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The Inequality Battle in Latin America – Part 2
April 14, 2014 | Contribution by FRANCOIS BOURGUIGNON

Francois Bourguignon is a Professor of Economics (and former Director) at the Paris School of Economics and the former World Bank Chief Economist and Senior Vice-President from 2003-2007.

For Francois Bourguignon — Professor of Economics (and former Director) at the Paris School of Economics and World Bank Chief Economist and Senior Vice-President from 2003-2007 — the fascination with how to reduce poverty and inequality continues unabated. Already the recipient of many honors in economics, in fall 2013 he received LACEA's Juan Luis Londoño Prize for high quality and policy relevant research on socioeconomic issues relevant to Latin America — which still is the most unequal region in the world.


Railroad slums, Buenos Aires.
Photo credit: Flickr @jazpdx (https://www.flickr.com/photos/jazpdx/)


In Part 2 of this series, Bourguignon tells the JKP that there are a number of steps that Latin America could take to ensure that the region becomes more egalitarian. First, policy makers need a decent income tax system — with greater progressivity and a higher income tax, which is typically quite low — and to ensure that people can't evade the tax. This will help bring in more revenue from the rich, although at this point the region lacks good data on the income of the top 1 percent, which he considers a major problem. Second, armed with more receipts from a much more progressive income tax, policy makers could help those at the bottom of the income distribution by boosting educational opportunities (including at the preschool level) and improving access to healthcare and finance.​

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The Inequality Battle in Latin America – Part 1
April 10, 2014 | Contribution by FRANCOIS BOURGUIGNON

Francois Bourguignon is a Professor at the Paris School of Economics


Delivery of Bolsa Família in Teresina, Brazil.
Photo credit: Flickr @glaubercavalcante (https://www.flickr.com/photos/glaubercavalcante/)

For Francois Bourguignon — Professor of Economics (and former Director) at the Paris School of Economics and World Bank Chief Economist and Senior Vice-President from 2003-2007 — the fascination with how to reduce poverty and inequality continues unabated. Already the recipient of many honors in economics, in fall 2013 he received LACEA’s Juan Luis Londoño Prize for high quality and policy relevant research on socioeconomic issues relevant to Latin America — which still is the most unequal region in the world.

In Part 1 of this series, Bourguignon tells the JKP that "the big evolution" in the field of inequality over the past 30 years has been the shift from focusing on income (a result of economic activity) to "opportunities" (determinants of economic activity). However, unlike income inequality, which can be summarized in a single figure (the Gini coefficient), the degree of inequality of opportunities — that is, differences in the capacity and capabilities of the people — is not only impossible to summarize in a single figure but also tough to measure, and thus a major area of research now. He also notes that in the past decade, Latin America's inequality has diminished in part thanks to successful programs like Opportunidades in Mexico and Bolsa Familia in Brazil, which provide cash transfers to the poor conditional on parents pursuing better education and healthcare outcomes for their kids. (Part 2 of this series explores possible policy steps to continue reducing inequality, especially on the tax front.)


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Growth, the Rich, and the Really Rich – Part 2
April 07, 2014 | Contribution by GERARDO ESQUIVEL

Gerardo Esquivel is a Professor of Economics at El Colegio de Mexico

While economic growth and the poor — do rising tides raise all boats? — has long been a major concern of economists, few have worried about growth and the rich. Yet there is an increasing concern, especially in industrial countries, about rising inequality within societies. Witness the numerous social movements in recent years, like Occupy Wall Street, which called attention to the fate of the "bottom 99 percent" versus the top 1 percent. A new paper, "Growth is (really) good for the (really) rich" — by Emmanuel Chavez (Economic Analyst, Mexico's Ministry of Finance and Public Credit) and Raymundo M. Campos-Vazguez and Gerardo Esquivel (Professors of Economics, El Colegio de Mexico) — tries to help inform the debate by asking how overall economic growth affects the "rich" (top 10 percent) and the "very rich" (top 1 percent, 0.1 percent, and 0.01 percent). It looks at 26 developed countries and emerging economies from 1980 to 2011, drawing on the World Top Incomes database.

Occupy Wall Street: The emphatic 99%
Occupy Wall Street, October 9, 2011.
Photo credit: Flickr @Kimberlyki (https://www.flickr.com/photos/29795482@N06/)



In Part 2 of this series, Esquivel tells the JKP that two key policy implications stand out. First, policy makers might want to adopt a more progressive tax system by varying tax rates among the top 10 percent and taxing different sources of income more equally (capital gains typically fall into a lower tax bracket). However, the challenge here, he stresses, is to avoid increasing taxes so much that they actually introduce large distortions that would impede investment and job creation. Second, if policy makers wish to create a more egalitarian society, then they could use the additional revenues to help those at the bottom part of the income distribution.

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Growth, the Rich, and the Really Rich
April 03, 2014 | Contribution by GERARDO ESQUIVEL

Gerardo Esquivel is a Professor of Economics at Colegio de Mexico
 
While economic growth and the poor — do rising tides raise all boats? — has long been a major concern of economists, few have worried about growth and the rich. Yet there is an increasing concern, especially in industrial countries, about rising inequality within societies. Witness the numerous social movements in recent years, like Occupy Wall Street, which called attention to the fate of the "bottom 99 percent" versus the top 1 percent. A new paper, "Growth is (really) good for the (really) rich" — by Emmanuel Chavez (Economic Analyst, Mexico's Ministry of Finance and Public Credit) and Raymundo M. Campos-Vazguez and Gerardo Esquivel (Professors of Economics, El Colegio de Mexico) — tries to help inform the debate by asking how overall economic growth affects the "rich" (top 10 percent) and the "very rich" (top 1 percent, 0.1 percent, and 0.01 percent). It looks at 26 developed countries and emerging economies from 1980 to 2011, drawing on the World Top Incomes database.

