Measuring Income Inequality under Restricted Interpersonal ...
Global Interpersonal Inequality. What do we know? · Global Interpersonal Inequality. What do we...
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Global Interpersonal Inequality. What do we know?Miguel Niño-Zarazúa, UNU-WIDERLaurence Roope, Oxford University Finn Tarp, UNU-WIDER
INTRODUCTION
Economics 101
First: any competitive equilibrium is Pareto efficient
Second: under certain conditions, every Pareto efficient allocation can be achieved as a competitive equilibrium
“Under certain conditions” …..
The “mainstream” view
Economic transactions mainly occur in free and competitive environments
Externalities and the political process Efficiency issues separate from issues of
equity/inequality
WDR 2006
The dichotomy between policies for growth and policies specifically aimed at equity/inequality is false (emphasis added)
The distribution of opportunities and the growth process are jointlydetermined (emphasis added)
A wider perspective
The classical view Many channels through which inequality
affects growth negatively (come back to)
Equity/equality both as an end and as a means
No rejection of the competitive market (and the need for incentives to work)
Turning to policy
Choices have to be made Focus on equity must not be an excuse
for poor economic policy But what is poor policy?
Good and bad: not so easy
“Easy” policy choices
Early childhood development Access to affordable health care Cost-effective land redistribution
Difficult policy choices
What to do when trade-offs exists – and there are many
Is there too much “soft” talk?“… growth … was de-emphasized in favor of fuzzy schemes like `empowering the poor,’ which nobody knows how to implement or to evaluate afterwards” (Easterly)
Agriculture vs social sectors (and a word about the MDGs)
A WIDER VIEW
• The concern of inequality is a critical factor in the success of development strategies in developing countries
• Inequality affects a country’s potential of economic growth, by impacting negatively on consumer demand, national savings and human capital formation
• Negative implications of high levels of inequality, in terms of social cohesion, crime, conflict and political instability, governance, and social exclusion, are widely acknowledged
The concern of inequality
Growth, poverty and inequality closely related(Bourguignon’s iron triangle)
Growth
Poverty rateInequality
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From Ravallion (2011)
Larger absolute poverty-income elasticities in countries with lower Ginis
6.01%/%25.03%/%
≅−=ΔΔ≅−=ΔΔ
giniifYPginiifYP
HHHH
HHHH
High inequality reduces the efficacy of economic growth to poverty reduction
The concern of inequality• The report of the UN System Task Team (2012) to support the
preparation of the Post 2015 UN Development Agenda points out that inequality is a “key concern, not just from the perspective of a future in which a decent and secure wellbeing is a prerogative of all citizens, but sustained development itself is impeded by high inequalities. Hence, redressing these trends will be a major challenge in the decades ahead”
• Despite this, there is no consensus regarding the direction of change in global interpersonal inequality. The most recent and authoritative review on the issue (Anand and Segal, 2008) points out that “it is not possible to reach a definitive conclusion regarding the direction of change in global inequality over the last three decades of the twentieth century”
MEASUREMENT and TRENDS
How to measure global interpersonal inequality?
`Concept one' measures inequality among countries, where countries are ranked according to their average per capita income, and every country receives an equal weight
->`Concept two‘ measures inequality among all the individuals in the world and assigns each person the average per capita income for his/her country (`between-country' inequality)
->`Concept three' measures global interpersonal inequality, taking into account the actual global distribution of income of all the citizens of the world.
The Gini coefficient is the most common inequality measure.
Theil L index (or Mean Logarithmic Deviation) belongs to the family of generalized entropy measures, and it is additively decomposable, with population share weights.
UNU-WIDER World Income and Inequality Database
WIID is the longest and most comprehensive database of income distributions
• Inequality trends within and across countries• Observations for 156 existing countries + Good Quality Ginis
based on HH surveys and NOT National Accounts Mainly quality data – otherwise quality ranking Deininger & Squire, LIS, Eurostat, UNICEF, CEDLAS It provides information on the source (e.g. income or consumption),
and quality of Ginis, fundamental for the study of global interpersonal inequality. Neither World Bank’s PovcalNet, CIA Factbook, UNDP offer these features
http://www.wider.unu.edu/research/Database/
What are the recent trends in global interpersonal inequality?
