Podcast Summary: The Commitment to Equity Assessment (CEQ) – Nora Lustig

The CGD Podcast – Center for Global Development
Host: Lawrence MacDonald
Guest: Nora Lustig (Professor of Economics at Tulane University, Non-resident Fellow at CGD)
Date: May 12, 2014

Overview

This episode explores the Commitment to Equity Assessment (CEQ), a project directed by Nora Lustig. CEQ examines how government tax and benefit policies affect inequality and poverty across diverse countries. The conversation covers how the project works, key findings (with Brazil, Ethiopia, and Uruguay as specific case studies), and the policy implications for governments aiming to create more equitable societies. Lustig shares insights into how policies can paradoxically increase poverty even while reducing inequality, and the importance of nuanced, country-specific analysis.

Key Discussion Points and Insights

What is the Commitment to Equity Assessment? (CEQ)

• Definition & Purpose ([00:51] – [01:47])

  • CEQ analyzes pre- and post-government intervention inequality: it compares people’s market-driven income levels before taxes/benefits with what they actually receive after fiscal policies.
  • It looks at both taxes (which may increase or decrease inequality or poverty) and benefits (which can do likewise).
  • Quote: “We not only look at inequality, we also look at poverty and...who bears the burden of paying for the taxes, which groups subsidize which groups in society.” – Nora Lustig [01:47]

• Scope and Expansion ([02:31] – [03:45])

  • Began in Latin America, now expanded globally; 6 countries completed, 16 underway, with support from organizations like the Gates Foundation and the World Bank.
  • Developing open-source tools for others to replicate the assessment.

Case Study: Brazil ([04:10] – [09:02])

• Positive Findings — Direct Taxes and Cash Transfers:

  • Programs like Bolsa Familia substantially reduce both inequality and poverty.
  • Quote: “Direct taxes and cash transfers...reduce inequality and poverty substantially.” – Nora Lustig [04:28]

• Negative Findings — Consumption Taxes:

  • Complex indirect tax system disproportionately taxes goods like beans and rice, which the poor consume most, sometimes increasing poverty even as overall inequality declines.
  • Quote: “When you add...consumption taxes, then Brazil doesn’t look so good...poverty increases beyond what would have been with market income.” – Nora Lustig [05:33]
  • Memorable Point: It’s possible for a tax system to be progressive (rich pay a higher %), reduce inequality, and simultaneously increase poverty among the poor. ([06:10])

• Illustrative Analogy:

  • “If you have a tax system that taxes the poor...10% and the rich pay 50%...that’s progressive, right? However, the 10% for the poor...may be sufficiently high to make their poverty situation worse than it was before the taxes.” – Nora Lustig [06:17]

• Additional Finding:

  • Poor whites benefit more from transfers than poor Afro-descendants, likely due to differences in formal sector enrollment and administrative systems (Cadastro).

Case Study: Ethiopia ([10:43] – [16:53])

• Observations:

  • Ethiopia is more equal, but almost everyone is poor.
  • As in Brazil, consumption taxes increase poverty, even if not inequality.
  • Highlights the trilemma for poor countries: providing a minimum living standard, investing for growth, and maintaining macroeconomic stability—difficult to achieve all via domestic resources alone, possibly justifying continued external aid.

• Quote: “If you try to rely on domestic mobilization in countries that are very poor, it’s going to be hard not to hurt the poor.” – Nora Lustig [15:11]

Taxation, Accountability, and Demand for Public Services ([11:26] – [13:21])

• On Taxation as Accountability:

  • MacDonald raises the classic view that taxing citizens incentivizes them to demand better governance.
  • Lustig counters, citing Mexico’s Opportunidades program: even without heavy taxation, requiring conditional actions (kids in school, health checkups) created demand for better services.

• Quote: “...through the Opportunidades program...people...became demanders of those services.” – Nora Lustig [12:55]

Exemplar Country: Uruguay ([19:16] – [20:58])

• Highlights:

  • Uruguay stands out as most successful so far—among the most equal in Latin America, provides a robust floor for citizens, reduces inequality effectively with spending and taxes.
  • Challenge: Tertiary education spending is not progressive due to high drop-out rates among the poor.

• Quotes:

  • “One of the countries that looks the best so far is Uruguay...done a pretty good job in terms of providing a floor for its citizens and also reducing inequality further...” – Nora Lustig [19:28]

Methodology and Modelling Challenges ([20:58] – [23:45])

• Current Approach:

  • Uses household surveys and simulates tax/transfer effects, often making assumptions due to limited direct data, especially about tax evasion.
  • Does not fully model behavioral changes (how people would act absent taxes/benefits)—something for future expansion.

• Quote: “Right now we’re just looking at who pays what and who receives what.” – Nora Lustig [23:30]

Policy Impact and Reception ([25:14] – [26:27])

• Influencing Decision-Makers:

  • Findings influenced policy debates in Costa Rica and Indonesia.
  • In Costa Rica, evidence presented to the Finance Minister led to reconsideration of potentially harmful reforms (e.g., eliminating food exemptions).
  • High-level demand in Indonesia and South Africa for in-house capacity to use CEQ methods.

• Quote: “It is actually being taken as something serious by the people that will be making decisions. So that’s very gratifying for us, as you can imagine.” – Nora Lustig [26:08]

Reflections on Government’s Role ([23:45] – [24:53])

• Misconceptions:

  • The findings might tempt a libertarian interpretation (“if governments just stopped taxing, the poor would be better off”), but Lustig emphasizes the assessment’s purpose is not to suggest no government intervention, but to help design policies that work better.

• Quote: “What this tells us is we need to measure it and then see how we can correct it. Because at this point, often people do not see the problem.” – Nora Lustig [24:17]

Notable Quotes & Memorable Moments

• On the paradox of progressivity and poverty:

  • “Taxes can be progressive and poverty increasing. And it’s a very important point that actually the IMF has not been emphasizing enough in its recent reports...” – Nora Lustig [06:10]

• On the challenge of the development ‘trilemma’:

  • “It’s a trilemma...if you want to fast track poverty reduction, you can’t easily fund it all with domestic resources in low-income countries.” – Paraphrased from [16:30–16:53]

• On practical policy impact:

  • “...the Minister of Finance decided to reconsider some of the policies [in Costa Rica].” – Nora Lustig [25:20]

Important Timestamps

• 00:51–01:47: CEQ project explained
• 02:31–03:45: Expansion and partners
• 04:10–09:02: Brazil case study
• 10:43–12:21: Ethiopia case study
• 12:55–13:21: Conditional transfers and service demand in Mexico
• 14:51–16:53: Ethiopia's policy trilemma and aid rationale
• 19:16–20:58: Uruguay as success story
• 20:58–23:45: CEQ methodology and limitations
• 25:14–26:27: Policy impact examples

Conclusion

The Commitment to Equity Assessment is a nuanced, empirically grounded approach for evaluating how fiscal policies affect poverty and inequality. Nora Lustig’s work reveals that well-meaning policies can have unintended adverse effects, such as progressive tax structures that raise poverty rates. By helping governments and multilateral organizations see exactly how their policies work for different groups within society, CEQ enables smarter, more equitable policy design worldwide.