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Inequality and Poverty in Mexico: 1982-2010
Nora LustigSamuel Z. Stone Professor of Latin
American EconomicsTulane University
New Orleans, November 17, 2011
Inequality and Poverty Trends
• Two distinct phases:– 1982-1994 - Debt crisis and structural reforms:
inequality and poverty rose.– 1994-2006 - Post-NAFTA, economic crisis, recovery
and slow-growth: inequality and poverty declined.• More recently
– 2006-2010 - Great Recession: poverty rose and the decline in inequality lost steam.
• Sources: Lustig (2010), Campos, Esquivel and Lustig (2011, in progress)
Inequality (Gini) and Poverty (Headcount): 1984-1992
Panel A: 1984-1992
12
13
14
15
16
17
18
44
46
48
50
52
54
1984 1989 1992
Pobr eza Extrema (%)
Gini
Gini (Lustig y Szekely, 1997b) Pobreza extrema (Lustig y Szekely, 1997a) Gini CoefficientHeadcount Ratio
Rise in Poverty: Debt Crisis or Policy?
• Debt crisis would have caused an increase in poverty no matter what. However:
• Evidence of “overadjustment:” fiscal policy more contractionary than required to restore macroeconomic balance.
• Brunt of adjustment was placed on Mexico; no “haircuts” for creditors until ten years later.
• Fiscal cuts did not protect spending on the poor.• Elimination of general subsidies on staples and dismantling of
agricultural support schemes were not replaced by compensatory programs
=> Policies exacerbated the impact of debt crisis on poverty.
Slight Decline in Poverty in the Early 1990s: Did Policy Help?
• Poverty declined slightly nationally, but rose in rural areas and the South and Southeast.
• Coincided with rural uprisings and revolts; Zapatista uprising the most salient.
• PRONASOL—Salinas’ administration flagship anti-poverty program– focused on building infrastructure in rural communities.
• But no safety nets to deal with sharp fall in international coffee prices and dismantling of price support and subsidies in agriculture.
• => Policy did not help.
Inequality (Gini) and Poverty (Headcount): 1984-1992
Panel A: 1984-1992
12
13
14
15
16
17
18
44
46
48
50
52
54
1984 1989 1992
Pobr eza Extrema (%)
Gini
Gini (Lustig y Szekely, 1997b) Pobreza extrema (Lustig y Szekely, 1997a) Gini CoefficientHeadcount Ratio
Rise in Inequality: 1980s and Early 1990s Market Forces or Policy?
• Unequalizing effect of increase in skilled/unskilled wage gap: – Between 1984 and 1995, real wages for skilled workers
rose by around 8 percent and unskilled wages decreased by around 22 percent.
• Increase in wage gap (skill premium) was linked to:– Trade liberalization and other factors which shifted labor
demand towards workers with higher skills.– Reduction in real minimum wages and weaker unions.
=> Policy contributed to increase in earnings--and hence overall--inequality.
Relative Returns and Relative Supply
Decomposition of Differences in the Distribution of Earnings: 1989-1994
-.5
-.2
.1.4
.71
Log
wag
e ef
fect
s
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100Quantile
Total differential Effects of Characteristics
Effects of Returns
Returns (Wage gap)
Real Minimum Wage Index (Dec. 2010=100)
100
120
140
160
180
200
Rea
l Min
imum
Wag
e (D
ecem
ber
2010
=100
)
1988m1 1992m1 1996m1 2000m1 2004m1 2008m1 2010m12Year
Real Minimum Wage 2010=100
Wage distribution with respect to median: 1989 and 2010
.1.1
2.1
4.1
6.1
8.2
Uni
oniz
atio
n R
ate
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010Year
ENIGH ENOE
Unionization Rate
Decline in Inequality: 1994/96-2006Market Forces or Policy?
• Labor earnings, government transfers and remittances have been equalizing.
• Labor earnings have been equalizing because skilled/unskilled wage gap decline.
• Decline in wage gap linked to rise in relative supply of skilled workers.
• Real minimum wages remained constant; irrelevant to earnings inequality trends.
• With launching of CCT Progresa/Oportunidades, government transfers became more progressive.
Gini Coefficient: 1984-2006
Decomposition of Differences in the Distribution of Earnings: 1994-2006
Returns (Wages gap)
Relative Returns and Relative Supply
Wage distribution with respect to median: 1989 and 2010
Decline in Inequality Loses Steam: 2006-2010
• New Trend or Great Recession? Too early to tell.
• But, could be the result of slowing down of educational upgrading; barriers to tertiary education access due to low quality of basic education and opportunity cost of not working
-.5
-.2
.1.4
.71
Log
wa
ge e
ffe
cts
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100Quantile
Total differential Effects of Characteristics
Effects of Returns
Decomposition of Differences in the Distribution of Earnings: 2006 - 2010
Returns (Wage Gap)
Government Transfers: Change in Gini (Mexico 2008; in %)
21
% change wrt market income Effectiveness Indicator
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
ArgentinaBrazilMexicoPeruBolivia
Government Transfers: Change in Headcount Ratio (Mexico 2008; in %)
22
% change wrt net market income Effectiveness Indicator % change wrt net market income Effectiveness Indicator
-80.0
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
ArgentinaMexicoBrazilBoliviaPeru
Headcount Index ($ 2.5 PPP)
Headcount Index ($4 PPP)
23
Share of benefits going to... Percent of poor who are beneficiariesPercent ofPoor <2.5 Poor <4 Non-poor Poor <2.5 Poor <4 Total PopulationCEQ Social SpendingGDP
ARGENTINANon Contributory Pensions39% 48% 52% 39% 32% 20% 15% 2%Asignación Universal Por Hijo (simulated)38% 60% 40% 48% 47% 21% 3% 0%BOLIVIABono Juancito Pinto 38% 61% 39% 20% 19% 14% 2% 0%Bono Sol 40% 53% 47% 8% 6% 5% 6% 1%BRAZILBolsa Família 49% 72% 28% 55% 47% 18% 2% 0%Benefício de Prestação Continuada (BPC)a37% 57% 43% 5% 5% 2% 3% 1%MEXICO
41% 66% 34% 62% 50% 20% 4% 0%29% 43% 57% 14% 10% 4% 1% 0%
Seguro Popular 29% 52% 48% 41% 38% 19% 4% 0%PERUJuntos 56% 81% 19% 36% 27% 9% 3% 0%Food Transfers 32% 54% 46% 39% 36% 20% 5% 0%
FLAGSHIP PROGRAMS
OportunidadesProcampo
Conclusions• Rise in poverty and inequality in 1980s and
early 1990s: – Debt crisis– Overadjustment: excessive fiscal contraction. – Labor market policy: falling minimum wage and
unionization rate. – Structural reforms-cum-wrong type of/missing safety
nets: trade liberalization, dismantling of general subsidies with flagship anti-poverty program not focused on income support (PRONASOL).
Conclusions
• Decline in poverty and, particularly, inequality in post-NAFTA 1994-2006:– Mild growth.– Educational expansion resulted in a reduction of
skilled/unskilled wage gap.– Government transfers became more progressive and
helped increase incomes of the poorest: Conditional Cash Transfer Program PROGRESA/OPORTUNIDADES.
– However, there is still a large share of extreme poor not covered by existing safety net.
Conclusions
• Decline in inequality loses steam: 2006-2010; poverty increases in 2008 and 2010.– Educational upgrading might be constrained by
both demand and supply factors => skilled/unskilled wage gap will not continue to decline and it may start rising again.
– Safety nets not designed to cope with shocks: rising food prices and falling employment and incomes due to macroeconomic shock (Great Recession).
THANK YOU