0.000
0.200
0.400
0.600
0.800
1.000
1.200
1.400
1976 1985 1995 2008
Gini
Theil L (MLD)
Theil L within-country componentTheil L between-countrycomponent
Global Interpersonal Inequality has fallen steadily between 1975 and 2008• Ginis fell from 0.727 to 0.681• Theil L idex (or MLD) fell from 1.314 to 0.981
Source: Niño-Zarazúa, Roope and Tarp (2013)
Counterfactual Scenario I
Inequality Measure 1975 2008Gini 0.727 0.764Theil L (MLD) 1.314 1.449Theil L within-country component 0.254 0.272Theil L between-country component 1.060 1.177
• We assumed that India’s and China’s populations grew at the same rate as they actually did during 1975-2008, but remained with per capita incomes at the 1975 levels
• China and India were low-income countries in 1975. If their per capita incomes had remained unchanged in a period that saw mean world incomes soaring, an increase in between-country inequality would have been expected
Source: Niño-Zarazúa, Roope and Tarp (2013)
Counterfactual Scenario II
• We consider the case where India and China had been able to grow their per capita incomes at the same rates as they actually did over 1975-2005, WHILE maintaining the same quintile shares as in 1975
• The further fall in inequality would have been driven by the much smaller level of within-country inequality in those countries
• The increases in domestic inequality in India and China have not been good for global interpersonal inequality.
Inequality Measure 1975 2008Gini 0.727 0.662Theil L (MLD) 1.314 0.872Theil L between-country component 1.060 0.600Theil L within-country component 0.254 0.272
Source: Niño-Zarazúa, Roope and Tarp (2013)
Poverty headcount ratio(USD 1.25 per day)
Poverty is falling globally – but remains a huge challenge
• Since 1990: people living on less than $1.25 has fallen in every region, including sub-Saharan Africa:– In 1990 ≈46% (or ≈2 billion
people) were extremely poor– MDG target of cutting extreme
poverty by half will be achieved by 2015
– Still: ≈1 billion people (≈14%) remain in extreme poverty
– Fragile states (most of which are Africa) not on track to reach MDGs
– Poverty problem in Africa remains very severe (both rate and absolute numbers)
% of people living on less than $1.25 USD (2005 PPP)
0 20 40 60 80
Developing Regions
Northern Africa
Sub-Saharan Africa
Latin America and theCaribbean
Eastern Asia (China only)
Southern Asia
Southern Asia excludingIndia
South-Eastern Asia
Western Asia
Oceania
Caucasus and Central Asia
2008
1990
Poverty increasingly associated with middle-income countries (often with high levels of inequality)
People living on less than $1.25 USD a day (2005 PPP)
0
10
20
30
40
50
60
70
80
90
100
1990 2008
% o
f glo
bal p
over
ty Low-incomeCountries
Middle-incomeCountries
0 20 40 60
South Asia
Sub-SaharanAfrica
East Asia
Latin America
MENA
% of global poverty
20081990
Inequality remains a major challenge
Inequality measured by mean-log deviations of income
0.05.0
10.015.020.025.030.035.0
Gap between high-and low-income
countries
Gap between high-and upper-middleincome countries
Income gap between country groupings
Constant 000 US$ (2005 PPP)
1980 2010 00.10.20.30.40.50.60.70.80.9
1
1981 1990 1999 2008
Latin Americasub-Saharan AfricaEast AsiaSouth Asia
Infant mortality rate
Life expectancy
Primary school enrolment, 1990-2010 (%)
1990 2010
Boys Girls Boys Girls
Developing world 84 75 91 89
Sub-Saharan Africa 57 50 78 74
Latin America and the Caribbean 88 84 96 95
Eastern Asia 99 96 97 97
Southern Asia 83 66 94 91
South-Eastern Asia 94 91 95 96
Western Asia 87 79 94 89
Developed Regions 95 95 97 97
Prevalence of undernourishment
Percent of population with access to a safe water source
Percent of population with access to improved sanitation facilities
BUSINESS CYCLES, FISCAL POLICIES AND WITHIN-COUNTRY INEQUALITIES
Gini index before and aftertaxes and transfers
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0.3
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0.6Before Tax After Tax
Political economy factors
• Fiscal policy does NOT work instantaneously
• Adequate timing in the introduction of fiscal policies is not an easy task - political incentives often influence fiscal policy
• Public choice models indicate that legislators are prone to spend money on programs that directly benefit their own constituents but are reluctant to raise taxes because they impose a visible cost on voters
• There is a political bias towards spending and budget deficits, therefore, deficits tend to be more common than surpluses
Main sources of revenue in LICs• VAT is the main source of government revenue in Low Income
Countries – about 4.5% of GDP vs. 1.5% from Personal Income Tax
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Low Income Lower middleIncome
Upper middleIncome
HigherIncome
VATPersonal Income TaxCorporate Income TaxTrade tax
Regressive taxes are problematic for poverty reduction when progressive spendingis limited due to poortargeting
Fiscal policy as an automatic stabilizer
• Automatic stabilizers increase the budget deficit(or reduce the surplus) during recession times and increase the surplus (or reduce the deficit)during economic booms
Unemployment compensation, cash transfers to vulnerable households, progressive income tax, etc
• Evidence suggest that while fiscal policy in industrialized countries follow more optimal smoothing rules, via countercyclical measures, fiscal policies in developing countries seems to be highly pro-cyclical.
