SWP335 Balancing Trickle Down and Basic Needs Strategies Income Distribution Issues in Large Middle-Income Countries with Special Reference to Latin America Marcelo Selowsky WORLD BANK STAFF WORKING PAPERS Number 335 FILE COPYt y.: HG 3881.5 .W57 W67 no.335 c.4 I WORLD BANK STAFF WORKING PAPERS Number 335 Balancing Trickle Down and Basic Needs Strategies Income Distribution Issues in Large Middle-Income Countries with Special Reference to Latin America Marcelo Selowsky The World Bank Washington, D.C., U.S.A. Copyright (¢ 1979 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing June 1979 Second printing March 1985 This is a working document published informally by the World Bank. 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When this paper was first published Marcelo Selowsky was a member of the Development Economics Department of the World Bank. ISBN: 0-8213-0524-7 - iii - Abstract This paper addresses income distribution issues and explores various policy options to eliminate extreme poverty in a particular typology of middle income developing countries. The countries included in the typology are characterized by a relatively high per capita income (above US$600 per year in 1976), a relatively high degree of industriali- zation (industry representing over 30 percent of GNiP), a rather large size both in population and area, and relatively well endowed resources in agriculture. A distinctive feature is a strong inequality in the distribution of income and wealth relative to other countries of similar levels of per capita income. The typical countries characterizing the typology are Brazil, Colombia, Ecuador, Mexico, Peru, and Turkey. iecause the Latin American countries included represent two-thirds of the population of the region, this report is basically addressed to that region. - iv - Acknowledgements Several people provided valuable comments during the preparation of this report. Sebastian Pinera commented on an earlier draft and provided important suggestions. Conversations with P. Isenman, B.B. King, P. Knight, C. Lluch, T.N. Srinivasan, L. Squire, M. Urrutia, J. Villarzu, R. Webb, and other colleagues in the Bank are gratefully acknowledged. Of course, none of them is responsible for remaining deficiencies. v TABLE OF CONTENTS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . .i-i I. POVERTY AND INEQUALITY: MAGNITUDES . . . . . . . . . . . . .1 A. The Number of People in Poverty . . . . . . . . . . . . 2 B. The Incidence of Poverty is Higher Among Children . . . 9 C. The Distribution of Other Welfare Indicators . . . . . . 11 D. Economic Characteristics of the Poor . . . . . . . . . . 13 E. Trends and Perspectives ... . . . . . . . . . . . . . 16 II. SOME HISTORICAL AND INSTITUTIONAL BACKGROUND . . . . . . . . 18 III. AREAS OF INTERVENTION ... . . . . . . . . . . . . . . . . 27 A. Policies Without Trade-Offs: Increasing the Employment Content of Growth . . . . . . . . . . . . . . 27 1. Restrictions on Trade 2. Subsidies to the Use of Capital 3. The Cost of Labor and Labor Incomes 4. Labor Market Segmentation 5. The Wages and Employment Trade-Off B. Increasing the Endowment of Capital in the Poor: Identifying the Good Investments . . . . . . . . . . . . 40 1. Investment in Human Capital - Preschool children - Formal education - Education and migration 2. Investment in Physical Assets: Small Farmers - Without redistribution of land - With redistribution of land - vi - C. The Basic Needs Approach .. . . . . . . . , 61 1. Toward a Children-Oriented Approach 2. The Calorie Deficit - The aggregate magnitude: Its cost - Deficits in young children - Delivery systems 3. Options in the Hlealth Sector - Present "urban-curative" bias - Cost of expanding a preventive care system 4. Issues in Delivering Educational Services - Enrollment and quality in rural areas - Self-financing of higher education IV. BALANCING TIIE OPTIONS: TRADE-OFFS BETWEEN BASIC NEEDS AND GROWMTII .... . . . . . . . . . . . . . . . . . . 84 A. Financing the Basic Needs Package . . . . . . . . . . . . 84 B. Trade-Offs with Growth: Keeping Uncertainty Down . . . . . 88 APPENDIX I - Additional Tables APPENDIX II - Tlle Self-Financing of Iligher Education: A Model of Full Tuition and Loans APPENDIX III - Estimates of Declines in Investment due to an Income Tax on the Richest 10 Percent of Hlouseholds - vii - SUMMARY 1. These countries are experiencing an impressive GNP growth--from 6 to 7 percent--and have achieved high mean per capita incomes--from 600 to 1,200 US dollars. Ilean life expectancy has reached 60 years, and mean caloric consumption equals caloric requirement. The distribution of these high means is particularly striking. Income distribution is so unequal that 25 percent of the population lives in absolute poverty, at least that percentage suffers from calorie deficit, and variations of up to 20 years are observed in life expectancies. Inequality dominates the levels of these means. Because relative income inequality seems, at best, neutral to growth, improvements over time depend on the relative force of GNP and population growth. The end result is that the absolute number of poor (100 rillion people for all of Latin America) will remain constant over time. 2. The very fact that per capita income is high means that the income and consumption deficits of the poor are only a small fraction of GNP. Therefore, if well implemented, these countries can afford, today, a substantial attack on poverty without hampering present growthl rates. Today's growth redistribution trade-off differs from that of 25 years ago when the per capita income of the countries in question was half the present figure. Further, such a trade-off is more the result of inappro- priate policy instruments, often applied in the name of improving income distribution, than of an inherent incompatibility between growth and redistribution. 3. The policy package suggested here strives for an optimal mix of a trickle-down and a basic-needs strategy. It consists of: (a) Policies to increase the employment effect of present GNP growth and to spread wage and employment gains to wider and poorer segments of the labor force. Additional efforts for factor costs to reflect relative scarcities must be made. This is well known; however, this problem is dis- tinctively serious in these countries and does not seem to correct over time. A special effort is made to assess the payoff of improving labor market functioning so that increases in labor demand can be translated into stronger increases in employment. (-) Policies to increase investment in the assets of the poor, human and non-human, when these investments also have a high return to the economy. Nlew evidence still shows that basic education is effective and highly productive in raising incomes. The payoff to physical investment, i.e, a small-farmers strategy, is found to be highly country- specific. First, landless labor represents the core of - viii - poverty in these countries; second, under the present distribution and location of poor farmers, "good invest- ments" will be exhausted rather quickly. Unless "good" land can be redistributed, new farmers can be created only if substantial additional investments are made. How quickly these investments hit low rates of return must be further studied. (c) A strong reorientation toward basic needs, especially toward children. Policy measures are suggested, first, to reorient public expenditures in health, education, nutrition, and shelter toward the poor; and second, to increase these expenditures from 5 to 10 percent of GNP. This additional 5 percent must have a strong basic needs content. Its features are: - 1 percent of GNP to be spent in improving the quality of primary rural education. A fraction of the present public expenditure on higher education--l/2 of 1 per- cent--must be diverted to school meals in rural areas. This requires some self-financing of higher education for which a proposal is outlined here. 1.5 percent to be devoted entirely to improving and expanding primary-preventive-rural health care. - 1 percent to be spent on preschool age nutrition programs. In a country of US$800 per capita income, this makes available US$160 per year for each pre- school age child in the poorest quartile of the population. - 1.5 percent to be spent on shelter. Given present households' expenditures in housing, this allows the financing of shelter--of a unit value equal to 5 times GNP per capita--for the poorest 30 percent of urban households. (d) Policies (a) and (b) do not induce a trade-off with growth. Policy (c) can. We estimate that if this additional 5 percent of GNP is financed with a 12.5 percent additional income tax on the richest 10 percent, losses in their investment could, at maximum , lower GINP growth by 0.5 percent, i.e., from 6.5 to 6.0 percent. This is derived assuming the basic needs package represents only consumption. The maximum trade-off ratio between growth and distribution is estimated here to be 1:10. - ix- (e) Crucial in implementing the above policy is to keep uncertainty down and "rules of the game" clear. This is particularly important in mixed economies. Other- wise, uncertainty will induce expected capital losses all out of proportion to the transfer aimed at, and the trade-off will be much larger. Private investment is much more sensitive to uncertainty than to income taxation. r I I. POVERTY AND INEQUALITY: TUIE PRESENT MAGNITUDE OF TU.E PROBLEM During the last two decades, the growth performance of these countries has been impressive. As shown in Table 1, the (unweighted) annual growth rate of GNP has been 6.5 percent in the 1960-76 period. Despite the extremely high rate of population growth (3.1 percent per annum), per capita income growth is still almost twice that of developed nations during their long run period of growth; that is, 3.4 percent for the countries in Table 1 against the figure of 2 percent reported for developed countries by Kuznets. In 1976, per capita income ranged from $630 for Colombia to $'1,140 for Brazil, a weighted average equal to $1,026; excluding countries with per capita incomes above $2,000, they rank between the 68th and 90th percentiles of the .Table 1: PER CAPITA INCOME AND GROWITH RATES Growth Rates (1960-76) Country Population, Per capita GNP per 1976 income, 1976 GNP Population capita (millions) (dollars) M% M% M% Brazil 110.0 1,140 7.7 2.9 4.8 Colombia 24.2 630 5.7 2.9 2.8 Ecuador 7.3 640 7.0 3.4 3.6 Mexico 62.0 1,090 6.4 3.4 3.0 Peru 15.8 800 5.5 2.9 2.6 Average: unweighted 860 6.5 3.1 3.4 (weighted) (1,026) Turkey 990 6.7 2.5 4.2 All Middle Income Countries 750 5.5 2.7 2.8 Source: World Development Report I, IBRD, 1978 1/ Simnon Kuznets, Modern Economic Growth, NIew Haven, Yale University Press. 