02 April 2013

How committed to equity are Latin American governments?

Long held up as examples of societies rife with inequality, countries in Latin America are now lauded for their attempts to do something about it.   But how committed to equity are Latin American governments?

This guest blog from Nora Lustig gives us some insights based on the Commitment to Equity Project. The results on health and education spending are particularly interesting....

Nora is the Samuel Z. Stone Professor of Latin American Economics at Tulane University and nonresident fellow at the Center for Global Development and the Inter-American Dialogue (and IDS Board member).

By Nora Lustig

Latin America’s distribution of income and wealth has long been the most unequal in the world—but poverty and inequality have been falling consistently since 2000 in most countries of the region. What has changed in Latin America? Are the region’s governments more committed to equality than in past? Have their tax and spending policies improved? Which governments are most committed? Which least? What policies and programs have been most effective in redistributing income? Are they sustainable? What is holding Latin America back from faster gains? What more—or less—should governments be doing?
The Commitment to Equity project (CEQ) is working to answer these and many related questions. A joint effort by the Inter-American Dialogue and Tulane University, the CEQ has been designed to measure the impact of taxes and government spending on inequality and poverty in every country of Latin America http://www.commitmentoequity.org. CEQ studies have now been completed on seven countries—Argentina, Bolivia, Brazil, Mexico, Paraguay, Peru, and Uruguay.

The early conclusions of the CEQ project point to a wide variation among countries in their policy choices, and the impact of those choices on income redistribution and poverty reduction. Some examples are:
  • Government size varies greatly in Latin America. Government spending is around 40 percent of GDP in Argentina and Brazil, similar to that of some European nations and the US, while it is only half as much in Mexico and Peru.
  • Taxes and transfers reduce inequality and poverty by nontrivial amounts in Argentina, Brazil, and Uruguay, less so in Mexico and relatively little in Bolivia and Peru.
  • Personal income tax varies from around five percent of GDP in Uruguay to nearly zero in Bolivia. In all countries in which they exist, direct taxes are progressive, but because direct taxes are a small percentage of GDP almost everywhere their redistributive impact is small.
  • Cash transfers have reduced extreme poverty by more than 60 percent in Uruguay and Argentina, but only by seven percent in Peru, which spends too little on cash transfers to achieve much poverty reduction. Bolivia spends five times more than Peru (as a share of GDP) but because funds are not targeted to the poor, the amount of redistribution and poverty reduction has been limited. It is only slightly higher than Peru.
  • In Brazil and Bolivia, indirect taxes wipe out most effects of direct transfers, and poverty is almost the same after as before taxes and cash transfers. In contrast, in Mexico poverty after indirect taxes and subsidies is lower because the poor pay little in the form of indirect taxes due to exemptions and informality.
  • Public spending on education and health is more equalizing than cash transfers in all the countries
  • The largely positive redistributive picture of Argentina, Brazil and Uruguay hides some unpleasant facts.
    • For instance, about 16 percent of Brazilian social spending goes to tertiary education, mostly benefitting the five percent of the population with incomes above US$50 per day.
    • Uruguay, too, allocates subsidies to upper income students.
    • Argentina’s sharp rise of public spending during the 2000s has been increasingly financed by distortionary taxes and unorthodox and unsustainable revenue-raising mechanisms.
Read the complete overview


Uma Lele said...

Nora, congratulations on this very robust story on the social spending in LAC. Cash transfers have become such a sexy subject and so actively promoted by institutions like the World Bank that the real impacts of these expenditures in their entirety on poverty outcomes have not been known nor the efficiency of expenditures. The study’s findings need to be widely distributed particularly in Asia, e.g., India where social expenditures have mushroomed.
The only missing link in this study I noted was that Venezuela is not included. Although there is widespread skepticism of Venezuelan strategy in the West, sympathizers argue that Chavez did a lot to redistribute income to the poor which explains his popularity? It would have been nice if countries such as Venezuela and Cuba were included with an objective analysis of their policies. In addition, it is important to note that investment in health and education are income equalizing but also that if cash transfers if not well targetted can be regressive too! All these are important lessons for South Asia/ India. Cheers.

Arjan de Haan said...

Just to endorse Uma Lele's comments, very good to see analysis of public spending in its entirety, showing much progressive public intervention, and areas for improvement. Hopefully this type of analysis will be extended, and data will become available in other countries to provide such assessments.