Nora Lustig
Tulane University
November 17, 2010

During the last decade, income inequality declined in most Latin American countries. Two main causes have been identified: a reduction in the skill premium and an increase in government transfers. (Lopez-Calva, Luis F. and Nora Lustig, Declining Inequality in Latin America: A Decade of Progress? Brookings Institution Press and UNDP, 2010.)

Income inequality declined throughout Latin America (LA) in the past decade while it has been growing in China, India and South Africa.   Given that LA is the most unequal region in the world and that during the 1980s and 1990s inequality increased, this is great news. The decline of inequality in LA has been pervasive: of the seventeen countries for which comparable data is available, inequality fell in twelve¹ (Figure 1). The average decline for the twelve countries was 1.1 percent a year between 2000 and 2007. Inequality declined in countries which grew fast (Chile and Peru) and countries whose growth was modest (Brazil and Mexico); in countries with high inequality (Brazil) and in countries with comparatively low inequality (Argentina); and, in countries governed by the left (Argentina, Bolivia, Brazil and Chile) and in countries governed by non-leftist regimes (Mexico and Peru).   

Figure 1. Change in Gini Coefficient by Country: circa 2000-2006; in percent

_{Source: Lopez-Calva and Lustig, (2010) op cit.
Note: For definitions see footnotes 1,2,3,4}

There appear to be two leading factors that account for the decline in inequality: the narrowing of the earnings gap between skilled and low-skilled workers (figure 2) and the increase of government transfers to the poor.² Educational upgrading (an increase in average years of schooling and a decline in years of schooling inequality) contributed to the narrowing of the earnings gap and democratization to the more equitable use of public resources.

Figure 2. Returns to Education: Argentina, Brazil, Mexico and Peru

Coefficients of primary and secondary over omitted variable (incomplete primary or without education) for total working men

_{Source: Lopez-Calva and Lustig,(2010) op cit.
Note: For definitions see footnotes 5,6,7,8}

Enlightened States? Increased Coverage of Secondary Education and Pro-poor Transfers

The decrease in the earnings gap between skilled and unskilled labor appears to be the result of the combination of supply and demand factors which tilted returns towards the low-skilled. First, the expansion of basic education during the last couple of decades substantially reduced the share of people with primary and less than primary schooling in the labor force (Figure 3).³ Second, the one-time unequalizing effect of skill-biased technical change in the 1990s (associated with the trade and investment liberalization) petered out. In the race between skill-biased technical change and educational upgrading, in the past ten years the latter has taken the lead.⁴

Figure 3. Composition of Adult Population by Educational Level: Argentina, Brazil, Mexico and Peru

_{Source: Source: Lopez-Calva and Lustig, (2010) op cit.
Note: For definitions see footnotes 9,10.}

The equalizing contribution of government transfers seems to be associated with the implementation or expansion of large-scale conditional cash transfer programs such as Brazil’s Bolsa Familia, Mexico’s Oportunidades as well as Argentina’s Jefes y Jefas de Hogar, ⁵ and with in-kind transfers in Peru.⁶ James Robinson⁷ argues that democratization was an important factor in fostering more inclusive patterns of government spending.

Did ‘Left’ Make a Difference?

Although inequality declined in countries governed by leftist and non-leftist regimes, has there been a difference between the two? Based on the descriptive analysis⁸ presented in Lustig (2009), leftist governments seem to have greater success in reducing poverty and inequality than governments of other political orientations.⁹ In fact, left populist governments appear to have reduced inequality faster than the social democratic left regimes (see Table 1 for definitions).¹⁰

^{Source: Lopez-Calva and Lustig, (2010) op cit.}

However, using regression analysis the results are reversed.  Controlling for other factors and introducing fixed effects, the results by Lustig and McLeod (2009)¹¹ (for a panel of 17 countries with adequate data for the period 1988 to 2006) suggest political regimes do matter for inequality outcome.  But the results for populist and social democratic regimes are quite different. The inequality-reducing impact of public spending in the populist regimes of Argentina, Bolivia, and Venezuela vanishes as the coefficient becomes statistically insignificant when one controls for unobserved effects and the commodity price boom (2002-2008). Historically, Argentina and Venezuela had lower levels of inequality than other Latin American countries, so a return to “normal” levels of inequality also helps explain part of the sharp post-2003 fall in inequality in both countries (as measured by the Gini coefficient).  In contrast, even controlling for the commodity price boom, social democratic regimes (Brazil, Chile and Uruguay) were more effective at reducing inequality.

Will the Equalizing Impetus Continue?

The trend of declining inequality is unlikely to continue unless the quality of education in public schools is vastly improved and access to tertiary education is expanded. The upgrading of skills of lower income groups will sooner or later face the “access-to-tertiary education” barrier—mainly due to the low quality education that the poor receive in basic and secondary levels-- and the decline in inequality is not likely to continue when that barrier gets hit. Despite the progress in making public policy more pro-poor, a large share of government spending continues to be either neutral or regressive, and the collection of taxes on personal income and wealth is very low. Making public spending and taxes more progressive and improving the quality of public services for the poor—especially in education-- are key to continue on the path towards more equitable societies.¹²

'This article first appeared on www.VoxEU.org. Reproduced with permission'.

Questions:

1. Which other factors may explain the decline in inequality? For example, what role did active labor market policies and a reduction in gender and ethnic discrimination play?

2. What happened in countries where inequality increased (Costa Rica, Honduras and Uruguay)? Did the skill premium rise? Did educational upgrading stall?

3. Why did government transfers become more pro-poor? What was the role of democracy and leftist regimes?

4. Is the expansion of pro-poor transfers fiscally sustainable?

5. Is the decline in inequality likely to continue?

Notes:

1. Data for Argentina and Uruguay is for urban areas only. In Uruguay, urban areas covered by the survey represent 80 percent of total population and in Argentina 66 percent.
2. The average change in the Gini for each country is calculated as the percentage change between the end year and the initial year divided by the number of years; the average for the total is the simple average of the changes by country (12 countries in which inequality fell).
3. The years used to estimate the percentage change are: Argentina (2006- 2000), Bolivia (2007- 2000), Brazil (2006- 2001), Chile (2006- 2000), Costa Rica (2007- 2000), Dominican Republic (2007- 2000), Ecuador (2007- 2003), El Salvador (2005- 2000), Guatemala (2006- 2000), Honduras (2005- 2001), Mexico (2006- 2000), Nicaragua (2005- 2001), Panama (2006- 2001), Paraguay (2007- 2002), Peru (2007- 2001), Uruguay (2007- 2000) and Venezuela (2006- 2000). 
4. Using the bootstrap method, with a 95 percent significance level, the changes were not found to be statistically significant for the following countries: Guatemala, Nicaragua y Venezuela (are represented horizontal lines in bars in the figure).
5. Ratios for returns to education were calculated from educational dummies coefficients of Mincer equations (using wages from main occupation for men only). Variables of education level (college, secondary and primary), potential experience and geographic regions were included. Omitted variable was no schooling or incomplete primary. Remunerations for men are for all workers including wage earners, self employers and employers.
6. Population considered for the age group of 25 years to 55 years.
7. Data for Argentina is for urban areas only. Urban areas covered by the survey represent 66 percent of total population.
8. Surveys before 1991 covered Gran Buenos Aires, surveys from 1992-1997 covered only 15 cities, and surveys from 1998-2006 covered 28 cities.
9. Skill groups formed by levels of formal education. Educational levels correspond to completed primary, lower and upper secondary, and tertiary. In Argentina: complete primary is achieved at 7 years, complete secondary at 12 years and tertiary at 15 or more years of formal education. Incomplete primary includes 6 or less year of education and no education. In Brazil: complete primary is achieved at 4 years, complete secondary at 11 years and tertiary at 15 or more years of formal education. Incomplete primary includes 3 or less year of education and no education. In Mexico: complete primary is achieved at 6 years, complete lower secondary at 9 years, complete upper secondary at 12 years and tertiary at 15 or more years of formal education. Incomplete primary includes 5 or less years of education and no schooling. In Peru: complete primary is achieved at 5 years, complete secondary at 11 years and tertiary at 14 or more years of formal education. Incomplete primary includes 4 or less years of education and no schooling. For 1997 completed secondary is achieved at 10 years.
10. Shares were calculated for adults only (for the age group of 25 years to 65 years).

1. All the declines except for Venezuela were statistically significant.

2 Lopez-Calva, Luis F. and Nora Lustig (2010) Declining Inequality in Latin America: A Decade of Progress? Brookings Institution Press and UNDP.

3 Basic education includes grades 1–9 in Argentina and Mexico; 1–8 in Brazil; and 1–11 in Peru. The number of grades includes what countries call basic primary and secondary education.

4 Tinbergen (1975) was among the first to use this expression and, more recently, it was the central theme of Goldin and Katz’s illuminating analysis of the United States (Goldin and Katz 2008). (Tinbergen, Jan. 1975. Income Distribution: Analyses and Policies. Amsterdam: North- Holland Publishing Co. and Goldin, Claudia, and Lawrence Katz (2008) The Race between Education and Technology. Belknap Press of Harvard University Press.)

6 Bolsa Familia and Progresa/Oportunidades are briefly described in Chapters 5 and 6 of Lopez-Calva and Lustig (eds.), op. cit., respectively. Also, see Fiszbein, Ariel, and Norbert Schady with Francisco H. G. Ferreira,Margaret Grosh, Nial Kelleher,Pedro Olinto, and Emmanuel Skoufias. 2009. Conditional Cash Transfers: Reducing Present and Future Poverty. Policy Research Report. Washington: World Bank.

7 Lopez-Calva and Lustig , op. cit.,Chapter 3.

8 Lustig, Nora (2009) ‘Poverty, Inequality, and the New Left in Latin America.’ Washington: Woodrow Wilson International Center for Scholars (July).

9 See also Cornia, Giovanni Andrea (2010) “Income Distribution under Latin America’s New Left Regimes”, Journal of Human Development and Capabilities, Vol. 11, #1, February.

10 Arnson, Cynthia with José Raúl Perales (2007) The ‘New Left’ and Democratic Governance in Latin America .Washington, D.C.: Woodrow Wilson International Center for Scholars, August.  www.wilsoncenter.org/topics/pubs/NewLeftDemocraticGovernance.pdf.

11 See Lustig, Nora, and Darryl McLeod. 2009. “Are Latin America’s New Left Regimes Reducing Inequality Faster? Addendum to Nora Lustig, ‘Poverty, Inequality, and the New Left in Latin America.’” Washington: Woodrow Wilson International Center for Scholars (July). http://www.wilsoncenter.org/topics/pubs/LUSTIG&MCLEOD_INEQ&LEFT_JUL%2027_09.pdf

12 These and other recommendations to break the intergenerational transmission of poverty can be found in UNDP’s first Human Development Report for the region: UNDP (2010) Actuar sobre el futuro: romper la transmision intergeneracional de la desigualdad. http://www.idhalc-actuarsobreelfuturo.org/site/informe.php.