Report No. 22037-CH Chile Poverty and Income Distribution in a High Growth Economy The Case of Chile 1987-98 (In Two Volumes) Volume l: Main Report August 30, 2001 Poverty Reduction and Economic Management Sector Unit Latin America and the Caribbean Region u Document of the World Bank CURRENCY EQUIVALENTS US$1.0 = 672.6 Chilean Pesos (August 2001) FISCAL YEAR January 1 - December 31 MAIN ABBREVIATIONS AND ACRONYMS ADI Indigenous Development Areas CASEN Caracterizacion Socioeconomica Nacional CENABAST Central de Abastecimientos CEPAL UN Economic Comision for Latin America CONADI National Corporation for Indigenous Development GDP Gross Domestic Product FGT Foster-Greer-Thorbecke FONASA Fondo Nacional de Salud JUNAEB Junta Nacional de Auxilio Escolar y Becas INTEGRA Fundacion Nacional para el Desarrollo Integral del Menor JUNJI Junta Nacional de Jardines Infantiles MIDEPLAN Ministry of Planning MINEDUCT Minisry of Education MINSAL Ministry of Health MINVU Ministry of Housing PMJH Capacitacion para Mujeres Jefas de Hogar Vice President: David de Ferranti Country Director: Myma Alexander PREM Director: Emesto May Lead Economist: Paul Levy Task Manager: Norman Hicks Povertv and Income Distribution in a High Growth Economy 3 Poverty and Income Distribution in a High Growth Economy: The Case of Chile 1987-98 Table of Contents Executive Summary .................................................. 5 Volume I. MAIN REPORT/OVERVIEW .................................................. 11 I. Introduction . 11 The Empirical Foundations of the Analysis .................................................. 12 II. Poverty Trends and Determinants: 1987-98 .................................................. 13 The Evolution of Poverty .................................................. 13 Determinants of Income and Poverty .................................................. 15 Key Social Indicators .................................................. 17 Deficits in Social Services .................................................. 18 Trends in Social Sector Deficits between 1990 and 1998 .......................................... 22 III. Trends in Inequality and the Impact of Social Expenditures .......................................... 24 Reducing Income Inequality .................................................. 24 Impact of Social Expenditures on Income Distribution, 1990-98 .............................. 25 Targeting of Social Programs .................................................. 29 Improving the Ficha CAS .................................................. 31 IV. Employment, Unemployment and Special Programs of Assistance ............................. 33 The Problem of Unemployment .................................................. 33 Providing Support for the Unemployed .................................................. 37 Proposals for Unemployment Insurance Savings Accounts ....................................... 39 Job Training .................................................. 39 V. Indigenous People, Social Exclusion and Poverty .................................................. 42 Poverty Amond Indigenous .................................................. 42 Major Challenges and Issues .................................................. 43 VI. Conclusions .................................................. 47 Poverty and Income Distribution in a High Growth Economy 4 Volume II. Background Papers I. UPDATED INCOME DISTRIBUTION AND POVERTY MEASURES FOR CHILE: 1987- 98 by Julie Litchfield .....................................................................1 II. THE DISTRIBUTIONAL IMPACT OF SOCIAL EXPENDITURE: CHILE 1990-98 by David Bravo, Dante Contreras, and Isabel Millan .................................................................... 25 III: INCORPORATING SOCIAL SERVICES IN THE MEASUREMENT OF POVERTY by Osvaldo Larraffaga .................................................................... 93 IV.THE TARGETING OF GOVERNMENT PROGRAMS IN CHILE: A QUANTITATIVE AND QUALITATIVE ASSESSMENT by Carine Clert and Quentin Wodon ................................... 119 V.GOVERNMENT PROGRAMS FOR THE INSERTION OF YOUTHS AND WOMEN IN CHILE'S LABOR MARKET by Rodrigo Castro-Fernandez, Carine Clert and Quentin Wodon ..... 147 VI. PROTECTING THE UNEMPLOYED IN CHILE: FROM STATE ASSISTANCE TO INDIVIDUAL INSURANCE by Rodrigo Castro-Fernandez and Quentin Wodon . .......................... 169 VII. INDIGENOUS PEOPLES IN CHILE: CURRENT SITUATION AND POLICY ISSUES by Estanislao Gracitua-Mario .................................................................... 189 This report was prepared by a team led by Alberto Valdes and Norman Hicks (Task Manager), and consisting of Julie Litchfield (University of Sussex, U.K.), Osvaldo Larrafiaga, Dante Contreras, Isabel Millan and David Bravo (all from Universidad de Chile, Santiago), and Rodrigo Castro- Fernandez, Carine Clert, Estanislao Gracitua-Mario, and Quentin Wodon (all from the World Bank). The valuable comments of Aristides Torche, Marcelo Tokman and Paul Levy are gratefully acknowledged. A preliminary version of the report was discussed at a seminar in Santiago, Chile in June, 2000 as part of the Bank's work on preparing its report "Policy Notes", and the report incorporates some of the comments made at that seminar. Poverty and Income Distribution in a High Growth Economy 5 Executive Summary 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 empowernent 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. Poverty and Income Distribution in a High Growth Economy 6 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 Poverty and Income Distribution in a High Growth Econom!y 7 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. Poverty and Income Distribution in a High Growth Economy 8 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 informnation 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 Poverty and Income Distribution in a High Growth Economy 9 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. Poverty and Income Distribution in a High Growth Economy: The Case of CHILE 1987-98 MAIN REPORT-AN OVERVIEW I. Introduction 1. Chile is one of the earliest of countries in Latin America to undertake a structural reform program. Starting as early as 1974, the country introduced policy reforms that included trade liberalization, monetary and fiscal controls, realistic exchange rates, and privatization of banks and infrastructure. While the process started in the mid 1970s, economic growth became strong starting from the mid-1980s, particularly after the financial crisis of 1982-83.1 Between 1985 and 2000, GDP growth has averaged about 6.6 percent per year. At the same time, Chile became known as a pioneer in social reform, including the implementation of targeted employment programs and reforms in education and health. This was especially the case after the return to democratic government in 1990. Indeed, Chile is now seen by other countries in the region as a model of successful reform. 2. The initial reform efforts in the 1970s and 1980s were associated with substantially higher unemployment, sluggish growth and many social and economic hardships. At the worst moments during the 1982-83 banking crisis, unemployment rose to over 20 percent. However, the longer term impact of the reforms has produced a major improvement of welfare at all levels, and a substantial decline in the numbers living in poverty. An analysis undertaken by the World Bank in 2 1997 , which examined the situation from 1987 to 1994, concluded that the high GDP growth rates had unambiguously contributed to a considerable reduction in poverty, in terms of incidence, depth and severity. The incidence of indigence fell from 13 percent in 1987 to 5 percent by 1994, and the headcount estimate showed that the population that lived in poverty fell from 40 percent in 1987 to 23 percent by 1994. This reduction in poverty during 1987-94 benefited almost all groups classified as vulnerable at the beginning of the period. Furthermore, the broad picture of income distribution that arises from the 1997 report was that of stable distribution during the period. 3. The present study has four main objectives: First, to present an update of the poverty and income distribution measures reported in the 1997 World Bank study for the period 1990-1998 using the same sampling methodology and survey questions as in the 1997 report; Second, to look at the adequacy of social services, and to see how well social services are targeted to the poor; Third, to consider how trends in income distribution would be modified if one took into account the transfer effect of social programs; and, Fourth, to look at some special issues that impact on poverty, namely unemployment and the problems of indigenous people. The major background work for this report is contained in a series of background papers, found in Part II. This overview provides a general summary of their findings. 1 The only exception was 1999 when GDP fell by 1.1 percent. (source: Central Bank of Chile) 2 "Chile: Poverty and Income Distribution in a High-Growth Economy: 1987-1985" (Report No 16377-CH, 1997) Poverty and Income Distribution in a High Growth Economy 12 The Empirical Foundations of the Analysis 4. This update uses information comprising six household survey micro-data sets-the Caracterizacion Socioeconomica Nacional (CASEN) for the years 1987, 1992, 1994, 1994 an.1 1996 and 1998.3 CASEN is a nationally and regionally representative household survey with a sample size of 48,588 households (in 1998). The original Bank study published in 1997 used the CASEN survey from 1987 to 1994. This update follows the same methodology of the earlier study. 5. The CASEN survey is carried out on a biannual basis by the Ministry of Planning. (MIDEPLAN) through the Department of Economics of the Universidad de Chile in Santiago. The sampling methodology can be described as multi-stage random sampling with geographical stratification and clustering. Once each survey is completed, the data are entrusted to CEPAL (UN Economic Commission for Latin America and the Caribbean) in Santiago to make adjustments for non-response, missing income values, and the under (or over) reporting of different income categories, with the National Accounts System being used as a reference. 6. Several additional adjustments, which differ from other poverty research based on the CASEN, were made to the Bank's 1997 report and these same adjustments have also been applied to the update. Some of these adjustments lead to higher poverty estimates while others to lower as compared to the results of other research. For example, the Bank's analysis relies on household income per equivalent adult (rather than simple per capita income) as the chosen income indicator, and reports the proportion of individuals (rather than households) below the poverty line. Also, differences in average price levels across regions of Chile as well as for live-in employees were adjusted. Unlike other research, no adjustment has been made to lower the poverty line in rural areas due to lower prices in these areas, since there is no rural consumer price index. (See Background Paper No. I for a detailed description of the database and methodology.) 3The resulting panel data set is unbalanced in the sense that one does not observe the same sample in each year, but each of the samples is representative for that year. Poverty and Income Distribution in a High Growth Economy 13 II. Poverty Trends and Determinants: 1987-98 The Evolution of Poverty 7. Three poverty lines are used in computing poverty measures, all of them expressed in 1998 Chilean pesos. These are the indigence line, a lower-bound poverty line, and an upper-bound poverty line4. The first two lines are widely used in Chile (see Annex I, Background Paper No. 1). For each poverty line, three poverty measures are reported. The simplest and most common measure is the headcount index (the proportion of individuals with income below the poverty line). It does not indicate the depth of poverty of the poor, nor does it capture changes in welfare among those who remain below the poverty line. The second measure is the poverty deficit index (an aggregate of the income shortfalls of the poor relative to the poverty line, divided by the population size). This measure essentially reflects the depth of poverty. A family that it is barely below the poverty line adds only a little to the poverty gap index, but a family that is destitute adds a great deal. The third indicator is the Foster-Greer-Thorbecke (FGT) index, which provides a distribution- sensitive measure that gives a greater weight to larger shortfalls, and thus is more sensitive to extreme poverty. Table 1: Poverty Measures: Household Incomes per Equivalent Adult 1987 1990 1992 1994 1996 1998 Indigence Line: PS 18,944 Headcount 12.7 9.0 4.7 5.1 4.2 3.9 PovertyDeficit 4.1 3.1 1.7 2.0 1.5 1.5 FGT(2) 2.1 1.8 1.1 1.2 0.9 0.9 Poverty Line L: PS 37,889 Headcount 40.0 33.1 24.2 23.1 19.9 17.0 Poverty Deficit 15.7 12.0 7.8 7.6 6.5 5.7 FGT (2) 8.2 6.1 3.8 3.8 3.2 2.9 Poverty Line H: P$ 43,004 Headcount 47.3 38.9 30.0 29.0 24.6 21.2 Poverty Deficit 19.1 14.8 10.1 9.8 8.4 7.3 FGT (2) 10.3 7.8 4.9 5.0 4.1 3.7 Source: Background Paper No. I by J. Litchfield in Part II. Notes: Litchfield's own calculations from CASEN 1987-1998. Incomes are monthly incomes and are expressed in 1998 pesos. Note: there were 460.3 Chilean pesos per US dollar in 1998. 8. What does this indicate for the period 1994-98? The study shows that the trends in falling poverty, in terms of incidence, depth and severity, continued through to 1998 (see Table 1). The proportion of people in poverty, as measured by the headcount poverty measure, continued to fall. The two other indices of poverty also decrease substantially, regardless of the poverty line used. In contrast to the fluctuating trends in inequality (discussed below), poverty has followed a downward trend for almost the entire period of 1987-98. Nevertheless, after 1994, poverty levels fell at slower rates than during the years of rapid growth (1987-92). 4The upper and lower poverty lines are P$43,004 and P$37,889 per month per adult equivalent. At an average exchange rate of P$460.3 per US$ in 1998, this is equivalent to $93 and $82 per adult equivalent per month in 1998 US $, or about US$3 per adult person per day. Poverty and Income Distribution in a High Growth Economy 14 9. Based on the standard poverty line used in Chile, the headcount measure shows that poverty fell from 23.1 percent in 1994 to 17.0 percent in 1998. Extreme poverty (indigence) fell from 5.1 percent in 1994 to 3.9 percent in 1998. The analysis shows that there was unambiguously less poverty between 1996 and 1998 than in all earlier years, whether poverty is measured by the headcount, the poverty deficit or by any of the most sensible poverty indices. This sort of unambiguous poverty reduction, across such a large range of different poverty measures, is not commonly observed in Latin America or other regions. Table 2: Mean Incomes per Decile: Household Incomes per Equivalent Adult (monthly income in 1998 Pesos) Decile 1987 1990 1992 1994 1996 1998 1 11374 13098 17385 16954 18629 19450 2 20398 24225 29726 30369 32560 35474 3 26793 31432 38627 39735 43327 47502 4 33610 39552 47506 49426 54321 60021 5 41308 48543 57607 60798 66817 73831 6 51105 59261 70402 74919 82341 91301 7 64809 74742 88322 93805 104067 116281 8 86628 98129 116097 124842 138543 154115 9 132936 146468 169423 186436 206154 231405 10 377276 408647 507791 506125 587924 663359 Top 1% 1017577 1166108 1563013 1486160 1695712 1973692 Source: Background Paper No. 1 by J. Litchfield in Part IL., based on Litchfield's own calculations from CASEN 1987-1998. Note: there were 460.3 Chilean pesos per US dollar in 1998. 