Declining Inequality in Latin America:
How Much, Since When and Why
Nora Lustig Professor, Tulane University
Nonresident Fellow, CGD and IADLatin America in a New Global Economic Order
CAF and University of OxfordFebruary 17, 2012
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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 coe
ffici
ent
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
Trends in InequalityGini Coefficient Early 1990’s-Late 2000’s
(Unweighted ave.)Light Grey: Countries with Falling Ineq (Lustig et
al., 2011)
9
10
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)
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
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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
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 12
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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
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 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
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
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
4.13.8
3.33.1
2.82.6
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
ann
ual g
row
th (i
n %
)
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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 6.5
6.0
5.1
2.6
6.6
Household per capita income for each decile Average of income per capita growth rates
Decil
Rat
e of
ann
ual g
row
th (i
n %
)
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 28
Household per capita income and its determinants
Per capita household income
Proportion of adults in the household
•FERTILITY
Household income per
adult
Household non-labor income per adult
•RENTS & PROFITS•REMITTANCES•GOV. TRANSFFERS
Household labor income
per adult
Proportion of working adults•PARTICIPATION IN LABOR FORCE•EMPLOYMENT OPPORT
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. 31
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 38
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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.. 42
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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