The political economy of falling (& now rising) inequality in L.A.,2002-2013

1. The political economy of falling (& now rising) inequality in L.A.,2002-2013 Giovanni Andrea Cornia University of Florence ------------------------------------------------------------- Conference on Political and Economic Inequality: Concepts, Causes and Consequences ETH, Zurich 29-1-2016

2. Trend in the average regional Gini index, early 1980s -2012 Washington Consensus Augmented Washington Consensus New Policy Approach Post Financial Crises Period Source: author’s elaboration on Cornia (2014) and CEDLAS data..: The trend for 1990-2006 is based on 18 countries. That for 2006-12 on 15 countries, as there are no data for Venezuela, Guatemala and Nicaragua..

3. What explains such sharp Gini fall? two theories: (i) ‘Luck’ • Some argue that the Gini drop 2002-12 was due to ‘luck’, i.e. better terms of trade (tot), remittances, portfolio inflows • Yet, given the high export concentration & selective access to finance common in LA, such changes generated, ceteris paribus, a rise in Gini • They generated also a positive ‘income effect’ & relaxed BoP constraint to growth • Yet, growth per se is no guarantee of falling Gini, as shown by China & India. • empirical work (next 3 slides) shows that till 2002 gains in tot & X volume did not affect inequality, but since then they did - as rents were taxed & redistributed • A favorable global environment per se would not have reduced inequality in the absence of the policy changes discussed below.

4. Relation btw terms of trade & Gini - 4 country groups r nr r no relation nr nr r r r nr

5. Relationship between tot, export volumes & Gini, 1980-2002, 2003-8, 2009-11

6. conclusions on TOT and Gini • Before 2002 no relation btw tot/X vol and Gini – as these were un-equalizing/insignificant due to lack of redistribution • Since 2002 TOT/X-volumes became important for reducing Gini – as countries created ‘redistr. tax & transfer institutions’. • Now 9 commodity exporters face fiscal problems in sustaining Gini reduction • LA is integrated in world economy from position of weakness, • further fall in world GDP  lower tot and X - that may affect inequality by reducing ‘fiscal space’ for redistribution

7. An alternative explanation:(ii) Political changes  econ. policy changes • Gradual return to democracy in LA since early 1990s • Democratic consolidation in 1990s, early democratic regimes were right or centre-right • Latino Barometro shows that poor results of their WC policies raised dissatisfaction • Since 2000 massive a ‘left turn’ (Fig): no ideological realignment but retrospective econ. voting • New groups/coalitions replaced traditional left parties/unions in supporting left regimes - organizations of urban poor (cartoneros) and rural poor, - unemployed and informal sector workers, - indigenous groups and local communities - part of middle class switching allegiance after fall in income share during WC yrs • Changes in policies followed electoral results ….. with short lags

8. the ‘left turn’ in ideological orientation of 18 LA governments Source: Cornia (2014) updated to 2013

9. Policies that helped reducing Gini • Rise in 2ary educat for low-middle class children- sw/uw • labor market policies • Rise in minimum wages • Collective bargaining (Southern Cone) • Labor standards + formalization of informal jobs • Tax policies • Rising tax/GDP + more progressive taxation • Rise in public social expenditure • Social transfers (CCT, social pensions) • Prudent macro policy (countercyclical fiscal/monetary policy, low deficits, low inflation, reduced ext. debt…but REER?)

10. +spending on educfall in region Gini educ.0.52(‘00) to.45 (‘12) Public expenditure on educ/GDP 2.8 3.3 4.0 4.4

11. Index of real minimum wages (2000=100), selected countries

12. Trend in Average Tax/GDP Ratio, 1973-2009, L.America The New Tax Consensus The Washington Consensus The Augmented Washington Consensus Debt Crisis Crisis of 1990-91

13. Time difference in Reynolds–Smolensky Index (Gini pts) btw 1990s-2000s Note: A positive sign of the index indicates that the tax system is progressive, a negative one that it is regressive.

14. Large increase in well targeted CCT & social assistance(0.5-1.0% GDP)- • Pure transfers + non-contrib pensions(Arg, Brazil, Chile, Bolivia, Uruguay)

15. Gini impact of taxation,cash transfers and serices in kind, 2008-9-10 Source: Lustig (2013)

16. new ‘macro fundamentals’ A ‘hybrid model’ (some WC elements + ‘development oriented’ macro policy ) Prudent budget (1ary surplus 3-4% GDP) monetary policy (chart) Active tax policy+tax/GDP ratio +3 to 9 points Increasing public expenditure (+ 5 % GDP) especially on social public goods Countercyclical monetary-fiscal policy competitive real exchange rate (SCRER)  (+) T, (-) NT  (+) current account surplus and low interest rates, (Brazil is major exception – subsequent REER appreciation in several countries Better prudential regulation of domestic banks Unchanged open trade regime, but changing trade pattern, low ext indebtedness, reserves accum, debt substitution)

17. 2. inequality data for 2013: the start of reversal of prior gains?

18. uptick in regional Gini in 2013 – why? • Falling Gini Rising Gini • Argentina -0.1 - Bolivia +1.4 • Chile -0.4 - Brazil + 0.1 • Colombia -0.1 - C. Rica + 0.6 • Honduras -3.8 - Ecuador + 0.9 • Panama -0.3 - El Salv. +1.7 • Peru -0.4 - Dom Rep. +1.4 • Average - 0.85 - Uruguay + 0.6 • Average - 0.26 - Average + 0.95 (excl Honduras) • Paraguay 0.0 • Regional average+ 0.13 • Regional average(excl Honduras) + 0.39

19. Recent political and policy changes • No major political changes till 2013 (slide 9) then…Venezuelan-Argentinean elections • No evidence of abandonment of centre-left policy model. Labor policies strengthened • Post 2009 growth sustained by domestic consumption but growth fell by 2 pts & recession in 2014-5 • Tax policy still focused on distributive issues (Gomez Sabaini & Moran 2014) • Public exp/GDP not falling but less ‘fiscal space’ – redistribution focuses on the poor • Macro policies under pressure (devaluation, inflation) Actual growth in 2014/5 Was 1.3 and 0.9 % …… Source: ECLAC 2014

20. Trend in commodity prices since 2009 (fall, rebound, further fall)  impact on Gini ?

21. sense of ‘political stress’ due to growth slowdown, falling tot & policy mistakes • Economic recession & inflation …. and their political impact • Falling consensus for PT in Brazil (see later) • Recession, inflation and uncertainty in Argentina • Very difficult situation in Venezuela • But ..Uruguay, Bolivia, Ecuador, Peru, Chile, Panama, etc still doing ok • In 9 commodity exporters falling world prices/volumes, made it difficult to fund expansionary social transfers • Rising protests of middle class – that during ‘golden years’ was taxed to redistribute to poor but received few services, & lost manufacturing jobs due to REER appreciation, ‘re-primarization’, and ‘tertiarization’ • External factors less important in other 9 countries–where tot did not change much

22. policy ‘mistakes’ and the ‘middle-class’ question • In key countries a fixed exchange rate (Brazil) or ‘hidden inflation’ (Argentina) lead to: • appreciation of REER  drop in competitiveness & middle class loss of manufacturing jobs • a rise in low paid services jobs for the poor • In Brazil Roussef also weakened by Petrobras scandal • Tax level and incidence improved as middle class was taxed more but received less than the poor in terms of public services • Erosion of middle class support for left regimes? This equation illustrates such situation Political instability = a – b (income share of mid 40/Top 20) + c (income share bottom 40/Top 20) • Empirical results suggest that redistributing from ‘rich’ to ‘middle class’ reduces instability, while redistributing from ‘rich’ to ‘poor’ raises it (as the poor have no ‘voice’ while the middle class has greater political influence). • Thus, reforms that benefit only the poor and not the middle class may fail

23. Data suggest stagn/erosion of middle class income share over 2009-13

24. In 7 left regime perception of regression 2011-13(left)in 6 of progress(right) Source: Latino Barometro 2013

25. The case f Brazil (from Saad-Filho 2015) • Millions of middle-class protesters took to the streets in Brazil on March 2015 in protest against the centre-left government (CLG). • CLG delivered for a time, growth, jobs, job formalisation, min wages,transfers • Global commodity boom sustained such policies, a small expansion of infrastructure, a bit of industrial restructuring (towards agriculture, mining, oil), 21 million low-wage/productivity services jobs in the 2000s. • Such gains hampered by the global stagnation and conservative macro policy (inflation targeting, free capital movements, floating exchange rates + tight fiscal policies) that hamper fiscal expansion, industrial restructuring and REER overvaluation. • With reais overvaluation, 4.5 million ‘middle class’ jobs disappeared in the 2000s +urban services and infratsructure were neglected. • Rousseff did not dropped redistribution, but falling commodity prices and 0% growth made it difficult to fund it. A strong reais leads to de-industrialisation and loss of middle-class jobs. Low past investment in infrastructure led to worsening in water /transport services affected the middle class, that paid high taxes during golden years. • In 2014, Brazil is the LA country that already over 2011-13 shows higher rate of perceived regression (Latino Baromentro)

26. Overall conclusions • As in EU, lasting global recessions sooner or later impact growth, BoP, revenue and - possibly - Gini • Post-2008, Gini fell till 2012 thanks to strong initial conditions & increase in consumption due to countercyclical fiscal policies • In 2013, first signs that Gini stopped falling (50% falls and 50% rises) – overall + 0.3 pts • Tot and X volumes (uncorrelated with Gini till 2002) now affect Gini as ‘redistributive measures’ in place since 2003 were cut. This is key in 9 countries • Social-democratic policies were not abandoned, even strengthened but entitlements eroded + focused on the poor

27. continued • Till 2013, despite global problems, no signs that the ‘left turn’ was over • With falling ‘fiscal space’ several govmts focused redistribution on the poor • Erosion of support of middle class that over 2009-2013 saw its income share stagnate or fall • Where share of middle class fell (7 countries), Gini rose, if modestly, in 2013 and support for the left started vanishing  leading to subs. loss of elections • With shift to centre-right in Argentina+Venezuela in 2015 - the social-democratic policy package will likely be changed • With slowing growth in 2014-5, Gini might be affected cyclically also in other countries • Post 1980s liberalization, LA’s dependency on global market has risen while region has ‘re-primarized’ and prematurely ‘tertiarized’