Friday, August 06, 2010

Latin America and inequality : Tough realities for public policies (II)

From the economic point of view, inequality has broad implications for whatever the notion of welfare. Starting from the macroeconomic side, it has been widely demonstrated that inequality is a threat for both social and political stability. Besides, it creates a distortion about the true nature of economic growth ,and the real meaning of freedom associate with it . As long as economic growth by itself do not solve inequality, its positive impact is strongly biased toward those who are able to catch the whole range of opportunities available as a result of growth. Thus, the paradox which comes along, is that economic growth might become “an alternative”, although it should be the best alternative. It follows that to solve inequality, policy makers try other alternatives(second worse), such as direct redistribution which is like inflicting a punishment . Those who are more fortunate, get on their shoulder the burden of the less fortunate. In this case, the state fail twice, the first because it aborts growth, and the second ,because neither it does not propose or implement the proper public policies . From the microeconomic point of view, inequality distort resource allocation as long as those with higher income levels , dictates the consumption and production pattern, because their weight on the total consumption expenditures, is higher than what it is for those with lower income. This implies either, an higher production level of capital intensive goods, or higher level of luxuries goods imports. Both cases do not help too much ,to new jobs opportunities, but do help to increase profits because these goods have higher prices, and inequality becomes wider. To overcome such a distortion, public polices should focus on the proper issue changing the measure of economic progress .It is necessary to go beyond the GDP growth, as the key indicator of economic progress. Using the GDP measure, in the sixties Brazil was among the top ten world economies , but its Gini coefficient (1970) was 0,61.In those years(1968) Chile with lower rates of GDP(2,3 annual average 1960-1975) than today, had a Gini coefficient of 0,49.(actually following the UN report is 0,55). Thus, economic growth needs good public policies and properly focused. These are complementary variables .The “real economic growth” is a broad – based one, with special emphasis for public policies on accelerating incomes growth of target poverty groups. This approach requires to redefine the “character” of Economic Growth. For inequality, it matters more the economic structure, than the rate of GDP growth. The practical implications go on to support actively small and medium size firms. Most of public management model actually applied in Latin America economies, deals with the implications of the rural urban migration flows , from the early stage of industrialization in the beginning of the twenty century ,and its demand for public services(housing, public health, education, infrastructure) .It was necessary for the Sate to organize those services with the implementation of the organizational structure functionally designed .These days, competitiveness challenges, suggest that it is needed a different public management model,a specific targeted focused one, which fit with entrepreneurs expectations (specially those from low incomes) to do business. Finally, it is also needed a different way to measure progress.It is needed an index which focus on the impact and direction of economic growth, rather than just its speed. An alternative would be, to construct a “poverty - weighted index” (Todaro 1981), to measure social welfare progress. This index ,weighs the growth of income , in each income groups, not by the proportion of total income in that groups, but by the proportion of the total population in each group.