What effect does public and private capital have on income inequality? The case of the Latin America and Caribbean region
Keywords:income inequality, public capital stock, private capital stock, Latin American and the Caribbean countries
The effects that the Latin America and Caribbean capital stock (public and private) had on the income inequality levels of 18 countries from this region were analyzed, over a period ranging from 1995 to 2017, recurring to an autoregressive distributed lag model in the form of an unrestricted error correction model. The results from the three models that were estimated (with the total capital stock, the public capital stock, and the private capital stock) pointed for the existence of an enhancing effect from the capital stock (public and private) on the income inequality of these countries in the short-run, suggesting that the investments were made in the already richer/wealthiest areas. In the long-run, the effects of capital stock on income inequality seem to vanish, probably due to the efforts to correct the previous detrimental effect. However, the lack of a statistically significant impact shows that, although the efforts, capital stock (public and private) still does not contribute to the income inequality reduction, meaning that these countries should improve/change the management and the selection criteria of their physical capital investments to be able to reduce their income gap.
Agenor, P. R., and Moreno-Dodson, B. (2006) Public Infrastructure and Growth: New Channels and Policy Implications. Policy Research Working Paper Series 4064, The World Bank.
Anderson, E., Jalles D’Orey, M. A., Duvendack, M., and Esposito, L. (2017). Does Government Spending Affect Income Inequality? A Meta-Regression Analysis. Journal of Economic Surveys, 31(4), 961–987.
Artadi, E., and Sala-i-Martin, X. (2003). The Economic Tragedy of the XXth Century Growth in Africa. NBER Working Papers 9865.
Asteriou, D., Pilbeam, K., and Pratiwi, C. E. (2021). Public debt and economic growth: panel data evidence for Asian countries. Journal of Economics and Finance, 45, 270–287.
Balseven, H., and Tugcu, C. T. (2017). Analyzing the Effects of Fiscal Policy On Income Distribution: A Comparison Between Developed and Developing Countries. International Journal of Economics and Financial Issues, 7(2), 377–383.
Benitez, D., Chisari, O., and Estache, A. (2001). Can the Gains from Argentina's Utilities Reform Offset Credit Shocks? World Institute for Development Economic Research (UNU-WIDER), Working Papers.
Bom, P. R. D., and Goti, A. (2018). Public capital and the labor income share. Sustainability (Switzerland), 10(11), 1–17.
Breusch, T. S., and Pagan, A. (1980). The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics. Review of Economic Studies, 47, issue 1, 239-253.
Brushett, S., John-Abraham, I. (2006) Infrastructure for improved rural livelihoods. Enbreve, 93, 1-4, World Bank: Washington, DC.
Bustillo, I., Artecona, R., and Perrotti, D. (2018) Inequality and growth in Latin America: achievements and challenges. Working Paper, Group of 24 and Friedrich‐Ebert‐Stiftung, New York.
Calderón, C., and Chong, A. (2004). Volume and Quality of Infrastructure and the Distribution of Income: An Empirical Investigation. Review of Income and Wealth, 50, 87–106.
Calderón, C., and Servén, L. (2004). The Effects Of Infrastructure Development On Growth And Income Distribution. Annals of Economics and Finance, 15.
Calderón, C., and Servén, L. (2014). Infrastructure, Growth, and Inequality: An Overview. Policy Research Working Paper; No. 7034. World Bank Group, Washington, DC.
Castellani, F., Olarreaga, M., Panizza, U., and Zhou, Y. (2019). Investment Gaps in Latin America and the Caribbean. Revue Internationale de Politique de Développement, 11(1).
Cavallo, E., and Powell, A. (2019). Building Opportunities for Growth in a Challenging World. 2019 Latin American and Caribbean Macroeconomic Report. Inter-American Development Bank: Washington, DC.
Cavallo, E., Powell, A., and Serebrisky, T. (2020). From Structures to Services: The Path to Better Infrastructure in Latin America and the Caribbean. Inter-American Development Bank: Washington, DC.
Cerdeiro, D., and Komaromi, A. (2017) Trade and Income in the Long Run: Are There Really Gains, and are They Widely Shared? IMF Working Paper No. 17/231, International Monetary Fund.
Chatterjee, S., and Turnovsky, S. J. (2012). Infrastructure and inequality. European Economic Review, 56(8), 1730-1745.
Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20(2), 249–272.