• Two explanations for pro-cyclicality can be pointed out:
1. Imperfect access to international credit markets during bad times Countries hit by an adverse shock lose access to international credit markets at the time when it is most needed
2. Inability of governments to generate sufficient surpluses during expansions that forces them to borrow less during recessions
Country Number of countries
Standard Deviation
Output Private consumption
Industrial countries
20 2.18 2.85
G7 6 2.05 2.26
Developing countries
36 4.47 7.62
Latin America 17 4.54 7.41
Africa 11 4 8.46
All sample 56 3.65 5.92
NOTE: Output and private consumption more volatile in developing countries than industrialized countries
Consumption volatility is critical as DC heavily rely on VAT
SOCIAL PROTECTION AS AN INSTRUME NT TO REDUCE WITHIN-COUNTRY INEQUALITIES
The Emergence of Social Protection• A new paradigm in the fight against poverty and vulnerability
• Tax-financed (and/or aid-supported) policies that moved antipoverty approaches:
– From food-aid and subsidies to regular, reliable and predictable income transfers
– Emerging consensus that eradicating poverty requires economic growth, basic service provision and social protection
– A shift from poverty as a lack of income to poverty as a multidimensional phenomenon
• Over 30 developing countries have large scale social transfer programmes
• Pilot schemes being introduced in Kenya, Malawi, Ghana and Zambia; and at implementation in Nigeria, Liberia, Uganda, and Tanzania
• More than 860 million people currently benefit from social protection, making it the most important policy instrument against poverty at the present time
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Social Protection: policy approaches against poverty
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Programme title Country TypeNumber of
households (in millions)
Number of beneficiaries (in
millions)
Country classification 1/
Poverty focus 2/
National Rural Employment Guarantee Scheme India Income
transfer plus 48.0 240.0 Lower middle income High
Urban DiBao China Integrated antipoverty 22.0 110.0 Lower middle
income High
Program Bantuan Tunai, Bantuan Tunai Langsung Indonesia Pure income 19.1 95.5 Lower middle
income High
Bolsa Familia Brazil Income transfer plus 12.5 52.3 Upper middle
income High
Rural Dibao China Pure income 10.5 42.0 Lower middle income High
Prêvidencia Social Rural Brazil Pure income 7.5 37.5 Upper middle income Categorical
Indira Gandhi National Old Age Pension Scheme India Pure income 15.7 31.4 Lower middle
income High
Progresa-Oportunidades Mexico Income transfer plus 5.5 27.5 Upper middle
income High
‘100 Days Employment Generation Scheme’ (EGP) Bangladesh Income
transfer plus 3.0 15.0 Low income High
Tekun (transfer in less developed regions for destitute households) China Pure income 6.6 10.7 Lower middle
income High
Beneficio de Prestaçao Continuada Brazil Pure income 2.4 10.0 Upper middle income High
Expanded Senior Citizens Act of 2010 Philippines Pure Income 2.0 10.0 Lower middle income Categorical
National Family Benefit Scheme India Pure income 2.0 10.0 Lower middle income High
Old Age Pension South Africa Pure income 2.4 10.0 Upper middle income High
Child Support Grant South Africa Pure income 1.9 9.5 Upper middle income High
Subtotal for 15 largest programmes 161.0 711.4Other 79 programmes 30.4 151.9TOTAL Developing world 3/ 191.4 863.3
Wider functionings of Social Protection: automatic stabilizers
• In Indonesia, the Jaring Pengaman Sosial was launched in 1998 to help poor households to mitigate the impact of the 1997-1998 Asian financial crisis