10. The observed reductions in poverty between 1994 and 1998 are also valid at the decile level (see Table 2). Mean incomes per decile (in terms of household income per equivalent adult) increased for all decile levels. For the lowest decile, the increase between these years was 15 percent in real terms. However, the increase for the upper deciles is far greater. The tenth decile had a real increase in the same period of 31 percent. In addition, although the headcount indicates a reduction in the number of poor people, the real income of the very poorest 2 to 3 percent of the population actually fell between 1996 and 1998.5 11. The significant decline in poverty during this period is a function of the rapid growth in per capita income. Between 1987 and 1998, real per capita income increased at an annual rate of 5.7 percent. As a result, the poverty rate fell by 58 percent (see Figure 1). The relationship between poverty reduction and growth seems clear from the graph. A regression of the poverty rate on per capita income and the Gini coefficient finds an elasticity between per capita income and the poverty rate of -1.26. By comparison, a recent study of poverty trends in the Latin America and Caribbean Region (Wodon, et. al., 2000) found a regional elasticity of -.94. This suggests that the impact of growth on poverty has been slightly above average in Chile in recent years, but these estimates are based on only six poverty observations, and may not be robust.6 5 However, this result is somewhat hard to interpret because these small changes occur in the very extreme tail of the distribution where income data are likely to be more unreliable. 6 The estimated equation is: InPR = 13.83-1.256lnYPC+.5861nGINI R2=.987, n= 6, df= 3 t statistics: (15.272) (.377) where PR is the poverty rate, YPC is GNP per capita in 1995 prices, and GINI is the Gini coefficient, and In indicates natural logarithms. Only the InYPC variable is significant at 5%. Poverty and Income Distribution in a High Growth Economy 15 Fig. I Poverty and Per Capita Income 6000 - 45 5000 ^ _ -40 3000 _-; _ 3520 4pove 2000 15 1000 10 0 0 Determinants of Income and Poverty: Education, Demographics and Employment' 12. An updated poverty profile has not been prepared, nor are there new estimates of regional poverty since the 1997 study, as the expectation is that there have not been dramatic changes in this short period. Nevetheless, this section takes a fresh look at some of the factors that determine income poverty, focusing on three key ones: household composition/demographics, education, and employment. The earlier 1997 report found that regional disparities were not very large, and there was some evidence of a convergence of per capita income across regions. It is also true, however, that between 1987 and 1994, the most dramatic reductions in poverty occurred in Greater Santiago. The earlier study had further indicated that poverty rates had been the highest among young workers with low education, female heads of households with low education, a large proportion of workers in the agricultural sector, non-labor force participants with low education, and elderly living in rural and urban areas with low education, and unemployed heads of households with low education. The highest concentration of poverty, nevertheless, was among young workers (even those with education beyond primary school) and adults with low education working in the non-tradable sector. This picture of the poor and vulnerable groups continues to ring true today in Chile and is consistent with the current preoccupations in the country with education and unemployment. Table 3: Marginal percentage increase in per capita income due to demographic variables [The excluded reference categories are a household with a male head and a spouse] Urban Rural I_Urban Rural Number of infants -0.105 -0.143 Number of adult squared 0.005 0.009 Number of infants squared -0.002 0.036 Female head -0.108 -0.112 Number of children -0.186 -0.204 Age of the head 0.005 0.034 Number of child squared 0.018 0.017 Age of the head squared -0.001 -0.001 Number of adults -0.047 -0.038 No spouse for the head 0.018 0.004 Source: World Bank staff using: CASEN 1998 (see Background Paper No 6 by Castro-Fernandez and Wodon). Coefficients underlined are significant at the 10% level. Coefficients not underlined are significant at the 5% level. 7This section draws on R. Castro-Fernandez and Quentin Wodon, "Protecting the Unemployed in Chile: From State Assistance to Individual Insurance?", Background Paper No. 6, Part IL. Povertv and Income Distribution in a High Growth Economy 16 13. Demographics. Estimates given in Table 3 show that per capita income decreases, ard thereby poverty increases, with the number of infants and children in the household. For the first child, an infant lowers per capita income by about 11 percent in urban areas, and 14 percent in rural areas. For additional children, the figure is closer to 20 percent. These numbers reflect the fact that larger families are dividing a fixed income over more members in the household, resulting in lower per capita income.8 Larger families seem to perpetuate poverty since, among other things, school attendance is negatively related to family size (Aldaz-Carroll and Moran, 2000). Per capita income tends to rise with a larger number of adults in the household, and with older adults. However, female headed households have a level of per capita income about 10 percent below that of male headed households. 14. Education. The gains from education are substantial. A household with a head having gone to the university (see Table 4) has almost twice the expected level of income of an otherwise similar household whose head has no education at all. Completing secondary schooling brings a 70 percent gain versus no schooling. Completing primary school brings a 30 to 40 percent gain. In all cases. the returns to education are higher in urban areas compared to rural areas. The returns to the education of a spouse, however, are somewhat lower. These lower figures may reflect, in part, the fact that at any given age, spouses are less likely to work. Table 4: Marginal percentage increase in per capita income due to education [The excluded reference categories are a household head and a spouse with no education at all) Urban Rural Urban Rural Household head Household spouse Primary partial 0.398 0.256 Primary partial 0.205 0.325 Primary total 0.365 0.302 Primary total 0.198 0.187 Secondary partial 0.701 0.513 Secondary partial 0.351 0.523 Secondary total 0.651 0.612 Secondary total 0.413 0.506 Superior (university) 0.901 0.814 Superior (university) 0.687 0.789 Source World Bank staff using CASEN 1998 (see Background Paper No.6). Coefficients underlined are significant at the 10% level. Coefficients not underlined are significant at the 5% level. 15. Employment. A key determinant of poverty is the quality of labor force participation. Employment patterns for the household head and the spouse also have a large impact on per capita income and therefore on poverty. Not surprisingly, having a household head or a spouse available for work or searching for employment has a large negative impact on per capita income in both urban and rural areas. In rural areas, the household suffers from a drop in income of 20 percent as compared to the case when the household head or the spouse is fully employed.9 In rural areas, having an unemployed household head implies a 70 percent drop in per capita household income. While these results probably overstate the impact of unemployment on poverty as measured by consumption, since consumption levels tend to be more stable over time, it is clear that unemployment can lead to serious 8 Per capita income calculations do not allow for the possibilities of scale economies in the household. Thus, a household with eight members would have half the per capita income of a household with four, assuming total household income were the same. However, even adjusting for scale economies would not change the basic conclusion thlat large families are associated with poverty (see Background Paper No. 6). While a figure of 20% may seem low, it must be remembered that average household income includes income from other household members, severance payments, transfers, etc.. Povertv and Income Distribution in a High Growth Economy 17 consequences. Moreover, households with a head or spouse not working also tend to have lower levels of income (for details, see Background Paper No. 6). Household heads who are self-employed or unpaid family workers have lower incomes (compared to salaried household heads). However, those working in the public sector have incomes that are substantially higher compared to the private sector (see Table 5).10 Table 5: Marginal percentage increase in per capita income due to employment variables of Household Head (increment in income compared to employed HH head, working as a wage earner in the private sector) Urban Rural Employment Status of head Available (unemployed) -0.198 -0.029 Searching (unemployed) -0.225 -0.725 Not working 0.058 -0.517 Type of employment of head Self-employed -0.105 -0.540 Employer 0.515 -0.054 Unpaid family work -0.403 -0.274 Public sector 1.105 2.154 Size of firm > 10 people 0.104 0.054 Underemployment of head Hours of work per week < 20 0.125 0.154 20 hours per week s39 -0.155 -0.256 Source: World Bank staff using CASEN 1998 (see Background Paper No. 6) All coefficients are significant at 5% level. Key Social Indicators 16. 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 complement to income poverty measures, there are a variety of social indicators, some of which are shown in Table 6, which provide other measures of welfare. A more detailed analysis of social indicators for Chile is available in publications by MIDEPLAN, and a comprehensive analysis is found in UNDP's Human Development Report. This sample of social indicators for Chile shows that it has achieved considerable improvements in key areas such as infant mortality, life expectancy, coverage of primary and secondary education, and housing. Labor income and labor force participation have increased, particularly for women. However, the rate of unemployment has also increased, reaching 10 percent in 1998 after having been at half that rate for several years, a situation that is attributed to the economic slowdown related to the Asian crisis and events in Brazil and other countries. By mid-2000, this relatively high unemployment rate persists at about 10 percent, and has led to a major concern around current labor reform proposals and other measures to encourage employment, especially of youths and other vulnerable groups. 10 The reason for this is not clear, but may be related to the fact that the public sector includes public sector financial institutions. Poverty and Income Distribution in a High Growth Economy 18 Table 6: Key Social Indicators 1990 1998 Population (millions) 12.85 14.56 Education Primary education coverage (%) 96.8 98.3 Secondary education coverage (%) 80.5 86.9 Illiteracy (%, older than 15) 3.7 4.6 Housing % of dwellings without deficit (building 57.2 72.7 materials, crowding or infrastructure) Health Results indicators: Life Expectancy, total (yrs.) 73.7 75.4 Life Expectancy, female (yrs.) 76.8 78.4 Infant mortality rate (per '000) 16.0 10.3 Under 5 mortality (per '000) 20.0 12.5 Input Indicators: Physicians (per '000) 11.0 9.5 Hospital Beds (per '000) 3.2 2.7* Health Expenditures per capita (1998 $) 182 289 Labor Market Statistics Unemployment rate (%) 8.4 10.0 Participation in labor force: men (%) 73.6 74.6 Participation in labor force: women (%) 31.3 38.1 Average years schooling for workers (yrs.) 9.8 10.5 Employment index 100.0 115.5 Mean labor income index 100.0 155.0 % wage earners in labor force 75.8 77.7 Source: Calculations based on 1990 and 1998 Casen survey. Health statistics from World Bank WDI data base. The unemployment rate from CASEN is slightly higher than the official INE figures of 7.8% in 1990 and 9.8% in 1998. * refers to 1996. Deficits in Social Services"1 17. An important dimension of Chile's social progress can be measured by the expanded access of the poor to social services, reflecting the large investment having been made since 1990 to rectify inequities. Now, as described below, middle and low income families have access to a broad spectrum of social services at costs considerably below their market prices as judged by similar services provided by the private sector. This begs the question of the comparable quality of services between the public and private sector, but attests to the wide spread availability. This is important from two perspectives: First, due to the omission of these publicly provided social " The analysis in this section focuses on education, housing and health because these areas are covered by the CASEN surveys. Other factors which could also be important in determining the quality of life, such as violence and security, are not covered in this discussion, but are nevertheless important. Poverty and Income Distribution in a High Growth Economy 19 services, the typical measure of income in Chile underestimates the real income of the poor; and, second, to the extent that the poor in Chile do not receive such services or if standards are not being met, then a social "deficit" can be considered to exist. Filling these deficits in access and standards can therefore be seen as a core element of Chile's social policy agenda. 18. A look at social sector progress in recent years, using appropriate standards, reveals the following:'2 Educational Achievements * Based on 1998 data, 16.5 percent of the 8 to 24 year old population had dropped out from school before receiving 12 years of education. Although the difference between the poor and the non-poor is significant, the gap is much lower than the difference in incomes. * Demand rather than supply factors dominate school non-attendance. Reasons include looking for a job (42%), helping with household activities (13%), pregnancy or already having a child (9.5%) and others. Table 7: Educational deficit at the household level (% of households) * 19.5 percent of the student % of households Very poor Poor Non-poor Total population (primary and Without deficit 51.5 54.7 76.4 73.1 secondary) is behind the With deficit 48.5 45.3 23.6 26.9 norm (relative to expected Total 100.0 100.0 100.0 100.0 grade by age). The Source: Background Paper No. 3 0. Larraflaga . Calculations based on corresponding value for the 1998 Casen survey. See background paper for definitions of deficits. very poor was 30 percent, compared to 24.4 percent for the poor and 16.9 percent for the non-poor. - An analysis of education deficits at the Table 8: Housing deficits household level--defined as household (% households) ao No. Very poor Poor Non-poor Total members who are illiterate, members aged 0 37.7 42.9 78.7 72.7 8-23 who have not completed primary 1 17.7 21.0 10.3 11.9 education and are not attending school, or 2 14.2 13.3 5.2 6.5 are two years behind normal school level-- 3 14.7 11.2 3.4 4.8 shows that 49 percent of the very poor 4 3.2 2 .6 2.2 households have one or more deficits, 6 2.2 1.4 0.4 0.6 compared to only 24 percent of the non- 7 0.7 0.5 0.0 0.1 poor households (see Table 7). Total 100.0 100.0 100.0 100.0 Source: Calculations based on 1998 Casen survey 12 Based on 0. Larraniaga, " Incorporating Social Services in the Measurement of Poverty", Background Paper No.3, Vol II. Please note that the standards being used in this section range from widely accepted defnitions such as those to measure the quality of housing, to less commonly used and evolving definitions such as those used for health. Developing such service standards to measure social deficits is an area for further discussion and research. Poverty and Income Distribution in a Higb Growth Economy 20 Housing * Approximately 70 percent of houses are owned by the families who live in them; 16.5 percent of households rent their dwellings; the remainder of dwellings being lent by relatives and/or provided by the employer. * 77.7 percent of owners have fully paid for the property. * 34.5 percent of the current owners had access to a public subsidy for the purchase of the property. * An analysis of housing deficits based on minimum standards of the quality of the housing13 reveals that 72.7 percent of households have no deficit in housing, and 11.9 percent have only one deficit (see Table 8). * Additional details, nevertheless, show that the housing deficit is considerably more pronounced in rural areas than in urban areas. Only 20 percent of families in the rural areas have no deficit, as compared to over 80 percent in the urban areas, and 19 percent of rural families have four or more deficiencies, as compared to 2.4 percent of urban families. * Among the poor, moreover, 57 percent live in housing with one or more deficits, and 36 percent in housing with two or more deficits. There is a substantial gap between the poor and non-poor in termns of sewerage-with more than 38 percent of the poor having no access, as compared to only 12 percent for the non-poor--and in terms of piped water--20 percent of the poor are without such service as compared to 5 percent for the non-poor. * Housing acquired with public subsidies is slightly more likely to meet standards in terms of materials, infrastructure and occupancy but the fact that 22 percent of families having received subsidies still have some housing deficit indicates that housing quality is not fully addressed by the subsidy program. Moreover, one would expect that difference in the occurrence of deficits for those not receiving public subsidies would be significantly higher than it is, showing that housing policy may not be adequately addressing housing deficits. This is most likely to be the case with respect to the lack of sewerage connections. 