Sectorial shifts and InequalityA way to relate macroeconomic
events to inequality changes
Carlos Villalobos Barría (University of Goettingen)
Chair of Development Economics -- University of Goettingen
Migration, Development, and Demographic Change Problems, Consequences, Solutions”
June 25 – 28, 2013, University of Antwerp, Belgium
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Outline
• Motivation• Research question• The decomposition methodology• Results• Conclusions
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
MotivationThis is a methodological paper based on the non-conclusive evidence about the
relationship between macroeconomic variables/shocks and income inequality changes (Cornia, 2012).
The opening up of the Latin American economies during the early 90s and liberalization reforms (Lopez-Calva and Lustig, 2010)
The Hurricane Mitch in 1998 – Increasing remittances (aprox. 20% of GDP in 2005)– Important aid and capital flows
Steadily appreciation of the RER after 1994A declining tradable sector until 2005 (mainly agricultural activities)
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Motivation
Prof. Alan Winters:Conclusion from 1999• Trade Liberalization generally stimulates growth (through it poverty
alleviation) - Not clear in Honduras• It creates losers - it applies to the Honduran case
Honduras, a place where, until now, there is no…• Macro stability• High rates of savings and investments• A committed, credible, capable government
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Motivation
But at least in education• The private sector is responsible to allocate resources
– Highly segmented educational system / schools producing agricultural workers
– Low quality education / lack of coverage (specially in rural areas)– Strong evidence of labour immobility
• Strong bias towards the non tradable sector (skill biased)– Not necessarily formal education but unobservable characteristics
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Motivation
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
MitchHurricane
Commodity boom
Inequality peacK
Chair of Development Economics -- University of Goettingen
Motivation
Mitch Hurricane (1998)Highest inequality (GINI)
4550
5560
6570
75
Gin
i Ind
ex -
Po
vert
y H
ead
cou
nt R
atio
1990 1995 2000 2005 2010Year
Poverty Head Count Ratio Gini rural areas pcGini country level pc
Source: Honduran household surveys and UNdata.
Poverty and Inequality Trends in Honduras
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
2 $ PPP per dayperr capita
Chair of Development Economics -- University of Goettingen
Motivation
• After 1999 (facts):– Increasing rates of growth with increasing poverty (explosion of
remittances, aid, etc)– Strong disequalization of the per capita income distribution– Mainly a rural phenomena– Upsurge (decay) of the non-tradable sector (tradable)– Strong evidence of labour immobility
• After 2005 (facts):– Increasing rates of growth with declining poverty– Recovery of the tradable sector earnings (particularly at the
bottom of the distribution– Declining inequality (mostly in rural areas)– Commodity boom
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
MotivationEvidence of Labour Immobility (worker‘s heterogeneity - Low Migration)
-15
-10
-50
5pe
rce
nt
0 20 40 60 80 100
Tradable sector 1991-1999
-20
-15
-10
-50
50 20 40 60 80 100
Tradable sector 1999-2005
-20
020
4060
0 20 40 60 80 100
Tradable sector 2005-2007
-10
-50
510
perc
ent
0 20 40 60 80 100percentile
Non-tradable sector 1991-1999-1
0-5
05
1015
0 20 40 60 80 100percentile
Non-tradable sector 1999-2005
-40
-20
020
40
0 20 40 60 80 100percentile
Non-tradable sector 2005-2007
Note different y-axis scales.
Source: Authors' calculations based on EPHPM I and EPHPM II
90% ci Median spline Growth rate in mean
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Reserach Question• How relevant are macro-economic shifts in explaining the Honduran
income inequality (poverty) developments over the last two decades?
• What is the story behind the fact that Honduras is an outlier in Latin America when considering the inequality trends over the last two decades?– Migration towards the modern sector
• Increasing earnings in the traditional sector
– Declining returns to skills (educational upgrade)– Social policies CCTP
• In this paper, we propose a lower bound methodology to investigate how sectorial shifts affects the income distribution contributing to explain the almost unchanged poverty figures over the last 15 years.
