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Inequality in Latin America: equity, perceptions and opportunities
- 1. Inequality in Latin America: equity, perceptions and opportunities Carlos Eduardo Vélez ERF 20th Annual Conference Cairo, March 23 / 2014
- 2. 2Inequality in LAC • 1. Income inequality and key determinants • 2. Perceptions of equity and fairness • 3. Inequality of opportunity
- 3. LatAm highest Gini Coefficients (1995-2005) Peru Venezuela 0% 20% 40% 60% 80% 100% 20 30 40 50 60 Accumulatedfractionofworldpopulation Gini Coefficient % (income inequality) Colombia Note: Includes 108 countries. Data obtained on 1993-1999 Mexico Uruguay Brazil China India Ireland Korea Source: World Bank Indicators, 2002
- 4. LatAm highest Gini Coefficients (1995-2005) / Gasparini et al (2011)
- 5. LatAm Income inequality: trend change (2002-2010): Cornia (2012) averange LAC Gini “widespread decline in income inequality over 2002-2010” Figure 3 Average regional Gini index of the distribution of household income per capita 49.8 48.9 51.0 52.6 53.7 52.2 50.9 50.5 46 48 50 52 54 56 early1980s 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2009 2010 Source: IDLA dataset and SWIID3 for the period early 1980s. Washington Consensus and Lost Decade Augmented WashingtonConsensus New Policy Approac
- 6. LatAm Income inequality: improving trend (2002-2010): Cornia (2012) changes LAC Ginis 15 of 18 LAC countries experienced lower inequality Figure 5 Changes in Gini income by economic structure, 1990–2002 and 2002–09 4 3 2 1 0 1 2 3 4 1990 2002 2002 2009 Remittances Recipients Industrial economies Commodity Exporters Notes: The industrial economies include Argentina, Brazil, Mexico and Uruguay; commodity
- 7. 7 Key reasons behind higher inequality in LAC: example: Bourguignon, Ferreira& Leite (2007) Brazil vs US micro-data based comparison (PNAD, 1999) • Three factors accounted for most of Brazil's excessive levels of inequality • Lower and unequally distributed endowments of education across households (28%) • Larger earning differentials by skill level -“skill wage differentials” – (32%) • Highly regressive public transfers, chiefly retirement pensions (39%)
- 8. 8 Key reasons behind higher inequality in LAC: Distribution of education tilted towards low skills
- 9. 9 Key reasons behind higher inequality in LAC: Labor earning differentials too steep
- 10. 10 Key reasons behind higher inequality in LAC: Bourguignon&Ferreira (2007) the incidence of pensions, Brazil vs the U.S. 0% 5% 10% 15% 20% 25% 0 20 40 60 80 100 Percentiles of the Distribution of Household Per Capita Income PercentageofTotalHouseholdIncome Brazil US Source: PNAD/IBGE 1999, CPS/ADS 2000 and author's calculation
- 11. 11 Key reasons behind higher inequality in LAC: Lopez&Perry (2008): Inequality of educational endowments igh income inequality, leading to the low intergenerational social mobility shown ection II.5. It should not come as a surprise, then, that we find a significant correlatio mong educational and income Gini’s in the region. Figure 10: Educational Gini in LAC countries vs. others Panel A. Gini coefficient of years of education Panel B. Years of education: rich vs. poor 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 LAC Africa Asia Eastern Europe Developed countries
- 12. 12 Key reasons behind higher inequality in LAC: Frankema (2008): rising skill premiums in LAC above the trend line, the far majority ranging between 2.0 to 3.0. This outcome seems to suggest that educated workers with the ability to carry out administrative work (reading, writing, algebra), are scarcer in LAC’s than in NWC’s or, from the opposite angle, that blue- collar workers in the NWC’s manufacturing sector are better educated, trained and therefore more productive and better paid relative to white-collar employees. Figure 1: The “white-collar premium” in manufacturing, Latin America versus the USA, Canada and Australia, 1905-1990 Mexico Chile Guatemala Uruguay Chile Venezuela Bolivia Chile Venezuela Canada Australia Argentina Australia USA 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 1900 1906 1912 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 Latin America USA, Canada, Australia Source: see appendix table A.2