13 Housing deficits consist of below standard floors, ceiling or walls, overcrowding, and lack of access to electricity, drinking water and sanitation facilities. See Background Paper No. 3, Table 10, for a complete definition. Poverty and Income Distribution in a Hinh Growth Economy ?I Table 9: The Proportion of the Population Affiliated to a Health Insurance System, Chile 1998 very poor poor non poor Total Public Non-Contributory 67.9 44.6 17.3 24.5 Public Contributory 19.6 39.8 38.0 37.2 Private 2.6 5.3 28.3 23.1 Other 0.5 0.9 4.0 3.3 Not Affiliated 9.2 8.8 11.5 10.9 Unknown 0.3 0.7 1.0 0.9 Total 100.00 100.00 100.00 100.00 Source: Background Paper No. 3 Notes: Calculations based on 1998 Casen survey. Health Care * About 90 percent of the population is covered by either a public (61.7%) or a private (28.3%) health system affiliation. The rest is either not affiliated or "does not know"(see Table 9). * Approximately 40 percent of those affiliated to the public health system do not pay any contribution. * About 17 percent of the population report not having attended a medical facility when in need which, in part, may be explained by self treatment and use of alternative medicines. Considering that everybody has access to the Chilean public health facilities, which acts as a provider of last resort, supply constraints are unlikely to represent a reason why Chileans did not get medical attention when needed. * Other factors such as timeliness can be important: about 15 percent of the population reports not getting timely access to health care. * Dental attention shows clear deficiencies; 38 percent of the population who required some kind of treatment did not have access. This is explained by the fact that dental treatment is not usually covered by either public or private health insurance. * Regarding health prevention, the frequency of health checkups, Pap smears for older women, and smoking show very little difference between the poor and non-poor (see Background Paper No. 3). * Overall, some 19 percent of families are evaluated as having some health deficit. Looking at access to medical services, timeliness of those services, and dental services, there are significant differences by poor and non-poor: the richest population is twice as likely to receive attention when in need as compared to the poorest population. Poverty and Income Distribution in a High Growth Economy 22 Trends in Social Sector Deficits between 1990 and 1998 19. Education. Throughout the 1990s, Chile's educational system has seen rapid changes, especially in terms of enrollment of 4 and 5 year olds, reduction in repetition rates and average years to graduate from primary school, and elimination of incomplete rural schools. This has been accompanied by improvements in acogniiveachievements, more pronounced Table 10: Comparison of the Housing Deficit Index cognitive acivmnt,mr.poone (Households) Between 1990-98 among students in municipal schools as 1990 1998 compared to those private schools, even No deficit 57.2 72.7 though attainment differences between the One 14.7 11.9 two systems remain large. Nevertheless, Two 9.5 6.5 there is widespread concern that Three 8.1 4.8 attainment levels are not yet where they Four or more 10.5 4.9 should be: this is particularly true for the Total 100.0 100.0 4 ,, . . Source: Background Paper No.3 by Larrafiaga stock" of human capital which by a recent Notes: Calculations based on 1998 Casen survey. international test was far below expectations. While it would be most desirable to measure the educational deficit in terms of differences in educational attainment internationally and by income levels, available statistics cannot provide this. 20. Looking at the available indicators, there are signs of improvement. The percentage of households with at least one deficit in education declined from 30.6 percent to 26.9 percent during the 1990-98 period. In terms of severity of the deficit, the gains are even larger. Households with two or more members experiencing educational deficit declined from 12.8 percent in 1990 to 7.8 percent in 1998. The analysis reports a significant reduction in the percentage of the population who have dropped out from primary school (from 5.1% to 1.4%), and those who dropped out from secondary school (4 or more years before graduation) fell from 15.1 percent to 9.9 percent. The percentage of students behind the expected level of grade attainment fell less (only three percentages points). Despite these improvements, more might have been anticipated in reducing the educational deficit given the substantial increases in government spending on education during the period. 21. Housing. Gains in reducing the housing deficit are considerable. The percentage of house- holds that had one or more dimension below standard declined from 42.8 percent in 1990 to 27.3 percent in 1998 (see Table 10). Those with deficits in four or more dimensions declined from 10.5 percent to 4.4 percent. The largest gains occurred in access to electricity, where households without access represented no more than 3.8 percent in 1998. The lowest gains occurred in access to sewerage. Overall, the incidence of the housing deficit declined by almost one half during the eight years. 22. Health. The findings for health services are less conclusive, in terms of changes over time. This is largely due to the inadequate information provided in the CASEN survey regarding access and quality of health care services and inadequate definition of the most appropriate way to measure deficiencies in health services. What data are available are not conclusive: they show a decline in 14 See the Implementation Completion Report for the Primary Education Improvement Project (Loan 341 0-CH), report number 19184-CL, dated May 17, 1999. Poverty and Income Distribution in a High Growth Economy 23 the need of medical and dental services, a decline in receiving medical attention when in need, and no change in receiving dental services when in need between 1990 and 1998. Time series on the timeliness of medical services are not available. However, this analysis is limited by the questions in the CASEN survey. Aggregate data (Table 6) show that infant and child mortality have declined between 1990 and 1998. Life expectancy, at 75 years overall, is only two years below the level the United States. Health expenditures per person have risen 59 percent in real terms. However, doctors per 1,000 people and hospital beds per 1,000 have both decreased. 23. When looking at the intersection of the social deficit encountered by Chileans in all four dimensions --income, education, housing and health care-- it turns out that about half the families- 48.9 percent of households-exhibit at least one form of social deficit, the most common deficits being housing or education. However, only 1.5 percent of households show deficits in all four dimensions. These numbers suggest a rather heterogeneous profile of households and a very small population which faces multiple challenges in improving their well-being. Thus, on the positive side, it can be said that poverty is no longer an overwhelming condition in Chile. On the negative side, over half of households demonstrate some deprivation according to these four indicators, the most frequent of which continue to be education and housing. Poverty and Income Distribution in a High Growth Economy 24 III. Trends in Inequality and the Impact of Social Expenditures Reducing Income Inequality 24. Income distribution in Chile has been relatively stable. If the relative gains (and losses) over the period (see Table 11) are examined, the overall impression is one of little movement for the period as a whole, with changes being relatively small. Yet, there has been a significant rise in inequality since 1994: the Gini coefficient fell slightly between 1987 and 1994 but rose thereafter and again reached the 1987 level by 1998 (from 0.5468 in 1987 to 0.5298 in 1994 and back to 0.5465 in 1998). Between 1994 and 1998, the four measures of inequality showed that there was lower inequality in 1994 than in 1998, with most of the change occurring between 1994 and 1996. Between 1996 and 1998, the differences between coefficients were extremely small. Table 11: Income Shares per Decile: Household Incomes per Equivalent Adult Decile 1987 1990 1992 1994 1996 1998 1 1.34 1.39 1.52 1.43 1.40 1.30 2 2.41 2.57 2.6 2.57 2.44 2.37 3 3.17 3.33 3.38 3.36 3.25 3.18 4 3.97 4.19 4.16 4.18 4.07 4.02 5 4.88 5.14 5.04 5.14 5.01 4.95 6 6.04 6.28 6.16 6.33 6.17 6.12 7 7.66 7.92 7.73 7.93 7.80 7.79 8 10.24 10.39 10.16 10.55 10.38 10.32 9 15.71 15.51 14.82 15.76 15.45 15.50 10 44.58 43.28 44.43 42.73 44.05 44.43 Top 1% 12.02 12.35 13.68 12.41 12.70 13.22 Mean 84,628 94,414 114,290 118,298 133,476 149,289 Median 45,648 53,440 63,204 66,960 74,043 81,809 Gini 0.5468 0.5322 0.5362 0.5298 0.5409 0.5465 E(O) 0.5266 0.4945 0.4891 0.4846 0.5139 0.5265 E(1) 0.6053 0.5842 0.6151 0.5858 0.6058 0.6264 E(2) 1.3007 1.3992 1.505 1.5634 1.4123 1.6172 Source: Background Paper No. I by J. Litchfield, CASEN 1987-1998. Note:E(0) equals the log deviation, E(l) is the Thiel index, and E(2) equals half of the squared coefficient of variation. 25. Changes between years and between the beginning and the end years are not statistically significant, with the exception of the increase in inequality observed between 1994 and 1998. Between these two years, there has been an increase in dispersion within both the top and the bottom of the income distribution (e.g. rise in both E(0) and E(2) measures) (see Table 11). It is too early to determine whether this is a temporary diversion from a previously stable path or whether this is the beginning of an upward trend.I5 Furthermore, the worsening of income distribution was offset by expanded social sector spending (see below), and it occurred in the context of rising living standards and falling poverty up to 1998, the latest year for which statistics are available. Ferreira and Litchfield( 1999) note that inequality in Chile appears to have worsened during the 1960s, improved during the early 1970s, and then worsened again from the mid-seventies to the mid-eighties. However, the overall trend is one of gradual worsening over the whole period. See also London and Sleekly (1997). Poverty and Income Distribution in a High Growth Economv 25 26. The poverty and inequality analysis was also extended to allow for a comparison between rural and urban areas. The total rural population represented approximately 20 percent in 1987 but fell to just under 15 percent by 1998. An examination of rural and urban differences indicates that both urban and rural populations experienced strong increases in mean incomes during the period 1987 to 1998, although incomes in urban areas rose proportionally by slightly more than in rural areas. This faster rate of growth in urban areas led to a very slight widening of the income gap between urban and rural areas. 27. Chile's stability in income Table 12. Gini Coefficients for Various Countries 1998 distribution is no cause for Country Gini complacency, even though globally Latin-America: many countries are experiencing a Brazil .61 deterioration of income equality. Chile Honduras .57 remains a country with relative poor Chile .56 performance on income distribution Mexico .56 when compared to other countries in Ecuador* .53 the region and elsewhere. According to Argentina** .53 the data shown in Table 12, only Paraguay* .51 Venezuela .49 Brazil, Colombia and Honduras in the Dom. Republic .50 region have worse income distribution, Bolivia* .49 although it should be noted that many Uruguay* .45 of these comparator countries report Other Countries: statistics for urban populations only. France(1995) .33 Furthermore, the Latin America region Russian Fed( .25 itself is one of the worst in terms of United States(1997) .41 income distribution, when compared to * urban only **only Buenos Aires other regions, such as Asia. Clearly Source: For LAC: household surveys from World Bank data bank, OECD countris are aheadin terms of based on per capita income, which differs slightly from the results on OECD countries are ahead in terins of the basis of adult equivalence used elsewhere in this report. For Other income distribution and serve as a Countries: World Development Report 2000/2001, Table 5 (World model for Chile to emulate. Bank, Washington DC). Impact of Social Expenditures on Income Distribution, 1990-98 28. The income data used to measure income poverty so far in this study were defined to include all primary incomes, cash transfers from government programs (family allowance, pensions, family subsidies, and unemployment insurance) as well as imputed rents, gifts and remittances. These income data did not include, however, the value of in-kind transfers made to households by the government through programs in education, health, and housing. By excluding the value of these in-kind services, the data underestimate total income. This is especially important in Chile since many of these programs are intended for the poor and reduce the constraints on household budgets, freeing income for the consumption of other goods and services. Hence, the omission of such in-kind transfers overstates the level of both poverty and income inequality in Chile. 29. The issue of what is the implicit income transfer equivalence of social programs has drawn the attention of Chilean economists. The key questions addressed in previous research are: (i) what has been the impact of social programs in alleviating poverty; (ii) how well targeted are social programs; and (iii) what has been the impact of such programs in reducing income inequality, Poverty and Income Distribution in a High Growth Economy 26 as measured for example by the Gini coefficient? Studies by MIDEPLAN (1996), de Gregorio and Cowan (1996), Scholnick (1996), Beyer (1997), and Contreras, Bravo and Millan (2000) presented preliminary estimates of imputed income transfers for some social programs based on a specific year of the CASEN survey. These studies reported comparisons of the income situation of the higher and lower quintiles with and without adjustments for the in-kind transfers. 