Sectorial shifts and Inequality A way to relate macroeconomic events to inequality changes

1. Chair of Development Economics -- University of Goettingen Sectorial shifts and InequalityA way to relate macroeconomicevents to inequality changes Carlos Villalobos Barría (University of Goettingen) Migration, Development, and Demographic Change Problems, Consequences, Solutions” June 25 – 28, 2013, University of Antwerp, Belgium Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

2. Chair of Development Economics -- University of Goettingen Outline • Motivation • Research question • The decomposition methodology • Results • Conclusions Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

3. Chair of Development Economics -- University of Goettingen Motivation This is a methodological paper based on the non-conclusive evidence about the relationship between macroeconomic variables/shocks and income inequality changes (Cornia, 2012). The opening up of the Latin American economies during the early 90s and liberalization reforms (Lopez-Calva and Lustig, 2010) The Hurricane Mitch in 1998 • Increasing remittances (aprox. 20% of GDP in 2005) • Important aid and capital flows Steadily appreciation of the RER after 1994 A declining tradable sector until 2005 (mainly agricultural activities) Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

4. Chair of Development Economics -- University of Goettingen Motivation Prof. Alan Winters: Conclusion from 1999 • Trade Liberalization generally stimulates growth (through it poverty alleviation) - Not clear in Honduras • It creates losers - it applies to the Honduran case Honduras, a place where, until now, there is no… • Macro stability • High rates of savings and investments • A committed, credible, capable government Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

5. Chair of Development Economics -- University of Goettingen Motivation But at least in education • The private sector is responsible to allocate resources • Highly segmented educational system / schools producing agricultural workers • Low quality education / lack of coverage (specially in rural areas) • Strong evidence of labour immobility • Strong bias towards the non tradable sector (skill biased) • Not necessarily formal education but unobservable characteristics Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

6. Chair of Development Economics -- University of Goettingen Motivation Inequality peacK Mitch Hurricane Commodity boom Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

7. Chair of Development Economics -- University of Goettingen Motivation 2 $ PPP per day perr capita Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

8. Chair of Development Economics -- University of Goettingen Motivation • After 1999 (facts): • Increasing rates of growth with increasing poverty (explosion of remittances, aid, etc) • Strong disequalization of the per capita income distribution • Mainly a rural phenomena • Upsurge (decay) of the non-tradable sector (tradable) • Strong evidence of labour immobility • After 2005 (facts): • Increasing rates of growth with declining poverty • Recovery of the tradable sector earnings (particularly at the bottom of the distribution • Declining inequality (mostly in rural areas) • Commodity boom Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

9. Chair of Development Economics -- University of Goettingen Motivation Evidence of Labour Immobility (worker‘s heterogeneity - Low Migration) Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

10. Chair of Development Economics -- University of Goettingen Reserach Question • How relevant are macro-economic shifts in explaining the Honduran income inequality (poverty) developments over the last two decades? • What is the story behind the fact that Honduras is an outlier in Latin America when considering the inequality trends over the last two decades? • Migration towards the modern sector • Increasing earnings in the traditional sector • Declining returns to skills (educational upgrade) • Social policies CCTP • In this paper, we propose a lower bound methodology to investigate how sectorial shifts affects the income distribution contributing to explain the almost unchanged poverty figures over the last 15 years. Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

11. Chair of Development Economics -- University of Goettingen The Decomposition Methodology • Set up as in Devillanova et al. (2010) • Workers‘ heterogeneity and Capital-skill complementarity (Imperfect mobility of labour) • Focus in rural areas • 50 % of the total population live in rural areas • 80% of the poor households live in rural areas • Strong evidence against the tradable sector (backward) • Overvaluation of the RER • Fluctuation in commodity prices are relevant • Natural catastrophes are common affecting principally the rural infrastructure and production. (Mitch Hurricane in 1998 but many other tropical storms are frequent) Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

12. Chair of Development Economics -- University of Goettingen The Decomposition Methodology The backward (tradable) sector mainly agricuture Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

13. Chair of Development Economics -- University of Goettingen The Decomposition Methodology THE RURAL SECTOR (50 % of the total population - 80% of all poor households) Macroeconomic shift 1999 2005 Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

14. Chair of Development Economics -- University of Goettingen The Decomposition Methodology • Oaxaca-Blinder type of decomposition of a distribtional change • The symbol (´) makes reference to t2 ΔD = D(t2)− D(t1) ΔD = D(WS‘, BS‘) − D(WS, BS) ΔD = [D(WS‘, BS‘) − D(WS‘, BS)] + [D(WS‘, BS) − D(WS, BS)] We can simulate D(WS‘ , BS) We decompose the distributional change in a between sectors gap effect and in a within sector effect which is caused by changes in productive endowments, their returns and employment changes across sectors (weights) . Note that there is no path dependence arising in this methodology. Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

15. Chair of Development Economics -- University of Goettingen The Decomposition Methodology • 1991-1999; 1999-2005; 2005-2007 Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

16. Chair of Development Economics -- University of Goettingen The Decomposition Methodology • 1999-2005 (Period of high GDP Growth without poverty reduction) Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

17. Chair of Development Economics -- University of Goettingen Results • Honduras 1999-2005 (Growth + Unchanged Poverty) • At least 40% of the Honduran (GINI) disequalization between 1999 and 2005 can be attributed to the decline of the tradable sector. • Documentedelements • Appreciated RER • Mitch Hurricane • Weak commodity prices Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

18. Chair of Development Economics -- University of Goettingen Results • Honduras 2005-2007 (Growth with poverty reduction) • At least 33 % of the Honduran (GINI) equalization between 2005 and 2007 can be attributed to the upsurge of the tradable sector. • Documentedfactors • Commodity Boom Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

19. Chair of Development Economics -- University of Goettingen Conclusions This analysis likely represents a lower bound of the impact of macroeconomic conditions on inequality changes. • Bias against the tradable sector, increases the return to skills, disequalizing the labour income distribution There is an measurable (lower bound) impact of macroeconomic shifts (traduced into the decay or upsurge of the tradable sector) on inequality changes. Trade reforms as well as changes in the real exchange rate and revenues shocks affecting the tradable sector should be carefully considered when analyzing poverty and inequality dynamics. The losers in Honduras were no t randomly selected. The were mostly the poor  In the long-run, avoid agricultural workers education. Promote inter-sectorial mobility of workers (as Prof. Winters recommended) by providing as in the developed world general education. Generate basic and open skills (Language and Mathematics) Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality

20. Chair of Development Economics -- University of Goettingen Thank you! Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality