The CGD Podcast: "Reducing Inequality Does Not Equal Reducing Poverty" – Nora Lustig
Episode Date: October 26, 2015
Host: Rajesh Merchandani (Center for Global Development)
Guest: Dr. Nora Lustig, Professor of Latin American Economics at Tulane University, Director of Commitment to Equity Institute

Episode Overview

This episode explores the nuanced relationship between inequality and poverty, challenging commonly held assumptions that reducing one automatically leads to a reduction in the other. Dr. Nora Lustig, a renowned expert in poverty and inequality measurement, discusses recent trends in both developed and developing countries, the effectiveness of different fiscal policies, and the vital need for accurate measurement in policymaking.

Key Discussion Points & Insights

1. Global Trends in Inequality

• Decline of Inequality in Many Developing Countries
  • Contrary to widespread belief, within-country inequality has declined in more developing countries than it has increased over the past 10-15 years.
    • "We've collected data for about 78 countries, developing countries, and in 45 in the last 10, 15 years, inequality actually has declined." (B, 01:10)
• Advanced Economies See Rising Inequality
  • The reason inequality has become a political meme is primarily its increase in rich countries, notably the US, and middle-income nations like Russia, China, India, and South Africa.
    • "In most advanced economies...that's why it's become so front and center an issue." (B, 01:31)
    • "South Africa, which is an interesting case because after apartheid went away, inequality actually went up instead of coming down." (B, 01:54)
• Latin America's Remarkable Shift
  • Since the early 2000s, Latin America has seen inequality drop in nearly all countries, though it still remains the world’s most unequal region.
    • "During the period of 2000, 2012, 2013...in all the countries in Latin America, they have experienced a decline." (B, 02:25)
    • "More equal still. Latin America has the highest inequality in the world. But it's good news that since the early 2000s, inequality fell..." (B, 02:56)

2. Data Quality and Limitations

• Exclusion of the Very Rich in Surveys
  • Standard household surveys, the basis for most inequality metrics, do not capture top incomes, especially in developing countries where tax data isn’t public.
    • "Household surveys do not capture the rich either. But...you have other sources...mainly tax returns...For the developing world, that information is not generally available." (B, 04:05)
  • Nora stresses the need for greater transparency and access to tax data, to fully understand inequality.
    • "We do need to know what happens at the top." (B, 04:40)
    • "That's why I think that the multilaterals should be quite clear...We need to really know what's happening in terms of who's paying and how much." (B, 05:10)

3. Drivers of Decreased Inequality

• Key Factors in Decline
  • Reduced wage inequality and more progressive, targeted government transfers have led to greater equality.
    • "Wage inequality declined, and then also the fiscal redistributive part, what governments transfer became more targeted to the poor..." (B, 05:30)
• Role of Education
  • The expansion of public education in the 1990s changed labor market dynamics, increasing wages for the least educated.
    • "Expansion of access to education and the average years of education increased in most of the countries...That is the main factor that drives the decline in wage inequality." (B, 06:11 / 06:46)

4. The Poverty–Inequality Disconnect

• Declining Inequality Can Raise Poverty
  • Surprisingly, policies that reduce inequality can sometimes result in more people living below the poverty line, particularly through certain tax structures.
    • "We found that even in countries in which fiscal policy, taxes and transfers reduce inequality, it may increase poverty." (B, 06:52)
    • "In Brazil, poverty doesn't increase, but then when you look within the poor, some gain, some lose. We found that of all the poor after taxes and transfers, 40% were made poorer by the taxes." (B, 07:58)
    • "In Brazil, rice and beans pay close to 20% in taxes. So you do the math. It's not surprising." (B, 08:23)

5. Policy Implications and Recommendations

• Necessity for Detailed Measurement
  • Policymakers need robust data to ensure their reforms do not inadvertently harm the poor.
    • "If you see that your system is impoverishing the poor...then you need to look...is it because we don't give them enough in terms of transfer to compensate. If they're not in the system, how can we put them in the system?" (B, 08:44)
• Cautious Domestic Resource Mobilization
  • Shifting from foreign aid to domestic resource mobilization without proper design can increase poverty, especially through regressive consumption taxes.
    • "Many poor countries, if you say, let's do [replace aid with domestic resources], you're going to end up taxing the poor even more." (B, 09:54)
• Subsidy Reform Warnings
  • Removing subsidies risks harming the poor unless compensatory measures are in place.
    • "When you remove subsidies, you're removing cash from the hands of the poor...you have to make sure that you're going to compensate them with something else." (B, 10:20)
• Tax the Rich, Not Just the Poor
  • Shifting the tax burden towards the wealthy can yield sizable benefits for poverty reduction at modest expenditure.
    • "What you could do with maybe additional resources in terms of helping the poor by taxing the rich is much more than what we sometimes think." (B, 11:37)

6. The Concept of "Optimal Inequality"

• Absolute Equality Is Neither Achievable Nor Desirable
  • Some inequality is necessary to reward effort and incentivize skills.
    • "I don't think perfect equality is the optimal level...you want to reward effort, right?...incentives are very important to be preserved." (B, 12:09)
• Getting Rid of 'Bad' Inequality
  • Policymakers should target inequality arising from unfair processes: monopolistic rents, discrimination, and exploitation.
    • "An optimal level...would be the one that gets rid of all the sources of inequality that are bad..." (B, 13:23)
• Redistribution for a Social Floor
  • Redistribution should ensure nobody falls below a socially-determined minimum in income, education, and healthcare.
    • "Redistribution. I want to have an extent of fiscal redistribution that ensures that nobody's below a certain threshold..." (B, 13:57)

7. Policymakers’ Dilemmas: Trade-offs and Priorities

• Measure, Rank, Then Intervene
  • Accurate measurement is fundamental. The first priority for governments should be not to harm the poor, even if that means less immediate reduction in inequality.
    • "As I mentioned earlier, a fiscal policy can be inequality reducing, but poverty increasing. So that is a no no for me...I would rather have one that does not reduce inequality, but it doesn't increase poverty." (B, 14:37 / 15:10)
• Broader View of Equity
  • Equity should include access to resources and opportunities, not just income redistribution.
    • "...look at what are the implications in terms of equity, which includes income inequality, but also access to resources, particularly in the area of education, health and infrastructure." (B, 15:42)

8. The Commitment to Equity (CEQ) Institute

• Mission and Scope
  • Nora leads the CEQ Institute, developing methodologies to evaluate how taxes and transfers affect inequality and poverty in 34 countries (20 completed).
    • "We have a methodology...that we apply across a number of countries. Right now we're covering about 34 countries around the world." (B, 16:11)
    • "Moving forward, our aim is to generate a database...Fiscal Equity Information and Monitoring System." (B, 16:38)
• Unique Contribution
  • Emphasis on both poverty and inequality in evaluation is a contribution to global policy discussions.
    • "We've also generated new measures that people hadn't focused on before. And I hope that they will become part of the mainstream..." (B, 17:02)

Notable Quotes & Moments

• On the Poverty–Inequality Disconnect:
  • "We found that even in countries in which fiscal policy, taxes and transfers reduce inequality, it may increase poverty." (B, 06:52)
• On Data Gaps:
  • "For the developing world, that information [tax data] is not generally available. Why? Because governments do not release it." (B, 04:30)
• On Education’s Role:
  • "The composition of the labor force by skill, by education level changed in favor...so their wages increased relative to...tertiary education. That is what drives...the decline in wage inequality." (B, 06:17 / 06:46)
• On Prioritizing Policy Goals:
  • "One of the main priorities always do not hurt the poor and benefit the poor. That's for me, the first priority." (B, 15:00)
• On Measuring Both Inequality and Poverty:
  • "...looking both at inequality and poverty I think has been a contribution that had been overlooked before." (B, 16:51)

Timestamps for Key Segments

• Introduction & Global Inequality Trends: 00:05–02:56
• On Data and Measurement Issues: 03:28–05:27
• Causes of Decreased Inequality (Education, Labor): 05:30–06:46
• The Disconnect: Policy Can Lower Inequality, Raise Poverty: 06:52–08:23
• Policy Implications, Mobilization, and Subsidy Reform: 08:44–10:55
• Tax the Rich and Welfare Spending: 11:04–11:50
• Absolute Equality vs. Optimal Inequality Explained: 11:50–14:18
• Policy Choices & CEQ Institute Mission: 14:18–17:20

Tone and Style

Dr. Lustig is measured, data-driven, and pragmatic—frequently highlighting caveats, the need for nuanced measurement, and the moral imperative not to harm the poor even when pursuing broader equity goals. The conversation is rich with reminders to not take global narratives at face value and to always consider country- and case-specific evidence.

For more on Nora Lustig and the Commitment to Equity Institute, visit the CGD website.