Who Really Benefited from the Commodities Supercycle – and Who Loses with Its End?

By Carlos Monge*

2017-05-13 AULABLOG_Carlos_Monge_graphic

Latin American governments and business associations have tended to overstate the benefits of extractive industries during the commodities supercycle that ended in 2014-15.  Resource-rich Latin American countries did experience high rates of economic growth and diminished poverty and inequality during the boom years.  On the surface, this would appear to strengthen arguments that – despite their negative environmental impact – extractive industries are the key to progress, especially in resource-rich areas.  Nevertheless, a closer look at data from household surveys in Bolivia, Chile, Colombia, Ecuador, and Peru shows that things are a bit more complicated.

  • The inequality gap between individuals, as measured on the GINI Index, has narrowed, but the gaps between groups of the population have not evolved evenly. For example, the National Resource Governance Institute (of which I’m regional director) recently completed a study of the performance of social indicators during the supercycle that concluded that the poverty gap between urban and rural populations has increased in all countries.  (The report is available in English and Spanish.)  In Peru and Chile, the gap increased more in territories where extractive territories are located, while in Colombia, Bolivia, and Ecuador less so.  The gap between indigenous and non-indigenous populations increased only in extractive territories in Ecuador, decreasing in both extractive and non-extractive settings in the rest of the countries considered.  Regarding gender, in all five countries the gap between men and women increased slightly in non-extractive territories and decreased a bit more in extractive ones.

This report establishes correlations between the increase in extractive activities, the availability of extractive rents, and patterns of inequality reflected in social indicators, but it does not establish a causal relation between such variables.  For example, the data show that urban populations in Peru’s extractive regions have benefited more than rural ones – which some very preliminary research shows is probably because urban centers provide extractive projects with the goods and services they need, while less sophisticated rural areas do not.  At the same time, rural populations have to compete with the extractive projects for those same urban goods and services, and with local governments for the labor force that the public sector contracts to develop infrastructure projects that are paid for through increased revenues delivered by the extractive sector.  This is what we have called the “Cholo Disease.”  A variation of the “Dutch Disease,” it reflects a loss of competitiveness resulting not from large exports of raw materials causing the currency to appreciate, but rather from increases in the cost of labor and of urban goods and services consumed by campesinos.  However, a more definitive explanation regarding exactly how this happens in Peru and in other countries certainly needs further research.

While our data clearly show the impact of mining and hydrocarbons extraction and the resulting expenditure of extractive rents on the poverty gaps between urban and rural populations, men and women, and indigenous and non-indigenous populations, further investigation into the causes and consequences is needed.  The end of the supercycle has already meant a fall in growth rates and extractive revenues, leading to a worrisome rebound in poverty rates.  We are still unable to answer, however, the question of how broadly it will impact the substantial segments of Latin America’s population that emerged from poverty but remains in a vulnerable position – and how it will aggravate poverty gaps among individuals and between groups in extractive and non-extractive territories.

May 16, 2017

* Carlos Monge is Latin America Director at the Natural Resource Governance Institute in Lima.

Can Latin America Achieve Fiscally Sustainable and Egalitarian Social Citizenship?

By Fernando Filgueira*

Uncertain Future

Photo Credit: Jan Tik / Flickr / Creative Commons

Latin America is undergoing a profound transformation of its social policies and of the very concept of social citizenship, but the outcome of this process is far from certain.  Electoral democracy, urbanization, increased educational attainment, and increased exposure to new and broader consumption patterns have destroyed the political foundations for conservative modernization.  The turn of the century has witnessed advances in social outcomes and public policies that for the first time provide a true window of opportunity for achieving more productive and egalitarian societies.

  • Decreasing poverty, lower income inequality, improved and expanded employment, and access to transfers and services to popular sectors were made possible by five critical factors: booming prices for Latin American commodities fueled economic growth and employment; stable prices – a positive legacy of the Washington Consensus era – meant that wages and transfers were not undermined by inflation; increased state fiscal capacity and commitment to social policy enabled a doubling in 15 years of real social per-capita expenditure; a demographic dividend, when combined (the young and the elderly) dependency ratios are lowest as a percentage of the population; and improved education access, completion, and credentials, which facilitated enhanced opportunity and increased productivity.

Yet these five advantages will lose steam in the next couple of decades.  Growth will wither as the commodity boom ends and expansionary monetary policy is limited.  Most Latin American economies are facing increased inflationary pressures. Existing tax structures and in some cases productivity levels will not permit social expenditure to increase at the rate of the last 15 years.  The easy phase of the demographic transition (when dependency rates are going down) is or will be over in most countries towards 2025.  Some countries in the region will face the European dilemma of an aging population, but they will do so with a lower GDP per-capita, weaker fiscal capacities of states, and a significantly more unequal income distribution.  While the soft targets of expanded education – primary school and expansion of lower middle school – have been achieved, the tough ones remain: extended coverage in early childhood, completion of high school, quality improvement, and true reduction of inequality of outcome in learning.

