Friday, June 15, 2007

Income distribution in Latin America:How to move a step forward?(I)

Income distribution, is a sensitive issue in most of Latin America countries, not just because of its relevance for social policy design, but because this region is among the more unequal income distribution in the world.-
The usual instrument for measuring income distribution ,is the Gini coefficient. This coefficient has a range of value between zero (0)and one (1), with (0) meaning a perfect income distribution, each person get the same income, and (1) meaning the worst income distribution, with one person getting the whole income generated in an economy. Thus while in the OCDE countries the average Gini coefficient is somewhat below 0,30,in Latin America is above 0,3 and close to 0,5 with an average of 0.41. Some countries like Brazil, are on the top of this range, and others ,like Uruguay and Costa Rica are on the bottom of it.
The available empirical evidence suggest (south east Asia Tigers, and Chile after the mid eighties recession ,Panama and Guatemala since 1990 up to 2002) that, economic growth is the first step to improve income distribution .
As long as that growth meant higher employment level, the overall impact of such growth was to improve income distribution, because the fraction of labour income over total product was higher. However, the underlying assumption is that labour services markets were flexible enough to support employment opportunities .-
Usually it is more often to have labour services markets with income bias, which means that labour laws and regulation make the labour service market less flexible, because it protect income instead of employment. The paradox in this case, is that firms do not have any chance different to that of laying off people ,or substitute people for capital when it comes to adjust themselves to different market conditions. Either way , the connection between higher economic growth and higher labour income share , get weaker. It follows that the economy might get higher growth , and keep its former income distribution unchanged. That was the experience (in the same period) for Argentina, Paraguay, Venezuela, Equator, Nicaragua and Brazil).-
It has been suggested ,that education is the second best tools to improve income distribution. The south east Asian economies experience of investing in education , has lead that beliefs to be like the driving force on the issue, leaving aside some particular aspects of Asian experience, such us the strong sense of commitment and compromise, Asian people had for getting a better education which by the way, was strongly connected to highly qualify job opportunities in theirs global firms networks. Thus, it was not education by itself, but its complementary nature with high performance kind of job. On the other hand, education achievements are strongly related to individual natural talents, which are not that much evenly distributed in Latin America. In fact, because talented people is scarce, education might have the opposite effect to the one which is expected: To deteriorated income distribution !. Better talented people concentrate the best education opportunities, allow them to get the higher paid jobs(including bonus compensation, stock options) widening the gap between them and those less talented.
In fact , since 1990 Chile has invested huge amount of resources in education ,and income distribution has not changed substantially in the same period ,although its trend is to improve slightly although not exclusively because of education.
Therefore, two of the classics tools for income distribution improvement seems to have some weakness to cope properly with the issue .-

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