Growth_Inequality_and_Poverty_in_Latin_A

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Unformatted text preview: The New Comparative Economic History 2‘)! ~ 315 Essays in Honor of Jeffrey C. Williamson Edited by Timothy J. Hatton, Kevin H. O'Rourke, and Alan M. Taylor The MIT Press Cambridge, Massachusetts London, England 2007) 1 2 Inequality and Poverty in Latin America: A Long-Run Exploration . Leandro Prados de la Escosura Latin America is today the world region in which inequality is highest, with an average Gini coefficient above 50 during the last four decades of the twentieth century (Deininger and Squire, 1996; 1998). A stable in- come distribution in the early postwar period worsened after 1980 (Alti- mir 1987; Morley 2000). Furthermore, no significant improvement in the relationship between income distribution and economic growth has taken place during the last decade (Londofio and Székely 2000), and inequality remains high despite episodes of sustained growth (ECLAC 2000). Is today’s high inequality a permanent feature of modern Latin Ameri— can history? How has inequality affected poverty in the long run? These are pressing questions for social scientists. Unfortunately, no quantitative assessment of long-run inequality has been carried out for Latin America, except for Uruguay (Bértola 2005), but the perception of unrelenting in- equality deeply rooted in the past is widespread (see, for example, Bour- guignon and Morrisson’s (2002) assumptions). In this chapter I first examine long-run trends in inequality in modern Latin America and then, on the basis of trends in inequality and growth, make a preliminary attempt at calibrating their impact on poverty reduction. When did inequality originate, and why has it persisted over time? Alternative interpretations have been put forward. Those that emphasize its colonial roots are worth stressing. According to Engerman and Sokol- off (1997), initial inequality of wealth, human capital, and political power conditioned institutional design, and hence performance, in Spanish America. Large-scale estates, built on pre-conquest social organization and an extensive supply of native labor, established the initial levels of in- equality. In the post-independence world, elites designed institutions pro- tecting their privileges. In such a path-dependent framework government 292 Leandra Prados de la Escosura policies and institutions restricted competition and offered opportunities to select groups (Sokolofi‘ and Engerman 2000). Acemoglu, Johnson, and Robinson (2002) provide a different explana- tion for the uneven fate of former colonies. Where abundant population showed relative affluence, “extractive institutions” were established, under which most of the population risks expropriation at the hands of the ruling elite or the government (forced labor and tributes, often existing already in the pre-colonial era, over the locals). With political power concentrated in the hands of an elite, this represented the most efficient choice for European colonizers despite its negative effects on long-term growth. This would be the case of the Iberian empires in the Americas, especially in its economic centers of Peru and New Spain. The opening up to the international economy has been associated with a widening of income differences within and across countries. Dependent- ists have seen it as a cause of increasing inequality across and within countries, stressing the role of the terms of trade in Latin American retar- dation as countries either improved and shifted resources to primary pro- duction (Singer 1950) or deteriorated and provoked immiserizing growth (Prebisch 1950). Neoclassical trade theory predicts that trade liberaliza- tion after independence would allow Latin American countries to spe- cialize along the lines of comparative advantage. The Heckscher-Ohlin model predicts that natural resources, as the abundant factor, will be intensively used and, as a result, their relative price in terms of labor will increase. This implies, in the Stolper—Samuelson extension of the Heckscher-Ohlin model, that insofar as land, the abundant factor, is more unequally distributed than labor, inequality will rise within national borders. No evidence on inequality is available for the pre-1870 period with the exception of Argentina, for which Newland and Ortiz (2001) show that the expansion in the pastoral sector resulting from improved terms of trade increased the reward of capital and land, the most intensively used factors, while the farming sector contracted and the returns of its inten- sive factor, labor, declined, as confirmed by the drop in nominal wages. A redistribution of income in favor of owners of capital and land at the expense of workers took place in Argentina between 1820 and 1870. Wil- liamson (1999) has explored the consequences for inequality of the early phase of globalization (1870—1914). On the basis of the wage-land rental ratio, he showed an increase of inequality within countries