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.

Does Trade Incentivize Educational Achievement?

By Raymundo Miguel Campos Vázquez, Luis-Felipe López-Calva, and Nora Lustig*

Female student walking by building

A student walks around Preparatoria Vasconcelos Tecate. / Gabriel Flores Romero / Flickr / Creative Commons

Mexico’s experience with free trade has challenged one of the tenets of faith economists know well from reading early in their careers David Ricardo’s Principles of Political Economy and Taxation: that “the pursuit of individual advantage is admirably connected with the universal good of the whole” and that “[trade] distributes labor most effectively and most economically.”  Under this principle, “wine shall be made in France and Portugal; corn shall be grown in America and Poland; and hardware and other goods shall be manufactured in England.”  Mexico reminds us that while these benefits exist in the abstract, there are trade-offs to be faced—that there are, potentially, social and individual costs induced by trade liberalization.

In a recently published paper entitled “Endogenous Skill Acquisition and Export Manufacturing in Mexico,” MIT economics professor David Atkin shows the ways in which individual people experience trade and how it affects their decision-making – sometimes in ways that may not necessarily be socially desirable.  It analyzes a time period (1986-2000) during which Mexico underwent major economic transformations, including a rapid process of trade liberalization after 1989 and the introduction of the North American Free Trade Agreement (NAFTA) in 1994.  Analyzing data for more than 2,300 municipalities in the country, the paper tells us that young Mexicans at the time faced a very basic decision: to stay in school and continue studying or to drop out and look for a job (among the many being created in the export-oriented manufacturing sector), most of which did not require more than a high school education.  Atkin found that, on average, for every 25 new jobs created in the manufacturing sector, one student would drop out after 9th grade.  (The World Development Report 2008 on Agriculture for Development had raised the question about “missing” individuals in this age group, but in relation to migration.)

  • While trade brought positive effects including a higher demand for low skilled workers and an eventual increase in their wages – consistent with David Ricardo’s basic notion – Atkin concluded that in Mexico it had the socially undesirable effect of preventing, or slowing down, the accumulation of human capital. The reduction in human capital investment is a trade-off which can have negative effects on the economy as a whole.
  • Factors other than free trade might explain this effect. First, young students may drop out if the returns to schooling are not high enough to compensate for the additional investment.  Second, a lack of access to credit and insurance for relatively poorer households might make it impossible for aspiring students to finance their investment and obtain higher returns by continuing to tertiary education or to cope with shocks and avoid abandoning school.  Finally, the result could be driven by a lack of availability of information about actual returns to investment in education, which could lead to myopic decision-making.

The movement of capital toward locations with lower labor costs is an expected, and intended, result of an agreement such as NAFTA, pursuing higher export competitiveness at the regional level.  David Ricardo would have said that TVs and automobiles shall be made in Mexico, while software shall be made in Silicon Valley.  What completes the story, however, is that because of distortions like the ones mentioned above – low educational quality, under-developed credit markets, or weak information that skews decision-making – free trade might lead to socially undesirable consequences.  And it did in the case of Mexico, as Atkin convincingly shows in his paper.  It seems that when Ricardo gets to the tropics, the world gets more complex.

November 7, 2016

* Raymundo Miguel Campos Vázquez teaches at the Centro de Estudios Económicos at el Colegio de México, and is currently conducting research at the University of California, Berkeley.  Luis-Felipe López-Calva is Lead Economist and Co-Director of the World Development Report 2017 on Governance and the Law.  Nora Lustig is Professor of Latin American Economics at Tulane University.