Chong, A., and Gradstein, M. (2004). Inequality and Institutions. IDB Working Paper No. 419, Inter-American Development Bank: Washington, DC.
Coady, D., and Dizioli, A. (2018). Income inequality and education revisited: persistence, endogeneity and heterogeneity. Applied Economics, 50(25), 2747–2761.
Cysne, R. P. (2009). On the Positive Correlation between Income Inequality and Unemployment. The Review of Economics and Statistics, 91(1), 218–226.
Dabla-Norris, E., Kochhar, K., Suphaphiphat, N., Ricka, F., and Tsounta, E. (2015). Causes and Consequences of Income Inequality: A Global Perspective. Staff Discussion Notes, 15, 1.
De la Torre, A., Messina, J., and Silva, J. (2017). The Inequality Story in Latin America and the Caribbean: Searching for an Explanation. In L. Bértola & J. Williamson (Eds.), Has Latin American Inequality Changed Direction? Looking Over the Long Run (pp. 317–338). Cham: Springer International Publishing.
Delbianco, F., Dabús, C., and Caraballo, M. Á. (2014). Income inequality and economic growth: New evidence from Latin America. Cuadernos de Economia (Colombia), 33(63), 381–398.
Ditzen, J. (2018). Estimating Dynamic Common-Correlated Effects in Stata. The Stata Journal: Promoting Communications on Statistics and Stata, 18, 585–617.
Driscoll, J. C., and Kraay, A. C. (1998). Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data. Review of Economics and Statistics, 80(4), 549–560.
Easterly, W., and Servén, L. (2003). The Limits of Stabilization: Infrastructure, Public Deficits, and Growth in Latin America. Stanford University Press and the World Bank.
Eberhardt, M., and Teal, F. (2011). Econometrics for grumblers: a new look at the literature on cross-country growth empirics. Journal of Economic Surveys, 25(1), 109–155.
Estache, A. (2003). On Latin America's Infrastructure Privatization and its Distributional Effects. Washington, DC: The World Bank, Mimeo.
Estache, A., Foster, V., and Wodon, Q. (2002). Accounting for Poverty in Infrastructure Reform: Learning from Latin America's Experience. WBI Development Studies, Washington, DC: The World Bank.
Estache, A., Gomez-Lobo, A., and Leipziger, D. (2000). Utility privatization and the needs of the poor in Latin America - Have we learned enough to get it right? Policy Research Working Paper Series 2407, The World Bank.
Faruqee, H. (2016). Regional Economic Outlook, April 2016, Western Hemisphere Department: Managing Transitions and Risks. USA: INTERNATIONAL MONETARY FUND.
Fay, M., Andres, L. A., Fox, C., Narloch, U., Straub, S., and Slawson, M. (2017). Rethinking Infrastructure in Latin America and the Caribbean: Spending Better to Achieve More. Directions in Development-Infrastructure, World Bank: Washington, DC.
Ferreira, F. (1995): Roads to equality: wealth distribution dynamics with public-private capital complementarity. LSE Discussion Paper TE/95/286.
Frees, E. W. (1995). Assessing cross-sectional correlations in panel data. Journal of Econometrics, 64, 393-414.
Frees, E. W. (2004). Longitudinal and panel data: analysis and applications in the social sciences. Cambridge University Press.
Friedman, M. (1937). The use of ranks to avoid the assumption of normality implicit in the analysis of variance. Journal of the American Statistical Association, 32, 675-701.
Fuinhas, J. A., Marques, A. C., and Koengkan, M. (2017). Are renewable energy policies upsetting carbon dioxide emissions? The case of Latin America countries. Environmental Science and Pollution Research.
Furceri, D., and Li, B. G. (2017). The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies. IMF Working Papers, 17(217), 1.
Gasparini, L., and Lustig, N. (2010). The Rise and Fall of Income Inequality in Latin America. The Oxford Handbook of Latin American Economics.
Gómez‐Sabaíni, J. C., Martorano, B., Morán, D. (2016). Taxation and Inequality: Lessons from Latin America. World Social Science Report on Inequality. UNESCO: Paris.
Greene, W.H. (2002) Econometric Analysis. 5th Edition, Prentice Hall, Upper Saddle River, 802.
Gupta, S., and Abed, G. (2002). Corruption, Public Investment, and Growth. In Governance, Corruption, and Economic Performance. USA: INTERNATIONAL MONETARY FUND.