in Argentina and Uruguay that confirms empirically the Stolper-Samuelson theoretical predictions. As natural resources were the abundant productive factor in Inequality and Poverty in Latin America 293 Latin America, they were more intensively used in the production of exportable commodities. As a result, returns to land grew, relative to , those of labor. Since the ownership of natural resources is more concen- ‘ trated than that of labor, income distribution tended to be skewed toward landowners, and inequality rose over the decades prior to World War I. Presumably, inequality trends reversed in the interwar period, when glob- alization was interrupted, as suggested by the fact that the steep decline in ‘ the wage-rental ratio stopped in Argentina and Uruguay, and rose in the _ 19305 (Bértola and Williamson 2005). Globalization after 1980 has also been associated with rising inequality in Latin America. Lewis’s (1954) labor surplus model, in which the worker fails to share in GDP per capita growth because elastic labor supplies (migration of surplus labor from southern Europe, especially Spain and Italy) keep wages and living standards stable, also provides the basis of an interpre- tation of rising inequality in Argentina (Dial-Alejandro 1970) and Brazil (Leff 1982) during the early phase of globalization. But, can we quantify trends in income inequality in modern Latin America? Lack of historical household surveys prevents replication of modern inequality studies. Only after careful and painstaking research, .country by country, can standard inequality measures be provided for Latin America’s past. An approach to assessing inequality has been proposed and applied to ,a wide international sample over 1870—1940 by Williamson (2002): the ,jratio of GDP per worker to unskilled wages. The rationale for this choice is that such a ratio confronts the returns to unskilled labor with the returns to all production factors, that is, GDP. Since unskilled labor is the more evenly distributed factor of production in developing countries, an increase in the ratio suggests that inequality is rising. So, in order to convey an idea of how inequality has evolved within Latin American societies, I have constructed Williamson’s inequality index as the ratio «of real GDP per worker to real wages, normalized with 1913 = 1 (see appendix). Long-run trends in inequality derived with 11-year centered moving averages are presented for a group of main Latin American countries in figures 12.1a and 12.1b. A sustained rise in the inequality index from the late nineteenth century up to World War I is observed for the South- ern Cone (no data available for Colombia) during the early phase of globalization (figure 12.1a). Conversely, a decline in inequality took place in the interwar years, as globalization was reversed. This view con- firms the Stolper-Samuelson interpretation. The stabilization or, decline of 7 294 —— Argentina —-- Chile ----- Colombia ----- Uruguay Leandro Prados de la Escosuni 1850 1856 1862 Figure 12.1a 1868 1874 1880 1886 1892 1898 1904 1910 1916 1922 1928 1 934 1 940 1 946 Inequality indices in Argentina, Chile, Colombia, and Venezuela (1913 = l). 2.50 2.00 1952 1958 1.50 1 .00 0.50 Figure 12.1 b Inequality indices in Brazil, Cuba, and Mexico (1913 = 1). i M.¢fiy..mwtumsu - “(or r ., .~ .. Inequality and Poverty in Latin America 295 inequality during the mid-twentieth century could be related, as Bértola (2005) points out, to urbanization and the emerging role of government. ‘j_ Redistributive policies, as suggested by the rise of income tax share of government revenues in the thirties and forties (Astorga and Fitzgerald 1998, 346), are correlated with the decline in the inequality index in Ar- gentina and Chile and its stagnation in Uruguay. The sustained rise in in- equality exhibited between the late thirties and fifties in Colombia coincides with the “violencia” period (Palacios 1995). _ In figure 12.1b trends in inequality are shown for Brazil, Cuba, and Mexico. Brazil presents a long-run decline up to 1913, with a flat phase between the late 18605 and 18905, and Mexico shows a moderate increase in inequality between the 18805 and the revolution of 1910. Scattered evi- dence for Cuba suggests a similar pattern. A dramatic increase in inequal- éity took place in the three countries after 1910 and well into the 19205, ifollowed by stabilization over the 19305 in Brazil and Cuba. A gradual rise in inequality in Brazil contrasts with the inequality reduction in Cuba between the early 19405 and the late 19505. If the data on Cuba are taken at face value, the 1959 revolution would have occurred in a context of in- Eequality stability after a sustained fall in a context of stagnated per capita evincome. The case of Mexico provides some perplexities, too. The after- :f-math of the 1910 revolution was a period of rising inequality followed by (*a dramatic inequality reduction. Then, between the mid-thirties and the vmid-fifties—years of accelerating per