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

The Critical Role of Universities in Latin America’s Future

By Rodrigo Arocena*

Tec de Monterrey

University students in Monterrey, Mexico. Photo Credit: ·júbilo·haku· / Flickr / Creative Commons

As the latest commodity boom winds down, universities in Latin America can play a leading role in helping the region rebound from the resulting economic slowdown and build itself a more prosperous and equitable future.  The consequences of the boom for economic, political, and social conditions in the region are hotly (and rightly) contested.  But one inescapable conclusion is that inadequate attention was paid to raising societies’ knowledge and qualifications in the production of goods and services.  This matters greatly, because knowledge gaps and skill deficits lie at the heart of what underdevelopment means today.  If the focus in the decades following World War II was on addressing disparities in industrialization, one of the challenges now is over-specialization in productive activities with low added-value of knowledge and qualifications.  When such specialization persists, social and environmental problems are not manageable in the long term.  Differences concerning knowledge and higher education are also one of the main factors behind inequality, in both North and South.  In Latin America, traditionally considered the most unequal region in the world, inequality in recent years has been reduced in a handful of countries and so has poverty in almost all of them.  But such social progress may be jeopardized soon not only because of economic and political changes but also because of quite weak progress made expanding knowledge capabilities and applying them to collective problems.

Universities are at the heart of the solution.  In the knowledge-based and innovation-driven economies that emerged in the North during the last decades of the 20th century, universities obviously made a difference.  They were fundamental actors in the accelerated expansion of advanced education that is closely connected with that type of economy.  They generated new scientific and technological knowledge and often channeled its use into productive activities.  Even then, in the advanced economies of the North private sector firms perform a quite larger proportion of total research and development than universities.  Moreover, Northern universities are mainly oriented by market demand, meaning that actors who are already knowledge-strong obtain most of the benefits of what universities do, fostering what could be called knowledge-based inequality.  This is different from Latin America in several ways:

  • Public universities in Latin America are the main generators of new knowledge, which is why they should get priority when thinking about the future of the region’s development.
  • They are frequently well plugged into National Innovation Systems, the web of actors and institutions responsible for upgrading productivity through the generation and effective use of new knowledge.
  • They represent a continuation, although at a weakened level, of the tradition of the socially committed university forged by the Latin American University Reform Movement.

In any country of the world, knowledge democratization deserves high priority in every progressive agenda – and Latin American universities are, at least potentially, fundamental actors in this task.  Democratizing access and success in higher education, and thus trying to overcome an ancient social divide that stymies development, is key.  The task also means fostering research in all disciplines and applying it to collective problems, as has occurred with research and innovation oriented to social inclusion.  The Latin American ideal highlights merging the modern university’s two long-established missions – teaching and research – with a third one, called “extension,” which entails cooperation with external actors in knowledge generation, cultural creation, and problem-solving, with priority given to the situation of deprived sectors.  As motors for knowledge expansion, and thus for social inclusion, Latin American universities make an invaluable contribution to development and the deepening of democracy.

April 28, 2016

* Rodrigo Arocena served as Rector of the Universidad de la República, Uruguay, from 2006 to 2014.

 

Honduras: President Hernández’s Mission

By Fulton Armstrong

Hernandez honduras 2

Photo credit: Public domain

Honduran President Juan Orlando Hernández, who last month passed the half-way point in his four-year term, has scored some important political gains, with uncertain implications for his country.

  • The Obama Administration has embraced him as a partner in the “Alliance for Prosperity,” to which it has committed $750 million year to “build a safer and more prosperous future for [Northern Triangle] citizens.” It represents a doubling of U.S. assistance.
  • In a decision Hernández said he “would respect,” last April the Honduran Constitutional Court – key members of which the Congress elected under circumstances of questionable legality when he was Congress President – allowed him and other former presidents to run for reelection. The Chairman of the Congressional budget committee last week said there “should be no doubt” that the party is committed to Hernández serving a second term.
  • He successfully parried efforts to create a copy in Honduras of the International Commission against Impunity in Guatemala (CICIG), the UN-sponsored body with extensive powers in that country. The final terms of reference of the OAS-sponsored “Mission to Support the Fight against Corruption and Impunity in Honduras” (MACCIH) aren’t as loose as he had proposed, but many of its key definitions, personnel, and funding remain highly uncertain.  OAS Secretary General Almagro’s public blessing of it was a public relations coup.
  • The Honduran Congress’s approval last week of a new 15-member Supreme Court took numerous rounds of voting – presidents traditionally get the slate approved in one vote – but his party did well enough. Allegations of bribery arose immediately.  Praising the new court, he said last Friday that he would soon launch a national dialogue on additional Constitutional reforms and on “revising the social contract of Honduras” and building “a new Honduras.”

