February - April 2017
Gini in Chile: From 0.58 to 0.35
By Rolf Lüders, former Secretary of the Treasury and professor of economics, Universidad Católica de Chile.
It is undeniable the remarkable economic growth experienced by Chile after the social and economic reforms started in the second half of the seventies and the corresponding reduction in poverty. Chile is now the leading country in Latin America in terms of GDP per capita and it has one of the lowest poverty indexes in the region. What about income distribution and social mobility?
Claudio Sapelli, a renowned economist working at Universidad Católica de Chile, recently published the second edition of his book “Chile, more equitable? A different view of income distribution, social mobility and poverty in Chile”. It is the most complete and thorough research ever made in Chile about income inequality and social mobility. The three key findings of the book are:
1) Between 2000 and 2013 inequality in Chile, measured by the Gini coefficient, dropped from 0.58 to 0.50, a 14% decrease.
2) Inequality will continue decreasing to 0.35, which is even lower than the 0.49 of the United States (2010), because newer generations in Chile have a lower inequality coefficient than older generations.
3) Social mobility is very high in Chile, even more than in United States, considering both mobility within the same generation and mobility between parent´s and children´s generations.
Summing up: Chile is a country of opportunities. It is what will be done–or, neglected to be done–in terms of public policy that will determine whether the path to full economic development of the country is aborted–like it has been the case of dozens of countries that in the past had reached similar levels of GDP per capita as Chile, but then had failed, victims of the “middle income trap”–or whether Chile will manage to succeed and become part of the handful of developed countries. In this sense, the book of Claudio Sapelli offers a rich source of concepts, diagnostics and data to be consulted with respect to the social dynamics of Chile.
It is worth mentioning that Sapelli applies an interesting technique–cohort analysis (generations)–to diverse historical data, and succeeds, for instance, in determining the income distribution of each one of the generations, measured by the Gini coefficient, in the base year of his data. Also, using data from the CASEN survey (a national survey of socioeconomic profile conducted by the Chilean government since 1985), Sapelli estimates the evolution of income distribution for different generations, one each year, beginning with those who were born in the early years of the 20th century.
Based on this analysis and using some additional assumptions, he projects the evolution of the Gini coefficient. This is possible because Chile’s Gini coefficient in 2013 is the weighted average of the Gini coefficient of the different generations. Then, the Gini coefficient for 2014 will be that of 2013 adjusted by the effect of differences on income distribution caused by the older generations that leave and the newer generations that enter the population.
How does Sapelli explain the income distribution for each one of the future generations? He does so relating personal incomes with years of education and experience, as well as the returns to each one of these factors. The results are very interesting. Of course, they serve to explain the historical evolution of the aggregate Gini coefficient for the country level, including the fact that between 2000 and 2013 it dropped significantly from 0.58 to 0.50.
Moreover, using the logic of his explanatory model it is possible to forecast that the aggregate Gini coefficient for the country will continue decreasing, because newer generations show a lower Gini coefficient than that of the older generations leaving. In the future, Sapelli estimates a value of 0.35 for the Gini coefficient, allowing Chile to reach an even lower index than the 0.49 corresponding to the United States (2010).
Sapelli also measures the intra and inter-generation mobility in Chile. If these mobilities are relatively high, it means the country is benefiting from a social and economic system in which poor people have good chances to be richer or even become rich, at the same time that people who are currently rich face the risk of loosing that privileged position, suggesting the existence of a reasonable level of equality of opportunities.
The intra-generation mobility measures–for a population classified in deciles by their income–the relationship between the relative level of income of those people in an initial period, and the relative level of income of the same people in, for example, five years. If people who are in the first decile at the begining remain in the same decile five years later, there would be no social mobility. If, on the other hand, some people moved to the second decile, others to the third, and so on, there would be mobility, which could be measured in an index.
According to calculations presented by Sapelli, between 1996 and 2001 that index in Chile, measured by the Batholomew method was 1.92, compared to 1.67 and 1.76 for United States and Germany, respectively. It means that the level of intra-generation mobility in Chile is high, and even higher than in United States and Germany.
Inter-generation mobility corresponds to the place of parents relative to their children in society. One way to estimate this mobility consists of estimating the correlation coefficient of years of education between parents and children. If parents and children have the same years of education, the correlation would be equal to 1. That result is what we would expect to find in a society with no mobility at all (though it could also be the case of a high-developed society where everyone -parents and children alike- reaches the maximum level of education, which is not the case for Chile). In our case, this correlation coefficient is 0.67 in 1930, and it has diminished up to 0.41. Recent comparable data shows that for the United States, this correlation coefficient is 0.46. Thus, again by this parameter, Chile also shows a high social mobility, higher than United States.
This last kind of mobility is also present in the poorer deciles. Poverty is a much more serious problem if always affects the same people. But in Chile, in this sector too, there is evidence of social mobility. In fact, 70% of the poor stay in that condition only momentarily while, for instance, they are searching for a new job or receiving an income that is too low or even negative from an independent job.
In conclusion, this updated and expanded second edition of the book by Claudio Sapelli about income distribution and social mobility in Chile confirms the results of the first edition. Chile is a country of relative high social mobility–thus, a country of opportunities– and income distribution has improved significantly. According to Sapelli, inequality will likely continue its reduction until reaches similar levels of the average for OECD countries.
These results ainvite to be optimistic about social mobility in Chile, and are absolutely different to the generalized perception that exists in the population. Moreover, at the time the book was written, the results of the CASEN survey of 2015 had not been published yet, and according to that data, inequality in Chile continued to decrease.
I invite the readers to take a look at Sapelli’s book, including its final chapter on economic policy. There, he claims that it is still possible to improve Chile’s indicators of social and economic equality of opportunities, by increasing the quality and extension of education. But he underlines that emphasis must be put in pre-school and elementary school, in order to increase the returns to education and guarantee the possibility of successful access to higher education.
Also, he suggests replacing part of the wide range of social programs existing in Chile by a different system, known as a negative income tax (in other words, a subsidy to the poor). This system would also avoid the disincentives created by the current scheme of social support, and would promote that people being helped by the state would make an effort to obtain independent incomes.