommend the classic Nobel Laureate Amartya Sen’s Development as Freedom and Francis Fukuyama’s The End of History and the Last Man. For more contemporary and fun readings, try John Kay’s The Truth about Markets: Why Some Nations are Rich but Most Remain Poor and Jagdish Bhagwati’s In Defense of Globalization.

ps: Done with the rhetoric, part II will emphasise on the metric; how do we measure equity?

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