Wednesday, 20 July 2011

Can inequality decrease under a neoliberal economic model?

By Carlos Fortin

I have just returned to the UK after spending six months in Chile, where there is an intense public debate on development policy.  The issue of inequality features prominently in this debate because, despite an impressive economic growth record, substantial improvement in poverty reduction, and successive governments that were outwardly committed to egalitarianism, Chile appears to be today a most unequal country. Its Gini coefficient is the 19th worst in the world, and it has remained essentially unchanged since 1990.

Something has obviously gone wrong.

Along comes a young Chicago-trained economist, Claudio Sapelli, to argue in a recent book 1  that the problem is how you measure inequality. ‘Fine’, he writes in the opening pages, ‘so Chile has a high Gini [………] So what?’

His answer is that when you use the appropriate measure, inequality in Chile is actually decreasing.  He argues that the conventional Gini is a ‘stock’ measure based on cross-section surveys. What is needed is a measure that captures changes in inequality through time. In the absence of panel data in Chile, a good second best is cohort analysis.

He divides the population in cohorts based on the year of birth (1902-1978) and calculates the Gini coefficient for each cohort for every year from 1957 to 2004. When plotted against time, the coefficients seem to suggest there are three periods. At first the curve is flat.

‘Starting with cohorts born in the early thirties there is a deterioration that continues up to cohorts born in the fifties. The income distribution then undergoes an improvement, starting with cohorts born in the early fifties and especially after the cohort born in 1959. The improvement is statistically significant and numerically important: of about 9 points in the Gini index’ (Sapelli 2011: 241).

The methodology and its results have been hailed as a breakthrough by the defenders of the neoliberal economic model that has prevailed in Chile since the Pinochet dictatorship. Others have been more cautious. To begin with, Sapelli does not offer a clear account of the mechanisms by which inequality is supposed to be diminishing. His initial hypothesis that the phenomenon was due to increases in educational opportunities was not supported by the data. He is forced to rely on the statistically problematic concept of returns to experience as the explanatory variable; he does recognize, however, that this is just a hypothesis that requires testing.

More seriously, Sapelli does not explain why, if inequality is decreasing, the overall Gini remains the same. Instead he hints that while the improvement is not discernable today, it will be in the future.  This is not very convincing; it reminds me of the comment by my former boss and current Prime Minister of India, Manmohan Singh, who once said that the long run was the last refuge of failed policies.

Still, the questions raised by Sapelli are intriguing and his data and conclusions certainly worth scrutinising further. My colleagues at the Chile 21 Foundation workshop on development policy and inequality are doing just that. Watch this space.

1. A summary English version of the argument is offered in Claudio Sapelli, “A Cohort Analysis of the IncomeDistribution in Chile”, Estudios de Economía, Vol. 38, N° 1, June 2011, pp. 223-242


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