Gupta, S., Kangur, A., Papageorgiou, C., and Wane, A. (2014). Efficiency-Adjusted public capital and growth. World Development, 57, 164–178.
Hacibedel, B., Mandon, P., Muthoora, P., and Pouokam, N. (2019). Inequality in Good and Bad Times. IMF Working Papers, 19(20), 1.
Hausman, J. (1978). Specification Tests in Econometrics. Econometrica, 46(6), 1251-1271.
Helpman, E., and Redding, S. (2010). Inequality and Unemployment in a Global Economy. Econometrica, 78(4), 1239–1283.
IFAD (2016) Chapter 1 – Structural and rural transformation in Latin America and the Caribbean. In Rural Development Report 2016. IFAD, Rome.
IMF (2014). Chapter 3. Is it Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment. In World Economic Outlook, October 2014: Legacies, Clouds, Uncertainties. USA: INTERNATIONAL MONETARY FUND.
IMF (2017). Estimating the stock of public capital in 170 countries. Fiscal Affairs Department.
Jong, J. F. M. De, Ferdinandusse, M., and Funda, J. (2018). Public capital in the 21st century: as productive as ever? Applied Economics, 50(51), 5543–5560.
Jouini, J. (2015). Economic growth and remittances in Tunisia: bi-directional causal links. Journal of Policy Modeling, 37(2), 355–373.
Kamps, C. (2006). New Estimates of Government Net Capital Stocks for 22 OECD Countries, 1960–2001. IMF Staff Papers, 53(1), 120–150.
Khandker, S., and Koolwal, G. (2007). Are pro-growth policies pro-poor? Evidence from Bangladesh. Mimeo, The World Bank.
Lardé, J. and Sánchez, R. (2014). The economic infrastructure gap and investment in Latin America. FAL Bulletin, Issue No. 332, number 4, Santiago, United Nations Publication, Santiago.
Levin, A., Lin, C. F., and Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1–24.
Lopez, H. (2003). Macroeconomics and Inequality. The World Bank Research Workshop on Macroeconomic Challenges in low-income countries. Washington, DC: The World Bank.
Maddala, G. S., and Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61(S1), 631–652.
Martínez-Vázquez, J., Vulovic, V., and Moreno-Dodson, B. (2012). The impact of tax and expenditure policies on income distribution: Evidence from a large panel of countries. Hacienda Publica Espanola, 200(1), 95–130.
Martorano, B. (2018). Taxation and Inequality in Developing Countries: Lessons from the Recent Experience of Latin America. Journal of International Development, 30(2), 256–273.
Meschi, E., and Vivarelli, M. (2009). Trade and Income Inequality in Developing Countries. World Development, 37(2), 287–302.
Michelitsch, R., Szwedzki, R., Sembler, J. I., Haarsager, U., Carbajo, J., Murcia, J. F., Seiwald, R., Oliveira, P., Funes-Aguilera, R., Cabrera, M., Sadeghi, P. (2017). Evaluation of Public-Private Partnerships in Infrastructure. Inter-American Development Bank: Washington, DC.
Mocan, H. N. (1999). Structural Unemployment, Cyclical Unemployment, and Income Inequality. The Review of Economics and Statistics, 5(February), 122–134.
OECD (2011). Divided We Stand: Why Inequality Keeps Rising. OECD Publishing, Paris.
OECD (2016). Promoting Productivity for Inclusive Growth in Latin America. Better Policies. OECD Publishing, Paris.
Percoco, M. (2014). Quality of institutions and private participation in transport infrastructure investment: Evidence from developing countries. Transportation Research Part A: Policy and Practice, 70, 50-58.
Pérez, G. (2020). Rural roads: key routes for production, connectivity and territorial development. FAL Bulletin, no. 377, Economic Commission for Latin America and the Caribbean (ECLAC), Santiago.
Perrotti, D. and Sánchez, R. (2011). The economic infrastructure gap in Latin America and the Caribbean. FAL Bulletin, Issue No. 293, number 1, United Nations Publication, Santiago.
Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Cambridge Working Papers in Economics 0435, Faculty of Economics, University of Cambridge.
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265–312.
Pesaran, M., Shin, Y., and Smith, R. (1999). Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, 94(446), 621-634.
Pi, J., and Zhou, Y. (2012) Public infrastructure provision and skilled–unskilled wage inequality in developing countries. Labour Economics, 19(6), 881-887.
