Declining Inequality in Latin America: Labor Markets & Redistributive Policies Nora Lustig Tulane University New Challenges for Growth and Productivity The Growth Dialogue G24 Washington, DC -- September 25, 2013 1
Inequality in Latin America is high but declining since around 2000 Decline is pervasive and significant Larger than the rise in inequality in 1990s Important contribution to the decline in poverty In countries with high growth & low growth In countries with left and nonleft governments In commodity exporters and importers 2
LATAM IS THE MOST UNEQUAL REGION IN THE WORLD Gini Coefficient by Region (in %), 2004 (Ferreira and Ravallion, 2008) 60.0 55.0 53.2 50.0 Gini coefficient 45.0 40.0 35.0 32.2 33.6 38.9 38.9 39.1 44.7 30.0 25.0 20.0 High Income Europe and Central Asia South Asia North Africa and the Middle East East Asia and the Pacific Sub-Saharan Africa Latin America and the Caribbean 3
Latin America: Declining income inequality by country: 2000-2011 3.00 (Annual Change of Gini in %) 2.50 2.00 2.116 1.50 1.00 0.82 0.767 0.50 0.609 0.401-2.635-2.051-1.989-1.297-1.237-1.166-1.068-1.03-0.912-0.793-0.742-0.724-0.468-0.386-0.196-0.096 0.00 Nicaragua Bolivia Ecuador Argentina El Salvador Mexico Venezuela Brazil Peru Dom. Rep. Panama Chile Costa Rica Paraguay Uruguay Guatemala Honduras -0.952 LAC-17 China South Africa India 4 USA
Decomposing the change in poverty in the 2000s: growth vs. redistribution (Datt-Ravallion Decomp Method) Growth Redistribution Change in poverty ($2.5 a day) during the 2000s* 140% 90% 40% -10% -6.2-12.4-12.3-4.8-6.6-12.1-7.8-6.1-12.6-10.7-6.2-60% Argentina Bolivia Brazil Chile Costa Rica Ecuador Honduras Mexico Panama Peru Paraguay 5
Determinants: Declining inequality of hourly labor income Larger and more progressive transfers Lower dependency ratios 6
Decomposing Decline in Inequality Labor (red); Transfers (Green); Demog (Blue) (Azevedo et al. 2012) 100% 80% 60% 40% 20% 0% -20% Argen na Brazil Chile Colombia Costa Rica Dominican Rep. Ecuador El Salvador Honduras Mexico Panama Paraguay Peru Uruguay LAC-14-40% -60% -80% 7
Determinants of declining inequality in hourly labor earnings: Decline in returns to post-secondary education (aka. skill premium) Supply Demand Pro-active Labor Policies Degraded tertiary 8
Argentina, Brazil and Mexico Argentina: High growth due to post-2002 recovery Devaluation in early 2000s => increase in relative demand of low-skilled workers Very pro-active labor market policies Brazil: Low growth during most of the period Increase in relative supply of skilled workers Increase in relative demand of low-skilled workers Pro-active labor market policies Mexico: low growth Increase in relative supply of skilled workers No pro-active labor market policies 9
How redistributive are Latin American governments? Decomposition of changes in inequality by income source show that transfers is, on average, the second most important proximate determinant of decline in overall inequality Benefit and tax incidence analysis for 11 countries www.commitmentoequity.org 10
Inequality Reduction: Brazil, Mexico, Peru and Uruguay (2009) (Taxes and Social Spending) 0.579 0.56 0.565 0.544 0.546 0.51 0.46 0.511 0.504 0.492 0.498 0.497 0.478 0.494 0.492 0.488 0.481 0.457 0.459 0.466 Brazil (2009) Mexico (2010) Peru (2009) Uruguay (2009) 0.439 0.429 0.41 0.393 0.36 Market Income Net Market Income Disposable Income Post-Fiscal Income Final Income 11
Inequality Reduction: Mexico 1996 vs. 2010 (Impact of Social Spending) 12
Mexico still less redistributive than peers 0.600 0.550 0.500 0.450 0.400 Brazil (2009) Mexico (2010) Uruguay (2009) 0.350 Net Market Income Disposable Income Post-Fiscal Income Final Income 13
Poverty Reduction: Brazil, Mexico, Peru and Uruguay (Income Taxes, Cash Transfers and Consumption Taxes; Poverty line US$2.50 ppp/day) 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% Brazil (2009) Mexico (2010) Peru (2009) Uruguay (2009) 6.0% 4.0% 2.0% 0.0% Net Market Income Disposable Income Post-Fiscal Income 14
Inequality Reduction by Direct Taxes and Transfers: Brazil, Europe and US Direct taxes and transfers reduce inequality by 7.0 percentage points in US & 3.9 percentage points in Brazil 0 Brazil Greece United States Italy Portugal Spain Netherlands France Austria Germany Sweden Luxembourg Belgium UK Finland Denmark Ireland Source: authors calculations for Brazil and US; Immervoll et al. (2009) for Europe 15
How should we measure inequality to monitor how equitable societies are? Two points: Regardless of the measure of choice=> before/after government taxes and transfers Data: Household surveys a good source mainly for labor income and government transfers But rich are not captured; use tax returns as suggested by Top Incomes Project (Alvaredo, Atkinson, Piketty, Saez) 16
24,0 Income share (%) 22,0 20,0 18,0 16,0 14,0 12,0 Top 1% 10,0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 FIGURE 3 Top 1% income share in Colombia, 1993-2010 Source: Table A4. 17
Commitment to Equity (CEQ), joint project of Tulane University and Inter-American Dialogue. www.commitmentoequity.org 18
References Alvaredo, Facundo and Juliana Londoño (2013) High Incomes and Personal Taxation in a Developing Economy: Colombia 1993-2010, CEQ Working Paper No. 12, March. Azevedo, J. P., G. Inchauste, and V. Sanfelice (2012) Decomposing the Recent Inequality Decline in Latin America, Mimeo, The World Bank. Campos, Raymundo, Gerardo Esquivel and Nora Lustig (2013) The Rise and Fall of Income Inequality in Mexico, 1989 2010, in Giovanni Andrea Cornia (editor), title not yet specified, Oxford University Press, forthcoming. Gasparini, L., S. Galiani, G. Cruces, and P. Acosta (2011) Educational Upgrading and Returns to Skills in Latin America. Evidence from a Supply-Demand Framework, Higgins, S., N. Lustig, W. Ruble and T. Smeeding. Comparing Taxation, Transfers, and Redistribution in Brazil and the United States, paper presented at the IARIW Conference, Rio, Brazil, September 13, 2013. Lustig, N., L.F. Lopez-Calva and E. Ortiz (2013) Declining Inequality in Latin America in the 2000s: The Cases of Argentina, Brazil, and Mexico, World Development, Vol. 44, 129-141. Lustig, Nora and Carola Pessino (2014) Social Spending and Income Redistribution in Argentina in the 2000s: the Rising Role of Noncontributory Pensions, Public Finance 19 Review.
References for Incidence Analysis Argentina: Lustig, Nora, Luis F. Lopez-Calva and Eduardo Ortiz-Juarez (2013) Deconstructing the Decline in Inequality in Latin America, chapter for Essays in Honor of Enrique Iglesias Brazil: Higgins, Sean and Claudiney Pereira. 2014. The Effects of Brazil s High Taxation and Social Spending on the Distribution of Household Income. Forthcoming in Lustig, Nora, Carola Pessino, and John Scott, Eds. Fiscal Policy, Poverty and Redistribution in Latin America, Public Finance Review. Mexico: Scott, John. 2014. Redistributive Impact and Efficiency of Mexico s Fiscal System. Forthcoming in Lustig, Nora, Carola Pessino, and John Scott, Eds. Fiscal Policy, Poverty and Redistribution in Latin America, Public Finance Review. Peru: Jaramillo, Miguel. 2014. The Incidence of Social Spending and Taxes in Peru. Forthcoming in Lustig, Nora, Carola Pessino, and John Scott, Eds. Fiscal Policy, Poverty and Redistribution in Latin America, Public Finance Review. Uruguay: Bucheli, Marisa, Nora Lustig, Máximo Rossi, and Florencia Amábile. 2014. Social Spending, Taxes, and Income Redistribution in Uruguay. Forthcoming in Lustig, Nora, Carola Pessino, and John Scott, Eds. Fiscal Policy, Poverty and Redistribution in Latin America, Public Finance Review. 20
Thank you! 21