Inequality:Where are we?

OsloMay , 2011

Jaime SaavedraPoverty Reduction and Equity

THE WORLD BANK

Measuring and analyzing inequality of outcomes and opportunities.

What is the equity impact of policies, or…how to make policies more equity enhancing? The PSIA agenda.

What is the role of fiscal policy? Are taxes and transfers working in reducing inequality? Is the social contract effective?

Persistent and high across regions. Small reduction in some regions, some countries

Reductions in inequality of opportunities in some regions

Strong case for public policy to address inequalities

Where are we on inequality?

Inequality high and persistent in Latin America

Scatter plot log per capita GDP (PPP) and Gini coefficient. Most recent since 2002.

Argentina

Bolivia

Brazil

Chile

Colombia

Costa RicaDominican Republic

Ecuador

El Salvador

GuatemalaHonduras

Jamaica

MexicoNicaragua

Panama

Paraguay

Peru

Uruguay

Venezuela, R.B. de

2030

4050

60G

ini I

ndex

6 7 8 9 10Log GDP per capita (PPP)

Other Countries LAC Countries

Europe and Central Asia countries are more equal on average.

Albania

Armenia

Azerbaijan

Belarus

Bosnia and Herzegovina

Bulgaria Croatia

Estonia

Georgia

HungaryKazakhstan

Kyrgyz Republic

LatviaLithuania

Macedonia, FYR

Moldova Montenegro

Poland

Romania

Russian Federation

Serbia

Slovenia

Tajikistan

Turkey

Ukraine

Uzbekistan

2030

4050

60G

ini I

ndex

6 7 8 9 10Log GDP per capita (PPP)

Other Countries ECA Countries

Also high in Africa

BeninBurkina Faso

Burundi

Central African Republic

Chad

Comoros

Congo, Dem. Rep. of

Congo, Rep.Cote d'Ivoire

Ethiopia

Gabon

Gambia, The

GhanaGuinea

GuineaBissau

Kenya

LesothoLiberia

Madagascar

Malawi Mali

Mozambique

NigerNigeria

Senegal

Sierra Leone

Togo

Uganda

Zambia

2030

4050

60G

ini I

ndex

6 7 8 9 10Log GDP per capita (PPP)

Other Countries SSA Countries

Small reduction in most Latin America countries

Changes in Inequality (Early 2000’s-Late 2000’s) have varied across countries

-6-4

-20

24

6G

ini A

nnua

l Cha

nge

(p.p

)

Ecu

ador

Ven

ezue

la, R

.B. d

e

Jam

aica

Par

agua

y

Arg

entin

a

El S

alva

dor

Bra

zil

Bol

ivia

Chi

le

Dom

inic

an R

epub

lic

Per

u

Pan

ama

Gua

tem

ala

Mex

ico

Col

ombi

a

Cos

ta R

ica

Uru

guay

Hon

dura

s

Nic

arag

ua

LAC

-6-4

-20

24

6G

ini A

nnua

l Cha

nge

(p.p

)

Azer

baija

n

Bulg

aria

Arm

enia

Turk

ey

Bela

rus

Ukra

ine

Kaza

khst

an

Mol

dova

Rom

ania

Kyrg

yz R

epub

lic

Geo

rgia

Russ

ian

Fede

ratio

n

Tajik

istan

Lith

uani

a

Bosn

ia a

nd H

erze

govin

a

Mac

edon

ia, F

YR

Alba

nia

Uzbe

kista

n

ECA

Mixed pattern in Eastern Europe and Central Asia

And also in East Asia and the pacific

Diverging patterns in Brazil and China

Manmohan Singh, : “Large scale poverty is the foremost challenge facing our country.. We have to be acutely conscious of regional disparities and imbalances within the country, and address the inequalities that exist.” (The Hindu, March 27, 2011)

Dilma Rouseff, "The most determined struggle will be to eradicate extreme poverty … we can be a more developed and fairer country... I will not rest while there are Brazilians without food on their table, homeless in the streets, and poor children abandoned to their luck." (Inauguration address, January 2011)

Jacob Zuma, "While many South Africans celebrate the delivery of houses, electricity or water, there are yet many others who are still waiting... " (2011 State of the Nation Address)

Min Zhu, IMF “The increase in inequality is the most serious challenge for the world ... I don’t think the world is paying enough attention.” (Davos, May 2011)

Premier Wen “…many had not seen the benefits of China’s dynamic growth” ...[we need to ]... “combat rising inequality and corruption” (Washington Post, 3/12/11)

Thai Democrat Party campaign statement "Need to address income inequality which (is) causing social problems in Thai society” (BKK Post, 2/28/20)

0

10

20

30

40

50

60

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

%

Underweight (0-3 years)

India Nigeria Peru

Another poverty indicator: malnutrition

Reduction in % of children underweight in India, Nigeria and Peru

Source: DHS, STATcompiler

0

10

20

30

40

50

60

70

80

90

100

1992

1998

2006

1990

2003

2008

1991

1996

2000

%

Underweight (0-3 years) by Wealth Quintile

India Lowest Nigeria Lowest Peru Lowest

India Highest Nigeria Highest Peru Highest

But little or no convergence between the richest and poorest – in fact widening of rich-poor gap for India and Nigeria

And again large and persistent gapsacross income levels

Source: DHS, STATcompiler

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0Brasil

NicaraguaGuatemala

PerúColombia

R. DominicanaCosta Rica

EcuadorHonduras

UruguayParaguay

BoliviaPanamá

VenezuelaEl Salvador

ChileMéxico

ArgentinaJamaica

Boy with 4 siblings in a rural home , uneducated head of household and income at extreme poverty levels

Child with one sibling un an urban home, household head with secondaryeducation in family income per capita of US$25 a day.