Hernández is not without critics in Tegucigalpa and Washington – even if their attacks have not thwarted him.  Opponents claim that his desire to overturn Constitutional prohibitions on a second term was more blatant than that of former President Mel Zelaya, whose removal by the military in 2009 Hernández supported claiming that Zelaya violated the prohibition.   Hernández has admitted that his party received funds embezzled from the national Social Security agency.  The Indignados, a grassroots opposition, doesn’t have the lobbying resources that the government has, but they have mobilized massive peaceful demonstrations, and veteran Honduras watchers praise their idealism, discipline, and maturity beyond their youthfulness.

Hondurans and foreign governments often favor leaders whose appearance of power promises stability, rather than favor processes and values – such as transparency and inclusiveness – that promise more effective democratic institutions.  Hernández was elected with barely 35 percent of the vote, but his growing power, coinciding with the weakening of legislative and judicial institutions, has concentrated power on the executive.  The country arguably faces one of the most complex situations in its history, on the cusp of either difficult change, such as reducing shocking levels of impunity, or a deepening of the current crisis.  The economic and political elites who control the nation have driven it into a rut from which “more of the same” does not appear a viable way out.  Hernández won praise from the international financial community by pushing through fiscal adjustments, yet these measures increased inequality in a country where half the population lives on less than $4 a day.  Preliminary data show that austerity has brought about an increase in unemployment and underemployment, which already affected roughly half of the labor force.  A U.S. and Mexican crackdown on Central American migration has reduced one of the only options that young Hondurans fleeing poverty, violence, and impunity thought they had.  While many Hondurans may wind up accepting a President’s reelection to a non-consecutive term, Hernández’s big push for a consecutive one and his talk of a “new social contract” understandably fuels skepticism if not angst.

February 16, 2016

Social Science that Matters: Pérez Sáinz on Latin America’s Inequalities

By Eric Hershberg

Image courtesy of FLACSO-Costa Rica

Latin America has made important advances dealing with income inequality over the past decade, but sustaining this modest progress requires a deeper grasp of its underlying causes.  Since Princeton sociologists Miguel Centeno and Kelly Hoffman in 2003 published their provocative article “The Lopsided Continent” probing Latin America’s infelicitous distinction as the region with the most unequal income distribution, the GINI coefficients – indicators of the gap between rich and poor – have declined in a number of Latin American countries.  Most of the advances, which admittedly appear tenuous and were slowed by the Great Recession of 2008-2009, can be traced to the expansion of secondary education and, particularly in countries governed by the left, unprecedented investments in social programs that have benefited the most disadvantaged sectors of the population.  Even now, however, income distribution in the region remains as unequal as anywhere on the planet – sapping productivity by depriving populations of opportunities to upgrade skills that could be deployed in knowledge-intensive economic activities.  Inequality also provokes social dislocations that undermine the welfare of the poor and non-poor alike, place burdens on over-extended state institutions and generate pathologies, such as crime, that undermine economic performance.  Moreover, the task of sustaining democratic political regimes is rendered much more difficult.

A new book by Juan Pablo Pérez Sáinz, a sociologist at the Latin American Faculty of Social Sciences (FLACSO) in Costa Rica, takes a fresh look at the dynamics of unequal power that influence how the fruits of economic activity become concentrated in some individuals and social groups – and remain beyond the reach of large swathes of a country’s inhabitants.  MERCADOS Y BÁRBAROS: La persistencia de las desigualdades de excedente en América Latina is in my view a landmark contribution to the sociological literature, and it identifies four intertwined processes that account for the disempowerment of important segments of the population, often characterized by subordinate status associated with gender, race, ethnicity or region.