capita GDP growth due to improv- ging labor productivity and employment creation—a spectacular rise in the inequality would have taken place. But how was the long-run evolution of inequality? A heuristic exercise in which available Gini coefficients (mainly from 1950 onward) are pro- Tjected backward with the rate of variation of the “inequality indices,” previously smoothed with 11-year moving averages, is provided in table :12.1, so conjectures about long-run inequality trends can be derived (see Lappendix). No doubt the pseudo-Gini indices derived prior to the mid- :twentieth century are questionable. By using changes in the inequality “index to project Gini coefficients backward, a new time series is created which two difl‘erent cardinal measures are used: the directly estimated 'nal inequality measures might result in large discrepancies. Nonetheless, it can be argued that because the inequality index can be interpreted as (,5 projections of Gini directly estimated coefficients could be consistent with 296 Leandro Prados de la Escosura Table 12.1 . Income Distribution in Latin America: Gini Estimates and Conjectures, 1850—1990 I . —_—__——————-—————-——————-———————'~—:: 1850 1860 1870 1880 1890 1900 1913;, 39.1 39.7 43.6 42.0 Argentina Bolivia Brazil 46.2 37.2 32.9 33.0 34.4 29.8 29.5 Chile 36.6 40.7 41.3 47.2 51.9 58.5 655:? c ' 45.83 olombla 5 Costa Rica Dominican R. Ecuador El Salvador Guatemala Honduras Mexico 27.8 p: Nicaragua ‘ ‘ Panama Paraguay Peru Uruguay 29.6 33.1 32.2 38.4 Venezuela 7 . LatAm4 34.8 35.9 38.0 35.4 40.5 LatAm6 37.73 LatAml 5 LatAm16 Note: Gini direct estimates are shown in bold; otherwise, pseudo-Gini (backward projecting; of Gini using variation of inequality indices). . . LatAm4: population-weighted average of Argentina, Brazrl, Clnle, and Uruguay. . *_ LatAm6: population-weighted average of Argentina, Brazil, Chile, Colombia, Mexroo, Uruguay. “first-order inequality dominance.” In other words, the amplitude of the swings in the pseudo-Gini indices could be wrong, but not the tendency}, Several features in long-run inequality are worth highlighting. Inequal; ity rose steadily until it reached a high plateau, which stabilized over the; last four decades of the twentieth century. Moreover, persistent highj inequality seems to be confirmed at least since the Great Depression: Another relevant feature is the wide variance across Latin American} countries, with Gini indices ranging from 40 to almost 60. Nonetheless, countries’ positions in the inequality ranking are not fixed. Southern Cone nations (Argentina and Chile) exhibited the highest inequality level, until the interwar years, when inequality rose in Mexico, Brazil, and ,10mbiahgguntries thatby ,1950 achieved an unenviable leadin, inequality; Inequality and Poverty in Latin America 297 1929 1938 1950 1960 1970 1980 1990 Argentina 49.3 50.0 39.6 41.4 41.2 47.2 47.7 Bolivia 53.0 53.4 54.5 Brazil 47.2 46.4 55.4 57.0 57.1 57.1 57.3 Chile 49.2 40. 5 41.7 48.2 47.4 53.1 54.7 Colombia 40.2 45.0 51.0 54.0 57.3 48.8 56.7 Costa Rica 30.7 50.0 44.5 48.5 46.0 Dominican R. 32.4 34.6 45.5 42.1 48.] Ecuador 57.1 61.0 60.1 54.2 56.0 El Salvador 44.0 42.4 46.5 48.4 50.5 Guatemala 42.3 28.6 30.0 49.7 59.9 Honduras 57.1 66.0 61.8 54.9 57.0 Mexico 24.3 30.4 55.0 60.6 57.9 50.9 53.1 Nicaragua 68.1 63.2 57.9 56.7 Panama 56.4 50.0 58.4 47.5 56.3 Paraguay 45.1 57.0 Peru 39.2 61.0 48.5 43.0 46.4 Uruguay 36.6 34.9 37.9 37.0 42.8 43.6 40.6 Venezuela 61.3 46.2 48.0 44.7 44.0 LatAm4 47.5 46.4 50.4 52.7 53.1 54.9 55.2 LatAm6 41.6 42.8 51.5 54.7 54.8 53.2 54.8 LatAm15 50.6 53.9 53.5 51.9 53.7 LatAml6 54.0 53.6 52.0 53.8 LatAmlS: population-weighted average of all Latin American countries but Bolivia, Cuba, Haiti, Nicaragua, and Paraguay. LatAml6: population-weighted average of all Latin American countries but Bolivia, Cuba Haiti, and Paraguay. : [t is also worth noticing the inequality decline in Venezuela during the 19505 and the worsening of Chilean income distribution of the 19705 and 1980s. Meanwhile, Uruguay appears to follow, at least until 1960, the Eu- fopean pattern of inequality. An attempt to provide a regional view is shown in figure 12.2. Two )hases of inequality expansion, one before 1929 and the other from World War II to 1960, are noticeable; and a fall in inequality is evident n the 1890s (associated with the Baring crisis) and in the Great Depres- ;ion years. The sustained rise in inequality since 1900 reached a high pla- eau in the 19603. This remained stable over the last four decades of the wentieth century and dwarfed the contraction in inequality of the 1970s ind its rise during the 19805. 