30. These studies were extremely useful in: (a) indicating that this particular adjustment could result in substantially lower Gini coefficients; and (b) raising a number of conceptual and measurement issues. However, they have been limited to the analysis of the income distribution by quintiles (and not at the percentile level) and in most cases for only one year, thus, not providing an overview on the evolution of the indicators (with/without adjustments) required to test the impact of such policies through time. Furthermore, these previous studies did not present the impact of social programs by region. 31. This report develops and applies a methodology for estimating the imputed income transfers from government subsidies in health, education, and housing based on the information collected by the CASEN survey for the years 1990, 1994, 1996 and 199816. Because of lack of data it was not possible to extend the analysis back to 1987. In contrast to the previous studies, the imputed values in this study are assigned to each individual household based on the services actually received by the members of that household. 32. Measuring the implicit income transfer from social programs raises several complex conceptual and empirical issues. For instance, should a one-to-one relationship between monetary cost of the service and the implicit income transfer be assumed? Or do the recipients of such transfers value them less than their monetary cost to the government? Are there substantial leakages in social expenditures towards the non-poor groups and/or are there high delivery costs so that the actual transfer received by poor households is less than the cost of the programs? This study tests the effect of applying alternative assumed values of the programs to households. Which subsidies were included? 33. The individual's own monetary income was adjusted for the imputed value (income transfer) of the following government programs: monetary transfers, imputed rental value of his owned house, implicit transfer (net of co-payments) for health, education, and housing. The same criteria for the valuation of these transfers was applied through the period. The health, education and housing programs include many different types of benefits. To estimate the imputed values, a detailed analysis of the various sub-components of each program was undertaken and developed into valuation criteria. The corresponding monthly benefit received by each member of the household was then calculated according to the frequency and type of service used. For example, 17 health categories were identified, such as surgery, dental services, laboratory tests, preventive check-ups, X-rays, emergency services, hospital expenses net of the above, etc. and, for each of these categories, average monthly values were estimated. In education, more than 25 sub- components were identified with their corresponding valuation criteria. For housing, six sub- components were defined and valued. 16 D. Bravo, D. Contreras, and Isabel Milan, "The Distributional Impact of Social Expenditure: Chile 1990-98" Background Paper No. 2. Poverty and Income Distribution in a High Growth Economy 27 34. The valuation criteria, discussed in detail in Background Paper No.2, are based on the assumption that the benefit from any program equals its cost of production, and that the quality of services does not vary by income group. In education, the basic funding sources considered were the school meals program, pre-school programs under JUNJI and INTEGRA, contributions from MINEDUC, the budget transfers to municipal and private subsidized schools in primary, secondary and especial education, government budget allocations for school books and equipment, special teacher post-graduate training programs, JUNAEB, scholarships, and some others. In health, the public health insurance program, the 2 percent contribution to ISAPRES, maternity leave, the PNAC program, and others, net of co-payments, were included. Table 13: Income Distribution Indicators Adjusted for Cash and In-Kind Transfers, Chile 1998 A B C D E F G Indicator Monetar A + A + A + Cash A + A + Fiscal Total y Income Health Educatio Transfers Housing Credit n income shares: QI 3.06 3.76 4.18 3.36 3.13 3.06 5.16 Q2 6.68 7.14 7.55 6.88 6.75 6.69 8.20 Q3 10.81 10.99 11.31 10.89 10.87 10.81 11.60 Q4 18.31 18.12 18.24 18.25 18.35 18.36 18.02 Q5 61.14 59.99 58.71 60.62 60.90 61.08 57.02 Q51Q1 20 16 14 18 19.5 20 11.1 distribution coefficients: Atkinson 0.689 0.570 0.551 0.631 0.664 0.689 0.451 Coefficient Theil 0.655 0.621 0.586 0.639 0.649 0.654 0.540 Log(P90/P1O) 2.55 2.34 2.21 2.46 2.52 2.55 1.99 Log Variance 1.104 0.898 0.823 1.001 1.032 1.106 0.663 Gini 0.5644 0.5460 0.5259 0.5563 0.5616 0.5641 0.5028 Source: Background Paper No. 2 by Contreras et. al..Column A shows the distribution of monetary income, without cas transfers from the government. Columns B to F show the impact of a specific type of transfer; column G shows the total effect of all transfers together. Note that this table uses a Gini based on income per capita, without adiusting What Has Been Confirmed? 35. The analysis, presented in Table 13, confirms that adjustments for cash and in-kind transfers from the public sector substantially reduce income inequality, regardless of which measure is used. To interpret the table, the columns B to F represent the contribution of each of the public social programs, in succession, combined with the original own measure of per capita household income, presented in Column A. The results in Column G represent the aggregate contribution of own monetary income plus the combined impact on equivalent income of all the programs. 36. For 1998, the Gini coefficient falls from 0.56 when only own monetary income is considered to measure income distribution to 0.50 when the value of cash and in-kind transfers from social programs is included. The ratio of the highest to the lowest income quintile falls from 17 It could be argued that the true benefits are actually greater or lesser than the costs of production, depending on how recipients value the service. It is possible that the quality of services received by lower income groups is below average. The authors of Background Paper No. 2 show that even if benefits were reduced to 30% of their costs, there still would be a statistically significant change in the Gini. Poverty and Income Distribution in a High Growth Economy 28 20 to 11. A substantial reduction in inequality is also observed when applying alternative poverty measures, namely the Theil Index, a transformation of the coefficient of variation, and the mean log variation coefficient. This reduction in inequality is robust to reducing the imputed value of the program benefits received by households by 30 percent. 37. These results suggests that social policies and programs in Chile have had a significant impact in reducing income inequality, in spite of the fact such policies are intended to be oriented towards poverty reduction rather than reduction of inequality per se. Moreover, the analysis concludes that the impact of social programs was more significant in 1998 and 1990. This resulted primarily from the significant increase in the budget allocation to such programs between 1990 and 1998 rather than from better targeting or lower delivery costs. Of the various social programs considered, Table 14 shows that subsidies to education were the main contributors to the reduction in inequality (59.9% of the total transfers), followed by health (25.5%), monetary transfers (11.1%) and housing (6.5%). Relative to various income classes, social sector subsidies are almost equal to the total of monetary income of the lowest quintile. The value of education services received alone equals 48 percent of monetary income. For the richest quintile, however, social subsidies barely constitute 1 percent of total income. Thus, for the poorest, social programs make a material difference in their welfare, almost as much as earned income. Table 14: Average Value in 1998 Pesos of Social Programs by Quintile (P$000's/month) Indicator Monetary Income Cash Health Education Housing Total Social Trans- Transfers fers Qi 19.0 2.3 4.9 9.2 0.6 17.0 Q2 41.5 1.5 3.8 7.5 0.6 13.4 Q3 67.2 1.0 2.5 6.3 0.8 10.6 Q4 113.9 0.6 0.7 4.9 0.8 6.9 Q5 380.1 0.2 -0.3 2.8 0.6 3.3 Average 124.3 1.1 2.3 6.1 0.6 10.2 Dist.(%) 11.1 25.5 59.9 6.5 100.0 Source: Background Paper No. 2 by Contreras et. al. 38. In terms of the impact of social programs on the reduction of inequality at the regional level, the picture that emerges suggests that the results are sensitive to the particular year, varying in their relative effect through the period 1990-98. In addition, there are variations by regions. The analysis concludes that social programs did have a more significant impact in Metropolitan Santiago and some other regions on distribution, but had no significant effect in Regions VIII and XI (see map). These are still among the poorest regions of the country even though there has been significant reductions in poverty since the 1980s. It is also important to note that the VIIIth region is the next most populated region after Metropolitan Santiago. This could indicate that there is an issue of the regional distribution of social programs and more aggressive targeting might be needed to ensure Poverty and Income Distribution in a High Growth Economy 29 access among regions. This is perhaps more important for public spending in areas such as housing and related public works, as compared to education. It may also reflect variations in local municipal institutional capacity to administer programs and to manage theficha CAS which is used to identify program beneficiaries and determine their eligibility as discussed below. Targeting of Social Programs'8 39. The impact of social programs depends not only on their overall size, but also on how well they are targeted to the poor. Social programs in Chile are generally targeted using the ficha CAS system (see box). The object of the CAS is to avoid using a measure of income, where proof of income is difficult to determine and respondents have an incentive to understate their true income in order to be eligible. The scoring of the CAS insures that households in upper deciles of the income distribution are excluded from social programs designed for the poor. However, the scoring system is not keyed directly to the poverty line so that some CAS eligible households may, in fact, be above the poverty line. Moreover, based on a qualitative, albeit limited assessment of the ficha CAS, it appears that questions themselves may not be sensitive to household vulnerability such as illness or job loss. The Ficha CAS Introduced during the military regime (1973-1989) and modified by the post-1990 democratic governments, the ficha CAS (Ficha de Estratificaci&n Social) is two-page form which is used for determining the eligibility of households to a number of government programs including not only monetary transfers (Subsidios Monetarios), but also access to low income housing, childcare centres and other programs. At present the official name of the form is the ficha CAS-I1. The first page of the form provides detailed information on the housing conditions of the household (e.g., material used for the construction of the housing unit, number and type of rooms, access to water, latrine and sanitary services, etc.) The second page of the form provides a list of the household members, with information on their occupation, educational level, date of birth, and income. At the bottom of the second page, additional information is provided on the assets held by the household (e.g. housing status, heating equipment, and refrigerator). Points are allocated to households on the basis of the information provided, with the number of points fluctuating between 380 and 770 points. Households with a total of inferior to 500 points are considered as extremely poor and those with a total number of between 500 and 540 points are considered as poor. The Ministry of Planning (MIDEPLAN) is responsible for the design of the ficha CAS, with implementation at the municipality level. Municipalities usually separate the activities of data collection and data entry from those of needs assessment. Data collection and entry tend to be done by a department of social information within the municipality, while the control of the needs assessment is usually done by social workers and t&cnico-sociales (welfare assistants). The national income transfer programns which are targeted using the CAS scoring system apply the formula in a strict manner in order for determining eligibility. The score obtained by a household automatically and exclusively prevails, so that eligibility depends only on the number of points obtained. The ficha is also used for targeting locally financed safety nets, but in this case social workers and other professionals can often give some weight to other eligibility criteria such as the presence of a chronic illness, the civil status of household members, and their actual financial resources at the time of request as the ficha is completed every three years, and there may be differences between the status of households when they apply for benefits, as compared to their status when they 40. Using the data from the 1998 CASEN survey, it is possible to analyze the coverage and targeting of several important programs, including pensions, family allowances, water subsidies, 18This section is based on Camie Clert and Quentin Wodon, "The Targeting of Government Programs in Chile: A Quantitative and Qualitative Assessment", Background Paper No. 4, Vol. 11. Poverty and Income Distribution in a High Growth Economy 30 child care, and housing. Data in Table 15 show both the coverage of the overall population, the participation in the program of the poorest quintile and the Gini income elasticity (GIE, see Background Paper No. 4 for details). 41. The first major observation is that these social programs cover a relatively small percentage of the population in poverty. The most extensive program, SUF or family allowances, only reaches about 32 percent of the poor (here defined as the poorest 20% of households). Programs such as subsidized child care reach about 5 percent of the poor (although all of the poor may not be eligible for the program, which supplies child care to low income working women). 42. The second major observations is that these programs do not focus exclusively on the poor and there are substantial leakage. For example, of the beneficiaries of SUF, about 56 percent are poor, and about 36 percent of the beneficiaries of PASIS are in the lowest quintile. On average, the targeted programs listed here have a targeting efficiency of only about 38 percent. 19 That is, about 62 percent of the beneficiaries of targeted programs are not poor. One of the reasons for this might be that the CAS system does not focus on income poverty, but uses proxies which are heavily dominated by housing and education measures. 