Tuesday, March 30, 2010

ECLAC, poverty, inequality and the importance of social spending

Ok, so before you ask... no, this isn't the beginning of a regular maladjusted feature on poverty and inequality... or is it?

The Economic Commission for Latin America and Caribbean (ECLAC) has a great brief on poverty and inequality in Latin America over the last 30 years. Long story short, there’s been tremendous progress in fighting poverty since the 1980s. You know, those 1980s, when every country on the block was getting structurally maladjusted, discovering their love for free markets and hatred for import substitution and, oh, failing to achieve even the most minimum levels of per capita income growth.

As can be seen below, during this lost decade—as economists refer to the period—the regional poverty rate rose from 40.5% in 1980 and peaked at 48.3% in 1990. At the same time, indigence rose from 18.6% to 22.5%. But then, beginning in 1990, poverty and indigence rates began to drop.

[Latin America: Poverty and Indigence, 1980-2008 (percentages)]
This huge drop in poverty and indigence rates since 1990 was first and foremost driven by GDP growth. However, as the brief notes, starting in 2002 another significant factor came into play: a decrease in inequality. As can be seen below, between 2002 and 2008 most countries in the region became more equitable.

[Latin America: Gini coefficient, 2002-2008]
See that? The countries below the 45-degree line are those where inequality decreased. And also, note which country is the farthest away from the line… starts with a "V", just sayin'.

In any case, the brief offers a nice little explanation for why inequality has been decreasing since 1990, which takes me to this last graph below:

[Latin America: Total public spending and social spending, 1990-2008]

That red line on the top is total public spending and the bottom blue line is public social spending, which has more or less steadily increased from 12.4% of GDP in 1990 to 17.9% in 2008. However, more to the point, is the line in the middle, which shows the “fiscal priority of social spending.” This is basically the ratio of social spending to total spending. In other words, governments in Latin America have increased the priority of social spending, a lot, and it is showing results in the reduction of both poverty and inequality.

There’s a lesson to be learned somewhere in there.