Income inequality and the commodity boom in Latin America

I just finished a paper exploring the links between income inequality and the commodity boom in Latin America.  I am still surprised with how many people claims that "the reduction of inequality was thanks to the commodity boom" without realizing that those two processes usually don't go together.   While the paper does not use new data, it does try to use all the evidence available (both descriptive statistics and secondary sources) to conclude that governments managed the commodity boom better than in the past in the short run, but did not promote any radical change in the long run.  The paper also presents data based on household surveys with new studies based on taxes, which very few people have done so far.

Anyway, it would be great to receive comments on it if anyone has time to read it.  Below is the abstract and here the paper:

Past historical experience and both orthodox and heterodox economic theories lead us to expect a positive relationship between income inequality and commodity booms.  Yet most of the literature has not been surprised by the fact that Latin America’s recent improvement in income distribution coincided with a rapid growth in commodity exports.  How was this positive outcome possible? Did income distribution improve because of higher commodity revenues or despite them? This paper answers these questions—seldom explored in the literature—through an extensive discussion of economic studies, descriptive statistics and policy changes. The paper shows that the reduction of inequality took place among the bottom 90% of the population only, while the income share of the wealthy remained stable when properly measured. I show that the reduction in the Gini coefficients resulted from a combination of better labour market outcomes—which favoured unskilled workers more than skilled ones—and better distributive and redistributive policies. The paper concludes that political pressures forced most Latin American governments to manage the commodity boom better than in the past in the short run but did not lead to significant transformations in the region’s elite-driven development model.

Bolsonaro: primarily a counterrevolution from the rich?

For all the discussions about corruption, the anti-PT vote and Bolsonaro as another Trump, I think these two graphs summarized as well as anything what may have happened in Brazil.  The first one reveals the growth of income between 2002 and 2014 for different groups of the population. The second, the vote that Bolsonaro (in blue) and Haddad (in red) received depending on the income level of the municipality. The upper middle class, which had not won much from the PT years, got upset and tired and decided to vote for somebody else.  One of the saddest things is that this group of the population should be more opened and liberal... and ended up voting for the most iliberal candidate possible. 

https://wid.world/document/divided-brazil-hindsights-on-the-growing-politicization-of-inequality-wid-world-issue-brief-2018-3/

On teachers and hedge fund managers

Today we had a talk from Michael Sandel who opposed the "tyranny of meritocracy" based on money and success with the recognition of the common good--even if hard to define!

With one of his examples, it reminded me of a question that I have heard (and raised myself) many times: why is it that hedge fund managers are paid MUCH more than kindergarten teachers?  The answer of why they should NOT be paid more is clear: a great kindergarten teachers contributes much more to the common good and to the construction of future good societies than a hedge fund manager.

Here a few answers that try to justify the higher income and why I think they do not work:

1. It is about merit: hedge fund managers make a more significant contribution by helping financial markets work and send the right signals.  Since financial markets are the blood of any economy, then they are being paid by their more significant contribution.

This explanation is simply a joke after 2008.  It may be true that finance when supporting production is vital, but what about speculation?  Is it truly contributing to the common good?  Even if it was, is it doing it hundreds of times more than a kindergarten teacher?

2. It is about supply and demand and, therefore, marginal productivity.  This is the favorite neoclassical explanation: in this case, it would imply that many people can be a good teacher (so supply of teachers is high) but few can be good hedge managers (you require sophisticated technical skills like engineering, etc).

This is, again, hard to understand.  First, there are many engineers that are poorly paid.  Second, the supply of really good teachers is not that high, and the market does not seem to know how to recognize quality.  Third, the key concept in the neoclassical theory of value is marginal productivity, which sends us back to what hedge fund managers are really doing.  Are they really being more productive than others?  In what ways?

3. Connected to the previous point, it is about risk.  Investing in the financial sector is much more risky than teaching students so the rewards also need to be higher.  Moreover, surviving that risk and the tension created requires a particular character (again, going back to merit).

Another superficially powerful explanation but rather weak in practice.  Are a lot of hedge fund managers really ending up poor?  Or do they generate enough income to sustain their operations?  And why is "risk" more important than, say, "patience"?  Anyone that has been in a classroom full of three year olds knows how hard to it is to manage them and how skillful one needs to be.

I realize I am not saying anything new, but I just want to emphasize who weak, at the end, the current value system is.  It is not only that the current level of inequality may be morally repulsive. It is that it does not have any clear justification (it is about the market is a weak social explanation) and it is actually leading to a very inefficient and poor allocation of resources.

What am I missing?  Are there other explanations?  I would love to hear from anyone who reads this and has another views.

Reviving social-democracy

As usual Branco Milanovic has a useful blog, this time reviewing a book about the state of the left.  Here the blog entry and here a link to the book.

A two by two table may be useful to summarize some of the arguments being debates and two central debates today:

	Pro-Cosmpolitan	Anti-Cosmopolitan
Pro state-led significant (re)distribution	Traditional social-democracy	Some of the European far-right????
Anti-state-led significant (re)distribution	Progressive neoliberals (‘Third Way a la Clinton, Blair)	Trump

The common argument today is that the coalition between the financial elite and social progressives resulted in policies that promoted cultural equality (recognizing the importance of gender equality, the problem of race, sexual freedoms, etc) while protecting the economic interests of the (financial) elite.  This coalition created a clear group of losers (both culturally but also economically): white men with manufacturing and semi-skilled jobs.    These voters "responded" by starting a cultural counter-revolution that is best represented by Trump.

Several questions emerge here:

a. Does Obama truly fit this description?  What about the Nordic social-democracy (which is losing votes nearly as fast as the left in other countries)?

b. Why did social-democratic parties adopt this kind of agenda?  Was it a result of political calculations?  Selfishness?  Ideology?

c. Most importantly, can't we really not move to the pro-Cosmopolitan, pro-redistribution cell?  Why not?  It is true that there are significant economic constraints towards a model with better employment, particularly in Europe.  Yet improving and even expanding welfare provision is by no means impossible and would benefit more than 50% of the population.  So I still wonder if a narrative around the importance of a sharing economy with redistribution and more state-led innovation is not possible.  It probably just needs better political entrepreneurs, no?

My main concern (which Milanovic has expressed very well in other blogs) is what should be social-democracy's position regarding migration?  An anti-migration position is incoherent and, in my view, unethical.  Yet an open borders position that fails to recognize clear social and economic tensions is also naive... maybe if resolving this problem and improving the broader narrative about a protected future that celebrates all human rights is possible and the key challenge.

Bolsonaro da miedo

Realmente uno se da cuenta de qué distinto piensa la gente a ti cuando alguien como Bolsonaro obtiene un 46% del voto. ¡Qué tristeza y qué miedo!  Mi análisis sobre ello en Agenda Pública: http://agendapublica.elperiodico.com/bolsonaro-nuevo-traspie-para-la-democracia-en-america/

Three quick readings on inequality

1. A 2011 on Slim and the creation of his museum.  He owns 380 Rodin's sculptures and wears 5,000 dollar suits but the journalist still makes an effort to present him as a regular man. Really?

"The 71-year-old lives in a modest six-bedroom house a mile from his office, and has no interest in flashy super-yachts or palatial houses around the world. His grey pinstripe suit may be made by Brioni, the fine Italian tailors, but his watch is a very ordinary-looking plain dial with a leather strap. His black leather loafers are shiny, but no more brilliant than any other self-respecting Mexican businessman’s."

2. A bottle of whisky was just sold for US$1.1m... yes, that is right, more than a million dollars!!!!!! (and, incredibly, it is not the first time)

3. On a more optimistic note, Oxfam in general and Oxfam-Mexico have done really interesting work on inequality.  They have now teamed up with the e-paper Chilango to produce a series of really interesting articles on how people from different classes live.   This special issue is really worth reading. 

Inequality should be explored from the social and not individual perspective

I just re-read, Gregory Mankiw's (in)famous defense of the top 1%, where he implicitly or explicitly argues that: (a) inequality results from payments for significant contributions to society; and (b) inequality does not lead to inefficient economic outcomes or harms equality of opportunities.   The paper also criticizes Raw's defense of income redistribution. 

This paper (as many other discussions of inequality) tend to adopt an individual-based approach (not surprisingly coming from neoclassical economics).  The questions are about individual incentives, individual just or unjust payments, comparative levels of utility, Pareto efficiency (that is, can we make somebody better without making anyone worse), etc.  But is this the best perspective?  What about if we adopt a social perspective?  What is we assume that our responsibility is to use resources in a way that everyone can live better while minimizing the costs on the environment?

If we adopt that and only that approach, three questions become central:

a. Won't a more equal distribution of income improve societies' ability to provide  enough income and rights to live a good life to everyone?

b. Is there any evidence to assume that a jump from high inequality to low inequality (not to perfect equality which is an unrealistic goal) will lead to significant costs in terms of economic growth?

c. Is there any evidence that the creators of Apple, Harry Potter or ET (to name the people that Mankiw uses in his defense of the rich) would not have made exactly the same contributions with less income rewards?  Why is it that Steve Jobs in the discussion of his life and success at Stanford does not mention money but dreams and passion?

