Is the 2000s L.A. fall in income inequality permanent or temporary?

Giovanni Andrea Cornia University of Florence

-------------------------------------------------------------Festschrift in honour of Professor Rolph van der Hoeven

Institute of Social Studies, Den Hag 08-10-2015

1. Inequality trends 1990-2010:

large improvements

Washington Consensus and ‘Lost Decade’

Augmented Washington Consensus New Policy Approach

Trend in av. regional Gini of Distribution of Household Income/c

Gini decline 2002-2010: Latin America = - 5.5 South America = - 7.0 Central America = - 3.9

(i) Political changes

(ii) Policy changes

(iii) Changes in external conditions

Sources of inequality decline 2002-2010

0

3

6

9

12

15

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Right

Centre

Left

(i) trend in ideological orientation LA gov: the ‘2000s left turn’

(i) average Gini drop/year 2002-2009 by political regime

• Gini points change average yearly

• Radical left -4.36 -0.51

• Social Democratic left -3.64 -0.92

• Centrist -3.11 -0.56

• Centre-right & right -0.70 -0.07

(ii) Policies that helped reducing Gini• Rise in 2ary educat. of low-middle class children- sw/uw

• labor market policies – Rise in minimum wages (less in average wage)

– Collective bargaining (Southern Cone)

– Labor standards + formalization of informal jobs

• Tax policies – Rising tax/GDP + more progressive taxation

• Public expenditure • Social transfers (social pensions, CCT, • Prudent macro policy (countercyclical fiscal/monetary

policy, low deficits, low inflation, reduced ext. debt)

(ii)

(ii) Index of real minimum wages (2000=100), selected countries

Years of left regimes

2002 2004 2006 2008 2010

Venezuela (1999) 94.5 92.7 113.9 107.2 93.8

Brazil (2002) 114.3 121.4 145.3 160.8 182.0

Argentina (2003) 81.4 129.8 193.2 253.3 321.3

Uruguay (2005) 88.7 77.5 153.2 176.9 196.8

Costa Rica (2006) 99.5 97.6 99.5 99.5 105.8

Nicaragua (2007) 105.9 113.5 128.5 141.6 174.6

Ecuador (2007) 112.5 122.2 130.0 146.7 161.5

Guatemala (2008) 108.6 117.6 119.6 111.9 122.0

Mexico (--) 101.2 99.1 99.0 96.2 95.6

Crisis of 1990-91

Debt Crisis

The Augmented Washington Consensus The New Tax Consensus

The Washington Consensus

(ii) Trend in Average Tax/GDP Ratio, 1973-2009, L.America

- Large increase in well targeted CCT & social assistance (0.5-1.0% GDP)- - Pure transfers + non-contrib pensions(Arg, Brazil, Chile, Bolivia, Uruguay)

(ii)

B. International Terms of Trade (x-axis) vs. Tax Revenue/GDP (y-axix) of the 18 main L.A. countries,

1990 - 2007

r=0.18 (0.05 for 2003-07)

0

10

20

30

40

0 50 100 150 200 250

D. International Terms of Trade (x-axis) vs. Non Tax Revenue/GDP (y-axis)

of the 8 main commodity L.A. exporters, 1990-07

r=0.39** (0.63 for 2003-07)

0

5

10

15

0 50 100 150 200 250

(iii) rise in tax revenue due to gains in terms of trade ?

All countries Commodity exporters (non tax revenue)

0.55

0.530.54

0.51

0.500.50

0.48

0.490.49 0.48

0.580.57

0.58

0.560.55 0.55

0.52

0.540.53

0.54

0.40

0.42

0.44

0.46

0.48

0.50

0.52

0.54

0.56

0.58

0.60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Gin

i Co

effi

cien

t

Incl. Rem. Excl. Rem.

(iii)Rising and more equalizing remittances (e.g. El S.)

Azevedo and Cabrera 2014

3 points

6 points

2. Inequality trend since the 2008 crisis: a reversal of prior gains?

Is the decline in Gini cyclical or structural ?..... Gini declines also during the crisis years of 2008-2012

Cornia (2014) on CEDLAS & CEPAL data for 11 countries with complete data for 2008-12, i.e.: Argentina, Bolivia, Brazil, Colombia, CostaRica, Ecuador, El Salvador, Mexico, Panama, Peru and Uruguay. The dotted line includes Uruguay (which recorded a higher-than-average Gini drop over 2008-12. The solid lines excludes it.

….but stagnant Gini btw 2012 & 2013 (SEDLAC data)

• Falling Gini Rising Gini – Argentina -0.1 - Bolivia + 1.4

– Chile -0.4 - Brazil + 0.1

– Colombia -0.1 - C. Rica + 0.6

– Honduras -3.9 - Ecuador + 0.9

– Panama -0.3 - El Salv. +1.7

– Peru -0.4 - Dom Rep. +1.4

– - Uruguay + 0.6

– Average - 0.86 - Average + 0.95

– Paraguay 0.0

rising % of those feeling that income distribution is fair or very fair, 2011-2013

(i) Political changes

(ii) Policy changes

(iii) Changes in external conditions

Sources of inequality changes 2009/10- 2013

(i) Political trends: no end to‘left turn’ – but ... will it start with the next round of elections ?