• In Argentina, Plan Jefes y Jefas de Hogar Desocupadoswas introduced in the aftermath of the 2001-2002 Argentinean peso crisis to support unemployed parents with children
• In the Aftermath of the 2008 financial crisis• South Africa extended the Child Support Grant to cover children up
to age 17, from the previous age limit of 15• In Brazil, the scope of Bolsa Familia was expanded to include an
additional 1.3 million households• In Mexico, Oportunidades was expanded in 2010 to cover an
additional 600,000 households mostly in urban areas
WHAT ARE THE COSTS AND SPOURCES OF FINANCE OF FINANCE FOR SOCIAL PROTECTION IN DEVELOPING COUNTRIES
Old agepension as % GDP
Child benefit as % GDP
Unemployment scheme as % GDP
Transfer package as% GDP
Net ODA/ as % GDP
Transfer package as % net ODA
Guinea 0,6 1,5 0,3 2,8 7,5 36,9
Burkina Faso 1,1 2,8 0,6 5,2 12,5 41,3
Ethiopia 1,0 2,8 0,6 5,1 12,6 40,3
Tanzania 1,1 3,1 0,6 5,5 11,4 48,5
Senegal 1,1 2,0 0,5 4,1 8,0 51,7
Kenya 0,9 3,0 0,6 5,2 3,9 131,3
Cameroon 0,8 1,8 0,4 3,5 2,2 154,0
The Cost of Social Protection
ILO (2008)
MICs spend less than 1% of GDP on Social TransfersLICs African countries: 3-5% GDP
Sources to Finance Social Protection
• Tax revenues as a share of GDP have grown modestly in the sub-Saharan region; from 13.5% in the 1980s to 18% in the 2000s
• Constraints associated with:o The structure of the economy – the rural subsistence economy
and the informal sector are difficult to taxo Administrative capacity of revenue authorities o Political economy factors
• What are the options for financing social protection in developing countries?
0 10 20 30 40 50 60 70 80 90 100
South AfricaBotswana
Cote d'IvoireMadagascarMozambique
BurundiTanzania
CameroonBurkina Faso
Central African RepublicEthiopiaGambiaGhanaGuinea
Guinea-BissauLesothoMalawi
MaliNiger
NigeriaRwandaSenegal
Sierra LeoneSwaziland
UgandaZambia
What about redistribution?
Source: Niño-Zarazúa et al (2012)
Marginal Tax Rate on the ‘rich’ needed to eliminate the normalised poverty gap
What about resource mobilisation?• Revenues from Natural resources. Potential for Angola, Botswana,
Cameroon, Chad, Côte d'Ivoire, Gabon, Equatorial Guinea, Ghana Namibia, Nigeria, Republic of Congo, Sierra Leone, Togo, Uganda and Zambia– Immediate challenges in terms of efficiency and equity
• Renegotiation of contracts with companies involved in the exploitation of natural resources: Bolivia’s Bono Juancito Pinto and Programa (PAN)
• Subsidies in developing countries are very regressive - amounted around $54 billion in 2010, roughly, 1/3 of ODA (170.6 billion USD)
• Rises in VAT earmarked for expenditures on Social Protection. VAT on cigarettes/alcohol could rise revenues in India and Vietnam equivalent to 0.3 and 0.4 % of GDP, respectively.
• Anti tax-evasion policies – Chile was able to reduce VAT evasion from 20% in the 1990s to less than 10% in 2009
CONCLUDING REMARKS
• Inequality remains a major challenge when analysing trends in within-country inequalities
• Concerns about the negative implications of inequality, in terms of social cohesion, crime, conflict and political instability
• Recent encouraging trends in Latin America, where inequality has been falling due to:– First: a decline in the premium to skills after an educational upgrading– Second, the introduction of progressive social policies, notably social protection– Political economy factors that determine in the choice of fiscal policy
• Recent although scant evidence from LA suggests that social transfers have contributed to the reduction in inequality in the order of 15% to 20%
• Potential sources to finance social protection vary from country to country. However, the expansion of social protection in developing countries also constrained by political economy factors