Chair of Development Economics -- University of Goettingen
Sectorial shifts and Inequality
A way to relate macroeconomic
events to inequality changes
Carlos Villalobos Barría (University of Goettingen)
Migration, Development, and Demographic Change
Problems, Consequences, Solutions”
June 25 – 28, 2013, University of Antwerp, Belgium
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Outline
•
•
•
•
•
Motivation
Research question
The decomposition methodology
Results
Conclusions
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Motivation
This is a methodological paper based on the non-conclusive evidence about the
relationship between macroeconomic variables/shocks and income
inequality changes (Cornia, 2012).
The opening up of the Latin American economies during the early 90s and
liberalization reforms (Lopez-Calva and Lustig, 2010)
The Hurricane Mitch in 1998
– Increasing remittances (aprox. 20% of GDP in 2005)
– Important aid and capital flows
Steadily appreciation of the RER after 1994
A declining tradable sector until 2005 (mainly agricultural activities)
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Motivation
Prof. Alan Winters:
Conclusion from 1999
• Trade Liberalization generally stimulates growth (through it poverty
alleviation) - Not clear in Honduras
• It creates losers - it applies to the Honduran case
Honduras, a place where, until now, there is no…
•
•
•
Macro stability
High rates of savings and investments
A committed, credible, capable government
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Motivation
But at least in education
•
The private sector is responsible to allocate resources
– Highly segmented educational system / schools producing agricultural
workers
– Low quality education / lack of coverage (specially in rural areas)
– Strong evidence of labour immobility
•
Strong bias towards the non tradable sector (skill biased)
– Not necessarily formal education but unobservable characteristics
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Motivation
Mitch
Hurricane
Inequality
peacK
Commodity
boom
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
75
2 $ PPP per day
perr capita
Motivation
Poverty and Inequality Trends in Honduras
Mitch Hurricane (1998)
45
50
55
60
65
70
Highest inequality (GINI)
1990
1995
2000
Year
Poverty Head Count Ratio
2005
2010
Gini rural areas pc
Gini country level pc
Source: Honduran household surveys and UNdata.
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Motivation
• After 1999 (facts):
– Increasing rates of growth with increasing poverty (explosion of
remittances, aid, etc)
– Strong disequalization of the per capita income distribution
– Mainly a rural phenomena
– Upsurge (decay) of the non-tradable sector (tradable)
– Strong evidence of labour immobility
• After 2005 (facts):
– Increasing rates of growth with declining poverty
– Recovery of the tradable sector earnings (particularly at the
bottom of the distribution
– Declining inequality (mostly in rural areas)
– Commodity boom
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Motivation
Evidence of Labour Immobility (worker‘s heterogeneity - Low Migration)
Tradable sector 1999-2005
60
Tradable sector 2005-2007
20
-5
0
20
40
60
80
-20
0
-20 -15 -10
-5
-15
-10
percent
0
40
0
5
5
Tradable sector 1991-1999
100
0
60
80
100
0
20
40
60
80
100
Non-tradable sector 2005-2007
40
Non-tradable sector 1999-2005
15
0
0
20
40
60
percentile
90% ci
80
100
-20
-40
-10
-10
-5
-5
0
0
5
20
5
percent
40
10
10
Non-tradable sector 1991-1999
20
0
20
40
60
percentile
80
Median spline
100
0
20
40
60
percentile
80
100
Growth rate in mean
Note different y-axis scales.
Source: Authors' calculations based on EPHPM I and EPHPM II
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Reserach Question
• How relevant are macro-economic shifts in explaining the Honduran
income inequality (poverty) developments over the last two
decades?
• What is the story behind the fact that Honduras is an outlier in Latin
America when considering the inequality trends over the last two
decades?
– Migration towards the modern sector
• Increasing earnings in the traditional sector
– Declining returns to skills (educational upgrade)
– Social policies CCTP
• In this paper, we propose a lower bound methodology to
investigate how sectorial shifts affects the income distribution
contributing to explain the almost unchanged poverty figures over
the last 15 years.
