Fiscal Policy, Poverty and
Redistribution in Latin America
Nora Lustig
Tulane University
Nonresident Fellow CGD and IAD
Inter-American Dialogue
Washington, DC, June 4, 2013
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
2
Declining income inequality by country: 2000-2010
(Annual average change in Gini in %)
Poverty: 1992-2010
(Headcount Ratio in %)
50.0
44.4
45.0
41.5
40.7
40.0
35.0
30.0
29.6
27.8
24.7
25.0
24.9
20.0
16.3
15.0
10.0
5.0
0.0
1992
1998
$2.5 a day poverty line
c.2000
$4 a day poverty line
c.2010
• Why has inequality declined?
–Declining inequality of hourly labor
income
–Larger and more progressive
transfers
–Lower dependency ratios
5
6
www.commitmentoequity.org
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• Special issue: Lustig, Pessino and Scott. Editors. “Fiscal
Policy, Poverty and Redistribution in Latin
America,”Public Finance Review (forthcoming)
– Argentina: Nora Lustig and Carola Pessino
– Bolivia: George Gray Molina, Wilson Jimenez, Veronica Paz
and Ernesto Yañez
– Brazil: Sean Higgins and Claudiney Pereira
– Mexico: John Scott
– Peru: Miguel Jaramillo
– Uruguay: Marisa Bucheli, Nora Lustig, Maximo Rossi and
Florencia Amabile
8
Standard Fiscal Incidence Analysis
• Pre-tax and benefits incomes
• Allocators of taxes and benefits
– personal income and consumption taxes
– social spending: cash transfers and in-kind
transfers (education and health)
– Consumption subsidies
• Post-tax and benefits incomes
•
Countries (yr of Survey): Argentina (2009), Bolivia (2007), Brazil (2009), Guatemala (2009), Mexico (2008), Peru
(2009), Uruguay (2009), Paraguay (2010)
9
10
Results
• Wide variation among countries in:
– policy choices (or outcomes of
political processes?)
–impact of those choices on income
redistribution and poverty
reduction
11
Government size varies greatly in
Latin America
• Government spending is around 40
percent of GDP in Argentina and
Brazil—similar to that of some
European nations with larger welfare
states
• …while it is only around 20 percent
in Mexico and Peru
12
Budget Size and Composition
Primary and Social Spending as % of GDP
13
Redistributive Impact Heterogeneous
• Taxes and transfers reduce inequality by
nontrivial amounts in Argentina, Brazil, and
Uruguay, less so in Mexico, and relatively little in
Bolivia and Peru
• Bolivia and Uruguay start from similar Market
Income Gini’s but end in different places with
Final Income
• Brazil has the highest Market Income Gini by
several orders of magnitude but ends up with a
lower Final Income Gini than Bolivia and Peru
14
Gini Before and After Taxes, Transfers,
Subsidies and Free Government Services
0.574
0.55
0.5
0.504
0.503
0.511
0.492
Argen na
Gini
0.489
Bolivia
0.463
0.446
0.45
0.438
0.429
Brazil
Mexico
Peru
Uruguay
0.4
0.393
0.369
Final
Income
Market
Income
0.35
15
Direct Taxes Progressive but
Underutilized
• Personal income tax varies from around
five percent of GDP in Uruguay to nearly zero
in Bolivia
• In all countries in which they exist, direct taxes
are progressive, but because direct taxes are a
small percentage of GDP almost everywhere,
their redistributive impact is small
16
Gini Before and After Direct Taxes
0.574
0.563
0.55
0.511
0.492
Gini
0.5
0.504
0.503
0.503
0.498
0.497
0.478
0.45
Bolivia
0.463
0.438
0.446
0.429
Brazil
Mexico
Peru
Uruguay
0.4
Final
Income
Net
Market
Income
0.35
Market
Income
0.393
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Cash Transfers Powerful Poverty-Reducing
Mechanism only when Targeted and of
Significant Magnitude
• Cash transfers reduce extreme poverty by
more than 60 percent in Uruguay and
Argentina…
….but only by 7 percent in Peru, which
spends too little on cash transfers
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Headcount: Before and After Cash
Transfers
25.00%
20.00%
Argen na
15.00%
Bolivia
Brazil
Mexico
10.00%
Peru
Uruguay
5.00%
0.00%
Net Market Income
Disposable Income
19
• Bolivia spends five times more in cash
transfers than Peru (as a share of GDP)
but…
…because funds are not targeted to the
poor, the amount of redistribution and
poverty reduction has been limited: it is
only slightly higher than in Peru
20
• Peru’s Juntos, although quite
effective because of its fine
targeting, achieves very limited
poverty and inequality reduction
because the scale of the program is
small:
–coverage of extreme poor is below
60 percent and per capita transfer
is low (compared to poverty gap)
21
Coverage of Direct Cash Transfers
100.0%
90.0%
93.3%
87.7%
83.2%
80.0%
67.8%
70.0%
73.1%
57.7%
60.0%
Poor<2.5
50.0%
41.9%
40.0%
2.5<=Poor<4
Non poor
29.2%
30.0%
20.0%
15.5%
10.0%
0.0%
Bolivia
Brazil
Peru
22
“Leakages” of Direct Cash Transfers
(Percent going to poor and nonpoor)
100%
90%
29.1%
80%
70%
62.0%
73.5%
60%
24.0%
Non poor
50%
2.5<=Poor<4
Poor<2.5
40%
30%
12.8%
9.7%
20%
10%
46.9%
25.2%
16.8%
0%
Bolivia
Brazil
Peru
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Indirect Taxes and Poverty
• In Brazil and Bolivia, indirect taxes wipe out
most of the effect of direct transfers, and
poverty is almost the same after as before
taxes and cash transfers.
