Declining Inequality in Latin America:

How Much, Since When and Why

Nora Lustig Professor, Tulane University

Nonresident Fellow, CGD and IAD

China Development Research FoundationBeijing, July 2, 2012

1

2

Gini Coefficient by Region (in %), 2004

32.233.6

38.9 38.9 39.1

44.7

53.2

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

High Income Europe andCentral Asia

South Asia North Africaand the

Middle East

East Asia andthe Pacific

Sub-SaharanAfrica

Latin Americaand the

Caribbean

Gin

i co

eff

icie

nt

Excess Inequality (IDB, 2011)

3

Excess Poverty (IDB, 2011)

4

Declining Inequality in LA: How Much? Inequality in all Latin American

countries has declined between (circa) 2000 and (circa) 2011

Decline continued through the global financial crisis in 2009

Inequality declined in LA while it rose in other regions

5

Inequality in LA: 1980-2010

45

46

47

48

49

50

51

52

53

54

55

1980 1986 1992 1998 2002 2010

Gini coefficient – Household per capita incomeUnweighted averages

Source: own estimates based on SEDLAC (CEDLAS and World Bank).

A consistent fall in inequality in the 2000s

Gini coefficient – Household per capita incomeUnweighted averages

48

49

50

51

52

53

54

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: own estimates based on SEDLAC (CEDLAS and World Bank).

Poverty, growth and inequality Latin America, 4 USD PPP international poverty line

Source: own estimates based on SEDLAC (CEDLAS and World Bank).

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP Poverty Inequality

The 1990s

The 2000s

Stagnation

1990s 2000sGrowth effect -4.8 -6.4Distribution effect 0.7 -3.7Total -4.1 -10.1

Decomposition of poverty changes

Source: Gasparini et al. (2012).

More homogeneity in the 2000s

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0V

enez

uela

El S

alva

dor

Ecu

ador

Arg

entin

a

Per

u

Bra

sil

Pan

ama

Par

agua

y

Mex

ico

Chi

le

Bol

ivia

Hon

dura

s

Dom

inic

an R

.

Col

ombi

a

Uru

guay

Gua

tem

ala

Nic

arag

ua

Cos

ta R

ica

Change in Gini coefficient

11

First Year in Which Inequality Started to Decline (Lustig et al, 2011)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Dominican Republic, Ecuador, Paraguay, Peru

Argentina, Bolivia, Venezuela

El Salvador, Panama

Brazil, Chile

Mexico

Yea

r w

hen

ineq

ualit

y st

arte

d to

dec

line

The decline in inequality has been widespread

Fast growing countries (Chile and Peru), slow growing countries (Brazil and Mexico) and countries recovering from crisis (Argentina and Venezuela)

Persistently high inequality countries (Brazil) and normally low inequality countries (Argentina)

Countries with left “populist” governments (Argentina), left social-democratic governments (e.g., Brazil, Chile) and center/center-right governments (e.g., Mexico and Peru)

12

13

Driving Factors

Decline in labor income inequality associated with a fall in the so-called premium to skills Decomposition exercises reveal that the

quantity effect was unequalizing in many countries (Paradox of progress in education) but the price effect (change in skill premium) was equalizing

Decline in non-labor income inequality associated with more generous and targeted cash transfers

14

What explains decline in skill premium

Not the same in all countries: Relative demand of educated workers rose

more slowly in the 2000’s ( several countries) Relative supply of educated workers rose

faster than demand in the 2000’s (Mexico) Minimum wages, unions (Argentina, Ecuador,

Venezuela) Reduction in unemployment/commodity

boom “Degraded” tertiary (Chile)

Wage premium: 1990s and 2000sAnnual change in skilled/unskilled conditional wage gapLatin America (16 countries)

-4

-2

0

2

4

6

8

Wage premium

1990s

2000s

Source: Gasparini, Galiani, Cruces and Acosta (2011).

Relative supplies increasing at similar rates for the average of 16 countries; Mexico, however, supply rose faster in the 2000sAnnual changes in skilled/unskilled wage gap, and relative supplies

Latin America (16 countries)

Source: Gasparini, Galiani, Cruces and Acosta (2011).

-4

-2

0

2

4

6

8

Wage premium Relative supply

1990s

1990s

2000s

2000s

More active labor policy

Minimum wage, unions, income policies

Increase in real value of minimum wage (2002-2010)

-20

0

20

40

60

80

100

DOM MEX PRY BOL CRI SVD PAN PER COL VEN GUA CHL HND ECU BRA NIC URY ARG

Employment

Reduction in unemployment

Increase in female labor market participation (especially poor)

Unemployment rate (Latin America)

0

2

4

6

8

10

12

1990 1995 2002 2009

19

Taxes, Transfers and Income Redistribution

Ongoing project for 12 countries; results are available for 6

Standard Fiscal Incidence Analysis

Household surveys from around 2008-2011

20

Cash Transfers and Inequality (decline in Gini in %)

21

Cash Transfer and Decline in Ext Poverty (Change in headcount ratio in %)

22

Coverage of Cash Transfers among Extreme Poor (in %)

23

Taxes and Cash and in-kind Transfers (Gini)

24

References:

Declining Inequality in Latin America: A Decade of Progress? Edited by Luis F. López-Calva and Nora Lustig, Brookings Institution and UNDP, 2010.

“Declining Inequality in Latin America: How Much, Since When and Why?,” Lustig, Lopez-Calva and Ortiz, Working Paper, Tulane University, 2011. http://ideas.repec.org/p/tul/wpaper/1118.html

“The Rise and Fall of Income Inequality in Mexico: 1989-2010,” Campos, Esquivel and Lustig, Working Paper, WIDER, January 2012.http://www.wider.unu.edu/publications/working-papers/2012/en_GB/wp2012-010/

“Recent trends in inequality in LA,” ppt presentation by Leonardo Gasparini, Universidad Carlos III, Madrid, May 2012.

“Taxes, transfers and income redistribution in Latin America,” Lustig, N. (c00rdinator), 2012

THANK YOU

26