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Poverty and Income Distribution in a High Growth Economy -- The Case of Chile 1987-98

 

Chile FY01 PA

Main Report (3.9Mb PDF)

Background Papers (14.1Mb PDF)

The Fall of Poverty

1. Chile remains one of the outstanding countries in Latin America in terms of its record in reducing poverty. A combination of strong growth and well directed social programs have combined to reduce the poverty rate in half during a period of just eleven years. This study shows that previously noted trends in falling poverty, in terms of incidence, depth and severity, continued into 1998. As a result, only 17% of the population now lives in poverty (compared to 40% in 1987), while those living in extreme poverty are barely 4% of the population.

2. This report focuses on updating the situation between 1994 (the previous Bank report) and 1998. The analysis shows that there was unambiguously less poverty between 1994 and 1998 than in all earlier years, whether poverty is measured by the headcount, the poverty deficit or by any of the most sensitive poverty indices. The reductions in poverty observed between 1994 and 1998 are observed at all levels of income, in including those in the very extreme tail of the distribution.

3. Income poverty is clearly related to a number of important factors. Some of these correlates relate to the demographic make-up of the family. In general, large families tend to be poorer, as do families headed by women. Households whose head or spouse of head has substantial education, will have less poverty. Completing secondary school brings a 70% gain in income, over a household whose head has no education at all. Primary education produces a 30 to 40 percent income gain. Returns to education at all levels are higher for people living in urban, as opposed to rural, areas. Employment patterns are also important. In urban areas, being unemployed reduces household per capita income on average by about 20%; in rural areas by as much as 70%. Lower income is also associated with self employment and unpaid family work.

Social Indicators and Access to Social Services

4. Poverty is a multi-dimensional concept, including both income and access to social services, as well as such intangibles as empowerment and social capital. As a compliment to the income poverty measures, social indicators can provide other direct measures of welfare for the poorest segments of society, focusing on such aspects as health, nutrition and educational status. The evidence shows that Chile has achieved considerable improvements in key social indicators such as infant mortality, life expectancy, coverage of primary and secondary education, and in housing during the past decade. Mean labor income and labor force participation has increased, particularly for women. However, the rate of unemployment has also increased reaching 10% in 1998 after having been at half that rate for several years, a situation that is associated with the economic slowdown related to the Asian crisis and events in Brazil and other countries.

5. Progress in poverty reduction can also be measured in terms of access to social services. Using monetary income only to measure poverty can give an incomplete assessment of the extent of the deprivation of the poor. This study presents a quantitative assessment of the "deficit" in education, health and housing status during the years 1990 and 1998, by comparing the access to these services with various thresholds based on widely accepted standards in each area.

6. In education, the percentage of households with two or more members experiencing educational deficit declined from 13% in 1990 to 8% in 1998. The analysis reports a significant reduction in the percentage of the population which dropped out from primary school (from 5% to 1.4%) and secondary school (from 15% to 10%). The percentage of students behind the expected level of grade attainment fell by significantly less (only three percentage points). Overall, the reduction in the educational deficit appears to be a direct result of the substantial increase in government spending during this period (an increase of 125% in real terms between 1990 and 1998).

7. In contrast, the reduction in housing deficits is considerably higher than that in education. The percentage of households that exhibit at least one dimension below standards declined from 43% in 1990 to 27% in 1998. Those with deficits in four or more dimensions declined from 10.5% to 4.4%. The largest gains occurred in access to electricity, where households without access represented less than 4% of the total in 1998. The lowest gains occurred in access to sanitation facilities. Overall, the incidence of the housing deficit declined by almost one half during this 8 year period.

8. Combining the three social sector deficit measures of poverty (education, health, and housing), with our income poverty measure, reveals that 51% of all households have neither a social sector deficit nor an income deficit. By contrast,. only 1.5% of all households have a deficit in all four dimensions. Thus, while there are few households demonstrating chronic or severe poverty in a multidimensional sense, about one-half of all households have some sort of social or income deficit.

Income Inequality: 1987-1998

9. Income inequality in Chile remains high by international standards. Income inequality appears to have substantially worsened between 1994 and 1998, with most of the deterioration happening during 1994-96. Within these four years there has been an increase in the dispersion within both the top and the bottom of the income distribution; while the bottom decile increased its real income by 15%, the real income of the top decile grew by 31%. However, the level of the Gini or other measures of income distribution in 1998 is broadly similar to that of 1987, so that the overall picture on inequality is one of a fairly stable distribution for the period as a whole. Furthermore, if one adjusts the income distribution statistics for the distributive impact of social spending, one sees an improvement in distribution during the period (see below).

10. Chile continues to become more urbanized over time; the rural population fell as a share of the total from 20% in 1987 to just under 15% by 1998.. The study shows that both urban and rural areas experienced strong increases in mean incomes during the period 1987 to 1998, although incomes in urban areas rose proportionally slightly more, thus widening the income gap between urban and rural areas. Continued rural- urban migration should be a factor reducing income inequalities in the future.

Adjusting Income Inequality for Social Spending

11. Most analyses of income distribution do not take into account the impact of government social spending. To the extent that social programs are having a major influence in transferring resources from richer to poorer parts of the population, this can be an important misestimation, particularly when social programs are growing.

