Poverty and inequality: the policy challenge

Emily MorrisInternational Institute for the Study of Cuba

October 9th 2008

Poverty and inequality: the policy challenge

• Policy objectives

• Measuring poverty and inequality in Cuba

• Assessing the record in context

• Policy debates and challenges

Policy objectives

The “basic principle of the Cuban revolutionary process” is development with “equity and social justice”, involving – the redistribution of incomes in favour of

workers and marginalised groups – the elimination of unemployment– the raising of living standards.

Measuring poverty and inequality in Cuba

• Measurements of poverty and inequality: • Absolute poverty – “minimum level of income

necessary to meet basic needs” – Extreme – not enough food – Moderate – not much money– Standard measures: equivalent to US$1 or US$2 a day.

• Relative poverty – less than half average income? • Inequality – Gini coefficient

• In Cuba:– Big problem: how to measure real incomes?

Measuring poverty and inequality in Cuba:real incomes

Aggregate consumption -- nominal and real

0

50

100

150

200

250

300

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Ind

ex

, 19

90

=1

00

Nominal household consumption Real household consumption

Economic crisis = lower real average incomes = more poverty, but how much? And for whom?

Measuring poverty and inequality in Cuba:calculating real wage growth: data

-10-5

05

10

152025

303540

%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Nominal wage growth CPI average increase

Estimates

Measuring poverty and inequality in Cuba: calculating real wage growth: results

0

50

100

150

200

250

3001

99

0

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Ind

ex,

1990

=10

0

Nominal wages

Cost of living index (1989=100)

Average real wage index (1989=100)

…but which measure of consumer price inflation?

Measuring poverty and inequality in Cuba: real wages with rations and fixed prices

1990

0

50

100

150

200

250

300

nominal pesowage

US$ equivalent

Othergoods

Rent,utilities

Rationedfood

1993

0

50

100

150

200

250

300

nominal peso wage US$ equivalent

Measuring poverty and inequality in Cuba: real wages with rations and fixed prices

1990

0

50

100

150

200

250

300

nominal pesowage

US$ equivalent

Othergoods

Rent,utilities

Rationedfood

1993

0

50

100

150

200

250

300

350

400

nominal peso wage US$ equivalent

Measuring poverty and inequality in Cuba:the decline in CUP purchasing power

00.020.040.060.080.1

0.120.140.160.180.2

1990

1992

1994

1996

1998

2000

2002

2004

2006

exchange rate: US$ per CUP

The purchasing power of the extra peso remains small…

Measuring poverty and inequality in Cuba:the rise in US$ purchasing power

0

10

20

30

40

50

60

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Value of US$100 as multiple of average monthly wage

…and the value of the dollar is still large

Measuring poverty and inequality in Cuba:the currency divide

• In 1993 • US$2 could match an average month’s salary of 182

pesos (real value around US$150)• to double it would take another US$150, or over

15,000 (150 x 100) pesos, or 82 months

• In 2007• US$20 would be needed to match a month’s salary of

400 pesos (real value around US$300)• to double it would take another US$300, or 7,200

pesos (300 x 24), or 18 months

Measuring poverty and inequality: average real incomes disguise divergence

Aggregate nominal and real consumption, and nominal wages

0

50

100

150

200

250

300

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Ind

ex

, 19

90

=1

00

Nominal household consumption Real household consumption

The gap between peso and hard currency (US$/CUC) incomes widened in 1990-1993; narrowed in 2005-2007

Shortages, currency depreciation, agromarkets

Higher wages, more bonuses, more goods on sale in pesos

Measuring poverty and inequality: findings

• Wages: average real disposable peso incomes barely recovered from 1990-1993 collapse

• Poverty: basic needs have been met• Inequality between peso earners was reduced

by the crisis and remains small• Most inequality still springs from duality between

hard currency and peso, formal and informal, economies

…which is different….

Assessing the record in context: real wages in transition

SloveniaPoland

Czech RepublicSlovakia

HungaryGeorgia

Estonia

LatviaRomania

KyrgyzstanBulgaria

LithuaniaAzerbaijan

KazakhstanRussia

Moldova

-80 -60 -40 -20 0 20 40

%Change in Real Wages, 1990-98Source: World Bank, Making Transition Work for Everyone, 2000

Cuba’s decline in real average wages was not exceptionally severe -- and other entitlements reduced the impact on welfare

Assessing the record in context: infant mortality

0

2

4

6

8

10

121

99

0

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

de

ath

s p

er

1,0

00

Positive proxy indicators: low and falling mortality rates …

Assessing the record in context: infant mortality in transition

0

5

10

15

20

25

30

RO

MA

NIA

RU

SS

IAN

FE

DE

RA

TIO

N

UK

RA

INE

BU

LG

AR

IA

PO

LA

ND

HU

NG

AR

Y

SL

OV

AK

IA

CZ

EC

HR

EP

UB

LIC

CU

BA

1990

1993

1998

2005

…comparing well with the “transition” economies

Assessing the record in context: inequality in transition

Income Inequality in Selected ECA Countries During Transition

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Czech

Rep

ublic

Hunga

ry

Slove

nia

Belar

us

Lativ

a

Ukrai

ne

Polan

d

Lith

uani

a

Croat

ia

Eston

ia

Mol

dova

Geo

rgia

Russia

n Fed

erat

ion

Krygy

z Rep

ublic

Tajiks

itan

Armen

ia

Gin

i coe

ffic

ient

(pe

rcen

t)

1987-90

1996-99

Cuban income inequality increased – but comparisons are difficult

Assessing the record in context: findings

• The increase in poverty and inequality in Cuba was induced by post-CMEA economic crisis

• Its record in meeting basic needs and maintaining equality in the formal sector has been positive

• But the gap between dollar and peso economies persists

Policy debates

• Ideology: welfare priorities– Commitment to protect the vulnerable, maintain social

cohesion and preserve human capital+ Management and resources: targeting

– Reforming institutional infrastructure – Raising spending– Improving accountability

• Auditing• Decentralisation

¿ Markets: getting the prices right– How to square the exchange rate circle ?– How to improve incentives but contain inequality,

using entitlements, bonuses and taxes ?

Conclusions

• Increase in poverty and inequality since 1990…

• … has been mitigated by policy

• A heterodox policy approach– bringing gradual improvement– but corrosive imbalances remain

no simple solutions

Poverty and inequality: the policy challenge

Emily MorrisInternational Institute for the Study of Cuba

October 9th 2008