298 Leandro Prados de la Escosuraj 60.0 50.0 40.0 30.0 m --—-- LatAm4 ——-- LatAmS 10.0 LatAm15 ""' LatAmlG 1870 1880 1890 1900 1913 1929 1938 1950 1960 1970 1980 1990 Figure 12.2 . ' ' Gini estimates and conjectures for Latin America (population-weighted averages). Inequality trends before World War I can be interpreted in Stolper: Samuelson terms. Thus, when Latin America opened up to international competition after independence, especially from the mid-nineteenth cen tury to World War I, the relative position of land improved, and beca V land was unevenly distributed, inequality tended ceteris paribus to crease. Predictable are the reduction in inequality as the economy o Latin America closed up during the interwar period, and a new surg in inequality during the second wave of globalization (1950—1980). Natu rally, the impact on income distribution of international trade and facto mobility is not the only force at play. Industrialization and redistributiv forces from an increasing role of government also appear to have affect inequality reduction in Latin America during the twentieth century. v ‘4 It is worth noting that inequality often appears to be positively comer-:15 lated with economic growth, as suggested by the correspondence between; rising inequality and per capita income before 1913 (especially in Southern Cone) and after 1950, and their decline in the interwar peri . (see tables 12.1 and 12.2). Was there a trade-OE between growth and equality in Latin America? This question demands careful investigation. Long-Run Trends in Poverty Poverty reduction depends on the growth of average income and on income is distributed, and is closely linked to the sensitivity of poverty to, Inequality and Poverty in Latin America 299 in (growth elasticity and inequality elasticity of poverty). Initial levels of development and inequality also condition the impact on poverty of owth and improvements in income distribution (Bourguignon 2003; A asen 2004; Lopez 2004; Ravallion 1997; 2004). f How did inequality and economic growth impinge on poverty in Latin : r erica? In this section I focus on absolute growth of the poor’s incomes (Ravallion and Chen 2003) rather than on whether a relatively dispropor- tionate growth in the poor’s incomes took place (Kakwani and Pernia 000). In a heuristic exercise, I calibrate trends of absolute poverty from which hypotheses for further research can be derived. 3, A glance at Latin America’s long—run economic growth is provided in table 12.2. In addition to country estimates, growth rates are presented for population-weighted averages of real GDP per head for different groups of Latin American countries (the lengthier the coverage, the lower the number of countries included). Some features can be noted. First, the ori- gins of modern economic growth, as defined by a sustained increase in butput per person, can be traced back to at least the mid-nineteenth cen- tury. Latin America experienced a sustained and steady growth over lore than a century, only broken during the 18905, the Great Depres- rion, and especially the 19805 crisis. Fortunately, though, the picture of atin America’s performance seems quite robust. After a slow start in the mid-nineteenth century, Latin America appears to have grown signifi- cantly during the 18705 and 1880s and, after a slowdown in the 18905, to .Vve accelerated until World War I. Latin America’s output per head slowed because of World‘ War I and halted in the years of the Great De- pression. After the Depre5510n, its countries enjoyed their fastest phase rformance in the 19705 made up for slower growth in the so-called Golden Age (1950—1973). The 19805 represent a major break in the long- run performance of Latin America, only slightly olfset by sluggish growth " the 19905. Thus, while the growth of the early phase, 18605—1929, was surpassed by the performance of the 19305—1980, the post-1980 era is a : hase of slowing down. To sum up, modern Latin America experienced fsustained growth since the mid-nineteenth century, that was only brought to a halt during the 19805. Latin America consists of a heterogeneous group of countries that exhibit substantial discrepancies in their factor endowments and long- i'un performance. The high variance of growth rates of GDP per capita ,in Latin America proves it. In Argentina, Chile, and Mexico, income per ihead grew faster than Latin America’s average between 1870 and 1913, inhereas-imBraziLLCiolombiLJzam ,, and XIme thiLJamnnnA.. in 300 Leandra Prados de la Escosura Inequality and Poverty in Latin America 301 8 m c» «3 Ir} «'3 q <2; 1.000 < N N m o —< N o A ' 0.900 9 N~~m°1mm°0 «2*. 0300 < M o N N N m o — N o .4 I 0.700 o 0.600 ~ «0 N. 6! ~ "2 O. M. v, M. 0. V. 5 N~0NNmmol—< No 0.500 0.400 g fi‘thfi'fi‘f‘YV‘Qm‘CZEQ‘O 300 — o N v— o N N m m o —< —< H _ ‘ 0 ._1 l .‘3 ' U . % § a mo 3 t: gmenwwwmvtem—tqvqw—i §§ 0-100 n: '5 0.000 >, Q: g 1913 1925 1929 1938 1950 1960 1970 1980 1990 2000 w r 5 5 W 50 Voo~ox~m©co~N~Nv0~~ “E F- 123 E ‘ ' .4 ' ‘ ._ ._~ ' _; _. B :3 Igure . _ . I t A D o o m o O o o N O! N o D g Dependence rate in Latin America (population-weighted averages). 5 m .2 >< . a" \O I-( ON (’1 [\ m ('2 O\ W 0 — I . g 1' m' :5 2 or N A m‘ m .4 o‘ E g “ 1913—1938. On the whole dunn the earl hase of modern economic an I | “9‘ g , g y p :3 -e g rowth 1870—1929 , Colomb...
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