  • The prevalence of precarious employment in labor markets, as a result of which people are condemned to toil endlessly but never enjoy the benefits of having a stable job.
  • The impossibility for most small-landholders or petty entrepreneurs to accumulate capital that might enable them to invest in the future of themselves, their families and their communities.
  • The weakness or absence of state institutions that might contribute to forging social citizenship encompassing all of a country’s inhabitants, the result of which is that vulnerable individuals and communities are left to fend entirely for themselves.
  • The overwhelming weight in Latin America of social categorizations – motivated by pervasive sexism, racism, ethnocentrism and xenophobia – that define excluded populations as less deserving of rights and opportunities than others.

If societies are to be expected to invest in social science, then it is reasonable to expect that social scientists strive to illuminate the underlying roots of their greatest challenges, such as the yawning inequalities in Latin America, and the sources of their persistence over time.  Through his historically informed and empirically rich analysis, drawing on theoretical insights from Marxian traditions and from the work of sociologists such as the late Charles Tilly, Pérez Sáinz has made an invaluable contribution to intellectual debates about inequality which should inform efforts to consolidate the modest gains we have seen in Latin America and thus help the region outgrow its enduring legacy of debilitating inequality.

December 4, 2014

Middle Class Abandons Public Education

By Osvaldo Larrañaga*

Photo credit: NoticiasUFM / Foter / Creative Commons Attribution-NonCommercial 2.0 Generic (CC BY-NC 2.0)

Photo credit: NoticiasUFM / Foter / Creative Commons Attribution-NonCommercial 2.0 Generic (CC BY-NC 2.0)

Seven of the most developed countries of Latin America – Argentina, Brazil, Chile, Colombia, Costa Rica, Peru and Uruguay – are experiencing an exodus of the middle class from public schools to private schools.  In Clases Medias y Educación en América Latina, my colleague María Eugenia Rodríguez and I present evidence that in these countries private schools offer primary and secondary middle-class students better opportunities to learn, better resources, and in almost every country a more disciplined learning environment.  However, the shift may worsen the region’s already deep inequality because private education is likely to multiply inequality.  Private schools show signs of high levels of social segregation, with implications for countries’ social cohesion and development.  On average, 87 percent of the students in these schools belong to the same social class (be it middle- or upper-class), as compared to 42 percent in the public schools.  According to our research, the challenge for governments is to strike the balance between allowing families to give children the best education they can and ensuring social cohesion and equity.

Some countries outside Latin America have achieved this virtuous balance. In the Netherlands, Belgium and Ireland, governments finance private schools so that families’ financial resources are not a factor in school selection.  In those countries, 60-70 percent of students from different social classes attend private schools, with excellent academic results.  Dutch and Belgian students place at the top in the Program for International Student Assessment (PISA) test, while Irish students score at the average of the OECD nations.  Another model – in Finland, Canada and New Zealand – produced the highest PISA scores outside Asia.  In those countries, 93-97 percent of students attend public schools, proving that public management of education is not incompatible with excellence.

Another key development needing attention in the region is that the number of students in higher education has tripled in the past 15 years as the middle and emerging classes see education as the most effective means for social mobility.  Increased demand for tertiary education has been covered primarily by private rather than public institutions, yet governments have done little to ensure the quality of the education students receive or to assist them in financing it.  Failure to address these issues invites a scenario that could result in frustration and social tensions.  Our research indicates that the problem – and its solution – has three principal aspects: the need to create information systems that enable the evaluation of graduates; the need to introduce mechanisms for financial aid for students attending private institutions; and the need for an accreditation process that ensures that financial aid goes to students attending quality institutions of higher education.  With such reforms, Latin America stands a much better chance of advancing social equity even while relying increasingly on the private provision of education.

*Dr. Larrañaga coordinates the poverty and inequality reduction area at UNDP in Chile.