1. The Political Economy of Structural Change and Progressive Income Distribution LAC-EU ECONOMIC FORUM 2013 Globalization, International Trade and the Welfare State at Crossroads: Converging Views in European and Latam countries? Santiago, ECLAC, January 2013 Luis Bértola Universidad de la República, Uruguay ECLAC consultant

2. Content 1. Productivity, structural heterogeneity and income distribution. 2. Productivity distribution among world citizens (structural heterogeneity). 3. Functional distribution and productivity: what is left behind the cycles? 4. Different dimensions of inequality 5. The Robin Hood paradox revisited Final remarks: The distinctive case of the political economy of natural resource-intensive economies

3. 1. Productivity, structural heterogeneity and income distribution: main arguments High income inequality in Latin America is deeply rooted in its heterogeneous productive structure. Other institutional features, as the weak State and unequal distribution of economic, social and political power, add to inequality in factoral distribution. The role of natural resources in capital building, concentration of property and generation of rents is crucial to understand the heterogeneous productive structure and the patterns of income distribution. The role of natural resources is also crucial to understand the extreme volatility of the Latin American economy and the challenges imposed to policy-making and sustainable growth. The scarce diversification of the productive structure, adds to power relations, in limiting income growth and the expansion of the public sector and the welfare state. Structural differences with Europe are clearly noticeable.

4. 2. Productivity distribution among world citizens (global structural heterogeneity) A classical topic at ECLAC since Anibal Pinto Integrating cross-section and convergence- divergence approaches. -32 countries -7 groups(AL, Asia, Scandinavia, Eurolatin, Settlers, Europe Core, USA, (and also All Europe). -9 productive sectors: GDP at current dollars, employment, labour productivity. -Years: 1991, 1996, 2001, 2006.

5. Basic data

6. “Global” inequality in productivity, 1991-2006 A slight increase in inequality during these 15 years.

7. Inequality by sectors Inequality within sectors is a proxy for inequality between countries, given that each observation corresponds to one particular country and that each country has only one obervation per sector. Inequality increases both within and between sectors (countries), but is higher within sectors (between countries). Inequality, at a global level, is mainly within sectors (i.e., international, between countries). However, the dynamic force is between-sector inequality, which also poses the problem of specialization.

8. Which sectors are more heterogeneous?

9. Inequality by country groups Inequality is slightly higher between groups than within, a feature that is reinforced during these years.

10. Which groups are more heterogeneous? Latin America is the more heterogeneous group… … and the more volatile one!!!!!!!! (even in comparison to Europe, with more countries 13-10, and higher pop. share, 30-26%).

11. Latin America: Inequality by sectors

12. The dominating and increasing inequality-source is between-sector inequality (i.e., within countries).

13. Inequality in productivity within Latin America is not mainly arising from differences between countries, but within them. This confirms Latin America as the one with hihest heterogeneity and volatility.

14. Structural heterogeneity by country (Gini-coefficient for productivity)

15. Structural heterogeneity and income distribution are highly correlated: Norway, Venezuela are outliers Source: Astorga, R. (ECLAC)

16. 3. Functional distribution and productivity: what is left after the cycles?

17. Minerals

18. Agriculture

19. Uruguay: real land prices (deflated by CPI) and productivity adjusted real land price, 1913=100

20. - LABOUR SHARES ARE LOW IN LATIN AMERICA AND TENDED TO DECREASE IN 1990-2009 - AS LABOUR PRODUCTIVITY INCREASES, LABOUR SHARES ARE REDUCED (ECLAC, 2012, BOX V.2) LABOUR SHARES (AT CONSTANT FACTOR COSTS), 1990-2009

21. The dynamics of the functional distribution of income The role of the rents of natural resources Control of natural resources Distribution of rents Sustainability vs. volatility The political economy of structural change and relative price movements

22. 4: Different dimensions of inequality: the Human Development Equality Index

23. 5. Per capita GDP and Public Expenditure, 2001-2007. The 1rst Robin Hood Paradox: those countries that need more public expenditure are those that collect less taxes in relation to GDP and thus have a less than proportional per capita public expenditure.

24. The Second Robin Hood Paradox: the lower the per capita income, the lower the impact of social expenditure on the reduction of inequality Source: Lindert, P.

25. The Third Robin Hood Paradox: social expedniture not always help reducing inequality.

26. Final remarks: The distinctive political economy of natural resource-intensive economies Unless capital investment and human capital investment creates conditions for innovation and a drastic and persistent change in the productive structure, sustained per capita GDP convergence will not take place and the welfare state will not be sustainable. Inequality will not signifcantly decrease, as a consequence of persistent structural heterogeneity, and because of the persistence of forces recreating inequality. The great problem is that this process cannot take place without the simultaneous creation of a welfare state. The key is an integrated approach to industrial policy, innovation, structural change and social policy. The risk is the combination of cycles of optimism with redistribution without structural change.