  • Five fault lines in Latin American social regimes make these problems a major threat to the sustainability of both social and economic development. A) Women’s incorporation into the labor market remains low (50 percent) and is highly stratified.  B) The absence of a robust state-led care system for early childhood and the persistence of a patriarchal distribution of care burdens undermines a route to development that is both more efficient and egalitarian.  C) Stark contrasts between insiders and outsiders in informal and formal labor markets and access to social protection and cash transfer  systems contribute to an expansionary monetary and fiscal policy that mainly benefits insiders unwilling to be taxed for redistributional public and collective goods and insurance. D) The region’s middle class and new emergent class, moreover, are not willing to increase taxation, since they do not perceive the quality of public goods and collective social services as adequate. And E) the pattern of fertility shows some of the worst patterns in social terms, including that most biological reproduction is left to the poor: Latin American governments do not equalize opportunity early on and through the educational system – which in the most unequal region of the world with diminishing but non-convergent fertility rates – leads to a productivity failure since underinvesting in the poor is underinvesting in the frontier of productivity enhancement.

These challenges will condition the possibility of a new social citizenship and a social investment model based on robust public goods, expansion of merit goods, and universality of entitlements.  It is not enough that elites are no longer able to control the political and economic game through status enclosure and authoritarianism.  In order to craft truly universal social policies conducive to providing inclusion for all, societies must confront narrow corporatism and restricted targeting – and the political economy they sustain.  Contributory models based on formal wages and targeted social policies based on need will not disappear, but they have to take a back seat to a model of basic universalism where access to quality public and collective goods is truly universal, and entitlements in transfers and services are not dependent on need or labor formality.  There have been important advances, such as a marked increase in non-contributory systems of cash transfers in terms of pensions and child-family transfers, but the commodity boom and the rise of the emergent and middle classes that drove them are not permanent.  A coalition that is willing to forgo private spending power in order to enhance quality of life through collective services is needed.  Such a coalition is made conceivable by these political, economic, and social epochal changes, but it is by no means guaranteed.  If reforms do not make it a reality, the promise will be shattered, and the pendulum between failed populism, with state-led “Robin Hood” incorporation attempts, and a technocratic closure of democracy and state bashing, will remain the central and tragic dynamic of the region.**

July 18, 2016

*Fernando Filgueira is a Senior Resarcher at the Centro de Información y Estudios del Uruguay (CIESU) and Collaborating Researcher the Economic Commission for Latin America and the Caribbean.  He is a member of the International Panel for Social Progress led by Amartya Sen.

**Read the full version of this essay, which is based on research done for the Economic Commission for Latin America and the Caribbean (ECLAC) and for EUROsociAL on social policy, labor dynamics, and demographic change.

How Sustainable are Latin America’s Advances on Poverty and Inequality?

By Eric Hershberg

Brazil Contrasts

“Projeto Contrastes.” Photo Credit: Gabriela Sakamoto / Flickr / Creative Commons

The significant decline in poverty rates and income inequality in Latin America over the past two decades – driven by a combination of sustained economic growth and intelligently designed social policies – may slow or even be reversed as economic conditions deteriorate across much of the region.  Poverty had begun to drop in most countries even before the commodity boom accelerated growth rates in South America beginning around 2003.  The “Washington Consensus” policies of the 1990s impacted wage income and employment negatively, but other factors diminished their impact on poverty.  By overcoming profound macro-economic instability, which among other things produced hyperinflation that devastated disadvantaged sectors of the population, the economic adjustments of that period were not entirely regressive.  Moreover, a concurrent shift toward targeted social programs – which redirected subsidies away from less vulnerable segments of the population in order to protect the poorest of the poor.  By 2002, the number of people living on less than $1.90 a day had declined 4.6 per cent from where it had been at the beginning of the 1990s, according to the World Bank, while the number living on less than $3.10 stayed flat and actually rose (from 135.6 million to 138.1 million).  Performance varied across countries.  By 2012, after a strong decade of growth and a wave of progressive governments, the progress was much more impressive, with poverty dropping to 33.7 million ($1.90/day) and 72.2 million ($3.10/day).

Inequality declined also – a different challenge in the region that Kelly Hoffman and Miguel Centeno aptly labeled the “lopsided continent.”  Measured by GINI coefficients, income inequality in Latin America, which exceeded that of any other world region at the beginning of the century, grew less pronounced under governments of various ideological proclivities.  A substantial body of research shows that this was a product of two factors.

  • Investments in primary and secondary education, which accelerated during the neo-liberal years, meant lower wage premiums for those with more than basic skills: near universal attendance in secondary school reduced the significance of gaps between workers who had secondary education and those who had little schooling.
  • Innovative social policies – particularly conditional cash transfers – meant that the lower rungs of the income ladder received meaningful transfers from the state, enabling them to narrow the income gaps vis-à-vis less disadvantaged sectors. Less frequently acknowledged was the positive impact of reforms on minimum wage policies and the creation or expansion of non-contributory pensions, both of which were pushed aggressively by several governments associated with the “Left Turns.”  Non-contributory pensions were especially important since the most vulnerable of Latin American aged populations, having spent their working years toiling in the informal sector, had previously lacked any sort of retirement pension.  (Read further analysis of pension reform.)

The region’s slowdown in economic growth and the pressure on public finance brought about by the end of the commodity boom – and the infusion of cash into state coffers that it afforded – raise questions about the sustainability of these advances.  The benefits of investments in education will endure for some time.  Even if education budgets decline, the costs in terms of lower educational achievement would take years to become evident, and it is not at all certain that the funding will decline.  However, the social programs are much more vulnerable, as are the ambitious efforts to increase minimum wages and labor protections more broadly.  Should the economic contraction underway in some countries and on the horizon in others generate an increase in informality, the labor market achievements of recent years could be quickly eroded.   This would impact inequality, and it might soon exacerbate poverty as well.

June 3, 2016