NS4540 Winter Term 2019 Latin American Poverty Income Inequality

1. NS4540Winter Term 2019Latin American Poverty Income Inequality

2. Overview I • Poverty rates in Latin America have come down rapidly in recent years. • 1990 – 48.4% Latin Americans living in poverty • 2012 -- 28.2% for a decline of 20% • Clearly a connection with • The late 19th century structural reforms, and • High sustained growth rates in increasingly outward-oriented economies • Still pockets of poverty in the region • One quarter of the region’s 160 million still live in poverty.

3. Overview II • Poverty eradication should bring a growth bonus in the form of a virtuous circle. • As individuals and households pull themselves from poverty they become part of a middle class delivering higher labor productivity • Productivity improvements increase purchasing power and demand for goods and services • Improved demand and increases in output pull more people out of poverty

4. Overview III • Main questions surrounding poverty • Who is poor in Latin America? • Is poverty endemic to lack of education and opportunities? • Is poverty identified with the • Informally employed? • Self employed? • Young? • Women heads of households? • Indigenous populations and African Americans?

5. Recent Trends and Diversity I • Currently Latin America’s poverty appears to be declining at a slower rate than that occurring elsewhere in the developing world • There are considerable differences in poverty rates in Latin America • Brazil and Mexico have over 50% of Latin America’s poor • Mexico alone has 53 million poor or 40% of the entire Mexican population.

6. Recent Trends and Diversity II • The World Bank classifies only two Latin American countries as poor • Nicaragua • Haiti • The rest are classified as middle-income countries • Poverty as a percentage of the population is highest in the Central American countries with the exception of Costa Rica • Honduras has the highest poverty rate at 67.4% • Chile the lowest at 7.8%

7. Recent Trends and Diversity III • Income inequality data show a declining trend • Might be attributed to • Catch-up growth following the lost decade and • Structural reforms at the turn of the century • As with poverty inequalities persist. • Latin America rivals Africa in terms of high income disparities (Gini coefficient measure). • Great country diversity patterns in Latin America • Depending on region the top 20% high income households in Latin America have incomes that are 7% to 25% higher than their lower income counterparts

8. Recent Trends and Diversity IV • Honduras has the largest proportion of poor households as a % of the population. • Case of Honduras suggests poverty and income inequality in Latin America take place concurrently • May be the case for the whole region • Implication: • Higher growth accompanied by more aggressive social policies may be required for eradicating poverty and • Greater access to social services by the middle class is needed to avoid social unrest and potential upsurges of populism

9. Recent Trends and Diversity V • Poverty can be proxied by Gini coefficients and quintile indices • A better measure may be proxies of the middle class which • Now accounts for up to 30% of the region’s population and • Is rising • Upward trend in middle class associated with • Better governance • Deeper credit markets and • More spending on health and education. • Democratic participation • Lower corruption

10. Recent Trends and Diversity VI • Recent trends in Inequality • The average Gini coefficient for the region is approximately 0.50 which makes Latin America as one of the most unequal regions in the world. • However the World Bank shows that relative to an average Gini coefficient of about 0.54 in the late 1990s, the average Gini coefficient in 2011 fell to approximately 0.48 • Except for Honduras where income inequalities increased, income inequalities decreased in the remaining sixteen Latin American countries. • Nicaragua shows the largest decline in income disparities in first decade of the 21st century, and Guatemala had the smallest.

11. Recent Trends and Diversity VII • Together the poor and the middle-class account for about 60% of Latin America • Remainder (roughly 40% is classified as vulnerable) • Countries with a large middle class • Chile in South America • Costa Rica in Central America • Face dual challenge of meeting demands of • a vocal middle class on one hand, and • Those of the poor and vulnerable who now aspire to become part of the middle class • A similar problem is faced by most other emerging regions. • Policy responses have been difficult however.

12. Poverty: Definition and Consequences I • Considerable disagreement on how poverty should be defined • Ongoing debates often lead to extremely vague definitions • Poverty is a multidimensional phenomenon • Closely associated with the rural sector and exacerbated by high rural-urban migration creating pockets or urban and semi-urban poverty

13. Poverty: Definition and Consequences II • Measurement • The extent and acuteness of poverty depends on • How it is defined and • How it is measured. • Two basic approaches to measuring poverty • Direct and • Indirect • The direct approach attempts to assess the status of the poor depending on how close individuals are to a prespecified set of “standards” set by experts • The indirect approach classified as poor those who do not have enough income to meet their basic needs

14. Poverty: Definition and Consequences III • In Latin America both poverty measures have been used • The direct method known as the unsatisfied basic needs (UBN) method and • The indirect method is the cost of basic needs (CBN) method • Both the UBN and the CBN methods have been guiding Latin America’s antipoverty policies for decades.