Piketty, T. (2014). Capital in the Twenty-First Century. Belknap Press, Cambridge, MA.
Romp, W., and Haan, J. De. (2007). Public capital and economic growth: A critical survey. Perspektiven Der Wirtschaftspolitik, 8, issue S1, 6–52.
Rubin, A., and Segal, D. (2015). The effects of economic growth on income inequality in the US. Journal of Macroeconomics, 45, 258–273.
Sanchez, S. M., Scott, K., Lopez, J. H. (2016). Guatemala: Closing Gaps to Generate More Inclusive Growth. Systematic Country Diagnostic. World Bank, Washington DC.
Santiago, R., Fuinhas, J. A., and Marques, A. C. (2019). Chapter Three - Income inequality, globalization, and economic growth: a panel vector autoregressive approach for Latin American countries. In J. A. Fuinhas and A. C. Marques (Eds.), The Extended Energy-Growth Nexus (pp. 57–96). Academic Press.
Santiago, R., Fuinhas, J. A., and Marques, A. C. (2020). The impact of globalization and economic freedom on economic growth: the case of the Latin America and Caribbean countries. Economic Change and Restructuring, 53, 61–85.
Seneviratne, D., and Sun, Y. (2013). Infrastructure and Income Distribution in ASEAN-5: What are the Links? IMF Working Papers, 13(41), 1.
Sheng, Y. (2011). Unemployment and Income Inequality: A Puzzling Finding from the US in 1941-2010. SSRN Electronic Journal.
Solt, F. (2019). Measuring Income Inequality Across Countries and Over Time: The Standardized World Income Inequality Database. SWIID Version 8.2, November 2019.
Stiglitz, J.E. (2012). The Price of Inequality. How Today's Divided Society Endangers our Future. W.W. Norton, New York.
Tang, T. C. (2003). Japanese aggregate import demand function: reassessment from the 'bounds' testing approach. Japan and the World Economy, 15(4), 419-436.
Theyson, K., and Heller, L. (2015). Development and income inequality: A new specification of the Kuznets hypothesis. The Journal of Developing Areas, 49, 103–118.
Tsounta, E., and Osueke, A. (2014). What is Behind Latin America's Declining Income Inequality? IMF Working Paper No. 14/124, International Monetary Fund.
Turnovsky, S. J. (2015). Economic growth and inequality: The role of public investment. Journal of Economic Dynamics and Control, 61, 204–221.
UN (2020). Inequality: Where we stand today, in World Social Report 2020: Inequality in a Rapidly Changing World. UN, New York.
Urata, S., and Narjoko, D. A. (2017). International Trade and Inequality. ADBI Working Paper Series, (675).
Vassallo, J. M. (2020). Public-Private Partnership in Latin America. Facing the challenge of connecting and improving cities. CAF, Caracas.
Wooldridge, J. M. (2003). Introductory Econometrics: A Modern Approach. South-Western College Pub, Ohio.
Wooldridge, J.M. (2002). Econometric Analysis of Cross Section and Panel Data. The MIT Press, Cambridge.
Yang, Y., and Greaney, T. M. (2017). Economic growth and income inequality in the Asia-Pacific region: A comparative study of China, Japan, South Korea, and the United States. Journal of Asian Economics, 48, 6–22.
Zolt, E. M., and Bird, R. M. (2005). Redistribution Via Taxation: The Limited Role of the Personal Income Tax in Developing Countries. UCLA Law Review, Vol. 52, UCLA School of Law, Law-Econ Research Paper No. 05-22.
Copyright (c) 2022 Renato Santiago, José Alberto Fuinhas, Antonio Cardoso Marques, Matheus Koengkan
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
LAER Copyright and License
Authors submitting articles to Latin American Economic Review (LAER), automatically grant this journal a license to publish. Copyright of all published material remains with the authors, who can reuse it in future work without needing to make reference toÂ LAER. Similarly, any other contribution of material to the website (for example text, photographs, graphics, video or audio) automatically grants us a right to publish. Copyright, however, remains with the author(s).
Authors release their work under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND 4.0). This license allows anyone to copy, distribute and transmit the work, provided the use has no derivatives, is non-commercial and appropriate credit to the author(s) is given. (If you remix, transform, or build upon the material, you may not distribute the modified material.)
A human-readable summary of the licence:
Full legal text: