Reducing Inequality Does Not Equal Reducing Poverty – Nora Lustig

Summary

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.

Transcript

[A]

Hello, I'm Rajesh Merchandani and thanks for joining me for this edition of the CGD podcast. Now, inequality has been at the forefront of the political agenda for several years. It certainly was high on the agenda at the recent meetings of the IMF and the World bank in Lima, Peru. Two things have put it there. Firstly, developing countries share of global economic output has gone up, which means that inequality between countries has gone down. But inequality within countries, we are told, has gone up. Nora Lustig isn't quite so sure about that. She's a world expert on poverty and inequality, professor of Latin American Economics at Tulane University in New Orleans where she runs the Commitment to Equity Institute. She's also a member of the World Bank's Global Poverty Commission and and a non resident fellow here at cgd. And she's my guest on this edition of the podcast. Nora, great to have you here.

[B]

Thank you for having me, Rajesh. A great pleasure.

[A]

Now, this idea that inequality within countries has gone up, you're not so sure about it, you don't necessarily agree. What's that based on?

[B]

We've collected data for about 78 countries, developing countries, and in 45 in the last 10, 15 years, inequality actually has declined. In 30, it has increased. And in the rest, which are three, it has not changed. So there are more countries in which we observe a decline than an increase in the developing world. I think that where we find that inequality has increased is in most advanced economies and that's why it's become so front and center an issue.

[A]

So it's so taken because it's in advanced economies, rich countries. That's why in terms of media coverage, it has suddenly become a meme, if you like a theme certainly of political campaigns for the last few years.

[B]

Yes, it has increased obviously in the US which is such a predominant country in terms of world interests. But it also has increased in some iconic countries in middle income countries and the developing world, like Russia, China, India and South Africa, which is an interesting case because after apartheid went away, inequality actually went up instead of coming down.

[A]

Which is counterintuitive to what they were hoping would happen. Why did that happen?

[B]

Because inequality among the black population increased. You had more and more people joining the elite from the black population. You didn't have them before. And that's what resulted in an overall increase in inequality. By the way, among the countries in which inequality has declined, without a doubt, during the period of 2000, 2012, 2013 is Latin America. In all the countries in Latin America, they have experienced a Decline.

[A]

So they have become more equal.

[B]

More equal still. Latin America has the highest inequality in the world. But it's good news that since the early 2000s, inequality fell in most of the countries. And I think that. That's why I think it's important to realize that there are places in which inequality went in the opposite direction from what we hear and to understand what was behind it, because maybe we can learn things that can be applied somewhere else.

[A]

Your studies, and they sort of shown this based on data from where They've.

[B]

Shown it from data. You mean from where.

[A]

Where does the data come from?

[B]

Comes from household surveys in the countries in. And these studies were carried out directly by researchers. It's not that we used a platform that already exists to show that no matter which study you pick for Brazil or Mexico or Peru or Argentina or Colombia, they all show a trend of a decline inequality in this period.

[A]

Does that household survey data include the very rich?

[B]

It does not.

[A]

So that's going to skew your results.

[B]

Absolutely. And we have a problem here. The problem is that in the rich countries, household surveys do not capture the rich either. But you have other sources that are publicly available, which mainly is tax returns, of course, without identifying who pays the taxes. But you have the results. And that's what's used by the people who study the top incomes. Like we know very much about what Thomas Piketty does, but Tony Atkinson, Emmanuel Saez are the people of this team. That's a main source to see what happens at the very top. For the developing world, that information is not generally available. Why? Because governments do not release it. And I think that in order to understand really what's been happening with inequality, we do need to know what happens at the top.

[A]

Because that might change your assertion.

[B]

It might change my assertion. It might change my assertion. But I can't say until I have access to that data. And that's why I think that the multilaterals should be quite clear in terms of having data that is going to be used for analyzing fiscal reforms to keep governments accountable. We need to really know what's happening in terms of who's paying and how much.

[A]

What are the reasons that you think inequality has gone down?