15. Poverty: Definition and Consequences IV • The UBN used to be the most widespread for measuring poverty in Latin America – up to the 1980s • Lost ground during the 1990s because it relies too heavily on subjective metrics • Complicates the debate on the ultimate goal of meeting some kind of consensus for policy • Should literacy be prioritized over something like crowding and if so why? • The UBN is based on the idea of “need” • Underlying promise is that what matters most for welfare is whether as set of basic human needs or standards is being met.

16. Poverty: Definition and Consequences V • Measures that are associated with need include • Crowding, • Literacy • Access to water and sanitation • Health services, • Electricity and • Shelter • Problems: • Often get confusing results – good in some areas poor in others • Difficult to decide on indicators • Where thresholds are set – one may classify household as poor another, extremely poor

17. Poverty: Definition and Consequences VI • Advantage of UBN • Enables mapping of poverty with parameters of interest • Guides local governments in their attempts • At prioritizing targets and • Estimating consequential budgets to attain those targets

18. Poverty: Definition and Consequences VII • Cost of Basic Needs Approach (CBN) • CBN is most widespread technique for assessing extent of poverty in Latin America • Relative to UBN, CBN is an indirect method because it does not focus on actual consumption and status • Instead it • Uses a bundle of goods considered to be essential and • Estimates its cost to obtain a region-specific income threshold called a poverty line • Bundle of goods is • Chosen by poverty experts and • Based on reginal consumption patterns

19. Poverty: Definition and Consequences VIII • The poverty line is constructed in two stages: • First a food component is estimated – nutritional requirements for meeting minimum health standards • The food bundle‘s cost is estimated based on prevailing market prices • Second, a non-food bundle is estimated • Calculations require specification of income thresholds to acquire nonfood goals and services • Once costs of the food and nonfood components have been estimated the income required to acquire a minimum threshold of combined commodities creates a poverty line

20. Poverty: Definition and Consequences IX • Using this method the World Bank estimates the income threshold for Latin America is $4 per day • Those living below this threshold are considered extremely poor. • Those within $4-$10 are considered vulnerable in that they risk falling back below the $4 mark with a probability of 10%. • Within $10 - $50 range individuals are classified as middle class • Greatest advantage of CBN is its simplicity • Also helps access the success of social policies through time

21. Poverty: Definition and Consequences X • Difficulties with the CBN • First, poverty lines vary across regions and over time • Making comparisons difficult and extremely imprecise. • Second, method incorporates value judgments. • Example the choice of food items that meet nutritional standards and their quantities and prices • Third, the nonfood bundle is an issue • What it should contain and how it should be priced is debated. • Fourth, the poverty lines derived from the CBN method often do not factor in cross-regional differentials with regard to public procurement of social goods.

22. Main Determinants of Poverty I • Poverty obviously linked to income. • Recent economic analysis suggests there are fundamental and proximate causes of poverty • Fundamental causes affect systematically the income dimension of poverty indirectly including • Culture • Ethnic composition, • Rule of law • Geography and climate

23. Main Determinants of Poverty II • Proximate causes of poverty those that effect income directly: • Low levels of human and physical capital • Technology, efficiency, and, more generally • Productivity and labor force participation. • Not much can be done to fight against the fundamental causes of poverty such as adverse climate or geography • However lot can be done to fight the proximate causes of poverty

24. Main Determinants of Poverty III • Education • Most analysis indicates that education is positively correlated with earnings • As income increases, the probability of being poor decreases • This turns out to be statistically significant in most studies • Of particular importance to contemporary Latin American economies are the economic returns for higher education – the educational premium • In one study a household head with higher educational attainment delivers an income which is 97% higher than that of a household head with primary education only

25. Main Determinants of Poverty IV • Other studies suggest returns to secondary education has fallen relatively to primary education as the supply of secondary graduates has risen sharply • Also evidence that the educational premium for tertiary education to secondary education has increased • Unemployment and Informality • Education also linked to formal employment • Unemployed or informally employed workers face a higher risk of being poor • Slow growth seems to be positively and significantly correlated with unemployment and poverty • However employment regulations going back to the protectionist 1940-80 period are still inhibiting employment creation today

26. Main Determinants of Poverty V • Relationship between informality and poverty has been established for years • Formally employed workers also have considerably less income volatility • Why do workers join the informal workforce in the first place. • First, formal sector employment requires skilled labor • Second, unskilled labor is often paid relatively high and rigid minimum wages when compared to other regions such as Asia • Firms therefore choose to contract labor offshore and/or pay low wages to imported labor from neighboring regions

