Growth, Redistribu0on, Poverty and the Middle Class Nora Lus)g Tulane University CGD and IAD Center for Global Development Washington, DC February 25, 2015 1 Evolu0on of Poverty and the Size of the Middle Class in the 2000s In the 2000s, economic growth and declining inequality led to Ø significant poverty reduc)on: propor)on of poor declined from 42 to 25 percent Ø a robust expansion of the middle-­‐class: propor)on of middle class popula)on rose from 22 to 34 percent Percentage of popula0on by income groups La0n America, c. 2000-­‐2012 Middle class Poor Azevedo, Lopez-­‐Calva, Lus)g and Or)z. 2015. Inequality, Mobility and Middle Classes in La)n America. In Dayton, Jeff (editor) 3 Growth or redistribu0on? Inequality declined in most countries Average Yearly Change in Gini: 2000 (circa) 2012 (circa)
2.61
1.02 0.74 0.69 0.64
Nicaragua
Bolivia
Ecuador
El Salvador
Argentina
Brazil
Peru
Dom. Rep.
Panama
Chile
Mexico
Uruguay
Colombia
Guatemala
Paraguay
Venezuela
Costa Rica
Honduras
LAC-18
Indonesia
South Africa
China
Russia
USA
3.00
2.00
0.61
0.09
1.00
0.00
-1.00
-0.28
-0.79 -0.74 -0.72 -0.70 -0.58 -0.50 -0.42 -0.40
-0.86
-0.92
-1.00
-2.00
-1.28
-1.45
-2.08 -1.68
-3.00
-2.64
-4.00
Lus)g et al. (2014) based on SEDLAC 5 Poverty reduc0on: growth contributed with 61 percent and inequality reduc0on with 39 percent, on average -35
Lus)g et al. (2014) based on SEDLAC 6 Change in poverty (percentage points)
-40%
Colombia
-30
Guatemala
-20%
Costa Rica
-25
Honduras
0%
Uruguay
-20
Venezuela
20%
Paraguay
-15
Panama
40%
Brazil
-10
LAC-18
60%
Peru
-5
Ecuador
80%
Chile
0
Bolivia
100%
Dom. Rep.
5
Argentina
120%
El Salvador
10
Mexico
140%
Nicaragua
% contribution of each effect
Redistribution effect
Growth effect
Change in poverty ($4 a day) in percentage points
Expansion of the middle-­‐class: growth contributed with about 79 percent and inequality reduc0on with 21 percent, on average Redistribution effect
Growth effect
Change in the size of the middle class (percentage points)
25
% contribution of each effect
90%
20
80%
70%
15
60%
50%
10
40%
5
30%
20%
0
10%
Lus)g et al. (2014) based on SEDLAC El Salvador
Costa Rica
Honduras
Panama
Colombia
Peru
Uruguay
Paraguay
LAC-16
Brazil
Argentina
Chile
Ecuador
Dom. Rep.
Nicaragua
Bolivia
-5
Mexico
0%
7 Change in middle class (percentage points)
100%
Why did inequality decline? Determinants of the decline in inequality •  Decline in inequality of labor income •  Larger and more progressive government transfers •  Expansion of private transfers: remi[ances 9 Determinants of the decline in inequality Private transfers Government transfers Labor income 10 What to expect in more challenging 0mes? Growth and Redistribu0on •  Slower growth will cause poverty to rise and the size of the middle class to shrink •  However, the impact will depend on the evolu)on of inequality Ø Will inequality increase, stay the same or decline? Inequality: 1992-­‐2012 0.58
0.56
0.54
0.52
0.50
0.48
0.46
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0.42
1992
0.44
Weighted averages of the Gini coefficient; 18 countries
Lus)g et al. (2014) based on SEDLAC 13 Inequality: 1992-­‐2012 (without Mexico) 0.58
0.56
0.54
0.52
0.50
0.48
0.46
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0.42
1992
0.44
Weighted averages of the Gini coefficient, excluding Mexico
Lus)g et al. (2014) based on SEDLAC 14 Determinants of the decline in inequality •  Labor earnings •  Government transfers •  Private transfers 15 Labor earnings Lower labor demand and fiscal consolida)on imply that Ø Market-­‐determined wages at the bo[om, will grow less, not at all or decline Ø Real minimum wages cannot con)nue to rise But wages of skilled workers are also likely to con)nue to decline Ø Net effect will depend on which factor dominates 16 Government transfers With most countries facing limited or no fiscal space, or worse Ø Transfers will not con)nue to be an important equalizing force Ø Some countries may even have to cut them down Ø In others they will get eroded by infla)on 17 Private Transfers: RemiVances Ø With US recovery, remi[ances are likely to con)nue being a posi)ve equalizing force 18 References •  Azevedo, J. P., L. F. Lopez-­‐Calva, N. Lus)g, E. Or)z-­‐Juarez (2015) “Inequality, Mobility and Middle Classes in La)n America”, in: Dayton-­‐Johnson, J. (2015) La#n America’s Emerging Middle Class. Palgrave McMillan. •  Lus)g, N., L. F. Lopez-­‐Calva, E. Or)z-­‐Juarez (2014) “Deconstruc)ng the Decline in Inequality in La)n America,” in Basu, Kaushik and Joseph S)glitz, eds. Proceedings of IEA roundtable on Shared Prosperity and Growth, 2015, Palgrave-­‐Macmillan. 19 Thank you 20