A distinction is often made between two ways that policies can matter to poverty and inequality. First, policies can influence how markets work to generate incomes and, second, policies can influence how the outcomes from market processes are distributed. It has been argued by some that governments should avoid the first role. The argument is that free markets will be efficient—that the pie will be larger, allowing more scope for “post-market” redistribution.
Against this view, it is argued in EOP (following others) that the various conditions for markets to be efficient in the absence of intervention do not hold in reality and that the deviations from efficiency have important implications for equity. For example, poorer people are more likely to be the ones locked out of access to credit and other inputs needed for productive investments.
The challenge is how to assure that policy reforms allow markets to work better for poor people. Chapter 9 of EOP goes further into a number of “economy-wide” and “sectoral” policy debates. This page provides some extras, including links for further reading.
Starting in 1988, Vietnam’s agricultural land was de-collectivized with local authorities given the power to allocate that land to individual households. In the 1990s, economic reforms have moved in the direction of supporting the gradual emergence of a land market. This study finds that there were gainers and losers, but the reforms were pro-poor overall; see: Land in Transition.
EOP emphasizes the heterogeneity in the welfare impacts of trade reforms; indeed, the “horizontal” impacts (at given pre-reform income) may well dominate the “vertical” impacts (between different levels of pre-reform income). This is shown to be the case for trade reform proposals for Morocco here: Morocco trade reform winners and losers. The case study of the welfare impacts of China’s accession to the World Trade Organization is found here: China WTO impacts.