- 13. 13 Key reasons behind higher inequality in LAC: Lopez&Perry (2008): Higher marital sorting vs OECD countries against marital sorting coefficients (defined as Pearson correlation coefficients for years of schooling between husbands and wives). Two basic messages emerge from this figure. First, there is a strong relationship between the two variables. In fact, the correlation coefficient between marital sorting and the Gini coefficient is above .6. The second message is that the marital sorting coefficients in Latin America are unusually high (at least relative to those in the rest of the world), something that can be taken as a symptom of a severe social stratification problem that not only further concentrates household incomes but reinforces the observed low social mobility. Figure 12. Gini coefficients and marital sorting by educational levels. Source: De Ferranti et al. (2004). III.2 Fiscal policy and income inequality
- 14. 14 Key reasons behind higher inequality in LAC: … and public expenditure, transfers and taxes? / Cornia (2012) Public social expenditure increased mostly in LOC countries (left of center) of health on the approach to its financing), those on tertiary education are as concentratedasthedistribution of income. In turn, expenditure on social security (pensions, unemployment insurance) is only slightly less concentrated than that of private income. These are average regional data and things vary between the three main country groups in the region (Table 13:Panel B). There are also indications that the incidence of social expenditure became more progressive over time (CEPAL 2005; López-Calva and Lustig 2010). Democratization is thus showing its impact not only on labour policies but also on non-clientelistic redistributive expenditure policies. Table 12 Average public social expenditure/GDP in LOC versus non-LOC countries Year Social public expenditure as percentage of GDP Total Education Health Social security Housing 1990 9.0 2.8 2.1 3.3 0.7 1996 10.9 3.4 2.4 4.0 1.0 2003 12.8 4.3 2.8 4.6 1.1 2008-9 13.3 4.3 2.9 4.6 1.4 LOC (2008/9–2003) 1.33 0.2 0.38 0.46 0.29 Non LOC (2008/9–2003) 0.48 -0.12 0.06 0.11 0.43 Notes: The data refer to the 18 countries analysed in this study, including Bolivia (on the basis of national data) that has been omitted in similar studies. Source: Author’s elaboration on the basis of the ECLAC database Cepalstat and national data for 2009, Table 13 Incidence of government expenditure by quintile (18 countries, 1997-2004)
- 15. 15 Key reasons behind higher inequality in LAC: … and public expenditure, transfers and taxes? / Cornia (2012) which lower inequality of secondary income + subsidies (in kind) 0.48 -0.12 0.06 0.11 0.43 countries analysed in this study, including Bolivia (on the basis of n omitted in similar studies. basis of the ECLAC database Cepalstat and national data for 2009, Table 13 ment expenditure by quintile (18 countries, 1997-2004) icients of the public expenditure by three country groups nditure ntile Expenditure sector (Panel B) Concentration coefficients of public social expenditure tile V Quintile Group 1 Group 2 Group 3 9 5.6 Education -0.067 0.116 -0.138 0 3.7 Health 0.074 -0.073 -0.192 3 16.5 Socialsecurity 0.504 0.568 0.349 3 1.1 Socialassist. -0.089 -0.154 -0.484 4 0.9 Housing 0.206 0.067 -0.026 9 27.8 Total 0.143 0.042 0.044 El Salvador, Guatemala, Honduras, Ecuador, Nicaragua, Paraguay, a, Dominican Republic, Mexico, Panama, and Venezuela; a, Brazil, Chile, Costa Rica and Uruguay. 07). 