43. The rather low levels of targeting and coverage to the poor contrast with the previous finding that social spending programs have had a material effect on income distribution, as measured by the Gini coefficient. However, these two findings are not inconsistent since it appears that many social programs have been important for redistribution from the upper levels of the income distribution to the middle and lower levels, smoothing the Lorenz curve but not necessarily benefiting the poor as defined by the poverty line. From Table 14, it is possible to calculate that the poorest 20 percent of the population receive 33 percent of total social programs, and 41 percent of cash transfers (the type most likely to be targeted with the ficha CAS). However, the next two quintiles which are above the poverty line receive about 60 percent of total social programs and 55 percent of cash grants. These figures are consistent with the estimated targeting efficiency shown for selected programs in Table 15, where roughly 30-40 percent of the benefits of these programs go to the poor. 44. The impact of programs on income distribution, rather than on just the poor, can be measured by the concept of the Gini income elasticity (GIE). This elasticity shows the impact of an expansion of the program on the Gini coefficient. An index of one indicates that a program raises incomes equally across all deciles, and there is no effect on income distribution. Elasticities below one indicate that expanding the program improves income distribution; negative coefficients indicate strong redistribution of income from the wealthy to the poor. As shown in Table 15, all programs appear to help improve income distribution. However, the impacts vary by program. Family allowances are strongly redistributive, with a GIE of -1.03, whereas water subsidies have less impact with a GIE of -.35. The PASIS pension program has a favorable GIE of -.56; in comparison, the regular, non-targeted, pensions programs of the Government are virtually neutral, with a GIE of .91. 19 This is the average of the figures shown in Table 16 for "targeting", excluding the non-PASIS pensions. Poverty and Income Distribution in a High Growth Economy 31 Table 15. Targeting and Coverage of Selected Social Programs-1998 coverage: tarzetine: participation rate (participation rate of (% of beneficiaries in Gini nroeram (% of total poorest 20%) poorest 20%) Elasticity population) Pension Assistance (PASIS) 6.1 10.9 35.7% -0.56 Non-PASIS (not targeted) 15.7 6.1 7.8% 0.91 Family Allowances (SUF) 11.5 32.1 55.8% -1.03 Water Subsidies 6.4 10.6 33.1% -0.35 Housing: Vivienda Basica 5.8 8.2 28.3% -0.41 Vivienda Programa I 1.1 2.2 40.0% -0.68 Vivienda Programa II 0.2 0.4 40.0% -0.59 Child Care: JUNJI 1.7 2.7 31.8% -0.50 INTEGRA 1.3 2.6 40.0% -0.71 Source: Based on CASEN, 1998 data, as in Clert and Wodon, Background Paper No. 4. GlEs for housing and child care are estimated assuming that allocation elasticities are equal to 1.0; i.e. there are no differences in benefits received by socio-economic level. Improving the Ficha CAS 45. There are numerous advantages in using the ficha CAS, and it is central for the administration of social programs in Chile. One of the main advantages of using theficha for many different programs is that this reduces the cost of means-testing. The cost of a CAS interview is about US$8.65 per household but because these costs are spread across several programs, the system is very cost effective. In 1996, administrative costs represented only 1.2 percent of the benefits being distributed using the CAS system. If the administrative costs of the CAS system were to be borne by water subsidies alone, for example, they would represent 17.8 percent of the value of the subsidies. The ficha CAS also offers a systematic and consistent way to manage diverse social programs, which brings advantages in terms of targeting, monitoring and evaluation. 46. However, there are some problems with relying on the ficha CAS. A study of the effectiveness of government programs and social exclusion by Clert (2000a, 2000b) using more qualitative methods revealed some important insights 20. First, there seems to be poor transmission of information, which may explain, in part, the relatively poor coverage rates of targeted programs in Chile. Based on a study of the Comuna de Huechuraba, the proportion of respondents who had not heard of the government social entitlement programs under review was relatively high, at 51 percent of the sample. The awareness rates were higher for certain programs than for others. For instance, 74 percent were aware of municipal programs in health and education, such as the free provision of medicines or school uniforms. However, 70 percent had not heard of the main national program to combat poverty in female-headed households. Even when they were aware of programs, many did not know how to apply for benefits. Part of the problem is that the poor are not in contact with municipal welfare offices where they can obtain information, and social workers are 20 This qualitative evaluation of theficha CAS is based on the perceptions of the interviewees and could be at variance with reality. However, to the extent that these perceptions exist itself may reflect a failure at the level of information management. Poverty and Income Distribution in a High Growth Economy 32 not given the necessary resources (time arrangements, vehicles) to be sufficiently mobile to make home visits. In general, social workers tend to serve those who come looking for assistance, but they rarely can go out into the community attempting to identify eligible people who have not applied for assistance.21 Another problem raised by the poor is that the point system in the ficha CAS may be too rigid. The emphasis of the CAS on the material aspects of the household tends to overlook cases where unemployment or health crises have led to a loss of income. In the case of locally financed safety nets, social workers are given some leeway to take account of income, health and employment problems. However, there is little or no discretion in the use of the CAS for nationally financed programs. Some rules also work against the poorest. For housing programs, besides being eligible under the CAS, applicants have to have a level of required savings. This is particularly a problem among the low-income elderly who lack the ability to generate savings, while rules work against them in qualifying for housing support if they combine efforts with children or other family relatives. In the case of child care, applicants have to show proof of employment and associated working hours. This works against teenage mothers wishing to complete schooling, women working irregular hours, such as cleaners and domestic workers, and the unemployed who want to search for work. In addition, in the case of housing, it may be the case that housing conditions improve--not because of greater income but because of self-help efforts. This too can put a family at disadvantage for qualifying for income programs. 47. Several other problems have been detected. One concern is how to convert private in-kind transfers-support from the family or from neighbors-into monetary equivalents, especially when these transfers may be erratic. Another is how to recognize intra-household allocations, an important issue from a gender perspective. This affects pregnant teenagers, for example, as they do not receive maternity benefits as dependents. 48. In September, 1999, the Government introduced changes to the CAS weighting system in an attempt to correct some of these problems. Among other changes, the revised CAS drops two questions on electricity access and television, and it introduces new weights for the various indicators. In addition, different systems for rural and urban areas have been eliminated. Simulations suggest that the new system is more effective in identifying the poor and the non-poor, thereby reducing the errors of inclusion and exclusion in the targeting of social programs. However, the system still places a high weight on housing and other material assets as proxies for income without including key indicators of vulnerability. Qualitative evidence suggests that finding ways to better take vulnerability into account would improve the system further. 21 However, these findings are based on a survey of only one community, so one needs to be careful in generalizing to the entire country. Poverty and Income Distribution in a High Growth Economy 33 IV. Employment, Unemployment and Special Programs of Assistance The Problem of Unemployment 49. Unemployment rates in Chile have been at about 6-8 percent of the labor force during the past decade. More recently, unemployment has risen, from 6.3 percent in 1998 to a peak of 9.9 percent in September 2000. As Chile emerged from the 1999 recession, the rate has been declining somewhat, ending the year 2000 at 8.9 percent. As shown in Figure 2 (below), fluctuations in unemployment over the period 1997-2000 appear to have little or no correlation with changes in real wages.22 The rise in unemployment in 1999 and again in 2000 was not associated with any decline in real wages; in fact, real wages increased slightly. Fig. 2: Real Wages and Unemployment, 1997-2000 130.00 14.0 1 28.00- - 12.0 1246.00- 124.00- - 10.0 122.00 - e 8.0 =wages1993=100 120.00 6.0 unemploy. 116.00 - -0 114.00 . 1 12.00 0.0 50. Continuing high unemployment is of increasing concern and there are doubts if and when the rate of unemployment will fall to the pre-1999 levels.23 Part of the problem is that nominal wages are relatively rigid, and labor force adjustments take place through the creation of unemployment rather than through a decline in nominal or real wages. This is a common problem in low inflation economies which cannot use inflation to reduce real wages (see Gonzalez, 1999). Moreover, unemployment has a clearly greater impact on more vulnerable groups--the poorly educated and less experienced, younger workers. As shown in Table 16, male workers in the lowest quintile had an unemployment rate of about 24 percent overall, when the total unemployment rate was only 6 percent in 1998.24 Younger workers have twice the rate of unemployment of older 22 Data on unemployment and wages from Central Bank of Chile (2001). 23 Based on INE data for the whole country. University of Chile data for Greater Santiago give somewhat higher unemployment rates, at about 14% for 1999. and 15% in September, 2000. 24 Since unemployment automatically eliminates a major source of income, this finding is a bit tautological. It would be better to measure unemployment according to consumption poverty, since consumption levels tend to be more stable over time. Povertv and Income Distribution in a High Growth Economy 34 Table 16: Unemployment by Quintiles, Age and Sex (% of labor force) Quintiles: 1 2 3 4 5 total Male 24.4 7.6 5.3 3.4 1.8 7.1 age: 18-24 27.9 13.6 10.0 5.9 3.6 11.7 25-34 25.2 7.7 6.8 4.3 2.8 8.2 35-54 23.6 5.8 2.6 2.0 0.4 5.9 55-64 20.4 7.4 3.8 2.4 0.7 5.5 Female 10.1 5.1 4.6 3.2 2.2 4.9 age: 18-24 16.0 10.7 8.8 7.6 3.5 9.2 25-34 10.7 6.8 6.1 4.2 2.6 6.0 35-54 9.5 3.3 3.1 2.2 1.4 3.7 55-64 3.1 1.9 1.1 0.8 0.7 1.4 total 17.3 6.4 4.9 3.3 1.8 6.0 Source: CASEN, 1998; see Background Paper No.5, Appendix Table I and 2. workers. Male workers aged 18-24 had an unemployment rate in 1998 of 11.7 percent, while those aged 55-64 had an unemployment rate of only 5.5 percent.25 51. Unemployment rates for women show a similar pattern, with higher rates for the younger and poorer women even though unemployment rates of women are generally lower than those of men. For those in the first quintile, for instance, the unemployment rate among women is 10 percent, compared to 24 percent among men. As pointed out in Background Paper 5, there are also much lower levels of activity or labor force participation among the poor groups, particularly women. While 58 percent of women aged 15-64 in the highest decile were in the labor force in 1998, the ratio is only 19 percent for women in the lowest decile (see Table 17). This suggests that poorer women are perhaps unable to participate in the labor force because of child care responsibilities, 'which is Table 17 Labor Force Participation Rates, Females Aged 1465 also related to the fact that (percent of total in age group) poor households tend to have Decile 1987 1990 1994 1998 poore ho ldsen ditoha Group ~~~~~~~~~~~~more children. In addition, Group 1 12.3 14.7 15.3 19.3 women are more likely to be 2 13.1 16.3 18.7 27.0 employed part time, and 3 14.4 16.2 21.9 32.3 young workers and women 4 17.1 20.7 25.1 38.1 are more likely to be 5 20.1 24.5 29.4 39.6 involved in more precarious 6 24.1 30.0 33.8 43.5 7 28.9 33.1 39.6 50.3 employment situations 8 31.9 35.1 41.8 52.4 (working without contract). 9 37.2 41.5 46.6 53.4 10 54.0 53.1 57.0 58.0 52. On the other hand, there Average 26.4 29.3 33.7 40.6 has been a continuous Ratio 1O:1 4.4 3.6 3.7 3.0 increase in the labor force Notes: Decile groups are calculated using Household Per Capita Income participation rate of women Source CASEN surveys, as quoted in Ferreira and Litchfield (1999), updated by in Chile, as in other Bank staff. countries, over the last twenty years, and this also 25 This finding is not unique to Chile. The ILO reports unemployment rates (1998) for all youths (male and female) of 20.4% for Argentina (age: 15-24), 14.3% for Brazil (18-24), and 21.9% for Venezuela (15-24). See ILO(1999). Povery and Income Distribution in a Hinh Growth Economy 35 has put pressure on labor markets to absorb these additional workers. Female labor force participation rates rose from 26 percent in 1987, to 41 percent in 1998. Between 1994 and 1998, a major growth in labor force participation seems to have occurred among women in deciles 2 to 9, and much smaller growth rates among the richest and poorest women. 53. Why unemployment remains high for the poor and the young after such a long period of prosperity has not been fully explained. One possible explanation is the rigidities that remain in the Chilean labor market. Heckman and Pages (2000) examnined the relationship between job security regulations and employment Fig 3: IrdsxcfEnIlnnrtPtecioninCile and unemployment in Latin America, including Chile. Job 4.5 - security regulations are the 4 1 labor code regulations that I ) o3.s -_ _ increase the cost of dismissing a 0) rn lworker, including prior 3 3 - \ / notification, severance payment, s ' 25 - \ / and foregone wages during any o legal proceeding made by the E 2 l \ I worker against a finn. a) 1.5 - t A____ .n___________ I 54. While these costs have 5 been reduced in some countries, job security costs rose in Chile o after 1991 (Figure 3). The overall finding is that job s Pa San io(1999) Uedhpsa security regulations are inefficient and increase inequality and reduce Fig. 4. Employment Distribution and Wages, employment opportunities for Formal Sector oflaborforce kernaldensityplots) young, female and unskilled (percent, workers. However, they do not All workers appear to be related to rates of unemployment per se. Rather, they tend to result in a larger informal sector of workers who are outside the provisions of the labor codes. Furthermore, their empirical results demonstrate s- l W l that job security costs are higher in Latin American countries, compared to OECD countries, and are among the highest in __ , Chile. In terms of a percentage Ch1ie, 15 of the average annual wage, job Chile, 1998 security regulations add an Source: Maloney(2000), updated to 1998 by R. Castro-Fernandez; vertical axis is percent of employment, horizontal axis shows log wages. Vertical line is the minimum wane. Poverty and Income Distribution in a High Growth Economy 36 estimated 28.1 percent to the annual wage in Chile, compared to only 12.1 percent in the U.K., 4.6 percent in Canada, and zero in the U.S.A. 55. Minimum Wages. Another possible factor that can influence unemployment is the relatively high level of the minimum wage in Chile. In the short run, increases in minimum wages could reduce poverty and reduce the gap between rich and poor. In the longer term, however, high minimum wages tend to make the use of low-skilled workers less attractive, leading to higher levels of unemployment among these groups, which are typically among the poorest and youngest workers. The minimum wage structure in Chile is complicated, with three different minimum wages, and a system of indexation based on inflation, productivity and a redistribution element. As a result, during the 1990s, minimum wages increased faster than the average wage level (5.6% vs. 3.8%). In 2000, the agreed minimum wage increased a further 6.5 percent, while the increase in average wages was about 1.4 percent. As a result, the minimum wage has become closer to the median wage, rising from 46 percent of the median in 1998, to 56 percent in 2000. 