Revision Lecture - Inequality Flashcards
(21 cards)
Main Findings for Inequality divergence in LA
- Low taxes and transfers explain 80% of inequality gap
- Fuscal welfare state not emerged in Global South
- Limited democratisation and low state capacity
What are the limits of the engermann consensus on inequality
Failed to disentangle what specific institutions matter:
- Doesn;t consider role of state capacity (BEsley)
- Compression of History (Austin)
- MIssign rise of the welfare state in 20th Century (Piketty)
Literature on economies of LA
Global south has ‘extractive’ economies; Engerman & Sokoloff
Limited property rights, market access and regressive fiscal systems (Sokolof & Volt)
Inequality - weak middle class - limits development (Easterly)
Disentangled inequality according to OECD LIS Method
Inequality –> differing returns –> tax returns –> distribute gains –> income inequality
Gini reductinon in % after taxes and transfer c.2018
WEurope: 38%
Latin America; 6%
Weak redistribution explains on avg. 80% of higher inequality in the global South
–> despite welfare state, most labour is informal meaning narrow and inefficient tax base (soemtimes even regressive)
LA countries compared to countries of equal income; is LA more equal?
LA redistribtues 2 timess less than countries of equal income
This is post taxes and transfers, pre it is mixed. indicating core issue w state capacity and tax
(Chile is 12% gini reduction vs 27% Romania); Bolivia, Salvador a& Honduras even have regressive systems i.e. inequality goes up after state action
Is Global south richer than G Nort when they built welfare states (1920 - 60s)
Global south remains more regressive and unequal; appears to be more about endogenous policy choices than economic constraints
Revisitng Kuznets curve with LA
Development does not lead per se to more quality e.g. East Asia (Singapore), Latin America (Chile)
Redistributinve systems explain lower inequality in Western Europe and its Offshoots
Actual relationship its development and growth of redistributive systems
Relationship with European settlers ad redistribution
Strong relationship (R squared = 0.7951)
How did LA improve economic inclusion but not fiscal redistribution
Pre-redistribution (economic inclusion):
- property and market access
- benefits citizens and elites
- doesnt need democratic checks
- follows desire for national building and stability
Fiscal redistribution (taxes and transfers:
- Benfits citizens not elites
- Requires democracy and strong checks (spending accountability)
only countries with strong democracy have built strong fiscal redistribution (G. North)
Relationship with democracy and inequality post taxes and transfers
More democractic AND post taxes and transfers we see a reduction in 20 Gini Points
Literature on conditions for emegrence of fiscal-welfare state
1) Social security and redistribution demands (Voting)
2) Requires crediblt commitments to effective spending (Checks)
Besley and PErsson on Fiscal State bulding
Executive Checks –> Effecive SPennding –> Direct taxes
Linder on WElfare State
Democracy –> redistribution support –> welfare system
B
Bolivia, Angola, Nambia are shallow democracies and mostly collect revenues from taxes on oil etc.
How is their fiscal capacity and fiscal redistribution
Fiscal reditributionis close to nothing but their fiscal capacity is around (30% tax to GDP) much higher than rest of LA
Argentina and Uruguary on fiscal capacity and fiscal redistribtion
They have a very similar numbers to US and middling of world
They are in Southern Cone with more colonial settlers; Argentina and Uruguary first to give universal franchise.
Whereas Chile had a much longer dictatorship despite same income level (State is very small like Hong Kong and SIngapore with low fiscal capacity and fiscal redistribution). Ends up in more inequality though.
When did global inequality and fiscal divergence take place
WEurope: inequality declien after war and with rise of fiscal welfare state
LA: no decline in inequality. in 20th Century more fiscality (tax to GDP) in 20th Century with a rise in democracy
Western offshoots operate the same pattern as West: America and Canada
Broken fiscal contract in Latin America
90% of populatio or more is exempted in Latin America
DIrect Taxes are only 2 % of GDP to Individuals –> weak fiscal state –> no contract and reciprocity
Taxes reliant on indirect on customs and VAT; volatile
What does taxing of the top 10% in LA show now
Threshold is set very high, most are exempt but enforcement does exist
- Result of the political economy, and endogenous choices rather than a lack of ability
Instituional Origins of Democracy and Taxation
Magna Carta: ‘No scutage nor aid shall be imposed unless by common counsel of our kingdom’
’ NO Taxation without representation’ US 1785
British Principle: Parliament had to pass all taxes after the Glorious Revolution (1688)
Conclusions
- No fiscal welfare state in LA; explains 80% of higher inequality
- Economic Inclusion & fiscal redistribution have distinct political economies
- Fist can be compatible with ‘unchecked’ rule but not the second
- Unchecked states struggle to tax and provide social protection