1967. developing countries ordered according to ascending per capita income. Vhat is striking is that these high country means, either per capita income, per capita calorie consumption, or life expectancy, coexist with extremely low values 'or these same variables for particular subgroups of the population. -T w many people live below a predetermined level of income defined by its welfare consequences? Pow sensitive are these numbers to different atid debnt_hje estimates of the relative income distribution obtained for these countries? Are these numbers dominated by the mean level of per capita income? Pcw do they compare with numbers derived by examining welfare indi- cators other than income? How sensitive is our final diagnosis to the use of other indicators? This section addresses some of these questions by putting together the fragmentary information available. A. THE NUMBER OF PEOPLE BELOW; NUTRITION-RELATED LEVELS OF PER CAPITA INCOME Incone levels associated with an ideal nutritional status of households is an appealing criterion in defining an income poverty line. Income is a proxy for the purchasing power of families and nutrition is highly associated with purchasing power. This association with income is less clear for other services such as primary education or basic health, particularly when it is freely provided by governments; that is, consumption 1/ is then less dependent on the purchasing power of the family. Before defining a nutrition-related-critical-income-line, the acceptable degree of the voluntary lea'aape to "nonnutrition" expenditures 1/ N;utritional status can also be affected by governTment interventions in water supplies and sanitation systems. -3- must he deterrined. Two suchl leakages occur: nonfood expenditures and the 'inefficiency" of the present diet. In other words, existing food expenditures would often yield a higher nutritional content if properly 1/ allocated among foods. Two extreme definitions of a poverty line thus arise: first, the least-cost diet wherein neither leakage has a wyelfare value; second, the level of income at which nutrition requirements are achieved while maintaining households' intra-food and food/nonfood preferences. Ongoing research at ECLA has developed a combination of these two criteria in defining poverty lines for urban and rural Latin America. Intra-food adjustments were made compatible with obseived patterns of food preferences so as to increase the efficiency of diets. The optimal diet in terms of calorie and protein requirements was priced in urban and rural areas, and the propensity to spend on non-food items was considered in 2/ arriving at the poverty line. These critical per capita income figures, in 1976 dollars, appear in Table 2. They range between $200 and $250, as compared with a mean figure of $300 derived in earlier experiments where 3/ calorie income preferences were fully maintained. 1/ There is ample evidence showing that, even at low levels of income, calorie-income elasticities are low. Increases in incore result in a sharp tendency to turn to more expensive sources of calories. 2/ For details on the precise methodology, see S. Piniera and S. Molina, "Extreme Poverty in Latin Arerica Project," ECLA (preliminary). Pedro Tejo, "Un 'Metodo para Estimar Consunos M4inimos de Alimentos para los Paises de America Latina," November 1976 (ECLA-IBRD) Research Project). 3/ See Reutlinger and Selowsky, Malnutrition and Poverty, World Bank Staff Occasional Papers, Number 23, Johns lpopkins Universitv Press, 1976. This estimate is based on cross section Latin Arerican data. Table 2: TOTAL PER CAPITA INCOME REQUIRED TO VOLUNTARILY ALLOCATE TO FOOD AN EXPENDITURE EQUAL TO THE COST OF AN "EFFICIENT" FOOD BASKET (1976 dollars) Urban Areas Rural Areas National Cost of Non- Implicit Cost of Non- Implicit Cost of Non- Implicit Country food food required food food required food food required basket expense income basket expense income basket expense income Brazil 150 139 289 108 83 191 124 113 237 Colombia 129 120 249 97 73 170 113 102 215 Ecuador 162 150 312 121 92 213 135 118 230 Mexico 136 126 262 102 77 179 120 110 230 Peru 134 124 258 99 75 174 114 102 216 Sources: S. Piniera and S. 2lolina: Extreme Poverty in Latin America Project, ECLA (preliminary). Pedro Tejo, "Un metodo para estimar consumos minimos de alimentos para los paises de America Latina," November 1976 (ECLA-IBRD Research Project). -5- W,hat is the number of people living below these poverty lines? HIow sensitive are these numbers to the use of the several, and sometimes quite different and debaLaable estimates of the distribution of income? Given the wide range of estimates reported, it is helpful to explore how the number of poor people change under extreme ranges of values. (And this will also be true in the future for countries wlhere at present only one estimate is available.) Table 3 presents selected estimates of the income distribution for these countries. Other estimates have not been reported because their reliability is even more questionable. Table 4 presents three hypothetical distributions covering most of the range observed in Table 3. The first is the most unequal, a share of 2 percent and 7 percent for the poorest 20 and 40 percent of the popu- lation, respectively. In the second estimate, these shares become 3.5 and 10.5 percent. These ranges cover most of the estimates for Latin America. In the third distribution, the share of all four deciles are 25 percent higher, reflecting the "better" estimate in Colombia and the present situa- tion in Turkey. Using these distributions and the country per capita income figure of Table 1, Table 5 derives the fraction of the population with incomes below the poverty lines. Because Mlexico and Brazil have almost the same country per capita income and very similar poverty lines, they have the same fraction of individuals in poverty for a given hypothetical income distribution,ranging from 13 percent for distribution II to 24 percent for distribution I. The latter figure becomes more plausible if the recent income distribution Table 3: THE DISTRIBUTION Of INCOME Colombia Peru Mexico Brazil Ecuador Turkey TM- rr =1964 1968 1975 1960 1970 1973 1970 1973 a/ (1) Poorest 20% 4.0-/ 5.2 2.4 3.5 3.4 1.9 3.5 3.1 1.8 1.8 3.4 (2) Poorest 40% 9.6 14.3 7.4 10.3 10.5 8.1 11.5 10.0 7.0 5.2 11.3 (3) Richest 5% 33.7 22.2 43.0 28.7 27.9 30.3 27.7 34.9 38.2 43.0 (4) Richest 10 49.4 39.3 52.8 41.9 42.1 43.5 39.7 47.8 51.9 56.6 39.1 Ratio of shares (3)/(1) 8.4 4.2 17.9 8.0 8.2 15.9 7.9 11.2 21.2 23.8 (4)/(1) 12.3 7.5 22.0 12.0 12.4 22.9 11.3 15.4 28.8 31.4 11.5 (4)/(2) 5.1 2.7 7.1 4.1 4.0 5.4 3.4 4.8 7.4 10.9 3.5 Gini coefficient .57 .50 .61 .51 .52 .56 .50 .56 .61 .68 .50 Composition of poorest 202: rural .65 .80 .75? .67p' .72 urban .35 .20 .25 .33 .28 a/ Refers to bottom quartile. b/ Composition of the poorest 45 percent of total households. c/ Composition of the poorest 32 percent of the population. Sources: Colombia - 1964 - Economically Accive Population: Miguel Urrutia, "Income Distribution in Colombia" International Labor Review, March-April 1976. 1974 - Households: Marcelo Selowsky, Who Benefits from Governmeat Expenditure, A Case Study of Colombia, Oxford University Press (forthcoming). Peru: Labor Force: Richard Webb, Government Policy and the Distribution of Income in Peru, 1963-1973, Harvard University Press, 1977. Mexico: Households: World Bank Mission Estimates from Household Survey Data. Brazil - 1960)- Economically Active Population: C. Langoni, Distribucao do Renta e Desenvolvi- 1970) mento Economico do Brasil. 1973 - Economically Active Population: Pesquisa National por Amostre de Domicilios, IBGE. Turkey - Households: K. Dervis and S. Robinson, "The Sources and Structure of Inequality in Turkey (1950-73),mimeo. -7- Table 4: SHARES OF POOREST DECILES ACCORDING TO HYPOTHETICAL DISTRIBUTIONS OF INCOME (percentages) Very Typical Moderate Decile Unequal Inequality Inequality I II III 1 0.67 1.50 1.87 2 1.33 2.00 2.50 3 2.00 3.00 3.75 4 3.00 4.00 5.0 Poorest 40% 7.00 10.50 13.12 Table 5: PERCENTAGE OF "POOR" UNDER HYPOTHETICAL INCOME DISTRIBUTIONS (Percent) Country I II III Midpoint Brazil 24 13 18.5 I (.62)±' (.61) Mexico I 24 13 18.5 (.62) (.61) Ecuador 1 40 35 37.5 (.65) (.60) Peru 35 1 24 29.5 (0.6) 1 (.62) Colombia 26.5 t 22 24.2 (.57) (.68) I ~~~~~~20.3 Weighted mean 25.4 Note: Values in parentheses show the share of rural families among the poor. -8- figures reported for these countries are accepted. The fraction of poor is higher in Colombia, and the results do not seem sensitive to the use of distributions II or III. Ecuador and Peru have reported distributions closer to I, which implies that 40 and 35 percent of the people live in poverty. Adjustments for the higher cost of living in urban areas reduces the rural share in the poverty group: while 75 percent of the population in the bottom quintile is rural, only 60 percent of the population below the poverty line is rural. By using the most plausible hypothetical distributions, the weighted (by the population of each country) mean figure of Table 5 yields a value of 25.4 percent of families in poverty, namely, those families who arp unable to finance, given their food-nonfood preferences, their calorie require- ments through an "efficient diet." This figure should be (and is) lower than an estimate of the observed fraction of people experiencing calorie 1/ deficits, 36 percent for 1975. Finally, it is interesting to observe the sensitivity of the aggregate income gap--the fraction of GNP that, if transferred, would lift poor families to the poverty line--to the alternative income distributions I and II. Even under I, one cannot escape the conclusion that these countries do have the resource capability of solving the problem of extreme poverty. 1/ Reutlinger and Selowsky, Malnutrition and Poverty, op. cit. Aggregate Income Gaps (Z), 1976 I II Brazil 2.2 0.7 Colombia 6.5 3.6 Ecuador 8.9 5.4 Mexico 2.3 0.3 Peru 4.1 1.9 B. THIE ICIDEMICE OF POVERTY IS 1HIGHER AMONiG YOUWiG CHILDREN The fact that poor families have larger family sizes gives origin to a larger incidence of poverty among children: the fraction of children that are poor is larger than the fraction of adults. What is the precise magnitude of this differential incidence of poverty and what are its implications for analyzing the consequences of poverty? Table 6 shows that wlhereas 16.5 percent of all adults suffer the welfare consequences of being in the poorest quintile, the figure for young children is 27 percent. If poverty is defined by the welfare consequences of living in households accounting for the bottom 40 percent of the popu- lation, the conclusion is that 50 percent of young children are poor, while only 35 percent of adults are poor. Poverty, then, is more a "children's problem." This way of presenting the poverty problem becomes more relevant: (a) if the welfare consequences of living in tne bottom deciles are measured in terms of different indicators for children than for adults; that is, anthropometric deficit, life expectancy at birth, etc.; and (b) if the propensity to spend in children--where expenditure is broadly defined, encompassing physical and psychological elements--from increases in house- hold per capita income is "low." Policy instruments to increase the -10- Table 6: URBAN LATIN AMERICA: CHILDREN (BELOW AGE 10) AND ADULTS BELONGING TO EACH INCOME DECILE Percentage of total Percentage of total Fraction of number of children in number of adults in population /a the country belonging the country belonging (deciles) f to each decile /b to each decile .10 .46 14% 8.0% .10 .43 13% 8.5% Poorest 20% .445 27% 16.5% .10 .40 12% 9.0% .10 .36 11% 9.5% Poorest 40% .41 50% 35.0 Country .33 .33 .67 /a From Table A-1. /b Denoting N as children and T as population. The fraction of the total number of children in the country that belong to a decile i can be written: = g (i )\t1) s((0.1) O (0.1) (f N. ~~~~~(NJTj) / earnings capacity of the family will have a slow effect on the extent of children's poverty. This issue will be addressed below. C. T7E DISTRIBUTION CF OT]iER WELFARE I)NDICATOPS During the last two decades, the countries in question experienced substantial gains in the mean level of selected welfare indicators. 