The Casino of Life: The odds of reducing inequality in a country like Bolivia

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The Casino of Life: The odds of reducing inequality in a country like Bolivia
By Ioulia Fenton*, La Paz, 21 June 2010.

As a visitor to La Paz, I am staying in a friendly hostel downtown. Last week I happened to stumble onto a Casino night organised by the owners. It was all for fun and no real money was exchanged. Everyone received 250 fake bolivianos (fbs) worth of chips. If you managed to do well and double your pot to 500 fbs then you could exchange them for a free drink.

I happened to be having dinner with some other travellers I had just met on a table which was destined for Black Jack. Now this was not like a real casino which to me can seem rather boring and somewhat lonely as players silently make bets and collect their winnings or losses. Instead the 10 players around our table had really gotten into the spirit of things and supported each other cheering and laughing through the whole game. Even the dealer was on our side. The positive atmosphere led to a bit of a winning streak for all of us. For a series of hands the dealer was beat. What was noticeable to me, however, was that those players who by the beginning of the winning streak had amassed more chips kept betting close to the maximum allowed of 50 fbs, while those with smaller pots would bet closer to the minimum of 5 fbs (with some exceptions).

As we progressed through the winning streak, everyone's individual pot grew. Proportionaly to our own pot sizes we were all probably making roughly the same bets, lets say 5% of the total pot (and therefore drawing similar proportions of winnings back), yet the absolute difference between pot sizes of the relatively chip rich and the relatively chip poor kept growing. The pot size of those making small bets did not change much, while the lucky ones with larger bets and pot sizes steamed ahead. Even when the relatively chip poor increased their bets and thus winnings on a hand, this made little difference to the overall gap despite them increasing their pot by a larger proportion than the richer players.

This got me thinking about the aim of many aid agencies and governments to reduce inequality and poverty through pro-poor growth in developing countries like Bolivia (1). What would this really mean and is it achievable? Or should we be focusing on different aims? Let me demonstrate what I mean with a simple thought experiment. Let's use the most ambitious scenario: To be pro-poor, growth needs to disproportionately benefit the poorest segments of the population and reduce absolute poverty (2). Let's assume a poor person earns around $600 (US) per year (or just above the national poverty line in Bolivia of $1.6 per day) and an average person earns around $5,000 per year (just above the Bolivian $4,454.99 national per capita GDP adjusted for PPP (3)). The income gap is $4,400 per annum. Lets assume that we have growth of 5% overall, but that it is pro-poor in that the poorest wages are increasing at 6% while the wages of the average person at 4%. After the first year it will look as follows:

Year 0
Poor Income $ 600
Middle Income $ 5,000
GAP $ 4,400

Year 1
Poor Income $600*1.06 = $ 636
Middle Income $5000*1.04 = $ 5,200
GAP $ 4,564 (+ 164)

So the absolute income gap has increased by $164 per annum. What if the next year new and highly successful pro-poor policies were implemented and the poorest´s wages grew at 12% and the better-off only 3%:

Year 1
Poor Income $ 636
Middle Income $ 5,200
GAP $ 4,564

Year 2
Poor Income $636 * 1.12 = $ 712
Middle income $5,200* 1.03 = $ 5,356
GAP $ 4,644 (+ 80)

So even in a really optimistic (and perhaps somewhat unrealistic) scenario, the income gap increased by $80 per annum, thus actually making the growth anti-poor. Imagine the figures if you compare the absolutely richest with the absolutely poorest. This begs the question whether pro-poor growth and income inequality reduction are compatible and complementary goals. Of course with both these case scenarios the standard of living of the poorest would have improved (assuming zero inflation), thus having a poverty reducing effect, while inequality has increased.

Income inequality is thus clearly not telling the whole story. In fact, as a previous Monday Morning Development Newsletter has reported (4), consumption inequality for Bolivia is much lower than income inequality (Gini 0.44 and 0.60 respectively) due to the fact that consumption in developing countries is less reliant on a formal wage than that in developed countries. A Gini of 0.44 is closer to the income inequality recorded for USA and thus paints a very different picture when being compared to Bolivia. This large difference in the Gini coefficient has been caused by simply changing the measure from income to consumption.

This brings me back to my casino night experience. Towards the end of our Black Jack game roughly half of us had more than doubled our initial pot, thus qualifying for a free drink. We had exchanged the required 500 fbs and we used the rest to help get drinks for those who did not quite have enough. We then divided the left over chips equally between all of us and played out the rest of the game.

The point here being that virtually everyone's pot did grow (income) and the free drink we received individually (consumption) was great, but having fun with the people around us and making new friends (our social capital) and sharing our wealth (collectively deciding to tax the rich to provide the same opportunities for the poorer in our group) in the end were the things that made up the whole experience. A person's income is not purely monetary or wage driven. Nor can inequality be easily measured purely from income statistics. Progressive taxation, non-cash government transfers (benefits), access to public services, opportunities in life (for a decent job, education, health services and so on), and human and social capital all play their part.

In fact, depending on the country, even the total monetary income someone receives can include a large number of sources. For example wages, remittances and family support, government welfare payments, interest earnings on savings and investments and so on, all of which are rarely captured in wage and income statistics. Inequality and poverty depend on all these factors and are very relative.

Lowering inequality through pro-poor growth has particularly been a focus of aid agencies in Bolivia. This article is not an attempt to say that lowering absolute income inequality is not an admirable goal. However, there needs to be a recognition that it may be difficult to achieve it in societies with relatively high levels of income inequality to begin with (as was demostrated in the rather simplistic and stylised mathematical example above). Although attention has been paid to non-income dimensions of poverty, they have not yet been universally incorporated into growth and inequality measures. Where attempts have been made, Bolivia's progress looks much more positive (5). In the Casino of life, many other factors determine how equal a society is and increasing opportunities for all is perhaps a more important aim that needs to be recognised in statistics.

1) See, for example, Klasen S., Grosse M., Thiele R., Lay J., Spatz J. & Wiebelt M. (2004) “Operationalising Pro- Poor Growth: A Country Case Study on Bolivia”.
(2) This is something that is recommended in a recent paper by Negre M. (2010) “Concepts and Operationalization of Pro-Poor Growth”, UNU-WIDER Working Paper No. 2010/47.
(3) For the year 2009 - source http://www.economywatch.com/economic-statistics/country/Bolivia/.
(4) See How unequal is Bolivia really? Monday Morning Development Newsletter, INESAD - By Lykke Andersen, La Paz, 11 February 2008. Available online at: http://www.inesad.edu.bo/mmblog/mm_20080211.htm
(5) For details of a study for Bolivia see Grosse M., Harttgen K. & Klasen S. (2006) “Measuring Pro-Poor Progress towards the Non-Income Millenium Development Goals”, UNU-WIDER Research Paper No. 2006/38.

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