Declining Inequality in Latin America:

How Much, Since When and Why

Nora Lustig Professor, Tulane University

Nonresident Fellow, CGD and IAD

Beijing, China, February 21, 2012 (via Skype)

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References:

Declining Inequality in Latin America: A Decade of Progress? Edited by Luis F. López-Calva and Nora Lustig, Brookings Institution and UNDP, 2010.

“Declining Inequality in Latin America: How Much, Since When and Why?,” Lustig, Lopez-Calva and Ortiz, Working Paper, Tulane University, 2011. http://ideas.repec.org/p/tul/wpaper/1118.html

The Rise and Fall of Income Inequality in Mexico: 1989-2010, Campos, Esquivel and Lustig, Working Paper, WIDER, January 2012.http://www.wider.unu.edu/publications/working-papers/2012/en_GB/wp2012-010/

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Outline

Declining inequality in LA: How much? Since when?

Declining inequality: Why? Argentina, Brazil, Mexico and Peru▪ Fall in skill premium▪ More progressive government transfers

The future: Will inequality continue to decline? Mexico trends after 2006 not optimistic

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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 co

eff

icie

nt

Excess Inequality (IDB, 2011)

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Excess Poverty (IDB, 2011)

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Declining Inequality in LA: How Much? Inequality in most Latin

American countries (13 out of 17) has declined (roughly 1% a year) between (circa) 2000 and (circa) 2009

Decline continued through the global financial crisis in 2009

Inequality declined in LA while it rose in other regions 8

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

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Comparing the Increase in the 1990’s with Decline in the 2000’s (Lustig et al., 2011)

Declining Inequality in LA: Since When?

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

In others, although there are fluctuations, inequality between 2000 and 2009 increased: Costa Rica, Honduras and Uruguay 11

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Gini 1996=100 (Lustig et al, 2011)

84

86

88

90

92

94

96

98

100

102

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Brasil Chile México

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Gini 1999=100 (Lustig et al, 2011)

80

85

90

95

100

105

110

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Argentina El Salvador Panamá Perú Bolivia Paraguay

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Rising Inequality 2000-2009

85

90

95

100

105

110

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Costa Rica Honduras Uruguay

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First Year in Which Inequality Started to Decline (Lustig et al, 2011)

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

The decline in inequality has been widespread

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

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

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

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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

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

Arg

entin

a

Bra

sil

Ven

ezue

la

Chi

le

Uru

guay

Lef

t-w

ing

El S

alva

dor

Pan

ama

Mex

ico

Per

u

Hon

dura

s

Non

-lef

t-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 in four countries: Argentina (Gasparini and Cruces) (urban; 2/3 of pop)

Brazil (Barros, Carvalho, Mendoca & Franco) Mexico (Esquivel, Lustig and Scott) Peru (Jaramillo & Saavedra)

Source: Lopez-Calva and Lustig (2010)

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Decline is robust

Statistically significant and significant in terms of order of magnitude

Lorenz dominance (unambiguous decline independently of choice of inequality measure)

Robust to income concept (e.g., monetary vs. total—which includes nonmonetary elements--)

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Four countries are a ...

Sample of Latin American diversity:

High (Brazil)/medium (Mx & Peru)/low ineq (Arg)

High (Arg and Peru)/low growth (Brazil & Mx)

Left (Arg & Bra) and nonleft (Mx & Peru) governments

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Sample Representative of High and Low Growth Countries

Argentina and Peru were growing at around 6 percent a year since 2003

Brazil and Mexico were growing at less than 3 percent a year (Brazil’s growth rate picked up only from 2008 onwards)

-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

Av

era

ge

an

nu

al g

row

th r

ate

(%

)

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

Mexico: Growth Incidence Curve 2000-2008

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1 2 3 4 5 6 7 8 9 100.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

4.1

3.8

3.33.1

2.8

2.6

2.3 2.2

1.8

0.6

2.7

Household per capita income for each decile Average of income per capita growth rates

Decil

Rat

e of

an

nu

al g

row

th (

in %

)

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Peru: Growth Incidence Curve 2001-2009

1 2 3 4 5 6 7 8 9 100.0

2.0

4.0

6.0

8.0

10.0

12.0

9.6

7.87.3 7.1 7.0 6.8

6.56.0

5.1

2.6

6.6

Household per capita income for each decile Average of income per capita growth rates

Decil

Rat

e of

an

nu

al g

row

th (

in %

)

Proximate and fundamental determinants of changes in inequality

There are many different factors that affect the distribution of income over time: “… the evolution of the distribution of income is the result of many different effects—some of them quite large—which may offset one another in whole or in part.” (Bourguignon et al., 2005)

Useful framework: to consider the ‘proximate’ factors that affect the distribution of income at the individual and household level:1. Distribution of assets and personal characteristics2. Return to assets and characteristics3. Utilization of assets and characteristics4. Transfers (private and public)5. Socio-demographic factors 27

Household per capita income and its determinants

Per capita household income

Per capita household income

Proportion of adults in the household

•FERTILITY

Proportion of adults in the household

•FERTILITY

Household income per

adult

Household income per

adult

Household non-labor income per adult

•RENTS & PROFITS•REMITTANCES•GOV. TRANSFFERS

Household non-labor income per adult

•RENTS & PROFITS•REMITTANCES•GOV. TRANSFFERS

Household labor income

per adult

Household labor income

per adult

Proportion of working adults•PARTICIPATION IN LABOR FORCE•EMPLOYMENT OPPORT

Proportion of working adults•PARTICIPATION IN LABOR FORCE•EMPLOYMENT OPPORT

Labor income per working adult in the household

•WAGES BY SKILL/OTHER•HOURS WORKED

Labor income per working adult in the household

•WAGES BY SKILL/OTHER•HOURS WORKED

DEMOGRAPHIC

•MARKET•POLITICS/INST.•STATE

•DEMOGRAPHIC

•MARKET

•DEMOGRAPHIC•MARKET•POLITICS/INST./SOC. NORMS•STATE(EDUCATION)

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Decomposition results (Alejo et al., 2009):

Demographics: Changes in the ratio of adults per household were equalizing, albeit the orders of magnitude were generally smaller except for Peru.

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Decomposition results (Alejo et al., 2009):

Labor force participation: With the exception of Peru, changes in labor force participation (the proportion of working adults) were equalizing.

This effect was stronger in Argentina. 30

Decomposition results (Alejo et al., 2009):

Labor income (Earnings): In Argentina, Brazil, and Mexico between 44% and 65% of the decline in overall inequality is due to a reduction in earnings per working adult inequality.

In Peru, however, changes in earnings inequality were unequalizing at the household level but not at the individual workers’ level.

=> decline in skill premium a driving force

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Decomposition results (Alejo et al., 2009):

Non-labor income: Changes in the distribution of non-labor income were equalizing;

the contribution of this factor was quite high in Brazil and Peru (45% and 90%, respectively).

=> more generous and progressive transfers, an important factor

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Argentina: Distributional impact of Conditional cash transfers

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Peru: Decline in non-labor income inequality: progressivity rose in non-monetary transfers

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Why has the skill premium declined?

Increase in relative supply of high-skilled workers

Decline in relative demand for skilled labor petered out

Institutional factors that compress the wage structure: minimum wages and unionization 37

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Other factors specific to country

Argentina: Pro-union government stance and by the impetus to low-skill intensive sectors from devaluation. Increase in minimum wages.

Brazil: Decline in spatial labor market segmentation and increase in minimum wage.

Mexico: The expansion of post-NAFTA maquiladoras.

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Why has inequality in non-labor incomes declined?

Government transfers became more progressive and generous for the poor:▪ In Argentina, the safety net program Jefes y

Jefas de Hogar.▪ 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.

▪ In Peru, in-kind transfers for food programs and health. Also access to basic infrastructure for the poor rose.. 41

Conclusions

In the race between skill-biased technological change and educational upgrading, in the last ten years the latter has taken the lead (Tinbergen’s hypothesis)

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

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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 enough.

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Is Inequality Likely to Continue to Fall?

The decline in inequality resulting from the educational upgrading 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.

=> United States experience should serve as warning (Goldin and Katz, 2008)

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Could declining inequality in Mexico have lost its momentum already?

Since mid-2000’s decline in inequality has lost momentum.

There is preliminary evidence that the relative demand for low-skilled labor is falling.

Could this be a transitory effect related to the financial crisis or a bad omen of things to come?

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THANK YOU

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