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology• Set up as in Devillanova et al. (2010)
– Workers‘ heterogeneity and Capital-skill complementarity (Imperfect mobility of labour)
• Focus in rural areas – 50 % of the total population live in rural areas– 80% of the poor households live in rural areas
• Strong evidence against the tradable sector (backward)– Overvaluation of the RER– Fluctuation in commodity prices are relevant– Natural catastrophes are common affecting principally the rural infrastructure
and production. (Mitch Hurricane in 1998 but many other tropical storms are frequent)
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
0.5
11.
5D
ens
ity
5 10 15 20Log-earnings
Rural log-earnings in Chile 2006
0.2
.4.6
0 2 4 6 8 10Log-earnings
Rural log-earnings in Hunduras 2005
Note: based on full-time employed rural workers.Source: Authors' calculations based on CASEN 2006 and EPHPM 2005.
Tradable sector Non-tradable sector
The backward (tradable) sector
mainly agricuture
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology0
.1.2
.3.4
-4 -2 0 2 4
0.1
.2.3
.4
-4 -2 0 2 4
0.1
.2.3
.4
-4 -2 0 2 4
0.1
.2.3
.4
-4 -2 0 2 4
Note: Each distribution consists of 3000 obs. randomly drawn from a normal distribution.
tradable non-tradable
Macroeconomic shift
THE RURAL SECTOR (50 % of the total population - 80% of all poor households)
1999 2005
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology• Oaxaca-Blinder type of decomposition of a distribtional change • The symbol (´) makes reference to t2
ΔD = D(t2)− D(t1)
ΔD = D(WS‘, BS‘) − D(WS, BS)
ΔD = [D(WS‘, BS‘) − D(WS‘, BS)] + [D(WS‘, BS) − D(WS, BS)]
We can simulate D(WS‘ , BS)
We decompose the distributional change in a between sectors gap effect and in a within sector effect which is caused by changes in productive endowments, their returns and employment changes across sectors (weights) . Note that there is no path dependence
arising in this methodology.
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology• 1991-1999; 1999-2005; 2005-2007
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
-10
12
Log-
ear
nin
gs g
ap
grow
th
0 20 40 60 80 100Percentiles
delta gap 1999-1991 delta gap 2005-1999
delta gap 2007-2005
Source: Authors' calculations based on EPHPM I and EPHPM II.
0.43
0.14
-0.14
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology• 1999-2005 (Period of high GDP Growth without poverty reduction)
0.1
.2.3
.4de
nsiti
es
0 2 4 6 8 10 12
sectorial distributions in rural areas in t
0.43
0.1
.2.3
.4
0 2 4 6 8 10 12
sectorial distributions in rural areas in t'
0.1
.2.3
dens
itie
s
0 2 4 6 8 10 12log - wages
rural wage distribution in t
0.0
5.1
.15
.2.2
5
0 2 4 6 8 10 12log - wages
rural wage distribution in t'
Source: Own elaboration based on randomly simulated data (parameters of Honduras 2005).
tradable sector non-tradable sector
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Results• Honduras 1999-2005 (Growth + Unchanged Poverty)
– At least 40% of the Honduran (GINI) disequalization between 1999 and 2005 can be attributed to the decline of the tradable sector.
– Documented elements• Appreciated RER• Mitch Hurricane • Weak commodity prices
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Results• Honduras 2005-2007 (Growth with poverty reduction)
– At least 33 % of the Honduran (GINI) equalization between 2005 and 2007 can be attributed to the upsurge of the tradable sector.
– Documented factors• Commodity Boom
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
ConclusionsThis analysis likely represents a lower bound of the impact of macroeconomic
conditions on inequality changes.• Bias against the tradable sector, increases the return to skills, disequalizing the
labour income distribution
There is an measurable (lower bound) impact of macroeconomic shifts (traduced into the decay or upsurge of the tradable sector) on inequality changes.
Trade reforms as well as changes in the real exchange rate and revenues shocks affecting the tradable sector should be carefully considered when analyzing poverty and inequality dynamics.
The losers in Honduras were no t randomly selected. The were mostly the poor
In the long-run, avoid agricultural workers education. Promote inter-sectorial mobility of workers (as Prof. Winters recommended) by providing as in the developed world general education. Generate basic and open skills (Language and Mathematics)
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Thank you!
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
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