Friday, 30 November 2012

The World Bank’s view on inequality in Latin America: a cautionary note

By Carlos Fortin

Latin America is the region of the world with the highest level of income inequality. Until now the evidence appeared to indicate that, despite a fairly respectable performance in terms of growth in the last decade, inequality had not been decreasing and might even have been worsening.

Supporters of the neoliberal economic model that prevails in the continent have therefore enthusiastically received a recent report from the World Bank1  that seeks to show that things are not as bad as have been depicted; in doing so, however, the report confirms the fears of the critics of the model with regard to the prospects for equality.

The report’s main message is that inequality has in fact decreased in the period 2000-2010 2:
  • In 12 of the 15 countries for which there are comparable data the Gini coefficient has gone down by an average of 5 points (unweighted);
  • In the three largest economies of the region, Brazil, Argentina and Mexico, the decrease was 5, 6 and 7 points respectively.
The report attributes this to what it terms ‘sustained German-like growth rates for the top tenth of the income distribution, combined with Chinese-like growth rates for the bottom tenth, over a 10-year period’, and goes on to comment that ‘It is difficult to overstate the importance of this achievement’(p. 18).
The picture, however, is not all that benign: 
  • Even after this improvement the levels of inequality in Latin American remain ‘unacceptably high’(Ibid.): the average Gini  in 2010 for the 12 countries that are improving was 0.482, compared with 0.257 for the Scandinavian countries.
  • Furthermore, the rate of improvement over the 10 years is very modest indeed; should the tendency be maintained it would take the 12 countries 50 years to reach the level of equality of Scandinavia.
More worrying is the fact, also recognised by the report, that the reduction in income inequality is not the result of structural change leading to a more equal primary distribution of income –i.e. before taxes and transfers. Instead it is the outcome of favourable international conditions (the Chinese demand for commodities) and especially of government redistributive transfers. This is particularly the case in the high performers; the Benefício de Prestação Continuada and Bolsa Família programs in Brazil and the Oportunidades social assistance program in Mexico account for between 18 and 20 per cent of the decline in income inequality in those countries.

The ability of the governments to maintain that level of support depends on whether the economies will continue to perform well. This in turn is highly dependent on the international economic context remaining favourable, an uncertain prospect at best. The gains are therefore fragile, and do not relieve the governments from the need to engage in serious structural reforms as the only solid basis for a reduction in inequality.

1 Francisco H. G. Ferreira, Julian Messina, Jamele Rigolini, Luis-Felipe López-Calva, Maria Ana Lugo, and Renos Vakis, Economic Mobility and the Rise of the Latin American Middle Class, Washington D.C., The World Bank, 2013. At (Pdf)
2 Based on data in the Socio-Economic Database for Latin America and the Caribbean (SEDLAC). At 

Thursday, 22 November 2012

Managing policy rents for the green transformation

By Hubert Schmitz

Last week I attended a conference at the German Development Institute (DIE) concerned with green industrial policy. It concentrated on rent management for the green transformation. This is an issue on which we at IDS are working with our DIE colleagues. Our common starting position is that first, enormous investment is needed to bring about the green transformation. Second, the bulk of this investment has to come from the private sector. Third, due to market failures government needs to intervene and help mobilise this private investment. These three things are not controversial; they are widely shared. Controversial however is how much government should intervene, how it should go about it and which green sectors it should target. It is a highly politicised debate – see for example the fierce discussion in the UK over government support for wind power.

Such political contestation is inevitable. After all managing policy rents means providing (and withdrawing) opportunities for above average profits on investment. This is always a difficult task but particularly challenging when it comes to accelerating the green transformation. The reasons? We are in a hurry; this is the first transformation in history to be achieved against a deadline; carbon emissions need to come down by dates which are frighteningly near. Second, the uncertainties are enormous; the viability and costs of the new technologies are impossible to predict. Third, these investments have time horizons of three or more decades. What a nightmarish scenario for policy making – even without the politics!

In our own work we (Tilman Altenburg, Oliver Johnson and I) have asked what guidance we can derive from the international experience with industrial and energy policy. What are the critical success factors for rent management? Let me share with you our initial thoughts. Management of green policy rents runs four risks:
  1. Abuse of the incentives
  2. Selecting the wrong instruments
  3. Targeting the wrong technologies or sectors, and
  4. Doing too little.
Critical success factors are those which help policy makers deal with these four risks. Let us take them one by one.

The first risk is the abuse of government incentives by rent seekers. This is the most talked about risk but it can be contained in a number of ways. These include monitoring by independent research organisations, by consumer protection agencies and by the press. Yes, the private sector can try to capture the whole process but this is hardly what has occurred in the British or German renewables industry.