 

Riocinha Favela - Rio de Janeiro Brazil
Riocinha Favela, Rio de Janeiro, Brazil.
Flickr @David Berkowitz (https://www.flickr.com/photos/davidberkowitz/)
 

In Part 1 of this series, Esquivel tells the JKP that the study finds that economic growth is good for the rich in the sense that the mean income of the top 10 percent grows in the same proportion as that of the whole population. However, it also shows that the "very rich" get even progressively bigger gains from growth. He says that many people have long assumed that the top 1 percent was reaping far more benefits than others from growth, but now we have empirical proof across countries over a long period of time. (Part 2 will look at the study's policy implications.)

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Escaping Poverty Through Work in East Asia
March 28, 2014 | Contribution by TRANG NGUYEN

Trang Nguyen is a Senior Economist in Poverty Reduction and Economic Management, the World Bank.
 

Over the past 5 to 10 years, many East Asian countries, not just China, continued to reduce poverty despite an economic growth slowdown surrounding the 2008-2009 global financial crisis. The $1.25 a day poverty rate in developing East Asia and Pacific (EAP) declined from 17.1 percent in 2005 to 12.5 percent in 2010. Which factor played the biggest role in the further progress against poverty? A likely assumption would be increased labor income, given that social policies in EAP are far less generous than in regions like Latin America and Eastern Europe and Central Asia.

Vietnam
Vietnam workers processing fish.
Photo credit: Flickr @World Bank - East Asia and Pacific (https://www.flickr.com/photos/worldbank_eastasiapacific/)

 

In an effort to better understand EAP's poverty dynamics, we recently studied 6 countries (Cambodia, Mongolia, Philippines, Thailand, Timor-Leste, and Vietnam) using data from the mid-to late-2000s. Our findings suggest that access to work and better earnings are essential — results that echo those of another recent World Bank study, which looked at 16 countries of different regions (for EAP, only Thailand) where there had been a substantial drop in poverty over the past decade (for more details, see "Jobs Boost Poverty Reduction").

Better jobs dominate in poverty reduction

Our study began by asking which factors played the greatest roles in each country's battle against poverty. We found that:

Labor income. Consistent with emerging evidence in other parts of the world, better jobs are the biggest force at work to reduce poverty. In all but one of the countries with data for the analysis (the Philippines), income from work (the sum of contributions from wage, farm, non-farm work, and the employment effect — that is, share of adults that are working) explains more than 40 percent of the observed changes in poverty (see figure below). In Vietnam and Cambodia, in particular, higher labor income explains more than 70 percent. In Timor-Leste, the loss of labor income between 2001 and 2007, covering a period of civil conflicts, explains almost all of the increase in poverty.
Non-labor income. This factor (the sum of income from assets, private remittances, public social assistance or insurance, and other transfers) was a big help in some countries. In Mongolia, increases in social transfers constituted an increasing fraction of the income of the poorest, consistent with the large contribution of non-labor income to poverty reduction. Similarly, in Thailand, non-labor incomes were quite important, with the share of transfers in aggregate incomes nearly doubling during the time period.
Demographic change. This factor (share of adults in the households) — which reflects birthrate declines some years ago and falling dependency rates (that is, a higher proportion of employable adults among all household members) — has made it easier to increase income and consumption per person in some of the countries, especially the Philippines.

Chart 1. Income from work explains a large share of poverty reduction
(Percent contribution to poverty changes)
IncomeFromWork-EastAsiaPacifcAtWork
Source: World Bank 2014 (forthcoming).
East Asia Pacific At Work: Employment, Enterprise, and Well-being.

Notes: (1) Components below the zero line represent the factors whose changes contributed to a fall in the poverty rate (negative percents) whereas components above the zero line represent the factors whose changes contributed to a rise in the poverty rate. (2) Share of adults is number of adults divided by household size. (3) Share of working adults is number of employed divided by working-age people. (4) Poverty is measured as the fraction of the population with per-capita income of less than $1.25 a day for all the countries except for Thailand, where it is measured using the $2.50 poverty line. Changes in poverty were calculated for the following periods: Cambodia (2007, 2010), Thailand (2006, 2009), Philippines (2006, 2009), Vietnam (2004, 2010), Mongolia (2007, 2011), and Timor-Leste (2001, 2007).

Different types of labor income matter differently

Which of these types of labor income helped or hindered the fight against poverty? The answer varies among the countries. In the 1980s and 1990s, work in agriculture was a key driver of poverty reduction. But more recently, wage income has played a bigger role. In fact, it explains roughly 50 percent of the observed decline in poverty in Vietnam, the Philippines, and Cambodia – and even more so in Mongolia.

At the same time, the loss of real farm incomes during this period set back efforts to reduce poverty in Cambodia, Mongolia, and the Philippines, although the wage income increases managed to more than offset those falls. Poor households in Cambodia and the Philippines experienced a reduction in the share of agriculture income in total income over the period 2006-2009. From 2007 to 2011 in Mongolia, agricultural production suffered substantial losses owing to severe weather conditions.

In sum, for EAP — as for other regions of the world — boosting access to work and better earnings is key to fighting poverty. Part of that process involves a movement from low-pay to better-pay employment and an increasing role of wage income relative to agricultural income.

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The Inequality Battle in Latin America – Part 2
The Inequality Battle in Latin America – Part 1
Growth, the Rich, and the Really Rich – Part 2
Growth, the Rich, and the Really Rich
Creating Jobs for Youth in the Dominican Republic