The Italian economist Vilfredo Pareto (1848-1923) observed, in 1906, that twenty percent of the Italian people owned eighty percent of their country’s accumulated wealth. This 20/80 ratio has since been observed in a large variety of situations, and the general idea of the “Pareto Principle” or the “80/20 rule” is that roughly 80% of “outputs” or “consequences” is typically caused by 20% of the “inputs” or “causes”. For example: 20% of motorists cause 80% of all accidents; 20% of criminals commit 80% of crimes; 20% of beer drinkers drink 80% of all beer; and 20% of clients account for 80% of sales.
The “Pareto Principle” has also been called “the Law of the Vital Few” and it is easy to see why. If 20% of firms produce 80% of value added, 20% of taxpayers pay 80% of the taxes, and 20% of investors are responsible for 80% of all investments, these relatively few persons are indeed vital for the functioning of the economy.
If, for some reason, these 20% choose to emigrate, their country is likely to suffer stagnation and underdevelopment. Average productivity will be low, there will be little investment, and the government will be unable to mobilize sufficient tax revenues to provide even the most basic public services. The lack of job opportunities and decent public services will spur even more emigration, which implies a vicious circle of emigration and underdevelopment.
Many poor countries have lost substantial parts of their population to emigration, and there are good reasons to believe that many of the migrants were among the “vital few”. For almost all countries on the planet, emigration rates are much higher among the highly educated compared to the less educated. For example, in Haiti only 2.5% of the population with primary education has emigrated while this is the case for 81.6% with university level education. The only five exceptions to this rule are United States, Finland, Norway, Sweden and Bulgaria, which have slightly higher emigration rates for the least educated groups (1).
Nicaragua is currently losing almost 1% of its population to emigration every year. Migrants are generally young and come from the wealthiest and best educated families. But apart from such positive observable characteristics, the migrants are also likely to be more dynamic, entrepreneurial, and investment minded than their peers who stayed behind and just accepted their lot in life. The emigration of the “vital 20%” may well explain why poverty in Nicaragua is staying stubbornly constant, despite massive foreign aid to the government (more than a quarter of GDP!), and large amounts of remittances directly to the households (about 12% of GDP through official channels and possibly as much through unofficial channels) (2).
Governments in poor countries (guided by the development cooperation) often focus their efforts almost exclusively on the poorest 80% of the population. This is a natural reflex given that the overarching goal of most poor country governments and all development aid is to reduce poverty. But in the process of helping the poor, they often neglect the “vital 20%,” which just quietly abandon the country if their needs are not met.
The needs of the “vital 20%” are completely different from the needs of the remaining 80%. It is not free primary education, free health services, free water and sanitation, universal pension payments, or any other gifts from the government and the development community. What they need are institutions and infrastructure that allow them to be as productive as possible, i.e. secure property rights, predictable rules, macroeconomic stability, low taxes, flexible labor markets, advanced education, good infrastructure, and the absence of red tape, corruption, crime and blockades.
For a pro-poor government it is obviously difficult to sit down and think about policies to cater to the privileged few. But in this globalized, highly competitive world, every government – also the poorest ones – have to think carefully about how they are going to attract/keep/create the “vital 20%” that is going to provide for the rest. They just cannot afford to let them slip away.
Have any other examples of ways to address the 80/20 rule in your community or country? Leave a reply below.
(*) Director, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail: email@example.com.
(1) Docquier & Marfouk (2004) Measuring the international mobility of skilled workers (1990-2000) : release 1.0.. The World Bank, Policy Research Working Paper No. 3381.
(2) Andersen (2007) “Análisis y Proyecciones de Población y Pobreza para Nicaragua 2005 – 2025“. Development Research Working Paper No. 8/2007, Institute for Advanced Development Studies, La Paz, October.