2008-9 13.3 4.3 2.9 4.6 1.4 LOC (2008/9–2003) 1.33 0.2 0.38 0.46 0.29 Non LOC (2008/9–2003) 0.48 -0.12 0.06 0.11 0.43 Notes: The data refer to the 18 countries analysed in this study, including Bolivia (on the basis of national data) that has been omitted in similar studies. Source: Author’s elaboration on the basis of the ECLAC database Cepalstat and national data for 2009, Table 13 Incidence of government expenditure by quintile (18 countries, 1997-2004) and concentration coefficients of the public expenditure by three country groups (Panel A) Shares of public social expenditure by sector and income quintile Expenditure sector (Panel B) Concentration coefficients of public social expenditure I Quintile II Quintile III Quintile IV Quintile V Quintile Group 1 Group 2 Group 3 7.4 6.5 6.3 5.9 5.6 Education -0.067 0.116 -0.138 5.1 4.7 4.2 4.0 3.7 Health 0.074 -0.073 -0.192 2.0 2.8 4.3 6.3 16.5 Socialsecurity 0.504 0.568 0.349 3.3 2.1 1.6 1.3 1.1 Socialassist. -0.089 -0.154 -0.484 0.8 0.9 1.1 1.4 0.9 Housing 0.206 0.067 -0.026 19.6 17.0 17.5 18.9 27.8 Total 0.143 0.042 0.044 Note: Group 1 includes Bolivia, El Salvador, Guatemala, Honduras, Ecuador, Nicaragua, Paraguay, and Peru; Group 2 includes: Colombia, Dominican Republic, Mexico, Panama, and Venezuela; Group 3 includes: Argentina, Brazil, Chile, Costa Rica and Uruguay. Source: Elaboration on CEPAL (2007). A key dilemma in this area concerns the expenditure on social security. As shown by
- 16. 16 Key reasons behind higher inequality in LAC: … and public expenditure, transfers and taxes? / Lopez&Perry (2008) LatinAmerica vs Europe: inequality differences in secondary income All these said, high asset inequality does not have to necessarily translate into high disposable income inequality unless taxes and transfers do not have significant corrective effects. In this regard, it may worth looking at the role played by the government in Latin America and compare it with some countries like the Europeans that are well known for having inequality as a policy concern. Figure 13. Disposable and Market income in Latin America and Europe Market Income Disposable Income Panel A. Latin America Panel B. Europe Panel C. Latin America Panel D. Europe 0.15 0.25 0.35 0.45 0.55 0.65 Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK EURO15 0.15 0.25 0.35 0.45 0.55 0.65 Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK EURO15 0.15 0.25 0.35 0.45 0.55 0.65 Argentina Brazil Chile Colombia Mexico Peru LAC6 0.15 0.25 0.35 0.45 0.55 0.65 Argentina Brazil Chile Colombia Mexico Peru LAC6 Source: Goñi, Lopez, and Serven (2008) In a recent paper, Goñi, Lopez and Serven (2008), elaborating on a topic highlighted in Perry et al (2006), argued that whereas in Latin America the distribution of market secondary primary
- 17. 17 Key reasons behind higher inequality in LAC: … and public expenditure, transfers and taxes? / Lopez&Perry (2008) LatinAmerica vs Europe: impact of taxes vs transfers between the average Gini coefficients of market and disposable income across European countries, about two-thirds (10 percentage points) are due to transfers. Figure 14. The role of taxes and transfers in Europe and Latin America Difference between Gini coefficients of gross income and market income Panel A. Latin America Panel B. Europe Panel C. Latin America Panel D. Europe Difference between Gini coefficients of disposable income and gross income -0.16 -0.12 -0.08 -0.04 0.00 Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembour Netherlands Portugal Spain Sweden UK EURO15 -0.16 -0.12 -0.08 -0.04 0.00 Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembour Netherlands Portugal Spain Sweden UK EURO15 -0.16 -0.12 -0.08 -0.04 0.00 Argentina Brazil Chile Colombia Mexico Peru LAC6 -0.16 -0.12 -0.08 -0.04 0.00 Argentina Brazil Chile Colombia Mexico Peru LAC6 Source: Goñi, Lopez, and Serven (2008) Such low levels of income redistribution through the State may be a reflection of high levels of State capture, and this in turn a reflection of high inequality levels as discussed transfers taxes
- 18. Still some skepticism about inequality progress in LA • Inequality in Latin America: breaking with history - World Bank Report / 2003 • Inequality in Latin America: Better, But Still Terrible – WSJ / 2013 • Yes but syndrome (inequality high and contained, but encouraging middle class growth) - Economist / 2014 • Summary: Inequality still too high, but progress being made
- 19. 19 Inequality of opportunity in LAC: Burroni etal (2013), Lower bound of IOR (hhld per capita income and circumstances) Figure 3: Inequality of economic opportunity and the level of development
- 20. 20 Inequality of opportunity in LAC: Burroni etal (2013), strongly associated with low social mobility Figure 6: Inequality of opportunity and the intergenerational correlation of education
- 21. 21 Perceptions of equity and fairness in LAC: Gaviria (2013), pessimist & optimist: contrast in perceptions of past and future mobility
- 22. 22 Perceptions of equity and fairness in LAC: Gaviria (2013), pessimist & optimist: contrast in perceptions of past and future mobility the Latinobarómetro survey. When respondents were asked whether they face 70 E C O N O M I A , Fall 2007 T A B L E 5 . Perceptions of Social Justice Percent Survey year Survey question 2002 2000 1998 1996 Opportunities to escape poverty All have equal opportunities . . . 25.9 . . . . . . All do not have equal opportunities . . . 74.1 . . . . . . Causes of poverty Lack of effort 36.5 External circumstances 63.6 Success depends on connections Yes 68.62 71.5 71.3 76.4 No 31.38 28.5 28.7 23.6 Hard work does not guarantee success Yes 58.11 53.8 54.9 55.6 No 41.89 46.2 45.1 44.4 Source: Latinobarómetro (various years). . . . Not applicable.
- 23. 23 Perceptions of equity and fairness in LAC: Gaviria (2013), pessimist & optimist: : contrast in perceptions of past and future mobility 74 E C O N O M I A , Fall 2007 T A B L E 7 . International Perceptions of Social Justice, 1994–99 Percent Latin Eastern OECD United Survey question America Europe countries Asia States Africa Total Opportunities to escape poverty People have opportunities 41.7 25.7 44.7 49.9 27.3 40.0 38.2 People have very few opportunities 58.3 74.3 55.3 50.1 72.7 60.0 61.8 Causes of poverty Lack of effort 31.2 21.7 33.7 34.8 60.0 28.1 34.9 External circumstances 66.8 78.3 66.3 64.7 40.0 71.3 64.6 Success depends on connections Yes 61.5 65.0 65.2 73.2 80.5 82.1 71.2 No 38.5 35.0 34.8 26.8 19.5 17.9 28.8 Hard work does not guarantee success Yes No 989-02_Gaviria.qxd 2/27/08 11:18 AM Page 74 74 E C O N O M I A , Fall 2007 T A B L E 7 . International Perceptions of Social Justice, 1994–99 Percent Latin Eastern OECD United Survey question America Europe countries Asia States Africa Total Opportunities to escape poverty People have opportunities 41.7 25.7 44.7 49.9 27.3 40.0 38.2 People have very few opportunities 58.3 74.3 55.3 50.1 72.7 60.0 61.8 Causes of poverty Lack of effort 31.2 21.7 33.7 34.8 60.0 28.1 34.9 External circumstances 66.8 78.3 66.3 64.7 40.0 71.3 64.6 Success depends on connections Yes 61.5 65.0 65.2 73.2 80.5 82.1 71.2 No 38.5 35.0 34.8 26.8 19.5 17.9 28.8 Hard work does not guarantee success Yes No Source: World Values Survey, various years. OECD = Organization for Economic Cooperation and Development.
- 24. 24 Perceptions of equity and fairness in LAC: Gaviria (2013), pessimist & optimist: : contrast in perceptions of past and future mobility Preferences for redistribution, support for the market economy and optimism about future mobility: • Respondent believes that reducing the differences between the rich and the poor is one of the main responsibilities of the state? • 73 percent answered “of course it is,” 17 percent said “maybe yes,” 6 percent responded “maybe not,” and 4 percent answered “of course not.” • Respondent considers the market economy to be the most convenient for their country? • 17 percent declared themselves to be very much in agreement, 40 percent in agreement, 29 percent in dis- agreement, and 14 percent very much in disagreement. • Expectations of future mobility are quite optimistic: 55 percent of individuals surveyed expect their children to have a higher socioeconomic status than themselves, while only 9 percent expect a lower level for their children.
- 25. 25 Perceptions of equity and fairness in LAC: Gaviria (2013), pessimist & optimist: : contrast in perceptions of past and future mobility group 1. Additionally, individuals in group 1 are more optimistic about the 6 8 E C O N O M I A , Fall 2007 B. Future mobility 0% 10% 20% 30% 40% 50% Percent -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 A. Past mobility 0% 10% 20% 30% 40% 50% -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 Percent Source: Latinobarómetro (2000). F I G U R E 5 . Perceptions of Past and Future Mobility
- 26. 26 Inequality of opportunity for children: HOI indicators provide some reason for optimism • Human Opportunity Index -HOI- developed by the World Bank (2005) is based on the principle of equality of opportunities (Romer) and measures whether children have equitable access to human development opportunities (7, education, basic housing, etc), independently of exogenous circumstances (ethnicity, parents education, gender, location, hh income) • HOI is basically a coverage rate C penalized by inequality of opportunity D IOH = C – P = C (1-D) • Hence, HOI rewards human development that reduces the most undesirable inequities –inequality due to unfavorable circumstances-
- 27. 27Inequality of opportunity for children: HOI indicators provide some reason for optimism Molinas et al (2010), wide range of HOI values 40 50 60 70 80 90 100 Honduras Nicaragua El Salvador Guatemala Peru Panama Paraguay Dominican Republic Brazil Colombia Ecuador Jamaica Argentina Venezuel Costa a Rica Mexico Uruguay Chile HOI 2010 Figure 2.1: The 2010 Human Opportunity Index for LAC. Source: Author’s calculations based on household surveys
- 28. 28Inequality of opportunity for children: HOI indicators provide some reason for optimism Molinas et al (2010), HOI growth 1995-2010 : 1% per year, scale effect twice the importance of equalization Growth Rates by Indicators, Dimensions, and Overall Human Opportunity Index Country Sixth grade on time School Attendance Education Water Electricity Sanitation Housing Overall HOI Argentina -0.17 -0.02 -0.10 0.32 0.10 1.21 0.54 0.22 Brazil 1.53 0.81 1.17 2.02 1.24 1.86 1.70 1.44 Chile 0.81 0.11 0.46 1.07 0.70 2.01 1.26 0.86 Colombia 1.82 0.61 1.21 0.24 0.63 1.83 0.90 1.06 Costa Rica 0.61 0.75 0.68 0.24 0.51 1.59 0.78 0.73 Dominican Republic 1.87 -0.06 0.91 0.97 1.59 1.41 1.32 1.11 Ecuador 1.35 0.62 0.98 3.98 0.91 0.84 1.91 1.45 El Salvador 1.60 0.92 1.26 0.02 1.92 0.23 0.73 0.99 Guatemala 1.31 1.11 1.21 1.35 1.62 1.55 1.51 1.36 Honduras 1.73 1.30 1.52 0.81 0.57 -0.93 0.15 0.83 Jamaica 0.52 0.10 0.31 -0.86 1.75 -0.09 0.27 0.29 Mexico 1.66 0.60 1.13 4.08 0.74 2.24 2.35 1.74 Nicaragua 1.48 1.24 1.36 0.42 0.73 4.46 1.87 1.61 Panama 0.48 0.32 0.40 0.62 0.79 0.32 0.58 0.49 Paraguay 1.21 0.12 0.67 2.25 1.24 1.13 1.56 1.11 Peru 2.24 0.30 1.27 0.50 1.67 2.36 1.51 1.39 Uruguay 1.40 -0.43 0.48 2.15 0.35 0.33 0.94 0.71 Venezuela 1.13 0.25 0.69 0.07 0.05 0.52 0.21 0.45 LAC Average 1.25 0.5 0.87 1.12 0.95 1.27 1.12 0.99 Source: Author's calculations based on household surveys
- 29. 29Inequality of opportunity for children: HOI indicators: identifying unequalizing characteristics Velez & Torres (2014), ex. Colombia Shapley decomposition
- 30. 30 Inequality of opportunity for children: HOI indicators provide some reason for optimism Molinas et al (2010), Benchmarking LAC vs Europe Figure 3.1: HOI Sanitation 3 8 8 12 13 14 14 16 19 20 28 29 36 37 38 47 74 81 2 5 8 19 21 44 45 58 69 70 92 0 20 40 60 80 100 Paraguay Nicaragua Jamaica Honduras Dominican Republic Costa Rica Panama Guatemala El Salvador Bolivia Ecuador Peru Brazil Mexico Uruguay Argentina Chile Venezuela Kenya Vietnam Kyrgyz Republic South Africa Romania Hungary Portugal Greece France** USA* Spain HOI (%) LACNON-LAC Access to Sanitation (Public connection only) Sources: LAC: CEDLAS Data, Non-LAC: IPUMS Census Data LAC EUROPE
