Global Interpersonal Inequality. What do we know? Miguel - - PowerPoint PPT Presentation

Global Interpersonal

• Inequality. What do we know?

Miguel Niño-Zarazúa, UNU-WIDER Laurence Roope, Oxford University Finn Tarp, UNU-WIDER

INTRODUCTION

Economics 101

 First: any competitive equilibrium is

Pareto efficient

 Second: under certain conditions, every

Pareto efficient allocation can be achieved as a competitive equilibrium

 “Under certain conditions” …..

The “mainstream” view

 Economic transactions mainly occur in

free and competitive environments

 Externalities and the political process  Efficiency issues separate from issues of

equity/inequality

WDR 2006

 The dichotomy between policies for

growth and policies specifically aimed at equity/inequality is false (emphasis added)

 The distribution of opportunities and

the growth process are jointly

determined (emphasis added)

A wider perspective

 The classical view  Many channels through which inequality

affects growth negatively (come back to)

 Equity/equality both as an end and as a

means

 No rejection of the competitive market

(and the need for incentives to work)

Turning to policy

 Choices have to be made  Focus on equity must not be an excuse

for poor economic policy

 But what is poor policy?

 Good and bad: not so easy

“Easy” policy choices

 Early childhood development  Access to affordable health care  Cost-effective land redistribution

Difficult policy choices

 What to do when trade-offs exists

– and there are many

 Is there too much “soft” talk?

“… growth … was de-emphasized in favor of fuzzy schemes like ` empowering the poor,’ which nobody knows how to implement or to evaluate afterwards” (Easterly)

 Agriculture vs social sectors (and a word

about the MDGs)

A WIDER VIEW

• The concern of inequality is a critical factor in the success
• f development strategies in developing countries
• Inequality affects a country’s potential of economic

growth, by impacting negatively on consumer demand, national savings and human capital formation

• Negative implications of high levels of inequality, in terms of

social cohesion, crime, conflict and political instability, governance, and social exclusion, are widely acknowledged

The concern of inequality

Growth, poverty and inequality closely related (Bourguignon’s iron triangle)

Growth Poverty rate Inequality

UNU-WIDER, Katajanokanlaituri 6 B FI-00160 Helsinki, Finland Tel +358-(0)9-6159911 Fax +358-(0)9-61599333

From Ravallion (2011)

Larger absolute poverty- income elasticities in countries with lower Ginis

6 . 1 % / % 25 . 3 % / % ≅ − = Δ Δ ≅ − = Δ Δ gini if Y P gini if Y P

HH HH HH HH

High inequality reduces the efficacy of economic growth to poverty reduction

The concern of inequality

• The report of the UN System Task Team (2012) to support the

preparation of the Post 2015 UN Development Agenda points out that inequality is a “key concern, not just from the perspective of a future in which a decent and secure wellbeing is a prerogative of all citizens, but sustained development itself is impeded by high

• inequalities. Hence, redressing these trends will be a major

challenge in the decades ahead”

• Despite this, there is no consensus regarding the direction of change in

global interpersonal inequality. The most recent and authoritative review

• n the issue (Anand and Segal, 2008) points out that “it is not possible

to reach a definitive conclusion regarding the direction of change in global inequality over the last three decades of the twentieth century”

MEASUREMENT and TRENDS

How to measure global interpersonal inequality?

`Concept one' measures inequality among countries, where countries are ranked according to their average per capita income, and every country receives an equal weight

• >`Concept two‘ measures inequality among all the individuals in the world and

assigns each person the average per capita income for his/her country (`between- country' inequality)

• >`Concept three' measures global interpersonal inequality, taking into account

the actual global distribution of income of all the citizens of the world. The Gini coefficient is the most common inequality measure. Theil L index (or Mean Logarithmic Deviation) belongs to the family of generalized entropy measures, and it is additively decomposable, with population share weights.

UNU-WIDER World Income and Inequality Database

• WIID is the longest and most comprehensive

database of income distributions

• Inequality trends within and across countries
• Observations for 156 existing countries + Good Quality Ginis

based on HH surveys and NOT National Accounts

 Mainly quality data – otherwise quality ranking  Deininger & Squire, LIS, Eurostat, UNICEF, CEDLAS  It provides information on the source (e.g. income or consumption), and quality of Ginis, fundamental for the study of global interpersonal

• inequality. Neither World Bank’s PovcalNet, CIA Factbook, UNDP
• ffer these features

http://www.wider.unu.edu/research/Database/

What are the recent trends in global interpersonal inequality?