[B]

Wage inequality declined, and then also the fiscal redistributive part, what governments transfer became more targeted to the poor, more progressive and more generous. So those were the two main factors. Now what's interesting is to look what happened in labor markets, because that's what generated a decline in wage inequality. And what we found is that throughout the 1990s there was quite an expansion of access to education and the average years of education increased in most of the countries. And the proportion of people with tertiary education increased. And the people that had no education or incomplete primary decreased as part of the composition.

[A]

So education provided by the government, this.

[B]

Is education mostly provided by the government. So the composition of the labor force by skill, by education level changed in favor, if you want to make it more scarce, the group that had the least education. So their wages increased relative to the wages of people that had tertiary education. And that is what drives. That is the main factor that drives the decline in wage inequality. So it was educational upgrading.

[A]

Is it possible to have declining inequality in a country, but rising poverty?

[B]

We found something that's disturbing. We found that even in countries in which fiscal policy, taxes and transfers reduce inequality, it may increase poverty. It means that in a bunch of countries, the poor and net payers into the fiscal, they may get back in kind, like education and health. But if you're concerned about the ability of the poor to feed themselves, to house themselves, then certainly you don't want the state to leave them with less money than when they start.

[A]

So how is that happening that they end up.

[B]

Why is it. No, I mean, it's. Yeah. So in most cases what happens is that consumption taxes, taxes are the ones that actually leave the poor as net payers, and in some cases the poor net payers to such a degree that depending on where you define poverty, the number of poor actually increases after taxes and transfers, which is in a way depressing because we want the state to leave the poor better off. And I think there is a problem because people haven't been measuring this well. So for example, 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. Even after Bolsa Familia, even after all the transfers, taxes are very onerous. Why? Because in Brazil, rice and beans pay close to 20% in taxes. So you do the math. It's not surprising.

[A]

So what implications does that have for policymakers?

[B]

Well, it's a tough one. I think that our message right now from the Commitment to Equity project is first of all, you need to measure what's going on. If you see that your system is impoverishing the poor or making some of the non poor poor poor, then you need to look at who are they? Are they beneficiaries of the transfer system? If they are, 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? It means that the government will have to do more in order to compensate the poor so that they're not left worse off. It also has a very serious implication for the current movement, I would say, to emphasize domestic resource mobilization and replace aid by local resources. I think that in order to do that without hurting the poor, you need to measure this. And probably you will have to be much more gradual in implementing the reform agenda rather than doing it very quickly and saying, we don't need aid anymore. Now, countries, let's use domestic resources. Many poor countries, if you say, let's do that, you're going to end up taxing the poor even more.

[A]

Just to pick up on that point, Domestic resource mobilization is one of the big things that has been discussed this year, particularly in July at the Addis Ababa Financing and Development Conference, unlock domestic resources. But you're saying, fine, but make sure you design them correctly, otherwise you could end up with more people in poverty.

[B]

Exactly. We have to be very careful. The same thing with the very important agenda of reforming subsidies. The subsidies that benefit a lot, people that are not poor, it's okay. But remember that when you remove subsidies, you're removing cash from the hands of the poor. So in the case of the poor, you cannot just say, okay, we're going to get rid of the energy subsidies because they're regressive and they're benefiting the rich. You have to make sure that you're going to compensate them with something else.

[A]

So is the answer to not use taxes that are, say, consumption taxes across the board, but to tax the rich?

[B]

I think that taxing the rich is very important because even though people say there's not a lot of resources, there was a recent article in the New York Times of how many additional things you would be able to pay for the poor in the US if the rich paid more taxes. And I'm sure you can find stories that are similar in many other countries. Even if it doesn't look like a lot, what you spend on the poor is not a lot either. I mean, some of the conditional cash transfers are 0.3, 0.5 or 1% of GDP.

[A]

But welfare spending in many countries, yeah, total welfare, yes.

[B]

But 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. So because you don't spend a lot actually in cash transfers to the poor.