I think there is increasing evidence that the answer to each of these yes, no and no: there is just no doubt that societies will be better off and we will meet our obligations to each other in low inequality environments than high ones. 

Combining data with political analysis

I just came across Duncan Green´s entry on inequality from a couple of years ago.  I like his argument that we need more on the politics of inequality reduction and his research project proposal (has he or his group advanced on it?  Does anybody knows?)  Yet one thing he does not acknowledge is the need to have more interaction between data and politics to make sure we are discussing real life.  His example of Brazil is paradigmatic in this case: Brazil in the 2000s would probably be a cae study in his inequality project (it has been a case study of inequality reduction in many other studies and books, including Why Nations Fail)... but maybe this would be a mistake.  I am afraid that unless we know more about the rich, we will know relatively little about inequality... but it is just too hard to get this information. What is the best way forward?

Is Costa Rica more unequal than El Salvador?

I am currently in the midst of a research project evaluating the long term determinants of inequality in the eighteen Latin American countries.  Because I am interested in COMPARATIVE historical processes and there are only eighteen countries, econometrics analysis is not particularly useful.  Instead, I will probably use qualitative comparative analysis (CQA) as an organizing devise.  This requires creating sets of countries closer to the very unequal and not very unequal categories (since we are studying Latin America all countries are very unequal).

Here it is where the problems begin.  The data is not totally consistent with what I think we know about income distribution in Latin America.  Following Gabriel Palma's work, I organize countries in two criteria: the level of the Palma ratio (relation between the top 10% and the bottom 40%) and the middle groups (deciles five to nine).  I establish cut-off points that are related to global patterns of distribution.

There are two main problems with this data: one about cut-off points that we can ignore for the moment and a more relevant one (where any feedback is most welcomed) having to do with the various of specific countries.  The place of El Salvador and Peru (and to some extend the Dominican Republic) is particularly surprising. 

In particular, compare Costa Rica with El Salvador: despite recent changes in both countries, can we really assume that Costa Rica is more unequal than El Salvador?  Where are El Salvador's fourteen families?

Of course, this is not a problem of my research alone--which is the most worrying bit.  How much should we value quantitative research on inequality that is based on such questionable data?  Are we really measuring INEQUALITY when considering income distribution based on household surveys? 

Inequality can only be reduced through violence... and implications for Latin America

Walter Scheidel wrote last year a really interesting book, The Great Leveler, which I am in the process of reading.  He argues that revolutions, wars and other forms of violence have historically been the way to significantly reduced inequality.  The argument has been used by the right to argue that there is not much we can do to reduce inequality.  In this interview, The Economist tries very hard to make Scheidel recognize exactly that.   Yet this is a silly argument for several reasons: (a) there are some exceptions to Scheidel´s rule; in particular, the Social-democratic social experiment in the Scandinavian countries begun before the Second World War and was only partly facilitated by it; (b) the fact that conflict helps inequality reduction does not mean that we cannot find more creative policy tools in the future; in fact (3) this is an alternative interpretation of the book: unless we don´t find ways to stop the current concentration of income at the top in the global economy, we may have to deal with significant conflict.

The book may also be quite significant for Latin Americanists and partly explain why inequality never went down as much in this region than others.  Latin America has historically been a relatively peaceful continent, particularly in the 20th century.  The World War and the Communist challenge affected it but less than to Europe.  And yet, it is also interesting than, as far as we know, the process of Independence replaced one elite by another without significantly reducing inequality.  Do we have good studies of why that was the case?

The 10 richest Latin Americans

Check the list of the ten largest Latin Americans based on data from Forbes here.  Several aspects of the list are interesting:

• There is just one woman in the list, whose income come from her late husband. Latin America's business elite is even more male-oriented than in developed countries.
• The list is dominated by Brazil (five) and Mexico (three).  This has less to do with the dynamism of these economies and more to do with the combination of size and inequality.
• As expected, their main interests are in relatively traditional sectors, including finance, mining, and food processing.  The dominance of these sectors would be even more evident if we took a longer lists of the richest Latin Americans and main business groups.  

It would be interesting to do more research on their origins of their wealth as well as the way they have become transnational actors.  This is particularly evident in the case of Brazil, where 3G capital (a global investment firm with links to Buffet and interests across the developed and the developing world) constitutes the main source of wealth for 3 of the men in the list.