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Monday, May 28, 2007

Paradox of the poor ignoring their self-interest in democratic countries

begonia by ruurmo from flickr (CC-SA)Yesterday I watched a movie "The Revolution Will Not Be Televised" on Google Video. It was about democratically elected president of Venezuela Hugo Chávez and 2002 failed coup attempt against him.

Here's a summary with a some background - Latin American countries like Venezuela have huge income inequalities, but are at least somewhat democratic, so every now and then masses of angry poor voters elect someone who promises to reduce income inequality somewhat. Most of the time nothing changes, but every now and then they elect someone who actually tries to do what they promised, what really annoys the local rich and the USA, so they try to get rid of them as soon as possible by any means necessary, often succeeding like in Chile in 1973. This time they failed.

Like everyone else I'm tired of the leftist bullshit about the poor, and low quality of discussion about politics in general. What we need is hard data, starting from measures of income inequality. We need reliable single number summaries, otherwise everyone will cherry-pick any data to support their chosen in advance conclusion. Some of the standard and widely available statistics of income inequality are:

And of general well-being:

Gini coefficient is the most popular measure of income equality. 0 means perfectly equal, and 100 means perfectly inequal. For vast majority of the civilized world it is somewhere between 25 and 40. Inequality in poor third world countries is usually far greater, sometimes over 60. Here are pictures from Wikipedia.

Gini coefficiet map by Mrnett1974 from Wikipedia (public domain)

Gini coefficiet map legend by Mrnett1974 from Wikipedia (public domain)Funny thing about many of these extremely inequal countries, especially in the Latin America, is that they are at least ostensibly democratic. The poor have majority, and could easily make the state implement policies reducing the inequality. Nothing "radical" would be necessary, simple thing like:
  • free healthcare
  • free education
  • raising taxes on natural resources extraction
  • raising minimum wage
would drastically improve situation of the poor without affecting the economy much. For example in Bolivia with income inequality of 60.1 doubling incomes of the poorest 20% would require reducing incomes of the richest 20% (who earn 42.3x as much) by just 2.3%. That's less than yearly GDP growth anyway. For comparison to do such thing in Germany (Gini index 28.3, quintile ratio 4.3:1), the richest 20% would need to loss 23% of their income - a very difficult thing to do without gravely disrupting the economy.

So what really happened to Venezuela under Chávez ?
  • Statistics from the Venezuelan government. Human Development Index 1998-2005 - a huge jump from 0.6917 to 0.8144.
  • Data from USA Department of State 1998 to 2006 - infant mortality 28.5 to 15.5 - a huge improvement again.
  • From the same source, life expectancy - 73.31 to 74.8, a more modest but solid improvement.
  • I wasn't able to find any source of Gini coefficients for the relevant time period. Unfortunately different sources use different methodologies, so gathering point data wouldn't be reliable.
  • There's a bit of data on income distribution. Income of the "class E", defined as poorest 58% of the society, grew by 53% nominal (30% real) in 2004 and by 32% nominal (16% real) in 2005. Income growths of higher strata of the society seem to increase slower than inflation. That means the poor are getting a lot richer and the rich are getting somewhat poorer (data unfortunately only for two years).
  • There are also some poverty statistics showing major decrease in poverty, but I'm not a big fan of poverty statistics, as the definition of poverty cutoff is quite arbitrary.
So basically in this case the angry poor managed to elect the right (for them) guy, and there is significant transfer of income from the increasing oil prices and from the rich to the poor.

The big question - why doesn't it happen more often ? There are so many countries with extreme income inequality, with a lot of money from natural resources, and with the poor being able to vote and affect income distribution, but somehow they very rarely use that power. The paradox is:
Why in so many cases where the poor could significantly improve their economic situation by voting, they aren't doing so ?
A few possible reasons:
  • If the wrong guy is elected, the ruling elites are able to stage a coup, like in Chile 1973, and like they tried to do in Venezuela in 2002.
  • The poor often vote for someone who promises a lot, but doesn't change anything.
  • The poor can be convinced to accept the status quo. The media, educational system and so on, all frequently side with the ruling elite, and there are no strong organized opposition groups.
  • In particular the poor can be convinced that inequality is required for economic growth. The data isn't conclusive within the civilized range of inequality (Gini index 25 to 40), but it is clear that Latin American style extreme inequality hampers growth.
  • The voters can be sidetracked by another issue. It isn't that difficult to polarize the society, and in two-party and presidential systems it is very difficult for third parties to operate. A good example is USA, where the Democratic and Republican parties have very similar economical policies, and differ mostly on minor ideologal issues like gay marriage.
It would be nice to quantify these points some day.


Babette said...

Thanks for using the GINI index and making it clear. Did you decide what was the "civilized range of inequality" or others?

Keep posted on Haiti-DR as well -

taw said...

The 25 to 40 range is commonly used because it's round and almost all developed countries fall into this range, or only slightly out of it. The only major outlier is USA, but it became an outlier only recently: 39.4 (1970), 40.3 (1980), 42.8 (1990), 46.2 (2000), 46.9 (2005) (estimates of US Census Bureau, data via Wikipedia).