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Poverty and inequality:

the policy challenge

Emily Morris

International Institute for the Study of CubaOctober 9th 2008

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Poverty and inequality:the policy challenge

Policy objectives

Measuring poverty and inequality in Cuba

Assessing the record in context

Policy debates and challenges

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Policy objectives

The basic principle of the Cubanrevolutionary process is development withequity and social justice, involving

the redistribution of incomes in favour ofworkers and marginalised groups

the elimination of unemployment

the raising of living standards.

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Measuring poverty and inequality in Cuba

Measurements of poverty and inequality: Absolute poverty minimum level of income

necessary to meet basic needs Extreme not enough food

Moderate not much money

Standard measures: equivalent to US$1 or US$2 a day.

Relative poverty less than half average income?

Inequality Gini coefficient

In Cuba: Big problem: how to measure real incomes?

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Measuring poverty and inequality in Cuba:real incomes

Aggregate consumption -- nominal and real

0

50

100

150

200

250

300

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Index,1990=10

0

Nominal household consumption Real household consumption

Economic crisis = lower real average incomes = more poverty,but how much? And for whom?

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Measuring poverty and inequality in Cuba:calculating real wage growth: data

-10-5

0

5

10

1520

25

30

35

40

%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Nominal wage growth CPI average increase

Estimates

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Measuring poverty and inequality in Cuba:calculating real wage growth: results

0

50

100150

200

250

300

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Index,1990=100

Nominal wages

Cost of living index (1989=100)

Average real wage index (1989=100)

but which measure of consumer price inflation?

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Measuring poverty and inequality in Cuba:real wages with rations and fixed prices

1990

0

50

100

150

200

250

300

nominal peso

wage

US$ equivalent

Other

goods

Rent,utilities

Rationedfood

1993

0

50

100

150

200

250

300

nominal peso wage US$ equivalent

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Measuring poverty and inequality in Cuba:real wages with rations and fixed prices

1990

0

50

100

150

200

250

300

nominal peso

wage

US$ equivalent

Other

goods

Rent,utilities

Rationedfood

1993

0

50

100

150

200

250

300

350

400

nominal peso wage US$ equivalent

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Measuring poverty and inequality in Cuba:the decline in CUP purchasing power

0

0.020.04

0.060.08

0.1

0.120.14

0.160.18

0.2

1990

1992

1994

1996

1998

2000

2002

2004

2006

exchange rate: US$ per CUP

The purchasing power of the extra peso remains small

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Measuring poverty and inequality in Cuba:the rise in US$ purchasing power

0

10

20

30

40

50

60

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Value of US$100 as multiple of average monthly wage

and the value of the dollar is still large

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Measuring poverty and inequality in Cuba:the currency divide

In 1993 US$2 could match an average months salary of 182

pesos (real value around US$150)

to double it would take another US$150, or over15,000 (150 x 100) pesos, or 82 months

In 2007 US$20 would be needed to match a months salary of

400 pesos (real value around US$300) to double it would take another US$300, or 7,200

pesos (300 x 24), or 18 months

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Measuring poverty and inequality:average real incomes disguise divergence

Aggregate nominal and real consumption, and nominal wages

0

50

100

150

200

250

300

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Index,

1990=1

00

Nominal household consumption Real household consumption

The gap between peso and hard currency (US$/CUC) incomes widenedin 1990-1993; narrowed in 2005-2007

Shortages, currencydepreciation,agromarkets

Higher wages, morebonuses, more goods onsale in pesos

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Measuring poverty and inequality:findings

Wages: average real disposable peso incomesbarely recovered from 1990-1993 collapse

Poverty: basic needs have been met

Inequalitybetween peso earners was reducedby the crisis and remains small

Most inequality still springs from duality betweenhard currency and peso, formal and informal,

economieswhich is different.

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Assessing the record in context:real wages in transition

Slovenia

Poland

Czech Republic

Slovakia

Hungary

Georgia

Estonia

Latvia

Romania

Kyrgyzstan

Bulgaria

Lithuania

Azerbaijan

Kazakhstan

Russia

Moldova

-80 -60 -40 -20 0 20 40

%Change in Real Wages, 1990-98

Source: World Bank, Making Transition Work for Everyone, 2000

Cubas decline in real average wages was not exceptionally severe

-- and other entitlements reduced the impact on welfare

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Assessing the record in context:infant mortality

0

2

4

6

8

10

12

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

deathsper1,000

Positive proxy indicators: low and falling mortality rates

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Assessing the record in context:infant mortality in transition

0

5

10

15

20

25

30

ROMANIA

RUSSIAN

FEDERATION

UKRAINE

BULGARIA

POLAND

HUNGARY

SLOVAKIA

CZECH

REPUBLIC

CUBA

1990

1993

1998

2005

comparing well with the transition economies

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Assessing the record in context:inequality in transition

Income Inequality in Selected ECA Countries During

Transition

0

0.1

0.2

0.3

0.40.5

0.6

0.7

CzechRep

ublic

Hungary

Slovenia

Belarus

Lativa

Ukraine

Po

land

Lithu

ania

Croatia

Estonia

Moldova

Georgia

Russian

Federation

KrygyzRepublic

Tajiksitan

Armenia

Ginicoefficient(percent)

1987-90

1996-99

Cuban income inequality increased but comparisons are difficult

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Assessing the record in context:findings

The increase in poverty and inequality inCuba was induced by post-CMEAeconomic crisis

Its record in meeting basic needs andmaintaining equality in the formal sectorhas been positive

But the gap between dollar and pesoeconomies persists

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Policy debates

Ideology: welfare priorities Commitment to protect the vulnerable, maintain social

cohesion and preserve human capital

+ Management and resources: targeting

Reforming institutional infrastructure Raising spending Improving accountability

Auditing Decentralisation

Markets: getting the prices right How to square the exchange rate circle ? How to improve incentives but contain inequality,

using entitlements, bonuses and taxes ?

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Conclusions

Increase in poverty and inequality since1990

has been mitigated by policy

A heterodox policy approach bringing gradual improvement

but corrosive imbalances remain

no simple solutions

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Poverty and inequality:

the policy challenge

Emily Morris

International Institute for the Study of CubaOctober 9th 2008