Structural Change and the Fall of Income Inequality in Latin America : Agricultural Development, Inter-sectoral Duality, and the Kuznets Curve

In this study we approach the recent decline in income inequality in Latin America from the perspective of structural change with a focus on the relative performance of the agricultural sector. Our focus is on the underlying forces implied by Kuznets (1965). We zoom in on the relative performance of agriculture in the development process and the rural-urban duality and pay particular attention to the last couple of decades in relation to the entire post-1950 period. We attempt to estimate empirically possible theoretical relations with regard to these patterns by posing the following basic questions: how does the resurgence of agriculture relate to the reduction of income inequality and to what extent is this an expression of Latin America moving downward on the Kuznets curve? The literature on agriculture’s relation to the recent changes of income distribution in Latin America is quite limited. For instance, in a recent ECLAC report titled “Structural change for equality” (2012), the role of agriculture is not even mentioned. By agriculture we mean both farming and agro-business that processes and transports that output. To our knowledge, this paper is the first attempt to investigate this relationship for the recent decades in the perspective of structural change in Latin America. There are strong theoretical reasons to connect agricultural development to income distribution. The closing of the rural-urban income gap reflects what Reynolds (1975) called a “dynamic” transformation of agriculture and relates to the contribution agriculture provides for overall growth of the economy. In addition, the elasticity of poverty reduction with respect to growth is estimated to be stronger when growth emanates in the agricultural sector (Ravallion and Chen 2007, de Janvry and Sadoulet 2009). Productivity growth in the lagging sector should also contribute to sectoral labor productivity to convergence and thus helps to reduce inequality (Timmer 1988). For these reasons, the resurgence of agriculture driven partly by improving commodity prices should be given due attention when assessing the decline in income inequality in Latin America. According to the logic of the Kuznets curve, the hypothesized “turning point” of the inverted U-curve is generated by a reduction of income inequality in one or both of the sectors and/or a reduction of the rural-urban income gap as the weight of the agricultural sector diminishes, and the income per capita gap between them declines. We find that the recent decline in income inequality is related to the recent resurgence of Latin American agriculture, and, by inference, its lack of decline across most of the 20th century must be related to a lack of productivity change in agriculture. We provide estimates showing that during the recent decades inter-sectoral duality has been reduced by agricultural productivity growth. The duality expressed as an inter-sectoral Gini shows the shape of an inverted U-curve and as such the closing of the rural-urban income gap corroborates with the theoretical expectations postulated by Kuznets. The wider implication of the study is, however, that with slower growth in agricultural labor productivity, continuing improvement in the income distribution becomes more difficult. In the absence of strong manufacturing growth, agriculture might be able to reduce income inequality further if agro-industries remain unskilled labor intensive, thus raising the opportunity cost of unskilled workers. On the other hand, the traditional service sector has perhaps become the “new agricultural sector” in terms of productivity and labor surplus. In other words, the source of the remaining dualism does not come only from rural areas, but also from urban areas

Growth and cycles of the Italian economy since 1861: the new evidence

Based on a newly-available large set of historical national accounts, the paper revisits the main features of economic growth and cycles in Italy for the post-Unification period 1861-2011. Alongside the structural changes in growth dynamics, the main sources of output and productivity growth are identified. As regards the analysis of the underlying cyclical component, a business cycle chronology is first established and then both the specific patterns of individual cycles and the co-movements of output with key macroeconomic variables are investigated. In the 150 years since its political Unification, Italy's economic growth was mainly propelled by consumption and investments, whereas on the supply side the industry and services sectors were by far the main contributors, also because of the positive effect of labour reallocation to nonfarm activities. Over the same period, Italy experienced approximately 20 business cycles of varying duration and amplitude. Output fluctuations were dominated by the short-term variability of agricultural production before World War II and by fluctuations of the industry sector thereafter. The cyclical behaviour exhibited by aggregate demand components conforms quite well to that evidenced in the standard international business cycle literature, although some exceptions arise in the pre-World War II years