'lean life expectancy at birth in 1975 ranged from 56 to 63 years, with gains between 5 to 10 years since 1960. Infant mortality, between 50 and 70 per thousand in 1975, declined by 30 to 40 deaths after 1960. In the 1974-75 period, the mean calorie consumption of these countries reached levels between .95 and 1.1 times the mean calorie requirement. Fow unequal is the distribution of these indicators across the population? Can one observe the same pattern here as that seen for per capita income. that is, "good" means coexisting with a large fraction of the population showing low levels of these welfare indicators? Because, unlike income data, country wide information on these distributions is not yet available, many must be inferred from case studies and submeans for regions. In Brazil, differences in 'ife expectancy of 21 years are found between the poorest groups in Rural Nlortheast and the richest group in urban areas. Factors other than incone are associated with these differences, since even within the poorest income group differences of up to 20 years 1/ can be found across regions. Sharp differences in child mortality across regions are found in Mexico and Ecuador. In Mexico, percentages range 1/ See Table A-2. - 12 - from 39.2 to 105.9 deaths per 1,000 live births in different states, and 1/ in Ecuador from 45.4 to 122.1. Perhaps malnutrition best reflects the distributive problems in these countties. A large number of undernourished individuals--in terms of caloric .ntal:e or anthropometric deficit--coexist with a mean per capita 2/ calorie cor ,umption equal to or above requirements. The distribution of calorie intake at the country level was estimate' * food consumption surveys in Brazil in the early 1960s and in Turkey in 1974. (The 1974 Brazil ENDEF survey will provide a more recent 3/ and reliable source.) The results are reported below. Calorie consumption as a Percentage of the population fraction of requirements Turkey Brazil below.75 17.4% 11.9% below.90 41.0% 29.1% Mean per capita consumption 1.04 1.07 as a raction of requirements Although they report a country mean consumption above requirements (consistent with FAO Food Balances) these surveys show 41 and 29 percent of the population with at least a 10 percent calorie deficit in Turkey and Brazil, respectively. 1/ See Table A-3. 2/ See Table A-4. 3/ The requirements take into account the demographic composition of the population. Brazil: Fundacio Getulio Vargas, "Food Consumption in Brazil, Family Budget Studies in the early 60s." Reported in Malnutri- tion and Poverty; Turkey: Nutrition in Turkey, National Nutrition, Health and Food Consumption Survey, Ankara, 1974. - 13 - A review of different studies where undernutrition in young children is measured in terms of weight deficits shows, as expected, a higher incidence of undernutrition than in the total population. In Turkey, 20 percent of preschool children are underweight, according to Turkish 1/ 2/ standards; in rural Colombia the figure is 65 percent for preschool children. A breakdown of these figures for different degrees of undernutrition shows that, even by choosing a less strict standard (degrees II and III, i.e., a deficit larger than 25 percent of the Gomez standard), between 20 and 40 3/ percent of preschool children in rural Mlexico are malnourished. D. THE ECONOMIC CHARACTERISTICS OF THE FAMILIES IN THE POVERTY GROUP Most surveys indicate that when households are classified by per capita household income, most of the poorest 20 to 40 percent of families live in rural areas. This is shown in Tables A-6 to A-9, for example, where the share of rural households in the poverty group ranges from 58 percent for Colombia (where rural households are those in towns with fewer than 1,500 inhabitants) to 82.7 percent for Peru. Brazil's figure falls between 64.3 and 72.9 percent, whereas Mexico and Turkey's figure is approximately 75 percent. In several countries, rural poverty is associated with particular regions; in the case of Brazil half the families in the poverty group are located in the Rural Northeast, and in the case of Peru, in the Mancha India. 1i Nutrition in Turkey, op. cit. 2/ La Politica de Salud, Departamento Nacional de Planeacion, Republica de Colombia, Color Osprey Impresores Ltda., Bogota, D.E., Colombia. 3/ See Table A-5. - 14 - Clearly, the above figures exaggerate the participation of rural households in poverty since the purchasing power of the reported income figures must be corrected by different price levels, particularly those of food. In the case of Peru, for example, such adjustments lowered the 1/ percentage of rural households in the poverty group to 59 percent7- The use of differential poverty lines provided by ECLA for urbnn and rural areas show that approximately 60 percent of households in the poverty group are rural. How are these households linked to the urban and rural economies? W4hat are their sources of income? These are important questions for identi- fying points of "olicy intervention. Ideally, one would like to classify rural louseholds according to the relative importance of their share of income from ownership of land, sharecropping, and the provision of wage labor to other farmers. Because the typical population census or household survey from which these poverty groups are constructed usually does not provide this data, sectorial (i.e., agricultural census or urban employment) surveys must be used to derive this information. Scattered evidence tends to show that the mixture of sources of earnings for the rural poor varies considerably in the countries explored. In Peru, 80 percent of the rural poor are subsistence farmers of distinct ethnic background. "Subsistence farmers are mostly Indian, Quechua or Aymara speaking, and in 1961 about 70% were illiterate. Their principal source of livelihood was on the average about 0.9 hectares of Sierra crop- land, three heads of cattle, and some other livestock. Most earned some 1/ Vinod Thomas, "Tae ,leasurement of Spatial Differences in Poverty: the Case of Peru,"World Bank Staff lorking Paper No. 273, January 1978. - 15 - cash income by seasonal labor on larger farms or occasional sales of 1/ livestock products." In Colombia, approximately half the rural households in poverty are small producers, the rest landless labor. Nevertheless, even small producers perceived at least two-thirds of their earnings as wage 2/ labor in larger farms. In contrast to Peru, where most rural poor are subsistence farmers, the evidence for Brazil shows that most of the poor are landless labor. According to the SUDENE-IBRD survey in Northeast Brazil, only 1.7 million of the 6 million rural labor force (heads of households plus working family members of landowners) own land. Of this 6 million, "about three million have no access to land, and subsist on temporary employment or scrounge out a living on lands so poor or remote that they were not captured by any of the censuses, cadastral survey or the SUDENE/IBRD survey. These three million and their families constitute the hard core of poverty in the Northeast. Most landowners (even if they own only two or three hectares of poor land), sharecroppers, renters and permanent workers, realize real incomes at or above the absolute poverty line, but the remaining persons presumably do not, 3/ and this situation is easily traceable to their lack of access to land." The above evidence shows that rural poverty cannot be characterized by a single, simple occupational classification. Small farmers do not seem 1/ Richard C. Webb, Government Policy and the Distribution of Income in Peru, 1963-1973, Harvard University Press, 1977, p. 13. 2/ Urrutia and Berry, Income Distribution in Colombia, Yale University Press, 1967. 3/ -. Iutcher and P. Scandizzo, The Agricultural Economy of ITortheast Brazil, forthcoming. - 16 - to represent the core of rural poverty, as is usually believed. For most countries, lan4less labor is at least equally represented in the poverty group, and wage earnings represent an important component of income, even in the case of subsistence farmers. This has important policy implications, as will be seen below. Who are the urban poor and what are their occupational charac- teristics? Two patterns seem to emerge from the data: 15ost of the urban poor are located in nonmetropolitan areas (as shown in Tables A-7 and A-10), particularly concentrated in small towns; and about half of them are associated with commerce and thle service sector. Depending on the country, between half and two-thirds of heads of households in the poor families are salaried employees, the rest self-employed. There is no single relationship between unemployment status and households in poverty. Open unemployment does not seem to characterize the households in the poverty group. A recent study at ECLA shows that most heads of households in the poverty group are employed, although a large percentage of them are underemployed, working fewer than 39 hours a week, and willing to work additional hours. This information is consistent with the estimates of the ILO, which show that open unemployment in Latin America is approximately 5 percent, while underemployment characterized around 30 percent of the labor force. E. TRENDS ANID PERSPECTIVES Evidence indicates that relative income inequality has, at best, remained constant over these long periods of sustained economic growth. 1/ S. Pinera, "Cuantificaciln, analisis y descripcion de la pobreza en algunos paises Latinoamericanos," Provecto Interinstitucional de pobreza critica, ECLA, 1978. - 17 - Although the fraction of people in poverty lhas declined, the force of population growth has resulted in a constant absolute number of people in poverty. In Latin America, 100 million people live and will remain in absolute poverty during the next two decades. Despite a constant number of poor, the economic capability of solving the problem of poverty has increased substantially. The aggregate income gap defined earlier declined from 8 percent in 1960 to 4.5 percent 1/ in 1970, and today does not exceed 3 percent. These figures clearly show that in this typology of countries poverty is, and will increasingly be, a purely distributive problem rather than the result of a lack of aggregate resources. Eliminating extreme poverty while maintaining a high growth rate should be feasible. It is the option explored in this report. 1/ S. Piniera, "lSe benefician los pobres del crecimiento economico?", ECLA, mimeo, 1978. - 18 - II. HISTORICAL ANJD INSTITUTIONAL BACKGROUND The present distribution of income and consumption is the result of three factors: (a) the distribution of human and nonhuman assets in the population; (b) the demand for the services of these assets derived from the structure and functioning of the economic system; and (c) net transfers induced by the public sector (taxes and expenditures). Ideally we would like to know how much of the past evolution and present levels of inequality and poverty can be explained by these different factors; to what extent was the trend in these factors the result of forces exogenous to public policy on the one hand, and attributable to government intervention on the other; and most important, what might have resulted if alternative government policies had been followed, particularly if those policy alternatives involved a trade off between redistribution and growth. We have neither the data nor the theory to fully explore these questions, and it is conceivable we never will. This section simply speculates about the probable effect that various initial conditions, trends exogenous to public policy and government interventions had, through the mechanisms described above in (a) to (c), on poverty and inequality. We think this framework can be useful in identifying future points of government intervention. A. INITIAL CONDITIONS Initial conditions must be discussed in relative terms, i.e., relatively to other typologies of countries. One comparison to be made is with other middle income countries such as Costa Rica, Taiwan, and Korea - 19 - which, at similar levels of per capita income, have achieved a much more equal distribution of income. The countries discussed in this report are characterized by a strong historical inequality in the distribution of wealth, particularly land. Except in Mexico, land reform programs never took place. The dis- tribution of nonphysical assets, especially education, followed the distribution of family wealth given the small role of public education in the prewar periods. In many countries, these inequalities have been associated with the ethnic composition of the population, creating strong cultural segmentations. The sheer size of these countries, their geographical complexity, and their strong differences in resource endowments across regions, compounds the problem of ethnic segmentation. In several countries, the ethnic sub- populations are located in the poorest regions, resulting in cultural and geographical segmentation that diminishes the mobility of capital and labor and dampens the potential of such mobility for improving regional equality. These conditions are quite different from those of countries like Costa Rica, Taiwan, and Korea. B. TRENDS EXOGENOUS TO PUBLIC POLICY TwIo basic trends have prevented improvements in the distribution of income over time. One is demographic growth, unparalleled in most develop- ment experiences; the second has been the emergence of strong tendencies in the economy toward dualism and segmentation in most factor markets, creating large economic rents and preventing the transmission of the gains of growth to wider segments of the population. - 20 - In most Latin American countries, population and labor growth have fluctuated around 3 percent per annum over the last couple of decades, a substantially higher rate than that experienced by most other developing countries. (See Table 7.) At these rates, one might expect unskilled labor to be absorbed by the economy only at declining wages. That this does not seem to be the case is partly explained by the high growth rate at which the urban economy has absorbed rural migration. A second feature of demographic growth is the different rate of population growth for different income groups. There is evidence that the population of lower income families is increasing at a faster rate than total population. Despite lack of direct data on demographic growth for Table 7 : POPULATION AND LABOR FORCE GROWTH RATES Average Annual Growth Rates (percentages) Total Population Labor Force 1960-70 1970-75 1960-70 1970-75 Brazil 2.9 2.9 2.8 2.9 Colombia 2.8 2.8 3.0 3.2 Ecuador 3.3 3.5 3.1 3.2 Mexico 3.4 3.5 2.8 3.3 Peru 2.9 2.9 2.1 3.0 All middle income 2.7 2.7 2.3 2.7 All low income 2.4 2.4 1.9 2.0 Source: World Development Report I. The World Bank, 19Q78. - 21 - families with different per capita incomes, regional data provides some evidence. Using state data on mean per capita income, fertility, and mortality rates, preliminary estimates for Brazil showed substantial differ- ences in demographic growth at different per capita income levels. In the poorest states of Northeast Brazil, natural population growth (3.5% a year) 1/ was almost double that of the richest states in the country (1.95% a year). What are the implications of these differential rates of population growth? First, unskilled labor supply tends to grow at a higher rate than the total labor force; if, in addition (and we do have some evidence on this), the demand for unskilled labor grows less than for skilled for a given GNP growth, the effect on the unskilled wage becomes even worse. The second implication of a higher population growth in lower income groups is its effect on their per capita capital formation, human and nonhuman. Unless strong public interventions complement the low savings rate in the poorer groups, such as the provision of education and comple- mentary physical assets when they already own some capital, the historical trends will be characterized by a widening gap in the rates of capital accumulation per capita across income groups. The past tendency of all socioeconomic groups to create barriers and pressures to market entry, what might be called "rent seeking behavior," is unique to several of these countries, and quite different from the experiences of other countries like Taiwan and Korea. Part of this behavior has been induced by government policies such as quantitative restrictions 1/ Constantino Lluch "Brazil: World Bank Human Resources Special Report," Annex II, draft, August 4, 1978. - 22 - and licensing in trade, credit rationing, and wage legislation increasing the labor cost to the urban modern sector far above the opportunity cost of labor. As a result, any sustained increase in the demand for labor has been mostly translated into increases in wages for a relatively small fraction of labor already employed in those sectors: lack of competition within labor has led to higher wages for the few already employed rather than in spreading that additional income to other workers through increased employment. rhis explains part of the different employment performance when we compare these Latin American countries on the one hand, and Korea and Taiwan on the other. As shown in several studies, labor market segmentation, defined as wage differences (for labor of equal skill or education) associated to particular occupation or sector of employment, explains a larger part of income differentials of workers. Earnings surveys in urban Peru indicate that, controlling for all personal attributes of workers (such as education, age, and experience), size of firm, which probably is the best proxy for unionization or restrictions to entry, had the same contribution in explain- 1/ ing wage differences as workers' education. C. GOVEPNMENT POLICIES i. Rather than reviewing all past government policies that might have had a redistributive effect, we examine those (a) undertaken with a distrib- utive objective in mind but which, because of their implementation, were 1/ 0. Altimir and S. Piniera, "Decomposition Analysis of the Inequality of Earnings in Latin American Countries": ECLA-World Bank Project, August 1977, mimeo. - 23 - less successful than predicted; (b) which were under consideration but judged incompatible with other objectives, particularly growth; (c) abandoned because they meant a degree of redistribution unacceptable under past political scenarios. Two major features characterized the implementation of policies that in spirit had a distributive objective. First, the implementation was to be fiscally cheap: that is, the instruments selected were not to over- burden the fiscal budget. Second, many were accompanied with an atmosphere of political rhetoric that induced a degree of uncertainty and expected capital losses completely out of proportion (and unnecessary) to the real transfer among income groups being sought. Policy instruments that were fiscally cheap and geared to a distributive objective usually had two consequences. If they did show a positive distributive effect, it was only short term; in the long run, it backfired. Second, they induced a trade off with economic efficiency and growth that alternative implementations would have avoided. Trade inter- ventions are good examples. Several of the forced industrial import substitutions policies by means of tariff protection were undertaken to increase industrial output and employment in the short run. In most countries the long-term effect was a disincentive to the growth of the export sector and of the most efficient import competing activities, particularly agriculture. Several studies show that the long-term employment effect was completely opposite to the short term objectives originally intended by these policies. - 24 - Policies to reduce the price of foodstuffs at minimum fiscal cost, sometimes even increasing government revenues, were also classical examples. Fiscal expediency always meant that lower prices to consumers could only be achieved by reducing incentives to domestic producers. Price controls on food prices have zero fiscal cost but create black markets that, in the long run, never benefit poor consumers. When foodstuffs were imported, subsidies on imports only (not on total consumption) meant lower prices to consumers at the expense of disincentives to domestic producers in the agricultural sector; the larger the share of domestic production in total consumption, the cheaper becomes the instrument (the price to consui.emrs can be reduced at a minimal fiscal cost) but the higher the real resource or efficiency loss. When foodstuffs were initially exported, export taxes or export prohibitions became cheaper instruments to reduce domestic prices than general consumption subsidies. In short, lower internal prices were reached only by discouraging domestic production and exports, fiscal expediency always induced a trade off between distributive oblectives and economic efficiency objectives. Government interventions raising the cost of labor above its opportunity cost, either by minimum wage legislation, tenure legislation, or social security contributions, were conceived with the objective of guaranteeing the real income and employment of urban workers. In several countries, such legislation has become substantially more important than that observed today in Western Europe. These policies--quite different from those undertaken by countries like Taiwan and Korea, where employment growth was a key feature of devel- opment--created strong rents among labor and prevented the increase in labor - 25 - demand to absorb the already high growth of the labor force. Again, these employment objectives could have been better served by more(fiscally) expensive instruments; increases in Social Security benefits could have been financed by the general budget instead of through a tax on the employ- ment of labor. Further, employment of unskilled labor could have been subsidized by tax exemptions proportional to the additional labor employed relative to a moving base year. ii. Economic policies in general, and redistributive policies in particular, have fluctuated widely over time in most of these countries, imparting a high degree of uncertainty and unpredictability to the decision making process of most economic units. This has been a distinctive feature of the history of these countries relatively to other country experiences. The economic costs of uncertainty have been particularly high and unnecessary during periods when more radical redistributive policies were under