Abstract
This paper studies the time-series behavior of a set of widely-used social indicators and uncovers two important stylized facts. First, not all social indicators are created equal in terms of the importance of cyclical fluctuations. While some social indicators such as the unemployment rate and monetary poverty show large cyclical fluctuations, other social measures such as the Human Development Index are, by construction, dominated by long-run trends. Second, a large fraction of the cyclical fluctuations in social indicators can be explained by the cyclical changes in income (proxied by real GDP per capita). Since cyclical income volatility is much larger in the developing world, these two critical facts raise fundamental issues regarding how permanent are improvements in social indicators (like the ones observed in many developing countries during the last commodity super-cycle). Finally, and relying on a global sample of industrial and developing countries, we dig deeper into the importance of cyclical versus permanent components by extending the seminal contribution of Datt and Ravallion (1992). In particular, we show that more than 40 percent of the fall in monetary poverty observed in Latin America and the Caribbean during the so-called Golden Decade can be attributed to cyclical changes in income.
Highlights
As academics and policymakers celebrate the substantial improvements in poverty rates and social indicators across developing economies, especially since the early 2000s, it is crucial to keep in mind that a large part of these social gains took place during a period of booming commodity prices and economic bonanzas for many developing countries
For a casual observer standing in the year 2014, taking the large cyclically-driven gains in the unemployment rate and monetary poverty at face value would lead to an over-optimistic evaluation of the permanent improvements in social conditions in the region
We show that for Latin America and the Caribbean (LAC) as a whole, 41.2 percent of the fall in monetary poverty during the Golden Decade was due to cyclical income factors, 23.8 percent was due to permanent income growth, and 35 percent was due to redistribution
Summary
As academics and policymakers celebrate the substantial improvements in poverty rates and social indicators across developing economies, especially since the early 2000s, it is crucial to keep in mind that a large part of these social gains took place during a period of booming commodity prices and economic bonanzas for many developing countries. After “parties” of this magnitude are over, one would expect periods of recessions to reverse part of the gains in the reduction of poverty that were achieved in good times. For a casual observer standing in the year 2014, taking the large cyclically-driven gains in the unemployment rate and monetary poverty at face value would lead to an over-optimistic (and, misleading) evaluation of the permanent improvements in social conditions in the region. In Brazil (with about one third of LAC’s population), for example, the poverty rate increased by about 3 percentage points between 2014 and 2017 (when real GDP per capita fell by 8.2 percentage points) Had she been more careful, our casual observer could have prevented such over-optimism (or conveying a misleading picture) by either controlling for the cyclical component of the unemployment rate and monetary poverty or basing her analysis on more structural measures (i.e., less correlated with the business cycle) such as the HDI indicator.
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