• In contrast, in Mexico, indirect taxes and
subsidies reduce poverty further, because
exemptions and informality allow the poor to
pay little in the form of indirect taxe
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Headcount Ratio Before and After Indirect
Taxes
25.00%
20.00%
Bolivia
15.00%
Brazil
Mexico
10.00%
Peru
Uruguay
5.00%
0.00%
Net Market Income
Disposable Income
Post Fiscal
Gini Before and After Government
Services Valued at Cost
0.55
0.5
0.563
0.543
0.498
0.503 0.497
Gini
0.489
0.493
0.494
0.478
0.488
0.447
0.45
0.457
Argen na
0.463
Bolivia
0.446
0.438
0.429
Brazil
Mexico
Peru
Uruguay
0.4
0.393
Final
Income
Disposable
Income
0.35
Net Market
Income
0.369
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Argen na-Reduc on in Inequality: Market (blue) vs.
Redistribu on (red)
43%
Redistribu on
124%
58%
Market
-24%
2003-06
2006-09
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Argen na-Reduc on in Poverty: Market (blue) vs.
Redistribu on (red)
88%
Redistribu on
110%
Market
12%
-10%
2003-06
2006-09
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Fiscal Incidence Indicators: Winners
and Losers
Who bears the burden of taxes and
receives the benefits from cash
transfers?
• Fiscal incidence by decile and
socio-economic groups
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Incidence of Taxes and Cash Transfers
Net Change in Income after Direct and Indirect Taxes and Transfers
by Decile
20%
15%
10%
5%
Bolivia
Brazil
0%
Mexico
1
-5%
2
3
4
5
6
7
8
9
10
Peru
Uruguay
-10%
-15%
-20%
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Fiscal Incidence of Income, Taxes and Transfers, by Socioeconomic Groups
Market
Income
Population
Shares
PostFiscal
Income
BOLIVIA (2009)
Poor (<$4)
Vulnerable ($4-$10)
Middle Class ($10-$50)
Rich (>$50)
Total population
MEXICO (2008)
29.1%
38.8%
30.8%
1.3%
100.0%
4.0%
-1.5%
-1.9%
-1.2%
-1.4%
BRAZIL (2009)
Poor (<$4)
Vulnerable ($4-$10)
Middle Class ($10-$50)
Rich (>$50)
Total population
Market
Income
Population Post-Fiscal
Shares
Income
Poor (<$4)
23.8%
Vulnerable ($4-$10) 38.0%
Middle Class ($10-$50)35.3%
Rich (>$50)
2.9%
Total population
100.0%
12.3%
-0.1%
-8.3%
-9.8%
-6.1%
PERU (2009)
26.7%
33.5%
35.3%
4.5%
100.0%
15.1%
-7.1%
-14.0%
-20.7%
-13.7%
Poor (<$4)
28.6%
Vulnerable ($4-$10) 37.5%
Middle Class ($10-$50)32.0%
Rich (>$50)
2.0%
Total population
100.0%
3.4%
-2.5%
-9.9%
-17.8%
-8.5%
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In sum: Bolivia, Mexico and Peru
• Although Bolivia spends five times more than
Peru in cash transfers, because they are not
really targeted to the poor they achieve little
in terms of poverty reduction
• In contrast, Peru’s cash transfers are very welltargeted but the size of the flagship program is
small
• In Mexico, the limitation is similar to Peru’s
but less markedly so
32
In sum: Brazil
The largely positive redistributive picture of Brazil has
three main problems:
• A substantial portion of cash transfers benefit the
nonpoor
• Indirect taxes weigh heavily on the market income
poor and wipe out the redistributive and poverty
reducing effect of cash transfers
• About 16 percent of Brazilian social spending in
tertiary education goes to the richest five percent of
the population with incomes above US$50 per day.