consideration. For example, tax and land reforms occurred during political regimes when the very concept of private property was being reevaluated--at least in the arena of political rhetoric. The resulting uncertainty about future capital losses was usually all out of proportion to the rea'L trar.sfer carried out by these reforms%. The resulting capital flightse and reductions of private investment could have been avoided if clearer rules of the game concerning '"not expropriatable sectors" had been established. These lessons are crucial for any redistributive policies to be undertaken in the future. iii. Much of the present inequality can undoubtedly be explained by a low level of public investment in the assets of the poor. What explains this behavior of public policy? To what extent was this policy defended on - 26 - the grounds it represented a trade off with growth, namely, those investments having a lower return than alternative investments? To what extent did it represent a real underinvestment (their return being higher than those of alternative investments) only explainable by past political scenarios under which transfers of investment across income groups were unfeasible? It is impossible to identify the extent to which this behavior of public policy can be attributed to either of these two factors. The implicit importance of each factor can be evaluated only if the rate of return to invest in the poor is measured: if most of that underinvestment yielded high returns, the trade off issue cannot be used as an argument. What is certain is that the trade off issue was unduly exaggerated in the past. The growth-distribution trade off resulted from extremely mechanistic views on the factors determining GNP growth, implicit in most postwar growth models. In these models (the best example being the labor surplus model), asset formation in the poor did not have a driving force on growth. Investment meant physical capital accumulation in the industrial sector, the poor benefftting only through an increased demand for labor. Any transfer to the poor, through taxing capital incomes in the industrial sector, meant a consumption transfer lowering aggregate investment. No such transfer was considered to have an asset creation effect on the poor, i.e., to have had an investment component in itself. A more modern and flexible interpretation of this view is that no asset formation in the poor, in small farmers or investing in human capital of the poor,could have a rate of return larger than investment in physical capital with which the poor are associated as hired labor. This remains a hypothesis to be tested empirically. - 27 - III. AREAS OF INTERVENTION Areas of intervention for poverty alleviation can be classified according to multiple criteria. They are grouped here into three major categories. The first includes the elimination of distortions that are adverse to a stronger trickle down effect of growth. Its objective is to increase the employment content of growth. The second area refers to investment policies to increase the endowment of human and physical capital of the poor. Here we are only interested in high yielding investments, namely, those that are good for the poor but also for the growth rate. Both sets of policies have two features. First, they increase the welfare of the poor by increasing their earnings capacity. Second, they do not impose a trade-off between distribution and growth or efficiency. On the contrary, they can benefit both, equity and growth. The third area is "basic needs," the provision of goods and services required to achieve a minimum level of "quality of life." In some circum- stances, these policies can also increase the long-term productive capacity of the poor. Sections A, B, and C address these three areas of intervention. A. POLICIES WITHIOUT TRADE-OFFS: ELIMINATING DISTORTIONS THAT ARE ADVERSE TO BOTH EMPLOYMENT AND GROWTH 1/ This section reviews policies to eliminate those distortions that not only have,by definition,a negative effect on output, but also adversely affect employment. Of special concern is the employment generation effect of 1/ This section identifies distortions to be removed and past policies to be replaced. It does not attempt to spell out the specific way and timing of the suggested changes. This should be addressed by specific studies in the fields of trade, agriculture, capital, and labor markets. - I.'~~~~~~~ - 28 - GNP growth, because it is the basic mechanism by which economic growth trickles down to the poverty grou8s. Although some distortions are the result of historical forces unrelated to public policy, most have been policy-induced and, ironically, were initially conceived to improve income distribution and employment 1/ growth. The central point here is that the distortions introduced were not the result of the objective per se, but of the specific policy instruments selected to achieve it. Thus, the trade-off between these objectives and economic efficiency is more the outcome of choosing the wrong instruments than of an inherent incompatibility between them. Why were these instruments chosen in the first place? Why were they not replaced by instruments capable of achieving the desired redistribu- tive effects without efficiency losses? The answer is fiscal expediency. The trade-off between employment and distributive objectives, on the one hand, and economic efficiency on the other is the result of using fiscally cheap instruments. The cheaper the instrument, the higher the inefficiency generated in the process of achieving a redistributive goal. The main thrust of this chapter is to show that, today, these countries can afford "expensive'- policy instruments, and therefore, avoid such trade-offs. Two sets of distortions that have adversely affected the employment generation effect of growth are explored. First, those that have distorted the composition of output either by trade policies or by internal price policies; and second, those that have increased the relative 1/ For a general taxonomy of policy and not policy-induced distortions, see J. N. Bhagwati, "The Generalized Theory of Distortions and lWelfare" in J.N. Bhagwati, et al., Trade, Balance of Payments and Growth (North Holland, 1971). - 29 - cost of labor over and above the one corresponding to the relative abundance of labor in the economy. 1. Changes in the output mix from reducing trade restrictions Trade restrictions provide a different premium to the export sector 6ihen they generate one dollar's worth of exporta) than to the import competing sector(when they substitute one dollar's worth of imports). The distortion is defined by the end result of the policy: the import substituting sector expands relative to the export sector and ends up by using more resources per dollar substituted than those used by the export sector per dollar generated through exports. If import restrictions are concentrated in particular import-competing industries (those requiring higher protection) the import- competing sectors without (or with small) protection also tend to be discriminated against. Agriculture, either through its exports or its import competing activities without protection, received most of the negative effects of such policies. To the extent that its labor intensity is greater than that of the highly protected industrial activities, the net effect on global employ- ment becomes negative. On several occasions employment creation was the objective of tariff protection policies to the industrial sector. The question arises why government chose such policies. One explanation is that the positive and negative effects on employment resulting from industrial protection are not symmetric in terms of timing or visibility. New industrial activities emerge quickly when they are the result of tariff barriers; the barrier is simply the result of negotiations with domestic investors or multinational - 30 - enterprises, i.e., the new investment has been 'latent." The positive effects; on employment are immediate, highly visible, and concentrated in urban areas. Urban labor usually has a stronger political militancy than rural labor. The negative effects of such policies usually occur over the long run and are less visible: the mechanism is the exchange rate, which tends to increase less than it would otherwise have, and the effect is spread across a large number of productive units and regions (it is less visible from a political point of view). Trade restrictions adversely affecting the agricultural sector have also been undertaken to keep consumer food prices below world prices. 11hen this is achieved by food import subsidies or prohibitions on food exports, prices to domestic producers go down below t'orld prices. A policy that lowers consumer prices without discriminating against domestic producers involves a subsidy on total consumption, independent of the source of supply. Obviously, this entails a larger fiscal burden than that of alternative instruments. Unless consumption subsidies are used, policies to keep the price of food down will discriminate against agriculture. The cheaper (fiscally) the instrument used, the less successful it is in reaching the objective without adversely affecting agricultural output and employment. 2. Subsidies to the use of capital. Interest rate policies tMost countries place ceilings on nominal interest rates that, under inflation, yield low or negative real rates ard strong excess demands for credit. Thus, credit becomes allocated to pressure groups and to large enterprises where risk is minimal (interest rate differentials are not allowed - 31 - legally so as to compensate for differential risks). Large enterprises in the industrial sector receiving that credit are perhaps the less labor intensive activities in the economy. Undervalued exchange rates and imports of capital goods without import duties are further sources of a cheap use of capital, as are tax credits and tax exemptions for investing in "backward regions." 3. Policies to reduce the discrepancy between the cost of labor and labor incomes 'Iinimum wage laws, social security legislation, and laws governing the stability of employment have been typical interventions to increase the 1/ real income of labor. Such policies have been enforced in particular sectors of the economy, in registered enterprises and particularly in the urban economy. For some labor skills, especially the lower ones, this legislation has become binding and thereby increased their real wages. To the extent the demand for labor has some price elasticity, this increase has been achieved at the expense of a lower employment in these sectors. From a political point of view, the room for maneuver in this field is limited. Of importance is to avoid adverse employment effects as governments extend wage legislation in the future to larger sectors of the economy, such as agriculture and the informal urban sector, particularly services. The issue is how to increase the coverage of these benefits without substantially increasing the cost of labor to these other sectors. 