27. Main Determinants of Poverty VI • Third – there is inadequate social security • IDB – up to 43% of salaried work force is not covered by national pension systems – may discourage workers from joining formal sector • Fourth – costs of setting up formal businesses are too high in comparison to those faced by informal enterprises • Excessive bureaucracy and taxes are contributing factors. • Suggests there are advantages to informality • First, unskilled labor often finds setting up an informal business is less costly

28. Main Determinants of Poverty VII • Second, relative to men women have fewer formal skills and bear a disproportionately high share of household chores • Women in Latin America often find it attractive to engage in informal sector activates while staying at home • Social norms are difficult to change but government failures with regard to • Limited access to higher education and skill acquisition • Taxation • Social security • Pensions, and • Day care center provision • Are largely responsible for informality

29. Main Determinants of Poverty VIII • Type of Employment • Informal sector workers lacking skills are often self-employed • Incomes of self-employed are considerably lower than of individuals who are either formally employed or employers • Self-employment and informal sector employment are related • Both types more prone to experiencing poverty compared to the formally employed • Most likely because of their lack of physical or human capital

30. Main Determinants of Poverty IX • Age • Population of Latin America is still young compared to other emerging market regions, particularly those in Eastern Europe • Young individuals more likely to be poor because of lack of • Skills • Experience or • Being part of the informally employed sector • Unemployment rates in Latin America are considerably higher for younger people relative to elder • Holds true for both men and women.

31. Main Determinants of Poverty X • Gender • Latin America mirrors well-defined problem worldwide • Relative to men, women are generally poorer and more vulnerable • Might be explained if Latin America was rural where physical labor was important, but now mostly urban • Have to conclude income differences mainly due to discrimination. • Gender considerations should be factored in when designing policies to eradicate poverty in Latin America • To some extent this is the case

32. Main Determinants of Poverty XI • Ongoing antipoverty campaigns prioritize women in at least two dimensions. • Conditional cash transfers, in general, are handed to women heads of households • Some of these transfers include microfinancing in which women are prioritized • Eight out of ten beneficiaries of microfinance programs are women

33. Main Determinants of Poverty XII • Inflation • Urban poverty is exacerbated by inflation, often caused by extremely high budget deficits and exchange rate misalignments. • Unlike the minority of wealthy Latin Americans, the poor are less able to hedge against inflation • Ethnicity and Racial Discrimination • According to World Bank estimates (2012) about 13% of Latin Americans are indigenous. Most of the indigenous population is concentrated in • Mexico • Peru • Guatemala, and • Ecuador

34. Main Determinants of Poverty XIII • Nearly 50% of the population in Brazil are mestizos, or Afro-Latin Americans • These populations often live in rural areas where the incidence of poverty is exceedingly high to • Drastic changes in weather conditions in poorly constructed dwellings and • Lack of access to basic health services, drinking water, sanitation and • Inadequate school facilities • Empirical estimates suggest racially discriminated ethnic groups are more prone to experiencing poverty.

35. Main Determinants of Poverty XIV • Labor Markets and Poverty • In Latin America, labor market legislation has often been used as a weapon against urban poverty • Design and consequences of legislative amendments have delivered mixed results • Minimum Wage • Most contemporary Latin American economies have adjusted minimum wages or wage floors. • Objective is to protect blue collar incomes from falling below income-based poverty threshold's

36. Main Determinants of Poverty XV • These policies have been either ineffective or unenforceable in practice. • Reason is simple • Minimum wage policies may protect the income of those workers who are already formally employed, but not those of the majority whose incomes are derived from informal sector employment or self employment • In industrialized countries there is usually a positive association between minimum wages and unemployment • Often not the case in Latin America – fired workers drift into informal economy

37. Main Determinants of Poverty XVI • Where minimum wage laws are enforced, wage floors should be low relative to mean wages • Means informally employed and unemployed can more easily access formal sector jobs • Firing Costs • Severance payments are relatively high in Latin America due to lack of unemployment insurance • High firing costs discourage firms from offering formal sector jobs,

38. Main Determinants of Poverty XVII • Emergency Job Creation Against Poverty • Widespread policy to fight poverty in Latin America has been the creation of emergency employment programs. • These programs provide subsistence to the unemployed poor, particularly during economic downturns. • However these jobs often • provide low-productivity jobs and • carry the risk of increasing dependency • Emergency employment is a short-term transitory government aid to the poor, with no lasting effect on their ability to generate income.