0.000 0.200 0.400 0.600 0.800 1.000 1.200 1.400 1976 1985 1995 2008 Gini Theil L (MLD) Theil L within-country component Theil L between-country component

Global Interpersonal Inequality has fallen steadily between 1975 and 2008

• Ginis fell from 0.727 to 0.681
• Theil L idex (or MLD) fell from 1.314 to 0.981

Source: Niño-Zarazúa, Roope and Tarp (2013)

Counterfactual Scenario I

Inequality Measure 1975 2008 Gini 0.727 0.764 Theil L (MLD) 1.314 1.449 Theil L within-country component 0.254 0.272 Theil L between-country component 1.060 1.177

• We assumed that India’s and China’s populations grew at the same

rate as they actually did during 1975-2008, but remained with per capita incomes at the 1975 levels

• China and India were low-income countries in 1975. If their per capita

incomes had remained unchanged in a period that saw mean world incomes soaring, an increase in between-country inequality would have been expected

Source: Niño-Zarazúa, Roope and Tarp (2013)

Counterfactual Scenario II

• We consider the case where India and China had been able to grow

their per capita incomes at the same rates as they actually did over 1975-2005, WHILE maintaining the same quintile shares as in 1975

• The further fall in inequality would have been driven by the much

smaller level of within-country inequality in those countries

• The increases in domestic inequality in India and China have not been

good for global interpersonal inequality. Inequality Measure 1975 2008 Gini 0.727 0.662 Theil L (MLD) 1.314 0.872 Theil L between-country component 1.060 0.600 Theil L within-country component 0.254 0.272

Source: Niño-Zarazúa, Roope and Tarp (2013)

Poverty headcount ratio

(USD 1.25 per day)

Poverty is falling globally – but remains a huge challenge

• Since 1990: people living on less

than $1.25 has fallen in every region, including sub-Saharan Africa: – In 1990 ≈46% (or ≈2 billion people) were extremely poor – MDG target of cutting extreme poverty by half will be achieved by 2015 – Still: ≈1 billion people (≈14%) remain in extreme poverty – Fragile states (most of which are Africa) not on track to reach MDGs – Poverty problem in Africa remains very severe (both rate and absolute numbers)

% of people living on less than $1.25 USD (2005 PPP)

20 40 60 80 Developing Regions Northern Africa Sub-Saharan Africa Latin America and the Caribbean Eastern Asia (China only) Southern Asia Southern Asia excluding I ndia South-Eastern Asia Western Asia Oceania Caucasus and Central Asia

2008 1990

Poverty increasingly associated with middle- income countries (often with high levels of inequality)

People living on less than $1.25 USD a day (2005 PPP) 10 20 30 40 50 60 70 80 90 100 1990 2008 % of global poverty

Low-income Countries Middle- income Countries

20 40 60

South Asia Sub-Saharan Africa East Asia Latin America MENA

% of global poverty 2008 1990

Inequality remains a major challenge

Inequality measured by mean-log deviations of income

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

Gap between high- and low-income countries Gap between high- and upper-middle income countries

Income gap between country groupings Constant 000 US$ (2005 PPP)

1980 2010 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1981 1990 1999 2008

Latin America sub-Saharan Africa East Asia South Asia

Infant mortality rate

Life expectancy

Primary school enrolment, 1990-2010 (%)

1990 2010 Boys Girls Boys Girls Developing world 84 75 91 89 Sub-Saharan Africa 57 50 78 74 Latin America and the Caribbean 88 84 96 95 Eastern Asia 99 96 97 97 Southern Asia 83 66 94 91 South-Eastern Asia 94 91 95 96 Western Asia 87 79 94 89 Developed Regions 95 95 97 97

Prevalence of undernourishment

Percent of population with access to a safe water source

Percent of population with access to improved sanitation facilities

BUSINESS CYCLES, FISCAL POLICIES AND WITHIN-COUNTRY INEQUALITIES

Gini index before and after taxes and transfers

0.1 0.2 0.3 0.4 0.5 0.6

Before Tax After Tax

Political economy factors

• Fiscal policy does NOT work instantaneously
• Adequate timing in the introduction of fiscal policies is not

an easy task - political incentives often influence fiscal policy

• Public choice models indicate that legislators are prone to

spend money on programs that directly benefit their own constituents but are reluctant to raise taxes because they impose a visible cost on voters