[A]

In Most countries, in all discussions of inequality, what you don't hear very much is the idea of equality, absolute equality. Does that make sense to aim for absolute equality? Or is there some kind of optimal level of inequality? And if so, what is it?

[B]

Yeah, I don't think perfect equality is the optimal level, and it's not, not reachable either. But it's not optimal from the point of view that you want to reward effort, right? I mean, so you expect to see differences in wages. If people work more, if they invest more in their education and their skills, if they put more effort in what they do, then I think incentives are very important to be preserved. And that's probably a good part of the inequality story. An optimal level of inequality for me would be the one that gets rid of all the sources of inequality that are bad. For example, if you have state capture by the rich and they use it to generate monopolistic rents, monopolistic profits, that's bad. That's bad for inequality and bad for growth. If you have discriminatory practices in the labor market or even before the labor market and people, how much access to schooling, how much access to work, voting they have, that's an inequality that comes out for something that's bad, bad for growth and bad for also equity. If you have exploitative relationships within a society in which some parts of the society takes advantage of the fact that others don't have access to certain assets, for example, and gives them very low wages, et cetera, you also want to get rid of that. So all the inequality that is caused by factors that are bad from a moral, or also, more importantly, from an efficiency point of view, you would like to agree, and that would be one criterion for me to define the optimal level. The second one is redistribution. I want to have an extent of fiscal redistribution that ensures that nobody's below a certain threshold, both in terms of cash income and in terms of access to opportunities in education and also in terms of access to health care. That would define to me what would be the optimal inequality level. And it will not be perfect equality.

[A]

When it comes to. Just put your policymaker hat on now, or your policymaker advisor hat on now. When you're trying to figure out the range of policies you deploy to tackle inequality and poverty, what do those choices depend on?

[B]

Well, I think that if politicians are worried about the political margin, right? Me as a policymaker, what I would advise always is make sure you're measuring things correctly, first of all, before you make decisions to the extent that you can, and then see what are the trade offs. And you have to establish the priorities. For me, one of the main priorities always do not hurt the poor and benefit the poor. That's for me, the first priority. And that's why I'm a little concerned about so much emphasis on inequality. Because sometimes, as I mentioned earlier, a fiscal policy can be inequality reducing, but poverty increasing. So that is a no no for me. I mean, even if it reduces inequality, I would rather have one that does not reduce inequality, but it doesn't increase poverty. So I think that as a policy advisor, I would rank first and foremost what happens to the poor and measure what are the implications of the current policy and proposed reforms. Second thing is 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. So you help equalize opportunities in the longer term.

[A]

You mentioned equity. You run the Commitment to Equity Institute. Just tell us briefly a little bit about that.

[B]

Okay, so what we do is we have a methodology that we have been polishing now for several years that we apply across a number of countries. Right now we're covering about 34 countries around the world. About 20 are finished. And so we are able to see to what extent existing systems are reducing inequality and poverty using taxes and transfers, including in kind transfers like education and health. Moving forward, our aim is to generate a database which we are calling something like Fiscal Equity Information and Monitoring System. So we'll be able to track over time how do the fiscal systems change, how consistent are they with the commitments that people have made either through the SDGS or also the World bank in terms of eradicating poverty. So we emphasize this notion of looking both at inequality and poverty I think has been a contribution that had been overlooked before. We've also generated new measures that people hadn't focused on before. And I hope that they will become part of the mainstream as we move forward.

[A]

And the website for the Commitment to Equity Institute is ceq.com?

[B]

It'S actually not CEQ. CEQ had been taken. So it's www commitment to equity, but without double T. So it's like commit men to equity all in one word.

[A]

You can find out more details about that on CGD's website. We do publish a lot of the work that the Commitment to Equity Institute produces. Our website address as ever, cgdev.org find out much more about Nora Lustig on that website too. Nora, great to have you on the podcast. Thanks very much for joining me.

[B]

Many thanks for having me. Rajesh it's been a pleasure.

[A]

And come back and join me, Rajesh Merchandani also for the next podcast from cgd.