Poverty and inequality: the policy challenge

Emily Morris International 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
300 250 200 150 100 50 0 1991 1992 1993 1994 1995 1996 1999 2003 2006 2007 1989 1990 1997 1998 2000 2001 2002 2004 2005

Index, 1990=100

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
40 35 30 25 20 % 15 10 5 0 -5 -10 Estimates

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Nominal wage growth

CPI average increase

2007

Measuring poverty and inequality in Cuba : calculating real wage growth: results
300 Index, 1990=100 250 200 150 100 50 0
1990 1991 1994 1999 2002 1992 1993 1995 1996 1997 1998 2000 2001 2003 2004 2005 2006 2007

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
300 Other goods 250 200 Rent, utilities 150 100 Rationed food 50 0
nominal peso wage US$ equivalent
300 250 200 150 100 50 0 nominal peso wage US$ equivalent

1993

Measuring poverty and inequality in Cuba : real wages with rations and fixed prices
400

1990
300 Other goods 250 200 Rent, utilities 150 100 Rationed food 50 0
nominal peso wage US$ equivalent

1993

350 300 250 200 150 100 50 0

nominal peso wage US$ equivalent

Measuring poverty and inequality in Cuba : the decline in CUP purchasing power
0.2 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0
19 94 19 90 19 92 19 96 19 98 20 00 20 02 20 04 20 06

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
Value of US$100 as multiple of average monthly wage 60 50 40 30 20 10 0 1990 1991 1993 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2007 1992 1994 2000 2006

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 months 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 months 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
300 250 200 150 100 50 0 1989 1990 1994 1996 2003 2005 1991 1992 1993 1995 1997 1998 1999 2000 2001 2002 2004 2006 2007

Shortages, currency depreciation, agromarkets

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

Index, 1990=100

Nominal household consumption

Real household consumption

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

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

Moldova Russia Kazakhstan Azerbaijan Lithuania Bulgaria Kyrgyzstan Rom ania Latvia Estonia Georgia Hungary Slovakia Czech Republic Poland Slovenia -80 -60 -40 -20 0 20 40

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

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

Assessing the record in context: infant mortality

12 10 8
deaths per 1,000

6 4 2 0
1990 1992 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 1991 1993 1994 1995 1997

Positive proxy indicators: low and falling mortality rates

2007

Assessing the record in context: infant mortality in transition

30 25
1990 1993 1998 2005

20 15 10 5
ROMANIA POLAND HUNGARY BULGARIA SLOVAKIA UKRAINE RUSSIAN FEDERATION CZECH REPUBLIC CUBA

comparing well with the transition economies

Assessing the record in context: inequality in transition

Income Inequality in Selected ECA Countries During Transition
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
R ep u H bli c un g Sl ary ov e Be nia la ru s La ti v U a kr ai n Po e Li l an th d ua n C ia ro a Es tia to M ni a ol R us do si v an Ge a o Kr Fe rg y g de ia yz r a R tion ep Ta ubl ji k ic s Ar itan m en ia

1987-90 1996-99

Cuban income inequality increased but comparisons are difficult

C ze ch

Gini coefficient (percent)

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 Morris International Institute for the Study of Cuba October 9th 2008