Nora Lustig
PhD in Economics and graduate in Economics from the University of California at Berkeley. She is Samuel Z. Stone Professor of Latin American Economics and founding director of the Commitment to Equity (CEQ) Institute at Tulane University. She is also a non-resident senior fellow at the Brookings Institution, the Center for Global Development and the Inter-American Dialogue in Washington. She was a founding member and president of the Latin American and Caribbean Economic Association (LACEA).
Interview
Q/ How do you assess the progress and remaining challenges in terms of reducing poverty and inequality in Latin America and the Caribbean in recent decades?
It is a pleasure to be here and to be able to discuss such important issues for our region, both in economic and social aspects. Regarding the progress and challenges we still face in terms of poverty and inequality, I will begin by commenting on the issue of poverty. The first point I would like to highlight is that Latin America is a region with an excess of poverty. What does this mean? That when we compare Latin American countries with others with the same per capita income, poverty is in excess.
All the countries in the region, when one makes a quantitative analysis of the poverty-income per capita ratio, are, on average, above the level of other countries with the same level of development. And one of the essential sources of why there is an excess of poverty is precisely because it is one of the most unequal regions in the world. The challenge of poverty and inequality, in a way, go together. However, poverty is highly linked to what happens with economic performance. And, unfortunately, in general, Latin America’s economic performance has been mediocre, with some exceptions. The most recent data are also highlighting the concern that this is a region that really cannot have high, sustained and inclusive growth.
In terms of the proportion of the poor population in the region, as a share of the total, there has been a decline. In 1990, according to ECLAC, about 50 % were poor; this has now fallen to about 25 %, 27 % in the most recent data, as the population has also grown and the number of poor people today is not so different from the early 1990s.
Q/ What do you consider to be the main structural barriers that limit the population’s opportunities?
I believe that the reason why the population has an excess of poverty, in large part, is because it is one of the most unequal regions on the planet. Levels similar to those in Latin America are found in some African countries, but in the rest of the world they are not as intense as those in our region. What has happened, however, is also interesting because during a period of time that coincides with the first decade of this century, inequality fell in practically all countries. This is a phenomenon that should be noted because it is unusual; it practically never happens in a significant way and in so many countries at the same time. The curious thing is that it happened in countries where there were good growth rates, due to the commodities boom we had at the beginning of this century, and in countries that did not grow so much.
So, it occurred in practically the entire region and we can link it, mainly, to what happened in the labor market in particular, with the relative salaries of the highly skilled population versus lower skilled workers: those relative salaries decreased for several reasons. One of them was because employment demand patterns changed in favor of the lower-skilled working class. Also, during the 1990s and early 2000s, an expansion of education. This led to more people with their skilled labor. And finally, perhaps an important element is that it was a period in which real minimum wages also increased, and this contributed to a narrowing of the gap between highly and less skilled workers. So there we have a series of lessons and public policies that are important to keep in mind, both the element that has to do with the increase in education coverage, as well as minimum wage policies. Unfortunately, this fall in inequality has not been sustained and, since 2012 or 2015, depending on the country, we see that it has even started to rise. By no means has it risen as much as it had fallen in the period of decline, but it is not a process that has continued and then we have to see what other elements should be put in place to continue the process of decreasing inequality.
All this that I have told you has to do with inequality, mainly in the labor market, and also what happens with transfers. But the information used to measure this type of inequality does not really include the richest population. And when we have access to information that does include them, what we see is that the concentration is very strong, which may have decreased somewhat during the period in which labor income inequality was reduced, but the concentration rates are still among the highest in the world. In terms of how much wealth and income, for example, the top 1 %, which is at the top of the distribution, Latin America is among the highest in the world.
Q/ What are the main structural barriers that limit opportunities?
Well, why are we in such an unequal world in Latin America? It has something to do with the dynamics at the macroeconomic level, because the type of development that is taking place does not generate enough jobs to offer opportunities to people who still come with lower levels of education or training.
What we have observed, in general, in countries that have developed, is that during the growth process, in order to be sustained and inclusive, the population that is employed in low productivity sectors moves, by the force of the demand for goods and services, to the higher productivity sectors. Something is happening in the region so that this does not happen, and I must tell the public that I think we do not know why this does not happen, that we do not really know why economies do not grow.
We economists must act with humility and say that we have many hypotheses and that we have tried different policies in many countries and we still have not found the answer. This is on the macroeconomic dynamics side. We also have a dynamic that happens at the microeconomic level, of households, of what happens to people in terms of their ability to acquire a better situation to be able to raise their standard of living, of families, over time. And what we observe is that in Latin America, approximately 50 % on average of what happens to people in their adulthood in terms of their capacity to generate income, education, etc., is determined by hereditary factors. What are hereditary factors? Where were you born? For the one who was born in a rural sector and in poor areas, the probability of managing to overcome this is relatively low. For the one born to low educated parents, the probability of having more education in the future is also lower than for those born into highly educated families. And, also, something very important in the regions is that those who are not white may also have a lower probability of achieving growth and development goals than if they belong to the white population. Unfortunately, in the region we still find that skin color determines much of what happens in terms of opportunities.
Q/ State fiscal policy has a distributive impact and has a particularly important impact on poverty. How equalizing has fiscal management been in Latin American and Caribbean countries? How does it compare with other regions? Which instruments have the greatest impact?