56. In many countries, minimum wages are not binding because they are not enforced. This is particularly true of countries with large informal sectors where employees are not registered as part of the social security/unemployment insurance systems, and are not subject to labor regulations. In contrast to Argentina, for example, Chile has a relatively small informal sector-about 15 percent of the labor force--so minimum wages do not seem to have an impact on the decision by firms and/or workers to drop out of formal systems. Yet, as shown by Maloney (2000), there is some evidence that minimum wages do affect wages in certain countries, including Chile. The kernal density plots (essentially smoothed histograms) of wage rates and employment for Chile does indicate a "piling up" of people at the minimum wage rate (the vertical line in Figure 4 above) rather than a smoother distribution. Surprisingly, the effect of minimum wages seems even stronger in the informal sector. The majority of workers in the informal sector seem to be clustered the minimum wage, even though it is not legally binding (Figure 5). 57. However, the relationship Fig 5. Employment and Wages, Informal Workers Only between minimum wages and (percent of labor force, kemal density plots) employment and poverty is not entirely clear. Research by Bravo and Informal workers Contreras (1998) shows that, (at least 1.5 prior to 1998) there appears to be no relationship between the minimum wage and unemployment. In addition, Lopez (1997) shows that, using I regional data over four years (1987,'90,'92 and '94), the level of minimum wage is significant but has a /5 \ Anegative sign in explaining poverty increases. That is, an increase in minimum wages appears to reduce o 0 poverty, in this case with an estimated Chile. 1998 5 elasticity of -.7. This finding is consistent with a binding minimum source: see Fig. I wage and an inelastic labor demand. Poverty and Income Distribution in a High Growth Economy 37 Raising minimum wages pushes people near the poverty line up into non-poverty, but at the same time causes additional unemployment which is detrimental to other poor people and other entrants to the labor market. While the poverty rate might decline, the poverty gap could be increasing. Providing Supportfor the Unemployed26 58. Overview. Workers are typically at risk of losing their job due to involuntary separations from firms, and such risks have greater impact on poor families who normally have fewer savings, assets to sell, or access to credit to offset income losses than the rich. Traditionally, countries have dealt with those risks through a combination of state-funded unemployment assistance (or insurance) and firm-funded severance payments. These programs frequently have a number of weaknesses. Unemployment assistance is supposed to help workers who lose their job to smooth their consumption spending during an unemployment spell. Yet when the unemployment benefits are large, there may create incentives for the workers to remain unemployed longer than necessary. This "moral hazard" problem may have been at work in the rise of unemployment rates and the length of unemployment in European economies.27 As for severance payments programs, they also have the potential of creating distortions in the labor market, not only in the relationships between firms and workers, but also between younger and older workers. 59. The weaknesses of these programs for dealing with unemployment shocks have placed the reform of social insurance programs at the center of the public policy debate. Unemployment insurance saving accounts (UISA) have been proposed as an instrument to protect workers from the loss in earnings associated with unemployment. The idea is to have all workers (and possibly their employers as well) deposit a share of their monthly incomes into their UISA, with the balance in the account accruing market interest rates. During an unemployment spell, workers withdraw funds from their individual account. The fact that the accounts are individualized helps to solve the moral hazard problem. Moreover, the fact that the contribution system is mandatory also helps to solve another problem, namely the adverse selection mechanisms through which only some workers might choose to self-insure, or through which private firms insuring workers would hand-pick workers with the lowest risk of being unemployed. 60. Overall, the objective of UISAs is to set the right incentives. However, in its pure form, UISAs have a disadvantage in that they do not produce the "risk pooling' effects of an insurance scheme, wherein benefits are predefined regardless of contributions. In an economy where unemployment is a rare event and is kept low, the risk pooling approach of mandated public insurance makes more sense (see De Ferranti et. al. (2000)). In a case such as Chile, where unemployment is a more likely event, there is less to be gained from risk pooling, since many more people are subject to the risk of unemployment. Thus, there is a stronger rationale to support individual accounts. Furthermore, many schemes combine aspects of both private accounts and risk pooling, providing some form of limited complementary unemployment assistance once private funds were exhausted, particularly for low levels of benefits. Recent proposals for replacing 26 This section is based on R. Castro-Fernandez and Q. Wodon, "Protecting the Unemployed in Chile: From State Assistance to Individual Insurance?", Background Paper No. 6, Part 11. 27 Beyer (2000) shows that the unemployment duration in Chile is lower than that observed in the OECD, and especially in Europe. In Chile, the average unemployment spell was 3 months over 1995-97, while in OECD countries, more than half of unemployed workers have been unemployed for more than a year (OECD, 1999). Poverty and Income Distribution in a High Growth Economy 38 standard forms of unemployment assistance by UISAs are being implemented in several Latin American countries (e.g., Brazil and Colombia). 61. The Current System. Chile currently has both of the typical programs found in many countries to provide support for the unemployed. A key finding from Section II is that unemployment for a household head or his/her spouse generates a loss of up to 20 percent in the household's per capita income. The unemployment assistance and severance payment systems that have been in existence for many years in Chile are supposed to offset such losses, but in practice, they do not succeed in adequately protecting the unemployed. 62. Unemployment assistance (UA) provides a minimum payment to unemployed workers in the formal sector, financed from general tax revenues, but with a payment that is much lower than the minimum wage. Even though the program is highly progressive in terms of income distribution, its main problem is that it has very limited impact (see Table 19). In 1998, the average unemployed worker received US$300 for the full length of the unemployment spell, which had a median duration of about four months (or about $40 per month). By comparison, in June 1998, the minimum wage was worth US$178 per month and since has been increased. In the 1998 CASEN survey, unemployment assistance benefits represent only 0.3 percent of total income. In terms of coverage, only 8 percent of all unemployed workers were receiving benefits in 1998. Table 18: Unemployment Rate and Unemployment Assistance Outlays Unemp. Number Assistance Outlays as Unemp. Number Assistance Outlays rate receiving outlays share of Rate receiving outlays as share (%) assistance (US$M) GDP (%) (%) assistance (US$M) of GDP (%) 1980 10.40 74,000 56,000 0.23 1990 7.79 33,845 6,000 0.02 1981 11.30 75,000 65,000 0.25 1991 8.16 30,246 6,000 0.02 1982 19.60 131,000 103,000 0.46 1992 6.71 23,432 6,000 0.01 1983 14.60 142,000 95,000 0.43 1993 6.56 19,147 4,000 0.01 1984 13.90 98,000 52,000 0.22 1994 7.83 20,572 6,000 0.01 1985 12.10 97,000 47,000 0.19 1995 7.38 21,282 6,756 0.01 1986 8.80 85,000 31,000 0.12 1996 6.44 21,343 7,234 0.01 1987 10.93 66,051 18,000 0.07 1997 6.09 22,586 7,610 0.01 1988 9.76 51,750 14,000 0.06 1998 6.29 27,290 8,014 0.01 1989 _ 7.91 39,245 9,000 0.03 1999 9.65 Source: Compendios Estadisticos, INE (Instituto Nacional de Estadisticas) and Boletines Mensuales, SSS (Superintendencia de Seguridad Social), see Background Paper No. 6. 63. Severance payments are an acquired right of workers in the formal sector to receive, upon dismissal, one month's salary for every full year worked, up to a maximum of eleven months. While severance payments form a positive incentive against firms laying off workers in a recession, they also form a perverse incentive against hiring more workers in a recovery. A major study ofjob security costs in Chile, of which severance payments is a major factor, shows that over time, job security costs have discouraged employment among younger workers (see Pages and Montenegro, 1999). Since these payments are linked to tenure, they tend to favor older workers and men. An index of these costs constructed by Pages and Montenegro shows that they have risen substantially since 1987. They also find there has been a substantial decline in the ratio of wage-employment to population among younger workers, while there has been no such decline for older workers. There seems to be no direct link between job security costs and unemployment. This suggests that high job security costs may be pushing younger workers into informal employment (self-employment, unpaid family workers). Povertv and Income Distribution in a High Growth Economy 39 Proposals for Unemployment Insurance Savings Accounts 64. Recently (April, 2001) Congress approved a new system of unemployment insurance which will replace the present system, while keeping in place the system of severance payments. This proposal introduces a system of USIAs, while retaining unemployment insurance for those who have exhausted their USIA benefits.. Under the new Seguro de Desempleo (SD) , the UISAs would be financed with contributions from workers (0.6% of the gross wage) and employers (2.4%) during the first 11 years of the labor relationship. Workers who would be eligible for the new system are basically those eligible for unemployment assistance today. Out of the 2.4 percent contributed by the employer, 1.6 percentage points will go to the UISA and 0.8 percentage point spooled into an unemployment assistance fund which would provide benefits under certain defined circumstances, but basically when the individual's USIA is unable to finance a predefined minimum benefit. This fund would be complemented by a government transfer of $10.5 million per year from tax revenues. 65. The system would work in the following way. When unemployed, the workers would withdraw funds from their UISAs. The maximum number of monthly withdrawals is equal to the number of years during which the worker contributed. For example, a worker who contributed for three years could withdraw funds from his/her account for three months. However, there is a maximum limit of five for the total number of withdrawals, which corresponds to the average length of unemployment in 1998. The amount of the each withdrawal is computed on a sliding scale, reflecting the total number of withdrawals allowed, the amount in the account, and a factor that makes the first withdrawals somewhat larger than later withdrawals. A last withdrawal is also made once the worker finds a new job, although the worker can elect to leave this in the USIA. The total amount of the account becomes available when the worker retires, or upon death, to his/her heirs. 66. An analysis of the distribution impact of the proposed program reveals that, while it is highly redistributive, it is somewhat less redistributive than the present system. In other words, the new SD system would lead to slight worsening of income distribution arnong current recipients. However, since the reach of the present program is so small and the proposed program would likely include more participants, its net effect could be to improve income distribution. Job Training28 67. To improve the employment prospects of two particular groups which face higher than average difficulty in the labor market--young workers and women from disadvantaged social backgrounds--the government has created two vocational training programs: Chile Joven, a program for low-income youth between ages of 15-24 years, and PMJH (Capacitation para Mujeres Jefas de Hogar), a program for low-income women. Both programs have been modified in recent years in an attempt to place stronger emphasis on labor market participation by trainees after completion of the program. 68. A recent evaluation of these programs found them to be quite effective.29 For Chile Joven, unemployment for the beneficiaries fell between 21 to 36 percent (depending on the type of training 28 This section is based on R. Castro-Fernandez, Carnie Clert, and Quentin Wodon," Government Programs for the Insertion of Youths and Women in Chile's Labor Market: A Discussion", Background Paper No. 5, Part 11. Poverty and tncome Distribution in a High Growth Economy 40 given), while there was no change in a similarly constructed control group over the same period. Likewise, an evaluation of PMJH found a decline in unemployment of about 15 percent, and improvements in job quality. These findings are encouraging, since most training programs in OECD countries have been found to have limited impact, and any positive impact tends to vanish after a few years (Dar and Gill, 1998). 69. The success of Chile's programs may be linked to certain key attributes, such as providing a direct contact with prospective employers. Poor and younger workers often lack the informal contact networks necessary to find employment. In the case of Chile Joven, a system of internships in firms provides a key entry to potential employers. In addition, the training programs put emphasis on building social and relational skills, and help reduce the costs of job search. Nevertheless, there some evidence that these programs may not be reaching the poorest. PMJH is restricted to women who are literate, thus leaving out one of the poorest groups. Success of the programs in helping beneficiaries find employment seems to be limited to the older, male workers and those with education. And some training centers appear to select trainees on the basis of the ability to be employed in the future, rather than on the basis of their needs thus pre-selecting those beneficiaries who are most likely to find employment. Survey data show that the poor are slightly more likely to participate in government training programs than the non-poor, but this is offset by the fact that the non-poor pay for private training, or receive it free from their employers. A lack of knowledge of government training programs is also a reason why the poor do not participate to a greater extent. In addition, there are other segments of the population which are particularly subject to labor market exclusion and who should receive more attention from policy programs. Clert (2000a) study suggested that individuals in their forties, who are excluded from the labour market due to age stigmatisation, cannot participate in state vocational training programmes restricted to the young. Other factors than age affect the access of the poor to employment, including discrimination based on appearance or the area where they live. Dealing with these kinds of exclusionary mechanisms is difficult, but can be addressed in some cases by well designed assistance (see box). 