• There is a political bias towards spending and budget

deficits, therefore, deficits tend to be more common than surpluses

Main sources of revenue in LICs

• VAT is the main source of government revenue in Low Income

Countries – about 4.5% of GDP vs. 1.5% from Personal Income Tax

1 2 3 4 5 6 7 8 9

Low Income Lower middle Income Upper middle Income Higher Income

VAT Personal Income Tax Corporate Income Tax Trade tax Regressive taxes are problematic for poverty reduction when progressive spending is limited due to poor targeting

Fiscal policy as an automatic stabilizer

• Automatic stabilizers increase the budget deficit

(or reduce the surplus) during recession times and increase the surplus (or reduce the deficit) during economic booms

• Unemployment compensation, cash transfers to

vulnerable households, progressive income tax, etc

• Evidence suggest that while fiscal policy in

industrialized countries follow more optimal smoothing rules, via countercyclical measures, fiscal policies in developing countries seems to be highly pro-cyclical.

• Two explanations for pro-cyclicality can be pointed
• ut:

1. Imperfect access to international credit markets during bad times Countries hit by an adverse shock lose access to international credit markets at the time when it is most needed 2. Inability of governments to generate sufficient surpluses during expansions that forces them to borrow less during recessions

Country Number of countries Standard Deviation Output Private consumption Industrial countries 20 2.18 2.85 G7 6 2.05 2.26 Developing countries 36 4.47 7.62 Latin America 17 4.54 7.41 Africa 11 4 8.46 All sample 56 3.65 5.92

NOTE: Output and private consumption more volatile in developing countries than industrialized countries Consumption volatility is critical as DC heavily rely on VAT

SOCIAL PROTECTION AS AN INSTRUME NT TO REDUCE WITHIN- COUNTRY INEQUALITIES

The Emergence of Social Protection

• A new paradigm in the fight against poverty and vulnerability
• Tax-financed (and/or aid-supported) policies that moved antipoverty approaches:

– From food-aid and subsidies to regular, reliable and predictable income transfers – Emerging consensus that eradicating poverty requires economic growth, basic service provision and social protection – A shift from poverty as a lack of income to poverty as a multidimensional phenomenon

• Over 30 developing countries have large scale social transfer programmes
• Pilot schemes being introduced in Kenya, Malawi, Ghana and Zambia; and at

implementation in Nigeria, Liberia, Uganda, and Tanzania

• More than 860 million people currently benefit from social protection,

making it the most important policy instrument against poverty at the present time

UNU-WIDER, Katajanokanlaituri 6 B FI-00160 Helsinki, Finland Tel +358-(0)9-6159911 Fax +358-(0)9-61599333

Social Protection: policy approaches against poverty

38

Programme title Country Type Number of households (in millions) Number of beneficiaries (in millions) Country classification 1/ Poverty focus 2/ National Rural Employment Guarantee Scheme India Income transfer plus 48.0 240.0 Lower middle income High Urban DiBao China Integrated antipoverty 22.0 110.0 Lower middle income High Program Bantuan Tunai, Bantuan Tunai Langsung Indonesia Pure income 19.1 95.5 Lower middle income High Bolsa Familia Brazil Income transfer plus 12.5 52.3 Upper middle income High Rural Dibao China Pure income 10.5 42.0 Lower middle income High Prêvidencia Social Rural Brazil Pure income 7.5 37.5 Upper middle income Categorical Indira Gandhi National Old Age Pension Scheme India Pure income 15.7 31.4 Lower middle income High Progresa-Oportunidades Mexico Income transfer plus 5.5 27.5 Upper middle income High ‘100 Days Employment Generation Scheme’ (EGP) Bangladesh Income transfer plus 3.0 15.0 Low income High Tekun (transfer in less developed regions for destitute households) China Pure income 6.6 10.7 Lower middle income High Beneficio de Prestaçao Continuada Brazil Pure income 2.4 10.0 Upper middle income High Expanded Senior Citizens Act of 2010 Philippines Pure Income 2.0 10.0 Lower middle income Categorical National Family Benefit Scheme India Pure income 2.0 10.0 Lower middle income High Old Age Pension South Africa Pure income 2.4 10.0 Upper middle income High Child Support Grant South Africa Pure income 1.9 9.5 Upper middle income High Subtotal for 15 largest programmes 161.0 711.4 Other 79 programmes 30.4 151.9 TOTAL Developing world 3/ 191.4 863.3