12. This study develops and applies a methodology for the estimate of the imputed income transfers from government subsidies in health, education, and housing, for the years 1990, 1994, 1996 and 1998. The analysis has confirmed that adjustments for in- kind income transfers substantially reduce the Gini coefficient on income inequality.

For 1998, this coefficient falls from 0.56 (unadjusted) to 0.50 (adjusted) and the ratio of the highest (richest) to the lowest (poorest) quintile falls from 20 to 11.

13. These results suggest that social policies in Chile have had a significant impact in reducing income inequality, in spite of the fact that such policies are oriented towards poverty reduction rather than reduction in inequality per se. Moreover, the analysis concludes that the impact of social policies was more significant in 1998 than in 1990. This resulted primarily from the significant increases in the budget allocation to such programs between 1990 and 1998, rather than from better targeting or lower delivery costs. Expressed in 1998 pesos, the subsidy component of social programs increased from $4,486 per capita in 1990 to $10,225 per capita in 1998.

14. Of the various social programs considered, subsidies to education were the main contributors to the reduction in inequality (60% of the total transfer), followed by health (26%), monetary transfers (11%), and housing (6.5%). From a regional perspective, the analysis shows that social programs have had a more significant impact in Metropolitan Santiago and several other regions, but had no significant effect in reducing income inequality in regions VIII and XI.' 15. Chile's success in reducing income disparities through social spending is linked to its system for targeting social programs, the ficha CAS. This system for proxy means testing provides a cheap and relatively easy mechanism for determining eligibility, which is consistent across programs. It appears that targeted programs such as family allowances, pensions, water and housing subsidies and child care programs help reduce the overall Gini concentration of household incomes. Nevertheless, the coverage of these programs among the poor is far from universal, and substantial amounts go to non-poor households. Part of the problem appears to be that poor families are often unaware of their eligibility for certain programs, although the level of awareness vary between programs.

These two regions are both south of Santiago.

The Problem of Unemployment

16. Unemployment is a severe problem for younger and poorer workers. Overall, unemployment rates have generally averaged about 6-8% of the labor force, although in recent years there has been some acceleration in this rate. Unemployment among the poorest has been much higher. Men from the lowest quintile had an unemployment rate (in 1998) of 24%, and those aged 18-24 an unemployment rate of 28%, compared to a general unemployment rate of 7% overall for men. In general, women tend to have lower unemployment rates at all income quintiles.

17. What causes such high rates of unemployment for the young? One factor is the high costs imposed by the labor codes in terms of job security requirements. These seem to work against job creation for the young, unskilled and female workers. A key element in job security costs is the expensive system of mandated severance payments.

While a new system of unemployment insurance supplemented by individual unemployment accounts has been introduced, there has been no change in the mandated severance payment system. Another factor is the relatively high minimum wage, which in recent years has been increased faster than the average wage, and also has more negative impacts for the younger and less skilled worker. However, the impact of minimum wages is not entirely clear, and there are other factors at play in the labor market: increased labor force participation by females over the decade has increased labor supply, and rigid nominal wages combined with low inflation has meant that labor market adjustments have occurred by employment, not wage, reductions.

18. Chile has an extensive system of job training. While job training programs have a spotty record in many countries, including those in the OECD, an evaluation of Chile's programs seems to show they are relatively effective in providing secure employment. The success of these programs seems to be derived from the close links they have with prospective employers. Nevertheless, these programs may not be reaching the poorest groups, who often lack information on their availability.

Indigenous People

19. Chileans of indigenous origin represent a special group of concern, because of their chronic high rates of poverty. Evidence shows that indigenous people are 56% more likely to be in poverty, and receive half the income of non-indigenous people, and have 2.2 years less schooling. Overtime, indigenous people have become increasingly urban, with 80% now living in urban areas. A number of Government programs have been put in place to assist indigenous people, and greater protection now exists for the land and water rights of the rural indigenous. However, tensions between indigenous groups and the Government continue. Part of the problem has been the weakness of indigenous organizations, and a lack of coordination between groups.

Recommendations

20. Chile has make remarkable progress in reducing poverty, both through macro policies which have produced a sustained rate of rapid growth, and well directed social programs. Few countries can match Chile's record of cutting its poverty rate in half over a period of 20 years. However, problems do remain. Unemployment is high, particularly among the young, and many of the poorest groups suffer from conditions of social exclusion. This report is intended to be largely an update of the poverty and income distribution situation in Chile, and related social issues, and was not designed to map out an anti-poverty strategy. However, a number of important points emerge that might be considered by the Government for further study and consideration. These include:

  • further labor code reforms that would reduce the very high costs of hiring new workers, particularly younger workers;
  • further reform of the unemployment insurance system, eliminating severance payments and putting more reliance on the newly established system that combines public insurance with private accounts;
  • reducing minimum wages, or at least modifying the rate of increase in minimum wages, so as not to discourage employment of younger and more inexperienced workers;
  • more investment in basic infrastructure and housing in poor communities, particularly water and sanitation shortages;
  • improving the targeting of social programs so as to be more focused on the poor, and thus reducing benefits that go to the non-poor;
  • more attention to evening the regional disparities in the allocation of social spending; and
  • more attention to the poverty problems of indigenous communities.

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