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.

Latin America´s inequality: lessons for the developed world

If we want to forecast the future consequences of growing inequality in United States and Europe, we should pay more attention to Latin America’s experience. For a century (if not longer) the concentration of resources at the top in that region has been higher than in any other part of the Western world. The top 1% today controls around a fourth of total income in Brazil and a third in Chile compared to around 20% in the United States and the United Kingdom and much less in other developed countries.

For more than a century, Latin America has witnessed a negative interaction between high inequality, poor economic performance and weak institutions—contributing to persistent political volatility and social discontent. A small elite, which still controls a large share of land and financial resources, has had limited incentives to increase productivity or invest in new sectors of the economy.  Why would they innovate when they could secure huge returns in low risk activities?

As a result, Latin American countries like Brazil or Mexico confronted a lack of well-paying jobs much earlier than the rich economies. During much of the 20th century, economic activity concentrated on large plantations and capital intensive manufacturing activities that created limited formal employment.  Most workers had bad jobs that paid little and did not provide access to social benefits. The process of market liberalization promoted by conservative economists in the 1980s and 90s did not change this negative relationship between inequality and the economy: the same old elite benefited from the privatization of public companies, while few domestic firms were able to successfully compete internationally. Much has been written about the reallocation of jobs from the United States to Mexico, but the truth is that a large number of Mexicans still work in the informal sector and receive wages below the poverty line.

The lack of economic dynamism had much to do with the control of policymaking by the top 1%.  They successfully pressured for low taxes, particularly on personal and corporate income.  Most Latin American countries have never spent enough on public health care and education and have paid too much attention to programs for the wealthy.  Until very recently, support for universities and sophisticated hospitals for the rich were high, while spending in primary education and rural health clinics insufficient.

Given these exclusionary policies and lack of economic dynamism, it is not surprising that citizens have supported populist responses repeatedly. Leaders like Juan Domingo Peron in Argentina in the 1940s and 50s or Hugo Chavez in Venezuela more recently promised to provide good jobs and adequate social benefits not only to the poor but also to large segments of the excluded middle class. Unfortunately, most often their governments ended up implementing unsustainable economic policies, while failing to confront the power of the top 1%.

Inequality has affected politics negatively in Latin America in many other ways. It has contributed to social polarization and reduced the space for political compromise. The elite had always shown limited willingness to strengthen state capacity or promote effective anti-corruption measures, while social movements have never been powerful enough to advance reform agendas consistently. Brazil’s instability in recent years constitutes a great example of the negative links between weak institutions, corruption and inequality-induced political conflict. Under presidents Lula and Dilma Rouseff, the government implemented some redistributive policies that favored the poor, yet failed to promote transparency or reduce briberies. Conservative forces—which favor the economic status quo—took advantage of this failure to reverse many of the progressive policies, halting the reduction of inequality.

There are, of course, significant differences between Latin America’s history and the United States and Europe today. The American economy is still an engine of technological innovation and has strong institutions—including a successful Federal Reserve. Despite its weaknesses, the European welfare state remains a powerful equalizing machine. Nevertheless, the Latin American experience constitutes a useful warning of what we could become in the future. In particular, it highlights the worrying long-term impacts of growing income concentration, weak labor markets and unresponsive political institutions. When voters felt marginalised in Latin America, populist responses became attractive. Yet populists could seldom resolve their economic problems or create truly inclusive institutions… leading to the kind of vicious cycle that we are starting to see now in other parts of the world.

More to come as I try to develop some of these arguments in a book during this upcoming year.

Inequality measures in Latin America

I have arrived to the Kellogg Institute (a fantastic place to work with really helpful people around) for a year on a project on the interactions between political and economic inequality in Latin America.  One of the first problems I am dealing with?  Indicators!  In the case of political inequality, the problem is that there is little agreement on how to measure it and a lack of relevant data.  The case of income inequality is more straight forward, well-known but also frustrating.