- 31. 31Inequality of opportunity for children: HOI indicators provide some reason for optimism Burroni et al (2013), Benchmarking LAC vs Africa Figure 7: The Human Opportunity Index in Africa and Latin America
- 32. 32Inequality in LAC Conclusion • Still very high income inequality, but improving in the last decade. • Inequality of opportunity (income) is also the highest across world regions. • Latinamericans consider unfair the current income distribution and favor redistributive policies, BUT support for the market economy and are optimists about future social mobility. • The steady improvement of the HOI for children, provides some reason for optimism. Nevertheless LAC is still very much behind OECD countries.
- 33. 33Inequality in LAC Conclusion Advantages of the Human Opportunity Index HOI • Identifies most unfair opportunity gaps by cohorts (early childhood, children, adolescent) • Identifies crucial circumstances to be compensated to improve access to human development opportunities of the most disadvantaged (Sector specific). • Provide timely feedback to policy makers by sector. The indicator is sensitive to contemporaneous government programs for early childhood, children and adolescent. • Help political concensus building: allow political coalitions to concentrate on the most undesirable determinants of inequality of opportunities, to fullfill the optimistic views of Latin Americans about future social mobility
- 35. 35Inequality in LAC References Bourguignon, Ferreira and Leite. 2007. Beyond Oaxaca–Blinder: Accounting for differences in household income distributions, Journal of Income Inequality Burroni, Ferreira and Peragine. 2013. Inequality of opportunity and economic mobility: Some international comparisons. IZA Working paper. Barros, R., F. Ferreira, J. Molinas and J. Saavedra. 2008. Measuring Inequality of Opportunities in Latin America and the Caribbean. Washington D.C.: The World Bank. Cornia. 2012. Inequality trends and their determinants: Latin America 1990-2010. UNU-WIDER Working Paper 2012/09. Di Ferranti et al. 2004. Inequality in Latin America: breaking with history. World Bank. Ferreira and Melendez. 2012. Desigualdad de Resultados y Oportunidades en Colombia, 1997-2010. CEDE Working Paper. Frankema. 2008. Wage inequality in twentieth century Latin America: a comparative perspective. Groningen Growth and Development Centre. Gaviria. 2013. Social Mobility and Preferences for Redistribution in Latin America. Economia Gasparini Cruces and Tornarolli, 2011. "Recent Trends In Income Inequality In Latin America," Journal of LACEA Economia. Lopez and Perry. 2008. Inequality in Latin America: determinants and consequences. Policy Research Working Paper 4504. World Bank. Molinas et al. 2010. Do our children have a chance? 2010 Human Opportunity report on LAC. World Bank. Velez Azevedo and Posso. 2010. Oportunidades para los niños colombianos: tendencias y diferencias regionales. 1997-2008. Velez and Torres. 2014. Desigualdad de oportunidades entre los niños colombianos: avances y retos del desarrollo humano en la última década. Working Paper. Escuela de Gobierno. Universidad de los Andes. World Bank. 2006. World Development Report: Equity and Development.