39. Conditional Cash Transfers I • In recent years both Brazil and Mexico have had a fall in income inequality (as measured by the Gini coefficient). • Reasons for this decline: • First, relative to the 1980- 1999 period, economic growth in these two economies has been multiplied by a factor of three • Second, higher growth in these two regions has been accompanied by a growing middle class • Third, the wage gap between the skilled and unskilled workers (the skill premium) has narrowed • Fourth, conditional and unconditional cash transfers have had an impact on poverty reduction and the decline in income inequalities.

40. Mexico’s Progresa Program I • The conditional cash transfer Progresa/Oportunidades/Prospera (name changes with administration) program in Mexico is the pioneering antipoverty campaign project in Latin America • Launched as Progresa during the Zedillo administration from 1994-2000 • The main center and center-right political parties, PRI, PAN agree the program is an effective poverty reduction tool • Program trials conducted before full implementation • Found program had a positive impact on primary and post-primary school enrollment • Could also have an impact on secondary school attainment.

41. Mexico’s Progresa Program II • The program is biased in favor of women. • Monetary transfers are handed out to women heads of households • Transfers increase with years of school attained • These transfers are higher for girls than for boys • Approach is consistent with econometric studies that show increased years of education of women heads of households has a positive effect on household income and investments in human capital.

42. Mexico’s Progresa Program III • As of 2000 the Progresa program has included subsidies for microfinance programs, the vast majority of which target women. • Recent evaluations of microfinance programs in Mexico show microcredit has a positive impact on investment and human capital • The overall effect of an expanded version of Progresa program on income inequalities has been to lower the Gini coefficient as much as 18%

43. Brazil Bolsa Familia I • Brazilian conditional cash transfer program Bolsa Familia (BF) is one of the largest in the world. • Program launched in 2004 and has grown rapidly since. • By 2008 BF covered around 11 million Brazilian households • Unlike the Mexican approach • BF takes form of cash transfers which are higher for lower income families with a large number of dependent children and elderly members • Unlike Progressa, BF does not target health and education directly • Instead targets investments in human capital indirectly • Families receive cash transfers per child, thereby lowering the cost of investments in children’s human capital accumulation.

44. Brazil Bolsa Familia II • In 2007, the Brazilian government decided to specifically target children via lowering the opportunity cost of attending school • Introduced a program aimed at stopping child labor that later became part of the BF program • Program involves cash transfers to families with children aged 7 to 15 • Additional transfers to low-income families with children have been added • School supplies • Gas • Food transfers

45. Brazil Bolsa Familia III • The combined effect of the BF program on income inequalities is difficult to assess. • Studies suggest indirect cash transfers to children’s investments in health and education via BF has had a minor positive impact on the recent decline in Brazilian income inequalities

46. Chile Ethical Family Income I • Chile’s IngresoEtico Familiar (IEF) started in 2011 • Program consists of both conditional and unconditional cash transfers to the poorest quintiles of the population. • IEF • Attempts to facilitate enhanced access to income generation opportunities for disadvantaged households. • Aims to empower poor families and • Include working members socially in the pool of the formal sector labor force. • The IEF program grants bonuses and conditional transfers for • Households living in extreme poverty and • An employment subsidy for women

47. Chile Ethical Family Income II • IEF organizes cash transfers under three pillars • Dignity, duties and achievements • Dignity pillar includes unconditional transfers that aim to provide immediate relief to families in extreme poverty • Duties pillar comprises conditional transfers • Conditionality implies that • Children under 6 years of age have compulsory health checkups and • Children between 6 and 18 years of age have at least 85% monthly school-related attendance. • Transfers under the pillars of dignity and duties have a maximum duration of twenty four months.

48. Chile Ethical Family Income III • The achievement pillar is • Directed to the most vulnerable 30% of the population, and • Provides incentives by giving bonuses to households in which women between 25 and 59 successfully find employment • Other bonuses given to the best-performing 30% of students from fifth grade onward. • In comparison to Mexican and Brazilian antipoverty programs, feature of IEF aims at providing incentives for families to pull themselves out of poverty on their own – and remain out • Support in programs designed to avoid permanent government aid dependency

49. Chile Ethical Family Income IV • Idea of IEF is appealing • Deliver incentives to improve living conditions of all family members -- adults and children, not just children and elderly as in Mexican and Brazilian programs • Targets households with incentives to all household members

50. Conclusions I • Recent declining trends in poverty likely linked to higher rates of economic growth in the 21st century • Growth acceleration in the 21st century ha been unequal, and poverty reduction reflects uneven growth • Rough approximations show that over 50% of households considered poor are concentrated in Brazil and Mexico • Bulk of Latin America’s poor live in urban and semi-urban areas • Poor in such areas include • Unemployed or informally employed • The young • Women • Afro-Latin Americans and • Ethnic groups