29 Santiago Consultores, "Principales Aspectos de Estudio "Evaluaci6n Ex Post Programa Chile Joven Fase 11", Santiago, Chile. These results should be treated with some caution, however, because of biases arising from differences between the treatment and control groups. Poverty and Income Distribution in a High Growth Economy 41 Social Exclusion in the Labor Market Discrimination by age and/or physical appearance: In Clert's study, some of the more subtle perceptions of exclusion from labor markets relate to elements of the respondents' identity such as age, physical appearance, place of residence and disability. Margarita, a women aged 52, had worked as a domestic worker all her life but was fired by her employer two years before and has remained unemployed since then. She explains: "One goes to a place and the offer says 'Needs domestic worker more than 25 until, let's say, 40'. So what's the matter? Those of us who are over 50, we don't have the right to work? The social impact of physical appearance also affects women and young men. A key informant from the municipal job bureau explained that qualifications were not the only factor at a job interview: "The employer weighs certain criteria: good appearance (buena presencia), experience, knowledge. [A good appearance relates to] the look, there are things about details. For instance, you have people who come here with their pony tail, their earring.. Presentation counts for 25 percent. But it is true that they will tell them 'I already hired someone else'. They won 't say I don 't take you because you look ugly. " The training programs show an awareness of the subtle mechanisms of discrimination which tend to be used by employers in their hiring practices. Non- written rules of selection have been addressed in the content of vocational training courses. Program participants value the acquisition of presentation skills, writing skills for resumes, and communication skills. Interestingly, the program Mujeres Jefas de Hogar gives participants free access to dental health, in part because early consultations with participants for the program design showed that women faced discrimination due to the importance given to physical appearance and personal presentation by firms. However, similar initiatives are still lacking for other segments of the population who may also need assistance, such as low qualified, middle age men. Area Stigma, The residents of the Pincoya Sector of the comuna of Huechuraba have felt discriminated against because of the reputation of the area as a rough and dangerous area peopled by dishonest inhabitants. For example, Jose who lived in the Pincoya sector, reported the following: "They ask me from which comuna I come from. I say 'Huechuraba'. And where is that? Nothing more but they look at me in a certain way with a gesture as if it meant... ah, there you have to come in with your back turned to make people believe that you are getting out. " This and similar type of discrimination are especially difficult to fight, but the government has promoted awareness and sensitization campaigns to combat the stigma attached to low-income youth, which often tends to be associated with delinquency, violence and threat. Valuing diversity. The program Mujeres Jefas de Hogar has promoted a recognition of social diversity within Chilean society by disseminating a positive image of various types of families. Within the government, the program contributed to a better recognition of the heterogeneity of poverty by public policy. As a senior official put it: " Women heads of households used to suffer from a triple discrimination: being poor, being a woman and being a single mother... With regard to women heads of householdfor instance, there's now greater cultural acceptance of the diversity offamily types ... Years ago they appeared in statistics but there wasn't a social recognition that they existed." Source: Background Paper No.5. See also Clert (2000a) Poverty and Income Distribution in a High Growth Economy 42 V. Indigenous Peoples, Social Exclusion and Poverty30 Poverty Among Indigenous People 70. Chile has a significant indigenous population, even though not at the level of neighboring countries such as Peru and Bolivia. Chilean law recognizes eight different groups and, according to the 1992 population census, these groups represented about 7.5 percent of the total population. (An estimate based on the CASEN 1996 survey suggests a much lower figure of 4.5 percent. However, most analysts agree that the census figure is a better estimate.) The census shows that the Mapuche forn the largest indigenous group, followed by the Aymaras and the Rapanui, with the remaining indigenous groups consisting of only a few hundred people each. 71. Indigenous populations of Chile remain among the poorest and most vulnerable groups. The CASEN survey indicates that incidence of poverty is 36 percent among the indigenous, compared to 23 percent among the non-indigenous population (1996). Thus, the chance of being poor is 56 percent greater if one is indigenous. On average, indigenous families receive almost half the income of non-indigenous families, and 65 percent of the indigenous families are within the lowest two quintiles of income distribution. Most economically active indigenous people are in unskilled jobs (31%) and in agriculture and fisheries (25%). In terms of education, schooling among indigenous peoples is about 2.2 years below the average of non-indigenous. 72. Contrary to popular perceptions, almost 80 percent of the indigenous population lives in urban areas, and most of them in Santiago (40%); over the last 15 years there has been a steady trend toward urbanization. Nevertheless, with population growth, the numbers living in rural areas has remained roughly constant and it is in these rural areas, as a subset of rural poverty, that one finds the worst poverty and the most contentious issues over land and water. On the other hand, those in the urban areas, particularly Santiago, may have better living conditions and income opportunities but report discrimination in labor markets, credit and schools, and some may hide their indigenous backgrounds. 73. The lack of a coherent national understanding of the status and recognition of indigenous peoples among Chileans at large, despite official recognition in 1993, seems to be one of the largest barriers of these groups to secure their place in society. Starting in 1990, the government has taken several steps to improve the situation. It created the Special Commission for Indigenous Peoples (CEPI), which in turn drafted an indigenous bill that was widely discussed throughout the country. This law recognizes indigenous peoples, gives them legal standing, protects their lands, and recognizes their culture. After the law's approval in 1993, a government agency, the National Corporation for Indigenous Development (CONADI) was established under the Minister of Planning and Cooperation. CONADI launched several special programs for indigenous peoples, and began coordinating with other government programs to facilitate indigenous peoples access to them. CONADI's operations are governed by a council, which includes indigenous representatives, but the government maintains majority control. 74. Among the special programs for indigenous people, CONADI operates a Land and Water Fund, designed to finance land and water right acquisition, irrigation sub-projects, and the resolution of land tenure conflicts. In addition, the Development Fund provides credit, technical 30 This section is based on E. Gratuitous-Mario, " Indigenous People in Chile", Background Paper No. 7, Part 11. Poverty and Income Distribution in a Hizh Growth Economy 43 assistance, seed money and subsidies to indigenous micro-enterprises. Other government ministries have special programs targeted at indigenous people in such areas as health, education, and agriculture. CONADI is also setting up Indigenous Development Areas (ADI), which are local planning unit designed to coordinate different government programs to indigenous peoples. Nevertheless, there has been continued dissatisfaction among the indigenous groups over the level of public support being channeled to them through CONADI, and increased demands for more resources. Major Challenges and Issues 75. Indigenous people in Chile face major challenges in gaining access to economic resources and overcoming social exclusion. In the case of the urban indigenous population, the key issues are related to: (i) human capital; (ii) labor market discrimination; and (iii) access to financial capital. These issues are compounded by social exclusion based on location, as most indigenous live in poor areas in the periphery, depressed downtown areas, or in specific neighborhoods. Location as an explanatory variable for poverty has already been shown to be important in the case of Chile in the 1997 Bank study, as well as in other countries, such as Uruguay, indicating a clustering of the poor accompanied by poor services. Moreover, urban indigenous peoples report difficulties to express and carry out their religious beliefs and ceremonies. Regarding human capital, most of the indigenous peoples living in urban centers or migrating to them do not have the technical skills required to have access to better employment opportunities. Most of the urban migrants work as unskilled construction workers (males), domestic services (females) or food industry/service employees (males and females). In the case of Mapuches living in small towns and secondary cities, there is also a significant number of both males and females who combine seasonal agricultural work and informal sector activities. 76. A further problem is that even when a indigenous worker has technical skills he or she faces a strong labor market discrimination. There are multiple examples of this discrimination from professionals to middle level technical staff, but more importantly among skilled and non-skilled workers who are subject to discrimination in hiring and dismissal practices, affecting typical female categories of occupation such as secretarial work, as well as male-dominated categories, such as construction. 77. Finally, small/micro entrepreneurs or self employed workers face significant constraints accessing (seed or operational) capital for starting and/or expanding their activities. First, the issue of discrimination plays a significant role in limiting their access to credit. Second, lack of collateral and poor knowledge of the system restrict their access. In this regard, the Development Fund established by CONADI is filling a gap. Nevertheless, the budgetary constraints of CONADI have imposed a severe constraint to the program. 78. Of the rural indigenous people, 95 percent are Mapuche with most rural Mapuche being small scale subsistence farmers who combine on-farm activities with off-farm employment. Over time, the survival of the rural Mapuche have become increasingly difficult due to the decreasing amount of land available for family farming, the lack of local employment opportunities, and the poor quality of available services. Overtime, average farm size has declined as a result of population growth, land division, and the colonialization of indigenous lands. Povertv and Income Distribution in a High Growth Economy 44 79. For the rural indigenous population, there are two main issues, both conflictive ones-- land and water rights. The land problem primarily affects the Mapuche rural population, while the water issue is relevant for Aymara and Quechua as well as Mapuche communities. For Mapuches, land is a central feature of their view of the world, not only as a mean of subsistence but also as an integral part of their identity. In addition, the economic horizon for many indigenous peoples must take into account the gradual decline of the importance of the primary sectors in Chile's economy combined with the changes in agricultural production. As well, indigenous peoples confront the same or even worse living conditions, especially in terms of housing, as the rural population in general. 80. Land. Since their forced confinement to reservations, the Mapuche have demanded compensation for what they consider a debt by Chilean society for depriving them of vast areas of land. Estimates suggest that, by the late 1970s, Mapuche communities had lost some 250,000 hectares from the original Titulos de Merced.3 Today, Mapuche leaders are demanding land compensation ranging from 150,000 hectares by those seeking restoration of land granted in the Titulos de Merced, to more ambitious claims for the territories occupied before the settlement in reservations, or about 1 million hectares. Other claims do not set a specific target but leave it open to the establishment of territorial autonomy.32 81. Addressing the legal and civil dimensions of the land question is a necessary step to resolve the current impasse. However, it is essential to keep in mind that the restoration of land does not guarantee--in and of itself--socially and environmentally sustainable development for the Mapuche, nor does it resolve the long term problem of rural indigenous poverty and increasing land pressure due to demographic growth. The fact is that most rural indigenous families have little land, located in rapidly deteriorating environments, with few productive alternatives. Even if the land available to these families would be doubled from 5 hectares per family to 10 hectares, or tripled to 15 hectares per family, most of would still not be able to get enough income to move out of poverty based on farm-production alone: small land holdings with the production of crops such as potatoes and wheat have become less economic and efforts at diversification are costly and out of reach of most small-holders. Sustainable natural resources management and agricultural production strategies are necessary to generate a subsistence base in combination with off-fann productive activities. Further, generating off-farm employment opportunities and providing training to the young rural indigenous population is essential to facilitate their out-migration and insertion in the labor market. 82. Water is another critical area for rural indigenous people. According to the water legislation (C6digo de Aguas) passed in 1981 and the constitution of Chile, individuals or enterprises can obtain private water rights by receiving a grant from the state for new water sources, by prescription or by purchasing water rights which are fully tradable and transferable. The law establishes two types of water rights: (i) those for consumption which entitles the owner to consume water without any obligation to replenish it, or (ii) those for production which means that 31 Sep Gachita (1992) "Fundamentos Socio-Econ6micos, CulturalesyJuridicospara el Establecimiento de un Banco de Tierraspara Pequenzos Productores Mapuches en Tres Microregiones de la IXRegi6n" Informe de Consultorla Instituto Nacional de Desarrollo Agropecuario (INDAP). 32 See Ancan, Jose and Margarita Calfio (1999), "El retorno al Pais Mapuche. Preliminares para una utopia por construir" en Liwen # 5 Pp 43-78 Poverty and Income Distribution in a High Growth Economy 45 the holder must restore water used at a stipulated quality and quantity. The law also distinguishes among categories of these rights33. 83. Indigneous rights to water have not been acknowledged or accommodated in official water policies. In 1975, the government froze the use of water at 1975 levels locking in established use. After that, when the new water law was passed in 1981, assumed water rights of indigenous groups were either transferred directly to the private sector (through prescription) or were acquired through non-contested application or bidding and subsequent registration (Registro de Propiedad de Aguas del Conservador de Bienes Raices). As a result of the above, water rights of indigenous communities have not been regularized, or are being contested, particularly by productive users (power-hydroelectric companies). 84. During the 1990s, several conflicts occurred among different users of water resources, particularly between consumers and producers. Indigenous groups have been involved in conflicts over water rights with power companies, as well as with water and sewerage companies, the mining industry, and the forest industry. To a lesser degree, there have also been conflicts with other private users. Currently there is no estimate of how many families or communities are part of these conflicts, or how much resources are involved. But it is important to note that CONADI has assisted more than 4,500 families claiming water rights over the past five years. 85. Institutional Development. The situation facing indigenous peoples in Chile, as in many other countries including OECD members, is complex and taxes the best well intentioned efforts by the parties to find lasting solutions. The path to resolution depends to a considerable extent on the institutional capacities of those representing the parties-indigenous, government, societal and private sector alike-to be imaginative, open to differences and constructive. 86. At present, the legal framework and institutional arrangements for dealing with indigenous issues need to be improved in Chile. The current legislation has significant limitations that make it difficult to resolve various problems. First, the law does not provide for constitutional recognition of indigenous peoples as distinct groups with special rights. Similarly, there is no ratification of ILO's 1989 Indigenous and Tribal Populations Convention.34 Indigenous leaders have already proposed a new indigenous bill addressing these two issues, as well as the right of indigenous peoples to elect their own representatives to the congress and local governments.35 87. Second, at the operational level, the institutional arrangements have proven insufficient to deal with the problems. The mixed composition of CONADI's governing board (indigenous representatives elected by universal vote and government representatives appointed by the executive) is not working as intended. Indigenous interests have frequently been subordinated to "national interests" when conflict has arisen. CONADI has not been able to provide or develop the mechanisms for allowing independent indigenous participation and, at the same time, it is unable to advance a clear an unequivocal government policy towards the indigenous peoples. As a result, 33 See Rios, Monica and Jorge Quiroz, 1995, The Marketfor Water Rights in Chile, World Bank Technical Paper 285. 34 The signatories of the ILO's Indigenous and Tribal Populations Convention (1989) agree to protect the human rights of indigenous peoples, eliminate discrimination, recognize and safeguard social, cultural, religious and spiritual values and practices, and insure that indigenous groups are able to participate in decision making processes and institutions which concern them, and exercise control over their own economic, social and cultural development. 35 See Proyecto de Reforma Constitucional que Reconoce la Existencia de los Pueblos Indigenas y les Otorga Participaci6n Politica en el Estado. An indigenous bill proposed by Congressman Francisco Huenchumilla, submitted for consideration to the National Congress on June 24, 1999. Poverty and Income Distribution in a High Growth Economy 46 decisions over sensitive issues in which there is no agreement among the Board members are delayed or carried out without the support of the indigenous representatives who are a minority (8 to 9) in the board. This situation has generated frustration among indigenous peoples and increasing mistrust on CONADI and the government in general. 88. From an operational standpoint, CONADI, as the institution in charge of implementing the indigenous policy, lacks the resources and staff required to carry out its responsibilities 36. The responsibilities are considerable. Despite the budget increases in 1999 (17.7%) and 2000 (22.5%), CONADI still does not have enough funds to respond to the demands coming to the Land and Water Fund or the Development Fund. 89. At the same time, it must be recognized that CONADI cannot in and of itself find a solution to all of the problems faced by indigenous communities. This will take the concerted effort of the relevant authorities: for example, Ministry of Education to promote opportunity, the Ministry of Interior to ensure equitable distribution of services, and the Ministry of Health to overcome any deficiencies in access and quality. A particular commitment needs to be made by those local governments with a significant indigenous population to encourage participation and access to services. At the same, there needs to be a societal effort to bring down barriers to indigenous people - and others-who are discriminated against in society. Chile has some successive programs addressing these problems which could be brought to bear specifically to indigenous groups. 90. Indigenous peoples too must be full partner of this process with the equal responsibility for constructive dialogue and building internal conflict resolution capacity. At present, most indigenous organizations are weak, numerous and lack strong coordination among themselves. There are over 200 local and regional Amayra organizations, and several hundred Mapuche organizations, both rural and urban. Further, the existing organizations have been unable to generate grassroots support. Each organization has a small group of supporters (or clientele) and most indigenous peoples (particularly among the Mapuche) do not feel represented by the existing national level organizations. There is a problem of representativeness which poses a serious challenge for indigenous organizations. While the existence of multiple organizations will continue to be a reality, and it could be argued is a strength of the indigenous movement in Chile, the need for coordination and common strategies aimed at increasing representativeness and participation at all levels is crucial. 91. Unfortunately, the current impasse on indigenous land and water claims, like in many other countries, polarizes communities and saps the energy of those most directly concerned, while progress lags on solving the myriad of other development problems facing what probably is the most disadvantaged group in Chilean society. While not ignoring these claims, there should be a concerted effort made to work on the problems faced by urban and rural indigenous populations and on creating within Chilean society overall a sense of commitment, national pride and identity with indigenous groups as a distinctive and unique character of what makes Chile, Chile. 36 A recent IDB loan ($35 million) will help strengthen CONADI, as web as provide funds for education, health and rural development activities in several indigenous areas. Povertv and Income Distribution in a High Growth Economy 47 V. Conclusions 92. From 1987 to 1998, Chile has made impressive progress reducing the incidence, severity and depth of poverty and improving overall social conditions. This is credit to the ecnomic and social policies followed by the government during the past decade which have brought both sustained growth and expansion of social services. The overall rate of poverty has continued to fall, reaching a level of 17 percent in 1998, as compared to a rate of 40 percent in 1987. Halving of the poverty rate in twelve years is a record matched by few other countries in the world. While a note of caution must be raised in terms of the experience of the last two years, considering the rise in unemployment in 1999 and 2000, there is very reason to believe that Chile can continue this performance. 93. Starting from a relatively high level of income inequality, greater equality in Chile remains an aspiration. Compared both to other Latin American countries and to OECD members, trends in income distribution show much stability over the period, albeit with noticeable deterioration in 1996-98. This has been off-set, however, by the implicit value of expanding social programs which has been redistributive, so that an adjusted measure of income distribution shows improvement over the period. The overall effect of in-kind transfers reduces the Gini coefficient by about 8 percent. Thus, the worrisome trend of a growing gap between rich and poor has been mitigated by positive actions by the government, and social programs that are generally well directed to the lower half of the income distribution. However, on a regional basis, the impact of social programs appears somewhat uneven, being more concentrated in Metropolitan Santiago and having lower impact in some of the poorest regions. Thus, more aggressive efforts might be required to ensure equal access among regions. 94. The approach taken in this study-focusing on social deficits-provides a framework for establishing a social policy agenda and priorities in Chile. Measuring poverty in terms of access to social services and standards provides an important non-monetary metric of poverty. On this score, there have been impressive gains and the results show that Chile has almost eliminated extreme poverty. Over 90 percent of the poor are affiliated with health care insurance; schooling at the primary and secondary levels is widespread and accessible; during the past decade, there have been significant gains in such areas as housing quality and access to water. Nevertheless, the analysis shows that about one-half of the population is still in deficit with regards to at least one of the dimensions included in the study. Education and housing stand out. 95. The study further points the following concerns: * Unemployment remains very high, especially among the poorest workers and among the youngest; this may be related to the costs associated with hiring new workers, severance payments and other obligations as well as relatively high minimum wages. Programs to counteract these problems appear to be effective but more might be done to ease the participation of poor women with children in the labor force. Other important factors influencing unemployment include the rising participation rates of women, and the general rigidity of nominal and real wages in a low inflation environment. The apparent binding effect of the minimum wage on both the informal sector and formal sector indicated that changes in this variable need to be thought through carefully to balance the impact on job Poverty and Income Distribution in a High Growth Economy 48 creation versus poverty reduction. These are important policy choices which deserve further attention and study by the government. This is especially relevant to the present conditions in Chile, where the job creation does not appear to be responding to renewed economic growth as it did in the past. * Given the relatively high and persistent levels of unemployment, greater attention needs to be paid to the support provided to the unemployed. Existing unemployment insurance programs provide very little support, both in coverage and amount, and the severance payments system serves to discourage formal sector employment and younger workers. Moving toward a system of public unemployment insurance combined with private accounts would help make labor markets more flexible and improve employment opportunities for younger and poorer workers. The reform of unemployment insurance by the Government provides a good balance between private accounts and public insurance mechanisms and would provide a more adequate safety net. 96. In light of the importance of education in overcoming poverty and the persistence of educational deficits, there is no doubt that the government's priority to improving the quality and relevance of education in Chile ought to continue and be fortified. Gains in primary and secondary education need to be consolidated, and the on-going efforts to improve quality and equality in teritary education, intensified. And finally, the new initiatives for adult education and life-long- learning will be a very good move to deal with the "stock" of Chile's human capital, the quality of which recent international surveys have shown to be disappointing. 97. Combined with the significant reduction in income poverty during the 1990s, Chile has done a good job in developing social programs that have provided support to people in the middle and lower deciles of the income distribution, and a mechanism for determining eligibility on a low cost basis. Nevertheless, an analysis of the ficha CAS shows that it can be improved, especially to take into account vulnerability to income loss and illness, as well as other special circumstances. The CASEN could too be improved in the area of health, for example. It may be that, in light of progress on housing in particular, that the ficha system now gives too much weight to that dimension. Importantly, any revision to the ficha CAS should involve those at the local level who use it and are most intimately knowledgeable of how it works. 98. Surprisingly, social programs in Chile have low coverage amongst the poor, and they are not as well targeted as they could be. This points to revising theficha CAS and using it to better target the poor and to limiting access by the middle class. In particular, special attention should be paid to expanding access of the poor to family allowances and child care, and pension assistance for the elderly poor. More effort might be made to redirect water subsidies and some housing programs. While there is undoubtedly benefit in terms income distribution for having less restrictive access, this does present a contradiction if at the same time the poor do not have access. 99. This also points to addressing some of the other problems of access, notably, the lack of information on programs, especially those administered by the central level, and the administrative capacities at the municipal level, especially for these agencies to take a more pro-active stance to seek out eligible beneficiaries. It may also entail a more careful analysis of demand driven programns which do not adequately taken into account regional and poverty differences and points to distribution of central funding with greater redistribution in mind. Poverty and Income Distribution in a High Growth Economy 49 100. Indigenous people represent a unique challenge for Chile and the pronounced lags in social and economic progress should not be overshadowed by the present conflicts. These groups exhibit high rates of poverty, and have not benefited as much from conditions of general prosperity. While most indigenous people have become urban dwellers, serious conflicts exist over questions of access to land, land titling and access to water in rural areas. Moreover, the possibilities of pursuing subsistence agriculture are more limited day by day. At the same time, social exclusion, discrimination in the labor force and in schools, and area stigma are likely to be even more pronounced for indigenous groups than others. The lack of a coherent national understanding of the status and recognition of indigenous people among Chileans at large seems to be one of the largest barriers for these groups to secure their place in society. 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World Bank (1997), Chile: Poverty and Income Distribution in a High- Growth Economy - 1987-1995, Report No 16377-CH, November 25, Washington DC. World Bank (2000), World Development Report 2000/2001: Attacking Poverty, New York: Oxford University Press. MAP SECTION IBRD 25555 - P E R U q Ptr>S$<44/ S' . f r < ~~~~A 2! IV A m Re rID cDa >~~~~~~~~~~~~~~~~~~~~~-, z < X AAAA5 / e-REt/ON TXf-- } REalOfDEMNE 46-] DE Tala 'd. A eNERAL A> t t a - J0 TAA CA tn'\ Tebudhl3 Omlnshonof. itW r u I | =X -3' A5P OEIOU > rhvottnGousytJmn 30'NE D}Cl< _IE I L C ( 7 U A on fihr Irgol 5t0$u5 of ony t risory or gh gr PaleraR < e se IrXo L 0 Cz i . 2 aurh boundories f 4F23 97 ' 4t$t)METf*SA s 7, i l QA!; 4(R/ 70,<,,e o - < (770-7st ;tfr7r * F3RURY 1tJ9