1/ This is less true for SQcial Security contributions; to the extent woikers perceive as benefits only a fraction of these contributions, this legislation becomes partly a tax on the use of labor. - 32 - Present minimum wage legislation and social security contributions cover only a small fraction of the labor force, that in the modern urban sector. Because this sector uses more skilled labor and is subject to more labor union pressures, only a fraction of their employment is bound by the minimum wage law (most workers earn a higher wage); the basic effect of such legislation is to increase the cost of labor through social security legislation, which sets a percentage contribution as a fraction of the wage. Extending legislation to more traditional sectors, such as agriculture and the informal urban sector, implies reaching activities of higher labor intensity, higher factor substitution, and employing labor of lower skills. Labor not covered by legislation has the lowest wages and incomes, as shown in Table 8 for Colombia; only 8.5 percent of workers covered by the social security system belong to the poorest quintile of households. The employment effects of extending labor legislation, minimum wages. coupled with legal social security contributions by employers, can be signi- ficantly more important than the effects of that legislation in the present. Minimum wages will increasingly become binding and therefore cover a much larger fraction of the labor force; the joint effect of both minimum wiage plus social security will involve a more important increase in the cost of labor than presently exists. If demand elasticities are higher in these new sectors, because of higher labor intensity and higher factor substitution, the potential negative employment effects are reinforced. Table 9 shows some orders of magnitude by which social security legislation increases the cost of labor. In some countries it reaches 20 percent of the wage. If the price elasticity of demand for the output - 33 - Table 8: COLOMBIA 1974: DISTRIBUTION OF HOUSEHOLDS COVERED BY THE SOCIAL SECURITY SYSTEK Quintile Z of Household 1 8.5 3 17.1 3 20.7 4 24.3 5 29.4 Total 100.0 Source: Marcelo Selowsky, "Who Benefits from Government Expenditures: A Case of Colombia." (forthcoming), Oxford University Press. 1979. Table 9: SOCIAL SECURITY CONTRIBUTIONS AS A PERCENT OF THE WAGE, 1970 Country Range Brazil 20.7 - 21.1 Colombia 10.8 - 18.3 Ecuador 13.5 - 14.5 Mexico 15.2 - 20.8 Peru 9.5 - 13.0 Source: OAS: Guidelines for Achieving Maximum Employment and Growth in Latin America, 1973. - 34 - as well as the elasticity of factor substitution is one and the share of labor is 0.5, an increase of 20 percent in the cost of labor will diminish employment in those activities also by 20 percent. To avoid such increases in the cost of labor, minimum wage laws should be complemented by subsidies (or tax exemptions) on the use of labor, and social security financed by the central budget instead of by the employer. This is well known; the issue is selectivity so as to make this policy fiscally feasible. One solution is to use these instruments at the margin and in sectors where labor demands are price-elastic. Subsidies could be given on the basis of additional employment, relative to a base year or relative to a fraction (i.e., 0.90) of the employment over, say, the last two years. The same would apply to social security contributions; employers would be exempt only for additional employment, the contribution to be financed by the central budget. Sectors with higlh labor-intensity and high capital-labor substitution such as certain activities in agriculture, construction, and commerce are likely candidates for these policies. The notion of policies at the -margin can also be applied to other types of legislation. Laws imposing high penalties on the dismissal of workers, for example, have become a typical feature of wage legislation, even more so than in developed cotntries. The result is that the hiring of labor has become a capital investment whose cost is governed by law. These laws could be replaced by unemployment insurance schemes financed by the public budget, providing unemployment payments that gradually decline over time and only last for a limited period. - 35 - 4. Labor market segmentation and the mobility of labor In most of these countries, wage levels are strongly associated with the degree of "modernity" of the sector of employment and with the size of enterprises. Labor market segmentation, the extent to which labor of equal skills receive very different salaries, is also associated with these characteristics. The empirical evidence shows that such segmentation not only has not diminished, but has perhaps increased over time. These wage differentials are partly explained by the differential enforcement of labor legislation described earlier and partly the result of labor contracts in enterprises with strong labor unions or multinational firms paying higher wages than domestic firms. The end result is that "protected" or formal labor markets face an excess supply of applicants, those failing to obtain employment ending up in the "informal" or free entry sectors where the wage tends to clear the market, reflecting supply-demand conditions. IWhat are the implications of this segmentation in labor markets for income distribution and the returns to unskilled labor? Two studies undertaken for Colombia shed some light on this question. Table 10 shows the strong redistribution occurring when labor segmentation disappears. By eliminating wage differentials for laborers of equal education in urban Colombia, the real wage of the most unskilled category of labor rises by 8 percent. This is a lower bound as only factor substitution takes place in this exercise. As a result, a high degree of income inequality within - 36 - this category of labor is eliminated. At the same time, workers in the utilities sector, basically government, experience a decline in income of 20 percent, whereas workers in the commerce sector experience a gain of 35 percent. Table 10: COLOMBIA 1965: WAGES OF UNSKILLED LABOR (pesos per hour) Present Wage segmentation equalization Manufacturing 1.95 1.81 Construction 1.66 1.81 Utilities 2.31 1.81 Commerce 1.34 1.81 Transport 1.47 1.81 AVERAGE 1.68 -1.81 Source: C. Dougherty and M. Selowsky, "Measuring the Effects of Misallocation of Labor," Review of Economics and Statistics, August 1973. When additional substitution and rural-urban migration is introduced (that is, long run adjustments are allowed), the results can be substantially stronger. By introducing substitution in the final goods market,.as well as the possibility of international trade, and by assuming that urban-rural wage differentials are maintained (which limits the degree of migration), the elimination of urban wage differential increases the real wage of unskilled labor, urban and rural, by 35 percent. The results of such an exercise are shown in Table 11. Segmentation is defined by a "modern" sector employing one-third of the unskilled urban labor force at 37 - Table ll:EFFECT ON WAGES AND E21PLOYMENT OF UNSKILLED LABOR OF ELIMINATING. LABOR. MARKET SEGMENTATION IN URBAN AREAS Wage Levels for Unskilled Labor Sector (Pesos per man year) Percentage Change Segmeintation No Segmentation Wages Employment Coffee 370 (.09) 498 34.5 6.2 Agriculture 410 (.38) 552 34.6 -10.6 Services and artisans 570 (.36) 1145 132.5 -11.7 Food industry 1850 1145 -38.1 115.2 Textiles 1660 1145 -31.0 121.5 Paper, Wood 1850 1145 -38.1 153.0 Rubber, chemicals 2660 1145 -56.9 263.0 Metals 1820 1145 -37.0 143.4 Non-metallic 1660 1145 -31.0 125.8 (.17) Mining 800 1145 43.1 -14.5 Machinery 2560 1145 -55.2 359.2 Diverse industries 1980 1145 -42.1 183.7 Light domestic 3920 1145 -70.8 129.7 Construction 1470 1145 -22.1 30.2 Transportation, communication 1320 1145 -13.2 7.1 Total 640 861 34.5 1/ J. de Melo, "Distortions in the Factor Market: Some General Equilibrium Estimates," Review of Economics and Statistics, November 1977. - 38 - wages substantially higher than the informal sector--services and artisans. By eliminating the urban wage differential and allowing for migration, employment in most manufacturing activities increases at the expense of the urban informal sector and agriculture. Manufacturing wages fall while they rise in the other sectors. The net effect is a substantial increase in real wages. These extreme but illustrative examples show the importance of preventing conditions that would generate an increase in wage differentials over time. 5. Trade-offs between increases in employment and increases in wates The literature shows a growing pessimism about the possibility of the manufacturing sector absorbing the high growth rate of labor supply in these countries. It is argued that manufacturing employment is still a small share of total employment (15-20 percent), and that its growth, therefore, cannot absorb important fractions of the total labor force. It is also argued that the rate of job creation in these sectors is low for a given output growth, that is, employment-output elasticities are lower than one--in other words, employment grows more slowly than output. The second argument, however, overlooks the fact that job creation has taken place with quite substantial increases in real wages. Clearly, one cannot have both! Given the high growth rates in real wages, the employment growth has been substantial, particularly relative to other historical experiences. Table 12 shows that,on the average, employment and real wages have been growing at 3.6 and 3.7 percent, respectively. The question is what the increase in employment would be if additional effort were made to translate ~3 9 Table 12: ANNUAL GROvtH RATES IN EMPLOYMENT AND WAGES IN THE INDUSTFIA, SECTOR, 1963-72 (Percentages) Country Emrployment Real Wages Brazil 4.7 2.8 Colombia 4.2 2.7 Ecuador 5.8 2.5 Mexico 1.9 6.9 Peru 1.3 3.7 Unweighted Average 3.6 3.7 Source: UN Growth of World Industry, reported in P. Meller, "Enfoques Sobre la Demanda de Trabajo: Relevancia para America Latina," CIEPLAN, June 1978. these increases in labor demand into additional employment rather than into additional wage increases, and what policy instruments should be employed in such effort. The answers to these questions are relevant to the issue of increasing the trickle down effect of an increase in labor demand. If the increases in labor demand that led to the combination of increases in wages and employment observed in Table 12 are maintained in the future, the following trade-off between wage increases and employment 1/ increases will occur. 1/ Assume a Cobb Douglas function X = L eAt where A is the growth rate of all other complementary factors of production, capital and technical progress Differentiating logarithmically the first order conditions yields. d2ogw = (a-l) d&og L + X where w is the wage rate. Assuming a=0.5, the value of X consistent with Table 12 is 0.055. Given A, we can derive the trade off between d2ogw and dRog L. - 40 - Growth in Wiaes Growth in Emploliment 2% 7% 3% 5% 4% 3% If wages were kept at a 2-3 percent growth rate, the employment growth rate in these sectors could reach 5-7 percent. The figures in Table 12 are averages for workers of all skills. As mentioned above, evidence indicates that real wages for educated workers have grown faster because of the short-run inelasticity of the supply of educated manpower. Expansions of the educational sector (discussed in the next section) will increase this elasticity and assure that additional labor demand results in a wider employment effect rather than higher rents of already employed workers. For lower skills, wage increases coexist with elastic labor supplies stemming from the rest of the economy. The issue of labor market segmentation discussed above is central to the explanation of this phenomenon. B. INCREASING THE EARNINGS CAPACITY OF THE POOR BY AUGMENTING THEIR ENDOWMENT OF ASSETS: IDENTIFYING THE GOOD INVESTMENTS 1. Introduction i. One way of increasing the earning capacity of poor households is increasing their ownership of productive (human and physical) assets. This policy alternative has been advanced several times by the Bank, the small farmers' strategy being perhaps the best example. This option is appealing because it automatically takes care of the long run, by - 41 - increasing present ownership it increases the future flow of productive capacity, and second, it is perceived as less paternalistic than policies that directly subsidize the consumption of the poor. A more explicit statement of the limitations and trade-offs of such an option is needed. For example, what are the limits of using this instrument for distributive purposes without a substantial trade-off with growth objectives? What are the criteria by which this trade-off can be judged? Can an optimal level of intervention in this area be identified, that is, a level of additional asset-creation in the poor that does not adversely affect growth? ii. Investments in the poor that do not adversely affect growth are, by definition, those whose rate of return (valued at shadow prices, without any distributive weights element) is higher than the opportunity cost of capital to the economy. Therefore, the magnitude of the underinvestment in the poor can be defined as that amount of high yielding asset formation which does not materialize oecause of the market imperfections facing the poor, particularly in capital markets. Correcting such underinvestment does not introduce a trade-off between distribution and growth; on the contrary it has positive effects on both equity and growth. Why have not governments taken care of this underinvestment if they indeed were interested in growth? Two reasons are possible: either few of these good investments remain, or the market imperfections facing the poor were a way of chanelling credit and investment toward higher income. groups. In other words, credit rationings allowed income groups with access to credit to undertake investments with returns below the opportunity cost of capital to the economy. - 42 - iii. The first task, therefore, is to exhaust the search for good investments in the poor. Only by first identifying and evaluating the contribution of these investments to their incomes can we then proceed to other interventions involving a higher degree of trade-off. The availability of "good investments" depends on the particular characteristics of the poor; the existence of such investments is highly country specific, highly interdependent and highly dynamic; it depends on the age characteristics of the poor (there are fewer good investments to be made in the very old), their human capital potential (for example, the fraction of physically and mentally handicapped in the poverty group), and their initial ownership of physical capital (for example, the fraction of artisans and small farmers or sharecroppers among the poor). Some empirical evidence helpful in identifying these investments is discussed below. 2. Investments in human capital These investments include all interventions that, by influencing the characteristics of individuals, affect their productivity as labor inputs. Investment in education and on-the-job training are interventions whose productivity effects have been well studied. Interventions at preschool age among poor children, infant nutrition, and other environmental variables such as health and psychological stimulation, have been analyzed but not yet quantified for their economic impact. These investments are particularly important because half of the poor individuals are children below age 15, w~hose future productive potential is influenced by early interventions: raising the income of households in - 43 - the present does not guarantee a sufficient investment in children on the part of their parents; in most societies the impossibility of borrowing against human-capital formation (there is no collateral) increases the possibility of underinvestment in education by poor families. 2a. InteAvention at ptuchoot agu in chid&en o6 poot 6amZiUu Growing empirical evidence shows that preschool children of poor families have a lower performance in most ability tests than matching controls from higher income groups. Much of this difference can be attributed to the nutritional-health-psychological environment of preschool age children. If environmental deficits affect the future productivity of the individual as well as his future capability of benefitting from schooling, the question arises whether countries are not indeed underinvesting in preschool age interventions for poor children. Table 13 presents a survey of studies whose specific aim was to evaluate the effect of infant malnutrition on specific types of abilities in young children that are crucial to basic learning. They show the mechanism by which early malnutrition can affect the effectiveness of later schooling. Other causal mechanisms by which early malnutrition affects learning have been suggested in the literature. Evidence shows, for example, that infectious diseases are likely to be less severe and less frequent in well- 1/ nourished children; to the extent that infectious diseases affect the child's responsiveness to his environment, they also affect his cognitive development. 1/ N. Scrimshaw, "Nutrition and Infection," in Recent Advances in lhuman Nutrition, ed. J. Brock (London: J. Churchill, 1961). - 44 - Table 13: STUDIES ON THE EFFECT OF MALNUTRITION ON LEARNING Probable Effect Authors Deficit in on Consequent Performance Learning Cravioto and De Licardie Auditory-visual inte- Reading ability (Mexico) gration Cravioto et al. (Mexico) Visual-kinesthetic Writing and draw- integration ing abilities Champakam et al (India Visual identification Reading abilities Cravioto et al. (Mexico, Kinesthetic-visual, General learning Guatemala); Guthrie, kinesthetic-haptic, abilities et al. (Philippines) haptic-visual, and auditory-visual integration Source: J. Cravioto and E. de Licardie, "The Effect of Malnutrition on the Individual," Nutrition, National Development, and Planning, ed. A. Berg et al. (Cambridge, Mass.: M.I.T. Press, 1973). In almost all studies apathetic behavior is identified as one of the clearest effects of malnutrition. Cravioto and De Licardie hypothesize about the further effects of apathy: "It should be recognized that the mother's response to the infant is to a considerable degree a function of the child's own characteristic of reactivity.... Apathetic behavior in its turn can reduce the value of the child as a stimulus and diminish the adult's responsiveness to him. Thus, apathy can provoke apathy and so contribute to 1/ a cumulative pattern of reduced adult-child interaction." Direct nutritional interventions to reach young children in poor families will be discussed at length in the next section. IHere we address other preschool age interventions. 1/ Cravioto and De Licardie, op.cit. .. 45 - Policies to change the out-of-lhome environment through widescale preschool compensatory programs are difficult to undertake in the short run, unless such programs are simply extensions of existing elementary schooling that can draw children into kindergarten programs one or twqo years earlier. Experience in the United States shows that because extensions of the "kindergarten type" are either insufficient in themselves or improperly designed, they cannot compensate for the environmental deprivation suffered by low income children. A more complex program is required. A partial solution, at least in the short run, might be a corrective policy geared to lower income children who enter primary school at a later age (1-3 years later) than higher income students. Educational programs for young women concerning childrearing practices would provide another type of solution. Two kinds of educational programs are important. First, nutrition education, particularly that relevant to infant-feeding and breastfeeding practices. Growing evidence indicates that the decline in breastfeeding practices in low-income families of urban areas is a main determinant of infant malnutrition. The resource cost of substituting breast milk appears quite large; preliminary estimates suggest that if 20 percent of the mothers in the urban areas of developing countries do not breastfeed, the loss in breast milk is around $365 million per year; if half of the other 80 percent discoutinue breastfeeding after the sixth month, the total loss reaches $780 million. 1/ A. Berg, The Ilutrition Factor: Its Role in National Development, (The Brookings Institution, Washington, D. C., 1973). - 46 - Second, education on childrearing practices with particular emphasis on early stimulation is another course of action. Implementing educational proerams of this type requires some preliminary research, which has not taken place on a wide scale in developing countries. Questions that arise are: flow different are childrearing practices across families in developing countries? What are the factors determining these differences? Are they related to income or to particular ethnic groups of the population? 2b. Invetme,ent in 6oxmat education In spite of spectacular expansions in enrollments and in the supply of educated labor, the evidence suggests that basic education is still an effective and productive way of increasing the earnings of poor households. Arguments against, based on presumably high levels of unemploy- ment among educated labor and on the notion that education is simply a screening device (to allocate "scarce" jobs in the modern sector), cannot be confirmed by existing evidence. What is the evidence? First, still today, poor households are characterized by extremely low levels of schooling among their working members, as well as low levels of school enrollment among their children; second, basic education has an important net impact on the earnings of labor, even if unemployment is taken into account and only possibilities of work in the informal sector are considered; third, education not only has an important potential impact on the incomes of the poor, but it also represents a high yielding investment from an efficiency point of view. In other words, it is good for equity and for growth. - 47 - Data by income groups show that 30 percent of heads of household in the poorest quintiles of families in Colombia have zero years of school- ing. Almost 60 percent have only two years or less. In the same income 1/ group, only 54 percent of children age 6-11 attend school. Cross-section regional data for the other countries show that an important number of pro- vinces still have enrollment rates under 60 percent for children below age 10. Controlling for other factors positively associated with schooling and having an independent effect on labor earnings, the effect of schooling is still important. Table 14 presents a summary of results for nine Latin American countries; even controlling for occupation and type of activity (employment variables), years of schooling explains between 7 and 25 percent of earnings inequality. This is a strong test for education: education also changes productivity by inducing cross occupational and cross sectorial mobility, an effect that is not captured by these estimates. These percentages are, therefore, a lower bound for thie capacity of education in explaining 2/ productivity differentials-! Similar results are reported for several cities of Colombia. Controlling for occupation, economic sector, and social stratum, primary 1/ Itarcelo Selowsky, V.Who Benefits from Government Expenditures: A Case Study in Colombia (Oxford University Press, 1979), forthcoming. 2/ If any change in a worker's occupation (associated with additional schooling) is the result of education acting as a rationing device in highly paid sectors or occupations, the above results would be the relevant ones. In.this case the change in worl:ers' wage does not reflect a productivity gain. - 48 - Table 14: LATIN AMERICA--Contribution of Different Characteristics to the Explanation of Earning Inequality.. Ranges Encompassing all Country Results Personal Variables Employment Variables Education Areas (years of schooling) Age Occupation Activity Urban Employees 7 - 17 10 - 21 6 - 12 5 - 9 Self-employed 8 - 22 15 - 26 3 - 9 3 - 10 Rural Employees 9 - 13 10 - 18 3 - 6 3 - 7 Self-employed 13 - 25 12 - 20 0 - 8 1 - 4 1/ Countries included are: Argentina, Brazil, Colombia, Costa Rica, Chile, Mexico, Panama, Peru, and Venezuela. Source: Oscar Altimir and Sebastian Piiiera, "Decomposition Analysis of the Inequality of Earnings in Latin America," ECLA-Wlorld Bank, August 1977. education increases earnings by 40, 16.4, and 38.3 percent in the cities 1/ of Bogota, Barranquilla, and Cali. Basic education is undoubtedly an important way of increasing the incomes of poor households. Whether it is also a good investment from the point of view of resource allocation depends on the economic costs of 1/ Phillip Musgrove, Consumer Behavior in Latin America: An Eciel Study (Brookings Institution, 1978). 49 - achieving increases in earnings capacities. The question is: What is the rate of return on investing in primary education? Table 15 shows rates of returns for different levels of schooling. Not only is the return on primary education higher than any conceivable opportunity cost of capital (the mean rate of return is 28.7 percent), but 1/ it is substantially higher than the return on other levels of schooling. Clearly, countries are underinvesting in basic education relative to higher levels of schoolingl Why do not poor households increase their enrollment in basic educa- tion as a reaction to its high rate of return? Why do rich households still invest in higher education in spite of its low rate of return? Although public primary education is free, other costs of schooling, basically forgone earnings, are important costs for poor families. Their implicit discount rate is also high, even in comparison with the high rates of return to primary education. Higher education is highly subsidized in most countries, conse- quently the private rate of return faced by rich households is substantially 1/ How does unemployment affect these rates of return? Ilow do these estimates capture the popular notion that unemployment makes education a less appeal- ing policy instrument? Unemployment affects both the costs (foregone earnings) and benefits (additional earnings) of additional schooling, and it is not obvious that the rate of return may fall after this adjustment. Second, even if it falls it may still be quite large. Some of the estimates in Table 15 automatically take unemployment into account. Most of them are based on yearly or monthly incomes of the total population: the earnings reflect unemployment periods in shorter units of time. The most important downward adjustment is unemployment that results from search activities when school graduates enter the labor force. (The first flows of earnings, to which rates of return are highly sensitive.) In Colombia, this adjustment broughtdown rates of return to basic education from 40 to 28 percent, still a respectable rate of return. - 50 - Table I5: SOCIAL RATES OF RETURN TO EDUCATION, BY EDUCATIONAL LEVEL Country Year Primary Secondary Higher Mexico 1963 25.0 17.0 23.0 Venezuela 1957 82.0 17.0 23.0 Colombia 1966 40.0 24.0 8.0 Chile 1959 24.0 16.9 12.2 1/ Brazil 1962 23.5 13.1 14.5 Turkey 1968 - - 8.5 India 1960 20.2 16.8 12.7 Malaysia 1967 9.3 12.3 10.7 Philippines 1966 7.0 21.0 11.0 South Korea 1967 12.0 9.0 5.0 Thailand 1970 30.5 13.0 11.0 Nigeria 1966 23.0 12.8 17.0 Ghana 1967 18.0 13.0 16.5 Kenya 1968 21.7 19.2 8.8 Uganda 1965 66.0 28.6 12.0 Average 1965 28.7 16.7 12.9 1/ For primary and secondary, Jallade. Source: C. Psacharopoulos, Returns to Education: An International Comparison, 1973. 51 - larger than the one shown in Table 15. This becomes clear in Table 16: not only rich households are being subsidized but this subsidy encourages investment in a sector with an economic return barely matching the oppor- tunity cost of capital relevant to most countries! The policy implications of the above are that the incentives for poor families to increase their enrollment rates must be increased. The constraint is not the capacity of schools but the demand for schooling by poor households. Additional incentives to compensate for foregone earnings (particularly in rural areas where employment opportunities for children are higher) and transportation costs are easy to implement; school breakfast and lunches, free transportation by schLool buses are some examples. Such measures can be easily financed by a redistribution of subsidies within the educational sector, specifically by eliminating subsidies to higher education. These measures will be analyzed in detail in Section C. Table 16: TOTAL (INCLUDING ALL ECONOMIC COSTS) AND PRIVATE CINCLUDING ONLY PRIVATE COSTS) RATES OF RETURN TO hiIGHER EDUCATION Country Total Private Brazil 8.0 15.5 Turkey 14.5 38.1 Colombia 8.5 26.0 Philippines 11.0 12.5 Thailand 11.0 14.0 Source: G. Psacharopoulos, Rates of Return to Education, op. cit. - 52 - Z . TLtvc ;l- 5) is: T-5 (4) RF Y(a+b)8A [ E (l+x)t] where t - 0, if T < 14 t-0 t - T-14, if T > 14 t-T-14 where A is the annual growth rate of new admittance and A are new admissions when the program begins. Recalling that b = 3a we can express (4) as a fraction of tor C by just knowing X and the fraction O the ratio of new admittance to the stock of students in the base year. For Latin America the value of X is 17% for the period 1960-71; for the value for 1971 was used. 0 - 104 - From the attached figure we can see that the system becomes self supported between the 12th and 13th year after the program begins. This result seems to be relatively insensitive to the value of . $ Ct-1 .12Cr r - .10 0 -..6 W-.5 C".80OC C t t RF(J-.7) C'-.80Ct X-.7 c' 1. 12Ct tX 0 1 2 35 6 7 8 9 1 11 2 1 14 5 1 7 8Ya 0 1 2 3 4 5 6 7 8 9 10 111213 14 1516 1718 Years - 105 - APPENDIX III ESTIMATES OF DECLINES IN INVESTMENT AS A RESULT OF AN INCOME TAX ON THE RICHEST 10 PERCENT OF HOUSEHOLDS - 106 - CLOSED ECONOMY CASE: MAXIMUM EFFECT (Perfectly elastic investment function) j s ~~~~~~~t2Y.4Y s S(YO 04) r MEI r (1-t1) r(l-t1-t2) A IO.4 A ^1 + ^2 t2 A - (t2) (0.4) (GNP) (m8+) + (I C(1-ti) GNP (0.4)t MS) + GNP (0.4)t m } tl - 0.2; t2 - 0.125; mx = 0.2; =F a 0.1 CHANGE INVESTMENT RATIO Propensity to save effect Lower interest rate effect Total Effect 0.01 (E 0.5) 0.007 0.017 0.01 (e = 1.0 0.014 0.024 - 107 - OPEN ECONOMY CAPITAL MARKET: MAXIMUM EFFECT (return abroad not affected by taxation) 1 r abroad I I I I D(l-1-t2) t2 I GNP n 1-tl GNP . (0.1) (0.156). n - (0.0156) n CHANGE INVESTMENT RATIO A 5 0.0078 if n = 0.5 GNP = 0.0156 if n = 1.0 = 0.0234 if r = 1.5 1/ Returns on capital invested abroad can only be consumed abroad. Otherwise investment alternatives abroad must also be taxed, the negative effect on domestic investment becoming smaller. i i W orld Bank French: Croissance et emploi en Chine. Oxford University Press, 1980. 444 pages Economica, 1980. ISBN 2-7178-0282-7, (including index). Publications Stock No. IB 0548, S7.95. LC 79-23354. ISBN 0-19-520115-9, hard- Spanish: Crecimiento economico y empleo cover; ISBN 0-19-520116-7, paperback. of Related en China. Editorial Tecnos, 1980. ISBN Stock Nos. OX 520115, $27.50 hardcover; Interest 84-309-0871-4, Stock No. IB 0530, 57.95. OX 520116, S12.95 paperback. Household Income or Employment Patterns and Household Income per Capita Income Growth in Welfare Comparisons Joseph J. Stern and Jeffrey D. Gautam Datta and Jacob Meerman Lewis Staff Working Paper No. 378. 1980. 32 Staff Working Paper No. 419. 1980. 70 pages (including 3 appendixes, references). pages (including bibliography, 2 appen- Stock No. WP 0378. S3. dixes). SokN.W 38 3 Stock No. WP 0419, S3. How Segmented is the Bogota The Determinants of Labor Earnings in Developing Employment Policy in Labor Market? Metropolises: Estimates from Developing Countries: A Gary S. Fields Bogota and Cali, Colombia Survey of Issues and Evidence Staff Working Paper NO. 434. 1980. 9 Rakesh Mohan Lyn Squire pages (tncluding bibliography). Rakesh Mohan Lyn Squire ~~~~~~~~~~~Stock No. WP 0434. 53. Staff Working Paper No. 498. 1981. 135 Low rates of growth in industrial em- pages (including 2 appendixes, bibliog- ployment, high rates of unemploy- Incidence of Poverty and the raphy). ment among new entrants to the ur- Characteristics of the Poor in Stock No. WP' 0498. S55 ban labor market, and low levels ofPeislrM aya,17 labor productivity and remuneration Peninsular Malaysia, 1973 Differences in Income, are the three issues addressed in this Pravin Visaria Nutrition, and Poverty within study. The author identifies the impor- Staff Working Paper No. 460. 1981. 221 tant determinants of labor demand pages (including statistical appendix). Brazil and supply and the extent to which Stock No. WP 0460. S10. Vinod Thomas the growth of labor demand has been Staff Working Paper No. 505. 1982. 91 constrained-and labor supply ad- Income Distribution and pages (including references, map). vanced-by inappropriate policies. On Poverty in Mexico Stock No. WP 0505. S3. the demand side, industrial trade pol- Joel Bergsman icy, agricultural growth, and the oper- The Distribution of Income in ation of capital markets are discussed; Staff Working Paper No. 395. 1980. 46 Brazil on the supply side, attention is fo- pages (including references). Guv P. 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Presents a quantitative framework to explore the implications of alternative Malaysia: Measurement and policies for investment, emplovment, Decomposition NEW income distribution, and fiscal activity Sudhir Anand for medium-term and long-term An account of income inequalities and Labor and Poverty growth. povertv in Malavsia. The research is Michael Lipton The Johns Hopkins University Press, 1977. policv oriented and the findings, to Explores factors that enable poor 138 pages (including S appendixes, bibliog- which the author's statistical technique households to transform their capacity raphy). is applied, are thoroughly discussed. to produce income in the labor market. LC 76-53909. ISBN 0-8018-1950-4, Stock A range of issues is covered, from data Discusses effect of dependency on No. JH 1950, $5.50 paperback. problems to conceptual questions aris- wage rates and labor duration on un- ing with respect to measurement. emplovment rates. 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