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In sum: Argentina
• Poverty reduction and redistribution through
fiscal policy are the highest in Argentina. Is
Argentina a model of redistributive policies?
– Increasingly relied on redistribution through cash
transfers => pension moratorium
– Pension moratorium: good for elderly women bad for
incentives (informality) and problems of unfairness
– Fiscal sustainability called into question: source of
revenues such as inflation tax and international
reserves are problematic
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THANK YOU
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Led by Nora Lustig (Tulane University) and Peter Hakim (InterAmerican Dialogue), the Commitment to Equity (CEQ) project is
designed to analyze the impact of taxes and social spending on
inequality and poverty, and to provide a roadmap for governments,
multilateral institutions, and nongovernmental organizations in their
efforts to build more equitable societies. CEQ/Latin America is a
joint project of the Inter-American Dialogue (IAD) and Tulane
University’s Center for Inter-American Policy and Research (CIPR)
and Department of Economics. The project has received financial
support from the Canadian International Development Agency
(CIDA), the Development Bank of Latin America (CAF), the
General Electric Foundation, the Inter-American Development Bank
(IADB), the International Fund for Agricultural Development
(IFAD), the Norwegian Ministry of Foreign Affairs, the United
Nations Development Programme’s Regional Bureau for Latin
America and the Caribbean (UNDP/RBLAC), and the World Bank.
http://commitmenttoequity.org
CEQ WORKING PAPER SERIES http://www.commitmentoequity.org
“Commitment to Equity Assessment (CEQ): Estimating the Incidence of Social Spending, Subsidies
and Taxes. Handbook,” by Nora Lustig and Sean Higgins, CEQ Working Paper No. 1, July
2011; revised January 2013.
“Commitment to Equity: Diagnostic Questionnaire,” by Nora Lustig, CEQ Working Paper No. 2,
2010; revised August 2012.
“The Impact of Taxes and Social Spending on Inequality and Poverty in Argentina, Bolivia,Brazil,
Mexico and Peru: A Synthesis of Results,” by Nora Lustig, George Gray Molina, Sean
Higgins, Miguel Jaramillo, Wilson Jiménez, Veronica Paz, Claudiney Pereira, Carola Pessino,
John Scott, and Ernesto Yañez, CEQ Working Paper No. 3, August 2012.
“Fiscal Incidence, Fiscal Mobility and the Poor: A New Approach,” by Nora Lustig and Sean
Higgins, CEQ Working Paper No. 4, September 2012.
“Social Spending and Income Redistribution in Argentina in the 2000s: the Rising Role of
Noncontributory Pensions,” by Nora Lustig and Carola Pessino, CEQ Working Paper No. 5,
January 2013.
“Explaining Low Redistributive Impact in Bolivia,” by Verónica Paz Arauco, George Gray Molina,
Wilson Jiménez Pozo, and Ernesto Yáñez Aguilar, CEQ Working Paper No. 6, January 2013.
“The Effects of Brazil’s High Taxation and Social Spending on the Distribution of Household
Income,” by Sean Higgins and Claudiney Pereira, CEQ Working Paper No.7, January 2013.
“Redistributive Impact and Efficiency of Mexico’s Fiscal System,” by John Scott, CEQ Working Paper
No. 8, January 2013.
“The Incidence of Social Spending and Taxes in Peru,” by Miguel Jaramillo Baanante, CEQ Working
Paper No. 9, January 2013.
“Social Spending, Taxes, and Income Redistribution in Uruguay,” by Marisa Bucheli, Nora Lustig,
Máximo Rossi and Florencia Amábile, CEQ Working Paper No. 10, January 2013.
“Social Spending, Taxes and Income Redistribution in Paraguay,” Sean Higgins, Nora Lustig, Julio
Ramirez, Billy Swanson, CEQ Working Paper No. 11, February 2013.
“High Incomes and Personal Taxation in a Developing Economy: Colombia 1993-2010,” by
Facundo Alvaredo and Juliana Londoño Vélez, CEQ Working Paper No. 12, March 2013.
“The Impact of Taxes and Social Spending on Inequality and Poverty in Argentina, Bolivia, Brazil,
Mexico, Peru and Uruguay: An Overview,” Nora Lustig, Carola Pessino and John Scott, CEQ
Working Paper No. 13, April 2013.
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