LAC’S GOOD DECADE: POVERTY, MOBILITY AND INEQUALITY

Augusto de la Torre World Bank - Latin American and the Caribbean Chief Economist

Winning the War on Inequality and Poverty in Latin America IADB – 15 May 2012

Honoring the Achievements of Enrique Iglesias

Stunning poverty reduction

27.5 27.9 27.7

25.1 26.8

24.5 25.7

26.7 26.7

24.1

21.9

18.6 17.2 16.4 16.1

14.0

46.0 44.9

42.3 41.5 43.0

41.4 42.7

43.6 44.0

41.0

38.1

34.1

31.6 30.6 30.4

28.0

7,500

8,000

8,500

9,000

9,500

10,000

10,500

11,000

10

15

20

25

30

35

40

45

50

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

GDP

per

capi

ta, P

PP (c

onst

ant 2

005

inte

rnat

iona

l $)

Pove

rty

head

coun

t (%

)

Moderate and extreme poverty in Latin America over 15 years

Extreme Poverty Moderate Poverty GDP per capita PPP (constant 2005 international $)

2

Source: LAC Poverty & Labor Brief, World Bank (2011) – Data SEDLAC

Significant and steady reduction in income inequality since 2002 …

3

Source: Cornia (2012): Inequality Trends and their Determinants Latin America over 1990-2010.

Average LAC Gini index of the distribution of per capita household income

… even as it continues to rise elsewhere

4

Source: Lustig, Lopez-Calva and Ortiz-Juarez (2011)

Within LAC, the decline in inequality has been widespread but uneven

5

-8.0 -7.0

-6.0 -6.0 -5.0 -5.0 -5.0

-4.0 -4.0 -4.0 -3.0 -3.0

1.0

3.0 4.0

-3.5 -5.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Peru

Mexico

Ecuador

Argentina

Dominican Republic

Brazil

Paraguay

El Salvador

Panama

Colombia

Bolivia

Chile

Honduras

Uruguay

Costa Rica

18 Countriesunw

eighted Ave.

13 Countriesunw

eighted Ave.

Change in the Gini Coefficient (Points), C 2000-2010

Source: LAC Poverty & Labor Brief, World Bank (2011) – Data SEDLAC

Nearly half of the decline in income inequality reflects decreases in labor income inequality, possibly connected to lower returns to education

6

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

Annualized changes in the labor income Gini, 1995-2010

Source: LAC Poverty & Labor Brief, World Bank (2011) – Data SEDLAC

Inequality in education has also fallen, promoting reduction in income Ginis, even if returns to education were not falling

7

Source: Cruces, García Domenech and Gasparini (2011) – Data SEDLAC

-0.160

-0.140

-0.120

-0.100

-0.080

-0.060

-0.040

-0.020

0.000

ARG

, 92-

09

BOL,

93-

05

BRA,

92-

09

CH

L, 9

0-09

CO

L, 9

2-04

CR

I, 90

-09

ECU

, 94-

09

HN

D, 9

1-09

MEX

, 89-

08

NIC

, 93-

05

PAN

, 91-

09

PRY,

90-

09

PER

, 97-

09

SLV,

91-

08

UR

Y, 8

9-09

VEN

, 89-

06

Generalized fall in years of education Gini

-25

-20

-15

-10

-5

0

5

10

Mexico

Bolivia

El Salvador

Venezuela

Chile

Weighted M

ean

Argentina

Mean

Costa Rica

Uruguay

Brasil

Paraguay

Ecuador

Peru

Informality too has been falling since the early 2000s

8

Source: Gasparini (2012) – Data SEDLAC

Change in informality in the 2000s

The middle class has been on the rise

9

20% 21% 22% 21% 22% 22% 21%

22% 24%

27% 28% 29%

35% 34% 35% 33% 34% 34% 35% 35% 36% 37% 38% 38%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1990 1995 2000 2005 2010

% o

f pop

ulat

ion

Middle Class (10$ a day line)Poverty (4$ a day line)Vulnerable (4$ - 10$ a day)

Source: Economic Mobility & the Rise of the Latin American Middle Class (Forthcoming ,LCRCE) – Data SEDLAC

But the middle class is not in the middle

10

0.0

1.0

2.0

3.0

4De

nsity

4 10 50 100Per capita daily income (USD PPP)

Note: Countries include Argentina, Bol ivia (2008), Brazi l , Chi le, Colombia , Costa Rica , Dominican Republ ic, Ecuador, El Sa lvador, Honduras , Mexico (2010), Panama, Paraguay, Peru, Uruguay.

Distribution of income in LAC (2009)

Source: Economic Mobility & the Rise of the Latin American Middle Class (Forthcoming ,LCRCE) – Data SEDLAC

Impressive intra-generational upward mobility

• From poor to vulnerable, from vulnerable to middle class Circa 2009

c1995 Margins Poor Vulnerable Middle

Class

Circa 1995

Poor 49.3 46.0 4.7 45.7

Vulnerable 2.6 43.0 54.5 33.4 Middle Class 0.4 2.6 97.0 20.9

c2009 Margins 23.4 35.9 40.7

11

Source: Economic Mobility & the Rise of the Latin American Middle Class (Forthcoming ,LCRCE) – Data SEDLAC

Though improving, inter-generational mobility has been stagnant

12

01

23

Year

s of

Edu

catio

n

Rur

al E

thio

pia

Rur

al C

hina

K

yrgy

zsta

n N

orth

ern

Irela

nd

Uni

ted

Kin

gdom

N

ew Z

eala

nd

Nor

way

C

zech

Rep

ublic

D

enm

ark

Ukr

aine

M

alay

sia

Slo

vaki

a Fi

nlan

d E

ston

ia

Eas

t Tim

or

Bel

gium

P

olan

d U

SA

N

epal

S

wed

en

Ban

glad

esh

(Mat

lab)

Ire

land

S

outh

Afri

ca

Net

herla

nds

Phi

lippi

nes

Sw

itzer

land

V

ietn

am

Slo

veni

a H

unga

ry

Sri

Lank

a P

akis

tan

Italy

G

hana

In

done

sia

Nic

arag

ua

Col

ombi

a C

hile

E

gypt

B

razi

l E

cuad

or

Pan

ama

Per

u

Impact of one sd. of parental education on children’s attainment

Source: Economic Mobility & the Rise of the Latin American Middle Class (Forthcoming ,LCRCE) – Data SEDLAC

The relative importance of growth vs. redistributive policies

13

-30

-20

-10

0

10

20

Cha

nge

in p

erce

ntag

e po

ints

Transitions into the middle class

Redistribution Growth

-30

-20

-10

0

10

20

Cha

nge

in p

erce

ntag

e po

ints

Transition out of moderate poverty

Source: Economic Mobility & the Rise of the Latin American Middle Class (Forthcoming ,LCRCE) – Data SEDLAC

Challenges & questions moving forward

• Inequality: Is this convergence or is the world becoming more “Latin”?

• Can the asymmetry in intra-generational mobility to the middle class reverse?

• Labor income important for the reduction in inequality & growing middle class

• The declining return to education rises many questions

• Price vs. quantity effects? Demand vs. supply effects?

• Changes in the composition of the labor force?

• Demographics, gender, quality of education

• Technological and sectoral shifts?

• The role of institutions (minimum wages, unions, etc.) or lack thereof (informality)

• Second generation issues for social protection – premium on social insurance

14

Female LFP and Fertility both equalizing

15

Source: LCRCE

Female valuation of Jobs, the latter seen as an array of characteristics Fertility declined at vertiginous speed

7.9 8.1 8.4 8.4 8.3 8.6 8.5 8.4 8.4 8.8 9.1

9.5 9.9 10.2 10.0

1

2

3

4

5

6

7

8

9

10

11

20

25

30

35

40

45

50

55

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Adul

t Fer

tility

, # C

hild

ren

per W

oman

% F

emal

e La

bor F

orce

Par

ticip

atio

n (A

ge +

15)

Female Labor Force Participation LACFertility: # Children per WomanGDP per capita PPP (Constant 2005 international $), in 1,000