(i) sense of ‘political stress’ due to GDP slowdown (& some errors)

• Economic recession & inflation – Falling consensus for PT in Brazil (see later) – Recession, inflation and uncertainty in Argentina – Difficult situation in Venezuela – But ..Uruguay, Bolivia, Ecuador, Peru, Chile, Panama, etc doing ok

• In 9 commodity exporters falling world prices/volumes, make it more difficult to fund expansionary fiscal social transfers

• Protests led by ‘middle class’ that was taxed to redistribute to poor but received fewer services, lost manufacturing jobs due to reprimarization

• External factors less important in other 9 – where tot did not change much

•

(i) Falling government approval rate (top) but still rising, if unequally distributed, perception of country progress (bottom)

GDP growth in 2014-15 =1.3 and 0.9%

Av. pop growth =1.1%

(ii) Global crisis & context of policy changes: 2009 crisis, 2010

rebound, 2011-13 slowdown. In 2014-5 zero growth/c. Gini affected

(ii) Policy changes • No evidence of abandonment of past macro model

• GDP growth sustained 2010-2013 by domestic consumption. In 2014-15 mean LA GDP growth 1.3 and 0.9 (with pop growth =1.1)

• Labour market policies further strengthened (Table)

• revenue/GDP ratios are stable, but in few countries loss of non-tax revenue (oil/mining royalties)

• Tax policy more focused on distributive issues (Gomez Sabaini & Moran 2014)

• Public exp/GDP not falling but ‘fiscal space’ dropping in some countries

• Macro policies under pressure (CPI from 5 to 9; primary surplus: from +3 to -0.1)

Trend in commodity prices & tot since 2009 (fall, rebound, further fall) rising Gini?

Other Countries (9)

42444648

50525456

0204060

80100120140

GINI Terms of trade

All Latin America (18 countries)

44

46

48

50

52

54

56

020406080100120140160

GINI Terms of trade

Minerals Exporting Countries (6)

42444648

50525456

0

50

100

150

200

250

GINI Terms of trade

Exporters of Agricoltural Goods (3)

42444648

50525456

020406080100120140160180

GINI Terms of trade

Terms of trade and inequality – 4 country groups

nr nr r

no relation

r rnr

rnrr

Exporters of Agricoltural Goods (3)

42444648

50525456

0

50

100

150

200

GINI Export volume index (2000 = 100)

Minarals Exporting Countries (6)

42444648

50525456

0

50

100

150

200

250

GINI Export volume index (2000 = 100)

All Latin America (18 countries)

44

46

48

50

52

54

56

0

50

100

150

200

250

300

GINI Export volume index (2000 = 100)

Other Countries (9)

42444648

50525456

050100150200250300350400

GINI Export volume index (2000 = 100)

Export volumes and Gini – country groups

nr

r

nr

rnrnr

r r

1980-2013 1980-2002 2003-2008 2009-2011 2012-2013

MINERAL EXPORTERS(6 COUNTRIES)

Terms of Trade

-.0285*** .0048 -.0319*** -0.0383** .0302

Export Volume

-.0198*** .0428*** -.0341*** -.0293 .0160*

AGRICULTURAL EXPORTERS(3 COUNTRIES)

Terms of Trade

-.0057 .0055 -.0936** -.0045 .0872

Export Volume

-.0133** .0531*** -.0498*** -.0417 .0980*

OTHER COUNTRIES(9 COUNTRIES)

Terms of Trade

-0.0222** -.0257*** .0787 0.2762 0.1196

Export Volume

-.0019** .0235*** -.0023 0168 -.0037

ALL(18 COUNTRIES)

Terms of Trade

-.0234*** -.0022 -.0434*** -.0361* .0654

Export Volume

-.0035*** .0353*** -.0043*** -.0019 -.0001

* ; ** and***denote significance at the 10%, 5% and 1% levels, respectively.

Mineral exporters: Bolivia, Chile, Colombia, Ecuador, Peru, Venezuela. Agricultural exporters: Argentina, Brazil, Mexico.Others countries: Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, Uruguay.

RELATIONSHIP BETWEEN GINI, TOT AND EXPORT VOLUME

Overall conclusions • Post SAP L.A. economies affected by strong dependency on global markets

• As in EU, lasting global recessions inevitably impact on growth, BoP, revenue, and posibly Gini

• Post 2008, Gini continued to fall till 2002 thanks to strong initial conditions & policy committment

• In 2013, first clear signs that Gini stopped falling (50% falls and 50% rises)

• Tot and X volumes (uncorrelated with Gini till 2002) might affect future Gini as the ‘redistributive institutions’ put in place in the 2000s may be more difficult to finance. This is key in 9 countries

• Despite global problems, no signs yet that the ‘left turn’ in politics is over

• Social-democratic policies not abandoned, even strengthened but entitlements possibly part eroded

• With deteriorating growth in 2014-5, Gini might be inevitably affected cyclically – but not structurally

• A structural change in Gini trend will depend on new wave of elections, starting with Brazil, Argentina and Venezuela. Conditions not so exasperated in most other countries

• A deepening of the 2000s reforms (in the field of taxation, education and industrial policy) could help combating the effects of the world crisis on income inequality