Wider functionings of Social Protection: automatic stabilizers

• In Indonesia, the Jaring Pengaman Sosial was launched

in 1998 to help poor households to mitigate the impact of the 1997-1998 Asian financial crisis

• In Argentina, Plan Jefes y Jefas de Hogar Desocupados

was introduced in the aftermath of the 2001-2002 Argentinean peso crisis to support unemployed parents with children

• In the Aftermath of the 2008 financial crisis
• South Africa extended the Child Support Grant to cover children up

to age 17, from the previous age limit of 15

• In Brazil, the scope of Bolsa Familia was expanded to include an

additional 1.3 million households

• In Mexico, Oportunidades was expanded in 2010 to cover an

additional 600,000 households mostly in urban areas

WHAT ARE THE COSTS AND SPOURCES OF FINANCE OF FINANCE FOR SOCIAL PROTECTION IN DEVELOPING COUNTRIES

Old age pension as % GDP Child benefit as % GDP Unemployme nt scheme as % GDP Transfer package as % GDP Net ODA/ as % GDP Transfer package as % net ODA Guinea 0,6 1,5 0,3 2,8 7,5 36,9 Burkina Faso 1,1 2,8 0,6 5,2 12,5 41,3 Ethiopia 1,0 2,8 0,6 5,1 12,6 40,3 Tanzania 1,1 3,1 0,6 5,5 11,4 48,5 Senegal 1,1 2,0 0,5 4,1 8,0 51,7 Kenya 0,9 3,0 0,6 5,2 3,9 131,3 Cameroon 0,8 1,8 0,4 3,5 2,2 154,0

The Cost of Social Protection

ILO (2008)

MICs spend less than 1% of GDP on Social Transfers LICs African countries: 3-5% GDP

Sources to Finance Social Protection

• Tax revenues as a share of GDP have grown modestly in

the sub-Saharan region; from 13.5% in the 1980s to 18% in the 2000s

• Constraints associated with:
• The structure of the economy – the rural subsistence economy

and the informal sector are difficult to tax

• Administrative capacity of revenue authorities
• Political economy factors
• What are the options for financing social protection in

developing countries?

10 20 30 40 50 60 70 80 90 100 South Africa Botswana Cote d'Ivoire Madagascar Mozambique Burundi Tanzania Cameroon Burkina Faso Central African Republic Ethiopia Gambia Ghana Guinea Guinea-Bissau Lesotho Malawi Mali Niger Nigeria Rwanda Senegal Sierra Leone Swaziland Uganda Zambia

What about redistribution?

Source: Niño-Zarazúa et al (2012)

Marginal Tax Rate on the ‘rich’ needed to eliminate the normalised poverty gap

What about resource mobilisation?

• Revenues from Natural resources. Potential for Angola, Botswana,

Cameroon, Chad, Côte d'Ivoire, Gabon, Equatorial Guinea, Ghana Namibia, Nigeria, Republic of Congo, Sierra Leone, Togo, Uganda and Zambia – Immediate challenges in terms of efficiency and equity

• Renegotiation of contracts with companies involved in the exploitation of

natural resources: Bolivia’s Bono Juancito Pinto and Programa (PAN)

• Subsidies in developing countries are very regressive - amounted around

$54 billion in 2010, roughly, 1/3 of ODA (170.6 billion USD)

• Rises in VAT earmarked for expenditures on Social Protection. VAT on

cigarettes/alcohol could rise revenues in India and Vietnam equivalent to 0.3 and 0.4 % of GDP, respectively.

• Anti tax-evasion policies – Chile was able to reduce VAT evasion from

20% in the 1990s to less than 10% in 2009

CONCLUDING REMARKS

• Inequality remains a major challenge when analysing trends in within-

country inequalities

• Concerns about the negative implications of inequality, in terms of social

cohesion, crime, conflict and political instability

• Recent encouraging trends in Latin America, where inequality has been

falling due to:

– First: a decline in the premium to skills after an educational upgrading – Second, the introduction of progressive social policies, notably social protection – Political economy factors that determine in the choice of fiscal policy

• Recent although scant evidence from LA suggests that social transfers

have contributed to the reduction in inequality in the order of 15% to 20%

• Potential sources to finance social protection vary from country to
• country. However, the expansion of social protection in developing

countries also constrained by political economy factors