Red Interamericana de Protección Social (RIPSO) Mexico , DF, August 10, 2011

Inequality, Poverty and Public Policy in

Latin America Nora Lustig

Professor, Tulane UniversityNonresident Fellow, Center for Global

Development and Inter-American DialogueRed Interamericana de Protección Social (RIPSO)

Mexico, DF, August 10, 2011 1

2

Gini Coefficient by Region (in %), 2004

32.233.6

38.9 38.9 39.1

44.7

53.2

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

High Income Europe andCentral Asia

South Asia North Africaand the

Middle East

East Asia andthe Pacific

Sub-SaharanAfrica

Latin Americaand the

Caribbean

Gin

i coe

ffici

ent

Excess Inequality (IDB, 2011)

3

Excess Poverty (IDB, 2011)

4

Trends in Poverty: 1995-2009 (IDB, 2011)

5

6

Declining Inequality in LA:

How Much? Since When?Why?Will it continue?

7

Extension of findings in our 2010 book and UNDP-sponsored project:

Trends in InequalityGini Coefficient Early 1990’s-Late 2000’s

Light Grey: Countries with Falling Ineq (Lustig et al., 2011)

8Early 90s

(12 countries)Mid-90s

(15 countries)Late 90s

(16 countries)Mid-2000s

(17 countries)Late 2000s

(17 countries)

0.480

0.490

0.500

0.510

0.520

0.530

0.540

0.550

0.509

0.523

0.530

0.518

0.503

0.520

0.537

0.540

0.524

0.502

9

Gini Coefficient Early 1990’s-Late 2000’s (same countries throughout)

Early 90s Mid-90s Late 90s Mid-2000s Late 2000s0.475

0.480

0.485

0.490

0.495

0.500

0.505

0.510

0.515

0.520

0.525

0.510

0.5190.520

0.508

0.492

Declining Inequality in LA: How Much? Decline is significant

Inequality has declined in 13 out of 17 countries (roughly 1% a year) between (circa) 2000 and (circa) 2008;

Decline is statistically significant in all but one case

Decline occurred while inequality in other parts of the world has been on the rise

Decline continued through the global financial crisis in 2009

Order of magnitude: higher (and in some cases much more so) than increase in previous period, for example

Growth has been notoriously “pro-poor”10

11

Change in Gini Coefficient by Country: circa 2000-2008 (yearly change in percent) SEDLAC

12

Change in Gini Coefficient by Country: circa 2000-2009 (yearly change in percent) SEDLAC

13

Comparing the Increase in the 1990’s with Decline in the 2000’s

1992

-200

2

2002

-200

9

1997

-200

3

2003

-200

9

1997

-200

3

2003

-200

9

1995

-200

1

2001

-200

8

1985

-199

8

1998

-200

9

1989

-200

1

2001

-200

9

1989

-199

6

1996

-200

8

1989

-200

2

2002

-200

6

1992

-199

8

1998

-200

9

2000

-200

3

2003

-200

9

1997

-200

2

2002

-200

7

Argentina Peru Paraguay El Sal-

vador

Brazil Panama Mexico Venezuela Chile Dominican Rep.

Bolivia

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.08.2

-8.4

2.7

-7.4

0.1

-6.2

2.6

-6.0

4.1

-5.4

1.5

-4.4

2.5

-4.2

5.0

-4.1

0.8

-3.5

0.1

-3.1

2.1

-2.9

2.7

-5.0

Change of Gini in percentage points Average of increase Average of decrease

-5

-3

-1

1

3

5

7

9

11

13

15

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Aver

age

annu

al g

row

th ra

te (%

)

Distribution of countries (%)

Distribution of countries according to the average per capita GDP growth rate between 1990 and 2005

Brazilian top 10%

Brazilian bottom 10%

China

Germany

Haiti

Income of the Brazilian poor has been growing as fast as per capita GDP in China while income of the richest ten percent has been growing like Germany’s per capita GDP

Declining Inequality in LA: How Much? Decline is Robust

Definition of income (monetary or total)/per capita or AEU/consumption

End years

Inequality indicator

Data source (UNECLAC or SEDLAC, the latter is used here) 15

Yearly Change in Gini: Three yr averages at end pts. (in %)