Two Latin-american childrenProbability of finishing 6to grade on time

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 %

RwandaLiberia

TanzaniaMozambique

UgandaEthiopia

NigerCongo Dem Rep.

Sierra LeoneZambia

MaliMalawi

MadagascarCameroon

KenyaGhana

NamibiaZimbabwe

Nigeria

Poor child Rich child

Note: Rich child is a boy, living in a urban household where the head is a male with 12 years of education, with one additional child in the household and belong to the fifth quintile of wealth. Poor child is a boy, living in a rural household where the head is a male with 5 years of education, with four additional children in the household and belong to the first quintile of wealth.

Two African children: Probability of completing 6th grade on time

The equality of opportunity principle

Circumstances exogenous to theindividual, like birth place, gender,

ethnicity, income and education of parentsshould not determine the persons

wellbeing

“In Peru 4 out of 10 children less than 5 years do not have access to clean water”

Problem: access, coverage

“Those 4 children are indigenous”

Problem: circumstances affect children's chances. distribution

There are two problems here

Human opportunity index Inequality of opportunity-sensitive coverage rate

that incorporates:

A)The average coverage of a good or service. that shouldbe universal,

B) If it is allocated according to an equality of opportunityprinciple

access to key goods and services should not bedetermined by “circumstances” outside one’s controlE.g. race, gender, parental education, wealth,geographic location).

In terms of school attendance, African countries are comparable with many countries in LAC region – in coverage and HOI

Africa and Latin America (late 2000s)

020

4060

8010

0H

OI (

%)

.

moz

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mad

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Hond

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Nica

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a

Ecua

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El S

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Cost

a Ri

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Para

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Colo

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Pana

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Boliv

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Mex

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Jam

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Peru

Vene

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Arge

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a

Dom

inica

n Re

publ

ic

Braz

il

Urug

uay

Chile

HOI - LAC HOI - Africa Coverage

Attending School (10-14 years)

Note: All HOI used for these comparisons use the same definition of opportunities and comparable list of circumstances

020

4060

8010

0H

OI (

%)

.

rwan

da

moz

ambi

que

tanz

ania

ugan

da

mad

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car

mal

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zam

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ghan

a

nam

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Gua

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Nic

arag

ua

Braz

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El S

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Hon

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Dom

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lic

Para

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Col

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a

Cos

ta R

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Pana

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Vene

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Boliv

ia

Peru

Uru

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Ecua

dor

Chi

le

Arge

ntin

a

Jam

aica

Mex

ico

HOI - LAC HOI - Africa Coverage

Finished 6th Grade On Time (13 - 15 years)

Africa and Latin America (late 2000s)

African countries compare poorly with most LAC countries on completion of primary on time - Late entry is a major problem in Africa

Encouraging trends for Africa on school attendance (late 1990s – late 2000s)

• Large improvements in school attendance for most African countries• In almost all African countries change in HOI > change in coverage reduction in inequality in attendance

namibiamalawighana

zambiauganda

madagascarmozambique

rwandatanzania

JamaicaParaguay

ChileDominican RepublicVenezuela, R.B. de

PeruGuatemalaCosta Rica

PanamaEcuador

ColombiaMexico

BrazilEl Salvador

HondurasNicaragua

0 1 2 3Percentage Points

Change HOI Change Coverage

Annual Change - Attending School (10-14 years)

But mixed picture on trends for primary school completion in Africa

ghanarwanda

mozambiqueuganda

madagascartanzania

zambiamalawi

namibia

JamaicaPanama

ChileColombia

Venezuela, R.B. deEcuador

Dominican RepublicMexico

GuatemalaHondurasNicaragua

El SalvadorParaguay

Costa RicaPeru

Brazil

-1 0 1 2 3Percentage Points

Change HOI Change Coverage

Annual Change - Finished 6th Grade On Time (13 - 15 years)

• Little or no improvement in HOI for 4 out of 9 African countries • Increase in HOI much smaller than increase in coverage for the 6 African countries showing an improvement rise in inequality in primary school completion

Africa and Latin America - Access to Electricity (late 2000s)

Source: World Bank using DHS data; work under progress (do not cite)

