Tenth Annual Inter-American Seminar on Economics

Tenth Annual Inter-American Seminar on Economics

The NBER held its “Tenth Annual Inter-American Seminar on Economics” in Santiago, Chile on November 21 and 22, 1997. Organizers Sebastian Edwards, NBER and University of California, Los Angeles, and Harald Beyer, Centro de Estudios Públicos, chose the following papers for discussion:

Harald Beyer, Patricia Rojas, and Rodrigo Vergara, Centro de Estudios Públicos, “Trade Liberalization and Wage Inequality in Chile”

Eduardo M. Engel, NBER and Universidad de Chile, and Alex Galetovic and Claudio Raddatz, Universidad de Chile, “Taxes and Income Distribution in Chile: Some Unpleasant Redistributionist Arithmetic”

Discussants: José de Gregorio and Osvaldo Larrañaga, Universidad de Chile

Ana Flávia Machado, Minas Gerais Federal University, and Ricardo Paes de Barros and Rosane Silva Pinto de Mendonça, Instituto de Pesquisa Económica Aplicada, “Inequality Among the Poor: Occupational Strategies and Gender Differences”

Leonardo Gasparini, Universidad de la Plata, “Measuring Unfairness in the Distribution of a Good: An Analytical Framework and an Application for Education and Health in Argentina”

Discussants: Dante Contrareras, Universidad de Chile and Cristián Aedo, ILADES

Raquel Bernal and Mauricio Cardenas, FEDESARROLLO, and Jairo Nunez and Fabio Sánchez, National Planning Department of Colombia, “Unemployment, Inflation, and Income Distribution in Colombia”

Nora Lustig and Miguel Székely, “ ‘Hidden’ Trends in Poverty and Inequality in Mexico”

Discussants: Francisco Rosende, Universidad Católica, and Ricardo Paredes, Universidad de Chile

Jeffrey D. Sachs, NBER and Harvard University, and Andrew Warner, Harvard University, “Natural Resource Booms and the Theory of the Big Push”

Edward E. Leamer, NBER and University of California, Los Angeles, “Latin American Income Inequality: A Heckscher-Olin Approach”

Anne Harrison, NBER and Columbia University, and Gordon H. Hanson, NBER and University of Texas, “Who Gains from Trade Reform? Some Remaining Puzzles”

Discussants: Pablo Serra and Rodrigo Fuentes, Universidad de Chile

Sebastian Edwards, and Daniel Lederman, Johns Hopkins University, “The Political Economy of Unilateral Trade Liberalization: The Case of Chile”

Beyer, Rojas, and Vergara explore the impact of trade liberalization on income distribution in Chile and conclude that trade openness increased wage inequality. Their research also indicates that the recent decline in wage inequality in Chile can be attributed to the relative increase in the number of college graduates there.

Engel, Galetovic, and Raddatz quantify the distributional effects of the Chilean tax system and assess the sensitivity of the distribution of income to changes in the tax structure and tax rates. They find that even radical modifications, such as raising the value added tax from 18 percent to 25 percent, or substituting a 20 percent flat tax for the current progressive income tax, have only a slight effect on the aftertax distribution of income. In contrast, targeting expenditures, and changing the level of the average tax rate, are far more important determinants of the income distribution. Moreover, the highyield but slightly regressive value added tax reduces inequality far more than the lowyield, strongly progressive income tax.

De Barros, Machado, and Mendonça report that the low educational level of the Brazilian population has been identified repeatedly as one of the main determinants of the country’s high poverty levels. Yet while the improvement of educational indicators has been considered the country’s most urgent goal in fighting structural poverty, it is important to note that this solution is necessarily very slow. Further, other mechanisms operate on the Brazilian labor market, such as “occupational insertion,” which permits even poorly educated workers to earn income that places them outside the poverty pool.

How concerned are various societies about the distribution of certain goods, chiefly basic education and health? Gasparini discusses a way of measuring unfairness in the distribution of any particular good. The consumption of the good is determined by both “socially acceptable” and “socially unacceptable” sources of differences in individual consumption. “Unfairness” in the distribution of a good is related to the dispersion in the values of conditional expectations across individuals. Using data for Argentina, Gasparini calculates “unfairness indexes” for both health services and education levels.

Bernal, Cardenas, Nunez, and Sanchez explore the relation between macroeconomic conditions and urban income distribution in Colombia. They show that unemployment and inflation have significant negative effects, while growth in manufacturing output and improved conditions in rural areas of the country have positive effects on income distribution. As a result, the recent combination of high unemployment, overvalued currency, and low overall economic growth in Colombia have resulted in greater inequality. The authors also find that unemployment and inflation have an adverse effect on education levels of the poor. Thus, macroeconomic instability is detrimental for the accumulation of human capital, which affects the distribution of income in the long term.

Lustig and Székely analyze the evolution of poverty and inequality in Mexico between 1984 and 1994. Using the information from the four existing Income-Expenditure Household Surveys for the period under consideration, the authors find that overall poverty and inequality rose during the adjustment years, and it remained practically unchanged during the incipient and frustrated recovery of the early 1990s. However, these aggregate trends hide important differences. While aggregate poverty and inequality remained almost unaltered between 1989 and 1994, a significant proportion of the poorest of the poor were worse off. In particular, poverty (extreme and moderate) increased in the primary sector, among rural workers, and in the backward areas of the Southern and Southeastern regions in Mexico. Also, while inequality among nonwage income sources declined, wage inequality showed a significant increase.

Sachs and Warner revisit the theory of the big push and related ideas about economic development in the 1950s. From the perspective of these theories, one would think that a large boom in natural resource output could provide the big push, stimulating industrialization and economic growth. But the authors present a big push model in which this is not necessarily the case. They also present preliminary evidence that commodity booms in Latin America in general have not stimulated faster growth.

Leamer suggests that the multifactor Heckscher-Ohlin model, using three or more factors -- such as raw labor, arable land, natural resources, and physical and human capital — can serve as a foundation for studying the consequences of abundance of natural resources and arable land. As such, it can help us to answer important questions about Latin America. His analysis suggests that some types of natural resources actually limit the return on human capital and contribute to the high Gini coefficients that are endemic to Latin America.

Harrison and Hanson argue that there are three unresolved issues with regard to the impact of trade reform: 1) many results linking trade reform to long-run growth are surprisingly fragile; 2) trade reform has only a small impact on employment in developing countries; 3) there seems to be a relationship between trade reform and rising wage inequality in developing countries. Focusing on the 1985 Mexican trade reform, they observe that wage inequality rose after the reform, which is puzzling in a Heckscher-Olin context, since Mexico had a comparative advantage in producing low-skill- intensive goods.

Edwards and Lederman analyze the political and economic circumstances surrounding Chile's unilateral trade liberalization. Between 1975 and 1979, Chile eliminated all quantitative restrictions and exchange controls, reduced import tariffs from an average of over 100 percent to a uniform 10 percent, and implemented other reforms. The authors examine the role played by the "reform team," investigate some of the distributive consequences of the reforms, and analyze the mechanisms the government used to maintain a minimum level of support for the liberalization process.