One of the instruments that the State has to modify inequality -which comes, as we were saying, from hereditary and systemic, institutional and macroeconomic factors- is through redistributive policy, which can be implemented with fiscal instruments such as taxes and transfers. We at Tulane University’s Equity Engagement Institute have developed a comprehensive and comparable methodology that allows us to analyze the impact of fiscal policy in many countries around the world. In fact, we already have 77 countries in our database, so we can compare Latin America with other regions. In fact, our database is the only one that covers the entire region with data on redistribution.
The first point I would like to mention is that Latin America is very heterogeneous in this respect. There are very large States, such as Argentina and Brazil, where the size of the State resembles that of advanced countries, even the Nordic ones. And there are States so small, as in the case of Guatemala, that they practically do not collect or redistribute anything. This also determines how much can be redistributed, which is heterogeneous in the region. But, on average, Latin America redistributes about the same as other upper middle-income countries. It is not particularly bad in terms of what happens on the redistributive side when compared to peers, but it definitely redistributes less than advanced countries.
The European Union, the United States, Canada, all redistribute more and the differences can be double or a little more than double. But one thing that is worrying in the region is that the more that is dedicated to social spending, the greater the redistributive effect, that is, the more inequality falls, which is good news. Latin America, unfortunately, and compared to what we see in other countries, is more unequal but does not dedicate more resources to redistribution.
In other words, it goes in the opposite direction. The greater the pre-fiscal inequality (before the tax authorities carry out their redistributive action), the greater the redistributive effort. This is unfortunate, because one would expect that the greater the prefiscal inequality, the greater the effort to reduce it.
The other element that I would like to mention is that in Latin America we do not observe a difference in terms of the fall in inequality due to fiscal instruments compared to other upper middle income countries, that is, with peers, not with advanced countries. One thing we have observed in the region is that in a number of countries fiscal policy increases poverty. What does this mean? That a proportion of the poor are net payers to the treasury. They receive less in cash transfers than they pay in taxes, especially indirect taxes such as VAT and other specific taxes such as those levied in several countries on certain types of consumption. And this for us is a result that should not occur in any country, especially in any upper middle-income country; fiscal policy should make the poor net payers.
Q/ What are the most promising instruments for reducing inequality while improving inclusion in a lasting and sustainable way over time?
In order to improve the impact of fiscal policy on inequality and, above all, to eliminate the issue I mentioned a moment ago, that in several countries fiscal policy impoverishes the poor because a group of poor people are net payers to the treasury. Here I am not taking into account, by the way, transfers in kind, it is not public education or health that I am contemplating, but, as I always say, it is very important, but I do not know how poverty is measured by monetary poverty in this case. What we want is for the treasury not only to eliminate extreme poverty, but not to make any of the poor net payers. For this, possibly, one of the instruments that has been very powerful in reducing extreme poverty through fiscal policy is cash transfers. And here there is a discussion about whether transfers should be universal or targeted.
I believe that this discussion has to take into account the type of objective. Universal transfers are obviously better in the sense that they do not have exclusion errors, but in order to reduce or eliminate extreme poverty they would have to be much higher than they are today. And then we would be faced with the impossibility of financing them, and also, if they can be financed with taxes, the inefficiencies that would be generated by the increase in taxes that this would entail.
So, when we propose universal transfers in our region, we are saying, in a way, that we prefer to pay people who do not need it. That is to say, to have errors of inclusion in order not to have any errors of exclusion. But with that, what we are doing is focusing less of the resources destined to transfers to the population that needs it most. Therefore, transfers, which are a very important element, must maintain a focused and generous component to eradicate poverty and eliminate the element that I mentioned a while ago, in the countries where this exists, that part of the poor population is a net payer to the Treasury. This is an instrument.
The other instruments, obviously, which are important and are being underutilized in the region, are income tax, especially what happens at the top of the distribution, where we have many marginal rates, well below the median in advanced countries. And the wealth tax is still very underutilized, especially the tax on property and the transfer of wealth, such as the inheritance tax.
Q/ Social protection has been strengthened in many countries, but despite advances in coverage, sufficiency remains very limited, especially for poor groups. How do you assess the efforts made to expand coverage, especially through non-contributory programs?
As I have mentioned, one of the fundamental objectives of fiscal and redistributive policy must not only be the reduction of inequality, but also the reduction and, hopefully, the eradication of extreme poverty in our countries. What would be needed with targeted transfers to the poor population to eradicate extreme poverty, in many cases, is very little as a proportion of total spending. So it is more a matter of political decision. To date, on average, in our region, transfers cover one third of the extreme poverty gap, that is, two thirds are not covered. This means that they should be much more generous than they have been up to now, and also cover about 50 % on average, although this varies greatly among countries, of the population living in extreme poverty. At the same time, an average of 40-41 % goes to the non-poor population, or those who are neither moderately poor nor extremely poor. In other words, we are allocating part of the transfers to sectors that do not need them. Therefore, the use of non-contributory instruments is extremely important, because informality means that many of the benefits that are part of the social security system would not reach the poor population. Non-contributory systems are very important, but I believe that, as I said a moment ago, it is important to take into account to what extent it is necessary to have targeted transfers, that their level be sufficiently generous and that, at the same time, they also try to cover the entire population in these conditions so that extreme poverty is eradicated.