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
Gini coefficient
50.0
44.7
45.0
40.0
35.0
32.2
38.9
38.9
39.1
South Asia
North Africa
and the
Middle East
East Asia and
the Pacific
33.6
30.0
25.0
20.0
High Incom e
Europe and
Central Asia
Sub-Saharan Latin Am erica
Africa
and the
Caribbean
3
Latin America: Declining income inequality by
country: 2000-2011
(Annual Change of Gini in %)
3.00
2.12
2.00
1.00
0.82 0.77
0.61
0.40
0.00
-1.00
-1.30
-2.00
-0.74 -0.72
-0.20 -0.10
-0.95
-2.05 -1.99
USA
India
South Africa
China
LAC-17
Honduras
Guatemala
Uruguay
Paraguay
Costa Rica
Chile
Panama
Dom. Rep.
Peru
Brazil
Venezuela
Mexico
El Salvador
Argentina
Ecuador
Bolivia
-2.64
Nicaragua
-3.00
-1.07
-1.24 -1.17
-0.79
-1.03 -0.91
-0.47 -0.39
4
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
Bolivia
Brazil
-4.8
-6.6
Chile
Costa Rica
-12.1
-7.8
-6.1
Honduras
Mexico
-12.6
-10.7
Panama
Peru
-6.2
-60%
Argentina
Ecuador
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%
4
LA
C1
ru
Ur
ug
ua
y
Pe
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Ec
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El
Sa
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do
r
Ho
nd
ur
as
M
ex
ico
Pa
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m
a
Pa
ra
gu
ay
Do
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in
i
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Re
Ri
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Co
s
om
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Ch
ile
Co
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-20%
Br
a
ge
n
na
0%
-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)
0.61
0.58
0.56
0.56
0.55
0.54
0.51
0.51
0.50
0.50
0.49
0.49
Brazil (2009)
0.49
Mexico (2010)
0.48
0.46
0.48
0.46
0.46
0.47
0.44
0.43
Peru (2009)
Uruguay (2009)
0.41
0.39
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)
0.54
0.52
0.52
0.5
0.52
0.50
Gini
0.49
0.49
1996
0.48
2010
0.46
0.45
0.44
0.42
Net Market Income
Disposable Income
Final Income
12
Mexico still less redistributive than
peers
0.600
0.550
0.500
Brazil (2009)
Mexico (2010)
0.450
Uruguay (2009)
0.400
0.350
Net Market Disposable Post-Fiscal
Income
Income
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)
18.0%
16.0%
14.0%
12.0%
Brazil (2009)
10.0%
Mexico (2010)
Peru (2009)
8.0%
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
Brazil
Greece
United States
Italy
Portugal
Spain
Netherlands
France
Austria
Germany
Sweden
Luxembourg
Belgium
UK
Finland
Denmark
Ireland
Change between Market and Disposable
Income Ginis
0
-0.05
-0.1
-0.15
Source: authors’
calculations for
Brazil and US;
Immervoll et al.
(2009) for
Europe
-0.2
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
Top 1%
12,0
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
10,0
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
Review.
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Lustig, Nora et. al. (2013)“The Impact of Taxes and Social Spending on Inequality and
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.
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Slide 5:
Thank you!
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