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology
• Set up as in Devillanova et al. (2010)
– Workers‘ heterogeneity and Capital-skill complementarity (Imperfect
mobility of labour)
• Focus in rural areas
– 50 % of the total population live in rural areas
– 80% of the poor households live in rural areas
• Strong evidence against the tradable sector (backward)
– Overvaluation of the RER
– Fluctuation in commodity prices are relevant
– Natural catastrophes are common affecting principally the rural
infrastructure and production. (Mitch Hurricane in 1998 but many other
tropical storms are frequent)
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology
Rural log-earnings in Hunduras 2005
.6
1.5
Rural log-earnings in Chile 2006
.2
0
0
.5
Density
1
.4
The backward
(tradable) sector
mainly agricuture
5
10
15
Log-earnings
Tradable sector
20
0
2
4
6
Log-earnings
8
10
Non-tradable sector
Note: based on full-time employed rural workers.
Source: Authors' calculations based on CASEN 2006 and EPHPM 2005.
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology
.4
.3
Macroeconomic shift
0
.1
.2
.4
0
.1
.2
.3
THE RURAL SECTOR (50 % of the total population - 80% of all poor households)
-4
-2
0
2
4
-2
0
2
4
2
4
.1
.2
.3
.4
2005
0
0
.1
.2
.3
.4
1999
-4
-4
-2
0
2
tradable
4
-4
-2
0
non-tradable
Note: Each distribution consists of 3000 obs. randomly drawn from a normal distribution.
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology
•
•
Oaxaca-Blinder type of decomposition of a distribtional change
The symbol (´) makes reference to t2
ΔD = D(t2)− D(t1)
ΔD = D(WS‘, BS‘) − D(WS, BS)
ΔD = [D(WS‘, BS‘) − D(WS‘, BS)] + [D(WS‘, BS) − D(WS, BS)]
We can simulate D(WS‘ , BS)
We decompose the distributional change in a between sectors gap effect and in a
within sector effect which is caused by changes in productive endowments,
their returns and employment changes across sectors (weights) . Note that
there is no path dependence arising in this methodology.
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology
1
2
• 1991-1999; 1999-2005; 2005-2007
0.43
0
0.14
-1
-0.14
0
20
40
60
80
100
Percentiles
delta gap 1999-1991
delta gap 2007-2005
delta gap 2005-1999
Source: Authors' calculations based on EPHPM I and EPHPM II.
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
The Decomposition Methodology
• 1999-2005 (Period of high GDP Growth without poverty reduction)
.4
.4
.3
.3
sectorial distributions in rural areas in t'
.2
0
0
.1
.2
0.43
.1
densities
sectorial distributions in rural areas in t
0
2
4
6
8
10
12
0
2
6
8
10
12
10
12
rural wage distribution in t'
.1
.15
.2
0
0
.05
.1
densities
.2
.3
.25
rural wage distribution in t
4
0
2
4
6
8
log - wages
10
tradable sector
12
0
2
4
6
log - wages
8
non-tradable sector
Source: Own elaboration based on randomly simulated data (parameters of Honduras 2005).
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Results
• Honduras 1999-2005 (Growth + Unchanged Poverty)
– At least 40% of the Honduran (GINI) disequalization
between 1999 and 2005 can be attributed to the decline of
the tradable sector.
– Documented elements
• Appreciated RER
• Mitch Hurricane
• Weak commodity prices
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Results
• Honduras 2005-2007 (Growth with poverty reduction)
– At least 33 % of the Honduran (GINI) equalization between
2005 and 2007 can be attributed to the upsurge of the
tradable sector.
– Documented factors
• Commodity Boom
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Conclusions
This analysis likely represents a lower bound of the impact of macroeconomic
conditions on inequality changes.
• Bias against the tradable sector, increases the return to skills,
disequalizing the labour income distribution
There is an measurable (lower bound) impact of macroeconomic shifts (traduced
into the decay or upsurge of the tradable sector) on inequality changes.
Trade reforms as well as changes in the real exchange rate and revenues shocks
affecting the tradable sector should be carefully considered when analyzing
poverty and inequality dynamics.
The losers in Honduras were no t randomly selected. The were mostly the poor 
In the long-run, avoid agricultural workers education. Promote inter-sectorial
mobility of workers (as Prof. Winters recommended) by providing as in the
developed world general education. Generate basic and open skills (Language
and Mathematics)
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality
Chair of Development Economics -- University of Goettingen
Thank you!
Arnoldshain S 2013 Antwerp, Belgien – Villalobos Barría – Sectorial Shifts and Inequality