assumes: a modest decline (five percent of its initial value) in tax
incidence among non-commodity exporters and of 35% among
commodity exporters, as suggested above; a 10% drop from the
initial level of social security expenditure/GDP in all countries; and
that the likely increase in job informality will be compensated by a
social safety net reflected in a rise in minimum wages. In contrast,
the second, more pessimistic, policy scenario assumes: a drop in
direct tax revenue/GDP ratio in relation to its initial level of 40%
for the commodity exporters and of 15% for the other countries; a
25% reduction of social security/GDP from its initial level ratio in
commodity exporters and of 15% in the others; a cut of the
minimum wage of 5% in LOC countries and of 25% for the NON-
LOC countries; and a 5% increase in the share of informal
employment in all countries.
The results of this highly hypothetical exercise are presented in
Table 14. They suggest that in 2008 the rise in inequality in relation
to the values predicted by the model for 2007 was very modest,
varying between 0.1 (Colombia and Brazil) and 0.6 (Ecuador). This
is not surprising as the external conditions continued to improve till
midyear, and the rate of growth remained acceptable in all these
countries. Under scenario 1, the 2007-2009 Gini rises were
somewhat more pronounced but still modest, ranging between 0.4
and 1.4 Gini points, i.e. much less that the drop realized over 2003-
- The largest increase was recorded among commodity exporters
such as Chile, Mexico and Ecuador. In non-commodity exporting
countries, the increase was around 0.5 Gini points. Even under the
more pessimistic scenario 2, the Gini increase remains moderate,
ranging between 1 and 1.7 Gini points. While these results may
depend on the model specification (which takes into account
structural rather than cyclical factors), and on the fact that some
adverse changes in variables were not included in model 1 Table 13
- such as a drop in capital inflows, rising interest spreads on
international loans, and rises in capital flights – may also negatively
affect income inequality. But the limited increase in inequality seems
to depend mainly on the fact that – except for Mexico – the crisis
has not been as acute as that of 1982-84, or that currently
experienced in the European economies in transition where GDP/c
is expected to decline between 10% and 20% a year over two years.