The second risk is choosing the wrong instruments. Consultants tend to sell best practice rather than best fit. This is best dealt with by testing instruments in selected parts of the country. China and Vietnam have become so successful partly because they have a long tradition of experimenting and testing before rolling out policies country wide.

The third risk is targeting the wrong technologies or sectors. This is the old debate over whether governments can and should pick winners. History tells us that the most successful economies have prioritised sectors. Yes, they made mistakes in the process but making mistakes is unavoidable. It is hard to see how the green transformation can be achieved without making informed choices of priority sectors and technologies.

The fourth risk is doing too little. In my view this is the most fundamental risk. The creation and allocation of rents remains insufficient and as a result the required scaling up of investment is not achieved. It is true that investments in renewable energy have been substantial in recent years but the totals are counted in billions of £, € or $. In contrast, investments in the fossil fuels industry are counted in trillions. These investors seek to protect their assets and undermine the case for renewables with any means at their disposal.

Achieving a substantially greener investment and energy mix is not a project which can be achieved from within government alone. It requires government working with business and with civil society (NGOs and research communities): a government-business-civic alliance. Members of the alliance do not have to be driven by concerns for the climate. Support can be gained from government and business people whose priorities lie elsewhere, notably securing energy, building new competitive industries and creating green jobs. The chance of exerting influence increases dramatically if players with different motivations (climate change, energy security, competitiveness, jobs) are brought together. In short, ‘building transformative alliances’ needs to be included in our list of critical success factors for green rent management.

Monday, 5 November 2012

Staying in the high value chain after the developed countries have gone: The case of Brazil

By Luciana Vieira (guest blogger, Visiting Fellow in the Globalisation Team, IDS)

Traditionally, developed countries have been the buyers of products manufactured in developing countries, although this has been changing lately. How can these countries ensure that they are still able participate in high value supply chains if their main buyers are gone?

Global Value Chain Approach in Brazil
One approach is to consider the Global Value Chains (GVC) analysis which tries to understand inter-firm relationships in the context of buyer and supplier. An important contribution to GVC is to understand how the workforce can get organised to have some bargaining power. In this sense, Benjamin Selwyn describes the rise of the Sao Francisco valley*, in the Northeast of Brazil, that became a successful exporter of high value fruit with public-private collaboration. He analyses the role of important stakeholders, such as unions, associations, local agencies, among others, also involved in the training and organisation that allow this region to produce more value added products (upgrading) in the global value chain.  Ben´s work certainly shows that small producers can get gains participating in global supply chains.

However, even in this unique case study, the production standards are being set by a transnational retailer who keeps much of the value added of the product. The transnational retailer’s willingness to pay a “premium price” was the driver for the workforce to organise and to upgrade. If there was no buyer paying that premium price and requiring such strict compliance with specific standards, would these workers naturally organise themselves and upgrade?

And if we look to other case studies from a GVC perspective, where there are no asset specificities such as perishability, favourable natural resources and location (lack of other available labour), would the empowerment of workforce be replicated under different conditions? Probably buyers would just source elsewhere where the standards could be met at the required price. We have seen this happen a number of times with other manufacturing products, such as the footwear industry moving from Brazil to China.

Getting trapped in the sophisticated European market
A further threat to export supply chains from developing countries (to ‘developed’ countries) is that they can get trapped or locked into more sophisticated European markets than those existing in the countries where the products originate from. Small producers may become involved in developing such high quality products that they can hardly find an alternative in their domestic market. And while these producers can upgrade technically:
  • Are they able to find other buyers for their products abroad, in order to overcome the trap of being dependent on a single buyer or market?  
  • Have they developed marketing skills and business development skills needed to this? 
My years of experience working with a number of Brazilian export supply chains tell me that, in contrast to many Asian companies, they know very little about markets, brands and pricing.

The Fair Trade example
One example is Fair Trade products. These have no appeal in Brazil where most consumers are constrained by their incomes and wouldn’t pay a premium price for this specific certification. If you consider other developing countries, for example in Africa, there is no alternative consumer market at all.

My main concern regarding such specialised export supply chains is that the economic crisis in Europe and/or the ‘buying local food’ initiatives will affect their markets in a very near future. So, from the perspective of developing country producers, there is an urgent need to transfer technical learning achieved and search/create alternative markets for their high quality products. Otherwise, there is a high risk that they will be forced to “downgrade” with all the implications that this has to the workforce and regional development.

* Listen to Ben Selwyn's seminar given at the Institute of Development Studies on 30 October 2012

For more information on this subject, visit: