Inequality in Latin America is high… …but declining since around 2000Decline is pervasive and significant• Larger than the rise in inequality in

1990s• Important contribution to the decline

in poverty• In countries with high growth & low

growth• In countries with left and nonleft

governments• In commodity exporters and importers2

LATAM IS THE MOST UNEQUAL REGION IN THE WORLD

Gini Coefficient by Region (in %), 2004 (Ferreira and Ravallion, 2008)

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

3

4

Latin America: Declining income inequality by country: 2000-2011

(Annual Change of Gini in %)N

icar

agu

a

Bol

ivia

Ecu

ador

Arg

enti

na

El S

alva

dor

Mex

ico

Ven

ezu

ela

Bra

zil

Per

u

Dom

. Rep

.

Pan

ama

Chile

Cos

ta R

ica

Par

aguay

Uru

guay

Guat

emal

a

Hon

dura

s

LA

C-1

7

Chin

a

Sou

th A

fric

a

Ind

ia

US

A

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

-2.64

-2.05-1.99

-1.30-1.24-1.17-1.07-1.03-0.91-0.79-0.74-0.72-0.47-0.39

-0.20-0.10

0.61

-0.95

2.12

0.820.770.40

5

Decomposing the change in poverty in the 2000s: growth vs. redistribution

(Datt-Ravallion Decomp Method)

• Determinants:–Declining inequality of hourly labor income–Larger and more progressive transfers–Lower dependency ratios

6

7

Decomposing Decline in InequalityLabor (red); Transfers (Green);

Demog (Blue) (Azevedo et al. 2012)

Changes in returns to education: 2000-2010 (vis a vis incomplete primary or no education)

Determinants of declining inequality in hourly labor earnings

Decline in returns to post-secondary education (skill premium)•Supply•Demand• Pro-active Labor Policies• Lower quality of post-secondary education

9

Wage Premium: Supply (blue) vs Demand (demand)

Argentina, Brazil and Mexico

• Argentina: – High growth due to post-2002 recovery– Devaluation in early 2000s => increase in relative demand of low-

skilled workers – Very pro-active labor market policies

• Brazil: – Low growth during most of the period – Increase in relative supply of skilled workers– Increase in relative demand of low-skilled workers– Pro-active labor market policies

• Mexico: – low growth – Increase in relative supply of skilled workers– No pro-active labor market policies

11

How redistributive are Latin American governments?

• Decomposition of changes in inequality by income source show that transfers is, on average, the second most important proximate determinant of decline in overall inequality

• Benefit and tax incidence analysis for 12 countries

• www.commitmentoequity.org

12

13

Commitment to Equity (CEQ), joint project of Tulane University and Inter-American Dialogue. www.commitmentoequity.org

14

Size of States(Primary and Social Spending as %

of GDP)

15

Fiscal Policy and Inequality Gini Coefficient by Income Concept

Market Income

Net Market Income

Disposable Income

Post-Fiscal Income

Final Income

0.39

0.41

0.43

0.45

0.47

0.49

0.51

0.53

0.55

0.57

0.59

Series1

Bolivia

Brazil

Chile

Colombia

Costa Rica

Guatemala

Mexico

Paraguay

Peru

Uruguay

16

Fiscal Policy and Inequality (Gini before and after direct taxes and cash

transfers 2009 or 2010)

Market Income After Direct Taxes After Direct Taxes&Transf0.45

0.47

0.49

0.51

0.53

0.55

0.57

BoliviaBrazilChileColombiaCosta RicaGuatemalaMexicoParaguayPeruUruguay

17

Inequality Reduction by Direct Taxes and Transfers: Brazil, Europe and US

Bra

zil

Gre

ece

Unit

ed S

tate

s

Italy

Port

ugal

Spain

Neth

erl

ands

France

Aust

ria

Germ

any

Sw

eden

Luxe

mbourg

Belg

ium

UK

Finla

nd

Denm

ark

Irela

nd

-0.18-0.16-0.14-0.12-0.1

-0.08-0.06-0.04-0.02

0

Change between Market and Disposable Income Ginis

Source: Higgins et al. (2013) for Brazil and US; Immervoll et al. (2009) for Europe

18

Cash Transfers and Poverty

• Cash transfers reduce extreme poverty by more than 60 percent in Uruguay and Argentina…

….but only by 7 percent in Peru, which spends too little on cash transfers to achieve much poverty reduction

19

Headcount: Before and After Cash Transfers

20

Poverty after Consumption Taxes(Headcount with US$2.50ppp/day)

Market Income

Net Market Income

Disposable Income

Post-Fiscal Income

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

Brazil (2009)

Mexico (2010)

Peru (2009)

21

22

Mexico: Social SpendingInequality Reduction 1996 and 2010

Net Market Income

Disposable Income

Final Income0.42

0.44

0.46

0.48

0.5

0.52

0.54

0.52

0.52

0.490.50

0.49

0.45

19962010G

ini

23

Mexico still less redistributive than peers

24

Thank you!