El S

alva

dor

Para

guay

Arg

entin

a

Chi

le

Ecua

dor

Peru

Pana

ma

Bra

zil

Mex

ico

Bol

ivia

Dom

inic

an R

epub

lic

Cos

ta R

ica

Ven

ezue

la

Gua

tem

ala

Uru

guay

Hon

dura

s

Nic

arag

ua

Tota

l 13

Tota

l 17

Chi

na

Indi

a

Sout

h A

fric

a

OEC

D-3

0

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

-1.48

-1.05-1.05-1.02-1.01-0.95-0.94-0.91-0.72

-0.52-0.35-0.33-0.24

0.05

0.460.68

1.02

-0.81-0.49

2.02

1.43

0.30 0.25

Ann

ual P

erce

nt C

hang

e

17

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.00.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Uru

PerMex

Hon

Gua

DRChi

Bra

Bol

Arg

Ratio Centiles 95/5 in 2000

Rat

io C

entil

es 9

5/5

in 2

009

18

Change in Gini Coefficient by Country: circa 2000-2008 (yearly change in percent) UNECLAC

Ven

ezue

la

Nic

arag

ua

Arg

entin

a

Bol

ivia

Peru

Para

guay

Bra

zil

El S

alva

dor

Pana

ma

Chi

le

Uru

guay

Ecua

dor

Mex

ico

Hon

dura

s

Cos

ta R

ica

Dom

inic

an R

ep.

Gua

tem

ala

Tota

l 14

Tota

l 17

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

-2.93

-2.03 -1.94-1.60

-1.33 -1.27 -1.23 -1.12 -1.11-0.79 -0.69 -0.51 -0.45 -0.27

0.38

0.98

1.98

-1.23-0.82

Ann

ual P

erce

nt C

hang

e

Declining Inequality in LA: Since When? For more than/almost a decade

In three countries, during second half of 1990s: Mexico, Brazil and Chile

In six, started in 2002-2003: Argentina, Bolivia, El Salvador, Paraguay, Panama and Peru

19

20

First Year in Which Inequality Started to Decline

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Dominican Republic, Ecuador, Paraguay, Peru

Argentina, Bolivia, Venezuela

El Salvador, Panama

Brazil, Chile

Mexico

Yea

r w

hen

ineq

ualit

y st

arte

d to

dec

line

Declining Inequality in LA: How Much? Decline in has been widespread

Persistently high inequality countries (Brazil) and normally low inequality countries (Argentina and Venezuela)

Fast growing countries (Chile and Peru), slow growing countries (Brazil and Mexico) and countries recovering from crisis (Argentina and Venezuela)

Countries with left “populist” governments (Argentina), left social-democratic governments (e.g., Brazil, Chile) and center/center-right governments (e.g., Mexico and Peru) 21

22

Gini (Circa 2000)

Total

Brazil

Bolivia

Paraguay

Panama

Honduras

Chile

Ecuador

Guatemala

Peru

Mexico

Dominican Rep.

El Salvador

Argentina

Nicaragua

Costa Rica

Venezuela

Uruguay

40.0 42.0 44.0 46.0 48.0 50.0 52.0 54.0 56.0 58.0 60.0

52.9

58.8

58.5

56.6

56.5

55.5

55.2

54.5

54.2

54.0

53.8

51.9

51.9

50.4

50.2

49.9

44.1

44.0

Gini Coefficient in Percent

23

Growth and Inequality: Chile

24

Growth and Inequality: Mexico

25

Growth and Inequality: Argentina (Greater Buenos Aires)

26

Yearly Change in Gini: Left and Non-left Regimes (circa 2000-2009)

Arg

entin

a

Bra

sil

Ven

ezue

la

Chi

le

Uru

guay

Left-

win

g

El S

alva

dor

Pana

ma

Mex

ico

Peru

Hon

dura

s

Non

-left

-1.5

-1.0

-0.5

0.0

0.5

1.0

-1.23-1.07 -1.07

-0.66

0.12

-0.78

-1.29

-0.97

-0.77

-0.39

0.79

-0.53

Why has inequality declined in Latin America? Are there factors in common?

In-depth analysis (Lopez-Calva and Lustig, 2010 and UNDP project paper for Chile and Uruguay): Argentina (Gasparini and Cruces) (urban; 2/3

of pop) Brazil (Barros, Carvalho, Mendoca & Franco) Chile (Eberhard and Engel) (labor earnings) Mexico (Esquivel, Lustig and Scott) Peru (Jaramillo & Saavedra) Uruguay (Alves, Amarante, Salas and

Vigorito); rising inequality most of the period; declines in 07-09

27

Why has inequality declined? Main findings Educational upgrading and a more

equal distribution of educational attainment have been equalizing (quantity effect). No “paradox of progress” this time.

Changes in the steepness of the returns to education curve have been equalizing at the individual workers level (price effect). Except for Peru, they have been equalizing at the household level too. 28

29

Schooling Inequality: Argentina (urban), Brazil, Mexico and Peru (Gini Coefficients) Gini Coefficients for Education for Argentina, Brazil, Mexico and Peru SEDLAC: March 2011

30

Schooling inequality cont.: Chile

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20090.15

0.20

0.25

0.30

0.35

31

32

Returns to educ (cont.): Chile

1990 1998 2000 2006 20090.0

0.2

0.4

0.6

0.8

1.0

1.2

Primary Secondary Tertiary

Ret

urns

Why has inequality declined? Main findingsChanges in government transfers

were equalizing:

more progressive government transfers (monetary and in-kind transfers); better targeting

expansion of coverage increase in the amount of transfers

per capita

33

Why has the skill premium declined? Conjecture: Increase in relative demand for skilled

labor petered out: Fading of the unequalizing effect of skill-biased technical change in the 1990s: Argentina, Mexico & Peru

Decline in relative supply of low-skilled workers: Expansion of basic education since the 1990s: Brazil, Mexico and Peru; expansion of access to post-secondary in Chile

Supply vs. Demand: THIS SHOULD BE THE FOCUS OF FUTURE RESEARCH 34

35

36

Composition of adult pop cont.: Chile

1990 1998 2000 2006 20090.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Incomplete primary Primary Secondary Tertiary

Perc

ent

Why has earnings inequality declined?

Other effects: Decline in spatial labor market

segmentation in Brazil. FUTURE RESEARCH: PATTERNS OF GROWTH AND DECLINING SPATIAL WAGE DIFFERENTIALS

In the case of Argentina, the decline also driven by a pro-union government stance and by the impetus to low-skill intensive sectors from devaluation. In Brazil, increase in minimum wages. FUTURE RESEARCH: DISENTANGLE INSTITUTIONAL FROM MARKET FACTORS 37

Why has inequality in non-labor incomes declined? New forms of SOCIAL PROTECTION have

been key In particular, Conditional (and

Unconditional) Cash Transfers: Bolsa Familia (Brazil) and Oportunidades (Mexico); Jefes y Jefas y Asignacion Universal por Hijo (Argentina); Juancito Pinto (Bolivia); etc.

In Brazil and Mexico, large-scale conditional cash transfers => can account for between 10 and 20 percent of reduction in overall inequality. An effective redistributive machine because they cost around .5% of GDP. 38

Conclusions It appears that in the race between skill-

biased technological change and educational upgrading (Tinbergen’s theory), in the last ten years the latter has taken the lead; the opposite of what has happened in the US (Goldin and Katz, 2008)

Perhaps as a consequence of democratization and political competition, government (cash and in-kind) transfers have become more generous and targeted to the poor (Robinson, 2010)

39

Conclusions

Trends in declining skill-premium continued through 2009 (most recent data points available) for the most part

Also, since 2008/9, Argentina and Brazil expanded spending on programs targeted to the poor; Pension Moratorium and Universal per Child Transfers in Argentina are potentially very redistributive

40

Is Inequality Likely to Continue to Fall?

Despite the observed progress, inequality continues to be very high and the bulk of government spending is not progressive.

The decline in inequality resulting from the educational upgrade of the population will eventually hit the ‘access to tertiary education barrier’ which is much more difficult to overcome: inequality in quality and ‘opportunity cost’ are high and costly to address.

Making public spending more progressive in the future is likely to face more political resistance (entitlements of some powerful groups).

41

42

The Big Challenge of Social Protection Coping with adverse shocks:

Economic Crises: unemployment, falling incomes

Natural Disasters

Spikes in Food Prices

43

Role of Networks such as RIPSO Crucial Exchange of know-how; what works; what

doesn’t extremely valuable for: Efficiency and efficacy of programs Political survival of programs

Access to high quality education; instruments to cope with systemic shocks; how to deal with tensions between programs who target the poor and universal coverage/middle class social protection

Integrate evaluation results to the exchange; better measures of inequality

Gracias!

44