020

4060

8010

0%

Uga

nda

Mad

agas

car

Zam

bia

Nam

ibia

Gha

na

Hon

dura

s

Nic

arag

ua

Peru

Pana

ma

Gua

tem

ala

El S

alva

dor

Jam

aica

Col

ombi

a

Para

guay

Ecua

dor

Braz

il

Cos

ta R

ica

Mex

ico

Vene

zuel

a, R

.B d

e

Chi

le

HOI Coverage

Source: World Bank using DHS data; work under progress (do not cite)

rwandazambiauganda

mozambiquemalawi

madagascartanzanianamibia

ghana

cambodiaindonesia

Venezuela, R.B. deCosta RicaHonduras

ChileColombia

MexicoBrazil

EcuadorPanama

NicaraguaPeru

ParaguayEl Salvador

JamaicaGuatemala

-.5 0 .5 1 1.5 2Percentage Points

Change HOI Change Coverage

Annual Change - Access to electricity (0-16 years)

Changes in the HOI - Electricity(late 1990’s vs. late 2000’s)

33 32

12 14 15

2827

49 47 45

14 20 21 23 26

0%10%20%30%40%50%60%70%80%90%

100%

Finish primary (6th) on time

School attendance

(ages 10-14)

Adequate water supply

Adequate sanitation

Electricity

Gender Ethnicity (Language) EducationSingle parent Number of Children RegionIncome Altitude

What is behind observed inequality of opportunities among children? (Peru 2009)

34

1427

5

23

30

49 5238

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cambodia Peru Indonesia

Household composition Household head educationIncome GenderGeographical Location

What is behind observed inequality of opportunities among children? – the case of sanitation

The case for public policy to address the

equity challenge

Gini after taxes and transfers

Source: Goni, Lopez and Serven 2008

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Arg

entin

a

Bra

zil

Chi

le

Mex

ico

Fran

ce

Italy

Spa

in

Uni

ted

Kin

gdom

Den

mar

k

Sw

eden

Gin

i Ind

ex

Market Incomes Disposable Incomes (after tax and transfers)

Taxes and Income – 2008

0

10

20

30

40

50

60

70

5 6 7 8 9 10 11 12

Tax

reve

nue

(% o

f GD

P)

Log GDP per capita (constant 2000 US$)

Source: WDI and OECD

Taxes as a % of GDP Latin America and OECD

Tax collection is low

- Not because of low rates

- Because exemptions andloopholes

- Progressive personal income taxes are barelycollected

- Very high informality

…and informality seems to relates to the (perceived) quality and fairness of state services

ECUARG

VENPERBOL

GUAHONMEXBRA

SAL

COLJAMCOSPAN

CHI

-.20

.2.4

e(S

hare

of S

elf-e

mpl

oyed

/ X

)

-1.5 -1 -.5 0 .5 1

e(Government Effectiveness / X)

coef = -.07803752, se = .02249611, t = -3.47

Parcial Correlations controling for the GDP pc at PPP

Government Effectiveness

VEN

ARGECU

PERGUA

BOL

PAN

HONBRAMEXSAL

COLCHI

COSJAM

-.20

.2.4

e(S

hare

of S

elf-e

mpl

oyed

/ X

)

-4 -2 0 2 4

e(Impartiality of Courts / X)

coef = -.02090103, se = .00903889, t = -2.31

Parcial Correlations controling for the GDP pc at PPP

Impartiality of Courts

Does the social contract work?

-60 %

-50 %

-40 %

-30 %

-20 %

-10 %

0 %

10 %

20 %

30 %

I II III IV V

HH

am

ount

as

% o

f GD

P p

er h

h

Transfers

-60 %

-50 %

-40 %

-30 %

-20 %

-10 %

0 %

10 %

20 %

30 %

I II III IV V

HH

am

ount

as

% o

f GD

P p

er h

h

United Kingdom Colombia

Taxes

From: Breceda, Rigolini and Saavedra, 2009)

Increase in Tax Rate on middle class (US$13 a day +) required

to eliminate extreme poverty

Source: Ravallion 2008

83.1

80.3

45.2

17.6

16.3

8.4

0 10 20 30 40 50 60 70 80 90

SAR

AFR

EAP

ECA

MNA

LAC

Marginal Tax Rate (%)

The richer do not participate and opt out

The rich opting out into higher quality private provision (pension, security, private education, etc), leaving as demanders of public services those with less “voice”

...and the poor also feel disengaged.

Differential access to public goods that should be universal equal access to property rights, to protection under the law, to judiciary services, to basic services

Overall negative views about state services and the political system.

A system that gives me very little, and gives the others low quality services In some cases continued perception of patronage and corruption in social assistance

Implicit validation of widespread tax evasion Much more EXIT than VOICE in Hirschman´s terminology

Low taxation and informality reflect a social contract that does not work for all.

Bad equilibrium of low taxes, weak states, regulators with low enforcement capacity, insufficient provision of public goods, unequal opportunties

Redistribution through taxes or through transfers?

A Tax Reform in Mexico

Progressive on the tax side

Regressive on the tax side…matters?

(% reduction in household incomes due to tax reform)

Some hope on the expenditure sideBrazil : Contributions to changes in inequality

Source: Barros et al (2010).

Non-labor income has a more important role in explaining reduction in extreme poverty and inequality : mostly ruralpensions, less CCTs

Thank you