We often say that "Latin America is the most unequal region in the world", forgetting the diversity of distributional outcomes within the region.  But which countries are doing best and worst on income distribution?  The answer is that it depends on who is measuring it.  There are two different cross-country databases on income distribution: one from the Economic Commission of Latin America and the Caribbean and one from the World Bank together with the Centre for Distributive, Labor and Social Studies in Argentina.    Both use the same sources (country-level household surveys), but make different adjustments.  The result?  The magnitude of inequality and the order of countries varies (sometimes a lot) depending on which of the two we use.

This is evident when considering the so-called Palma Index (which compares the income of the top 10% with that of the bottom 40%) in both cases:

Note two things: the Palma index as measured with ECLAC data is larger in several countries like Honduras, Guatemala but also Chile and Peru.  Also, the comparative levels of inequality change: Colombia is the most unequal country when using SCEDLAS data but not there are other countries with more inequality when using ECLAC data.

There are several reasons to explain these differences but I want to concentrate on the implications here.  First, much of our econometric results may be driven by data issues... that are seldom fully studied.  In our graph, Honduras is a total outlier that may be eliminated from some regressions in one case or one of many in another.  Second, regional studies that treat the data carefully and are based on descriptive statistics may be more valuable than commonly recognised (more on this at a later stage). Third, at the end, we may need to always work with stylised facts when discussing inequality and triangulate as much as we can.  There is little doubt that Colombia and Honduras are very unequal and that Uruguay is probably the least unequal country in the region... yet what happens in the middle is less clear and needs careful consideration and a lot of triangulation. 

More on all these topics in upcoming weeks; I hope to use the sabbatical to write about inequality in this blog more often.  Feedback most welcome (as it will feed directly in the new project).

Lessons from La Paz

I am glad to come back to the blog after more than a year without writing.  Latin America is in a rather interesting and contradictory moment (e.g. Mexico elects the first leftist candidate in decades while Colombia opts for an Uribista) so it is a great opportunity to write again.  I am also beginning a sabbatical at the Kellogg Institute in Notre Dame soon and will try to write about the region and about my research projects more often.

I had the opportunity to spend last seven days in La Paz, a unique city in Latin America.  As part of the CAF-LAC final agreement (which is finishing in its currently incarnation after six successful years), we organised a conference with the Universidad Católica San Pablo on Social and Economic Development in the Andean countries.

I could reflect on many components issues discussed during the last few days, but let me emphasise two that may require further research:

a. The political economy of structural change in mining/oil economies.  In conversations with John Crabtree, we agreed that finding the right time to promote structural change (for example, through active industrial policies) is rather complicated.  Commodity booms are periods of Dutch disease: rents are high, the exchange rate strong and it is just easier to benefit from mining exports and cheap imports.  There are just not enough political incentives to promote new sectors of the economy (including through a weaker exchange rate).  These are often periods of active state intervention... but not active industrial policy (at least this has been the case in most of Latin America during the 2000s).  In contrast, period of crises (which often take place after commodity booms) lead to the adoption of neoliberal policies and the reduction of state intervention.

Do you know of any cases within Latin America or beyond of active industrial policies in commodity exporters?

b. There is an intense debate in Bolivia about the macroeconomic sustainability of current policies.  Is the government truly committed to stability?  Will it continue reducing reserves at the current (high) speed)?  Will it maintain its high public deficit?  Answering these questions is not only about economics but about politics and about policy learning.   We need to understand the extent to which the current government has LEARNT the dangers of deviating from macroeconomic rigour.  Everyone recognises that the government  was rather careful in recent years--partly because it still remember the hyperinflation of the 1980s.  But, if this is the case, won't it remember those lessons in the near future?  Shouldn't policy learning result in a more careful policy stand after the elections next year?

In discussing these questions with a few friends like Jose Peres Cajías, I realised that we may not have enough research on policy learning and its implications on macroeconomic policy both in good and bad times.