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Income distribution
Consumption level and available family income
Relation between economic status and food consumption level in the Dominican republic and Chile
Redistribution of income and its implications for food availability and prices
References
Flavio Machicado
It is generally agreed that price policy, as in the case of any other economic policy, stems from a deliberate action on the part of the economic sector of government administration. Therefore, the fixing of prices is not merely the result of an equilibrium point determined by the free interplay of the market forces. A better definition of how government economists formulate an economic policy is required. To do this, the internal characteristics of the structure of the system, and its vulnerability to fluctuations in foreign affairs, must be taken into account.
Good policy formulation does not suffice if the economic entity doing the planning does not have the strength to act on it. Moreover, the economic system is so dependent on foreign affairs that its actions can easily be nullified by any economic phenomenon that may occur in the economies of other countries.
In general, economics is so vulnerable to outside forces that most of the time the changes and fluctuations of internal prices are responses to the changes in import prices or to a decrease in the price of export goods. For this reason, the action of the government is quite limited to mitigating these effects. Furthermore, the influence of consumption patterns imported from abroad that are enjoyed by the higher income classes often means that certain economic policies do not have the effect originally planned by the administration. This is even the case when a fully defined economic policy operates within the boundaries of a free market system.
An analysis of the distribution of income and its correlation with food consumption reveals the complexities of the application of price policy. Both elements provide a background on which to base some interesting conclusions that can lead to future discussion.
In order to illustrate the effects of price policy on food supplies and nutritional status, I will deal with the experience of Chile until the overthrow of Salvador Allende, and with the Dominican Republic until Joaquin Balaguer left office. A comparative analy sis of both experiences is interesting because these are two qualitatively different countries. They differ in their economic structures, and in their Political and institutional processes as well. Some aspects related to price policy are also distinct in each country and in each historical period being considered. Furthermore-and this is most significant-despite the differences between these two countries, there is nonetheless great similarity in the distribution of income and its impact on nutritional status of the populations in both countries.
It is also important to note that in both experiences, inflation makes it harder to conceive a price policy that will stimulate agricultural production and permit greater food consumption.
It is appropriate to quote here a pertinent synthesis carried out by Raśl Prebish:
An intensive and even development of the economy requires a series of transformations in the form of production, in the social and economic structure, and in the income distribution unit. These transformations would allow the economy to grow at a faster rate than primary exports and to attenuate the internal impact of their fluctuations. They would also remove the internal obstacles that oppose development. If these transformations do not take place, or if they are carried out partially or insufficiently, then there are imbalances and tensions that arouse or favour the interplay of inflationary forces that lie latent within the Latin American economy. [1]
On the other hand, and although a long time has passed, the interpretation that the economist, Juan Noyola, gave of the inflationary process in Chile is still valid. This description could apply as well to the effects of inflation in the Dominican Republic. It is being held in check under very vulnerable conditions. In my opinion, it will not be possible in Chile to continue the policy of holding down both current salary levels and public programme spending that has thus far allowed a high rate of public investment. In addition to this phenomenon, there is a persisting export crisis, and if these conditions continue, the inflationary process will accelerate and fiscal deficit will not be far off. This situation is made still worse by the fact that there remain stringent policies that inhibit production of internal goods, especially food.
According to Noyola's analysis:
. . . during the last twenty-five years [until 1956 when the analysis was made] two basic inflationary pressures have been acting: one of internal origin, the other external. The first has its origin basically in the long-term stagnation of exports as compared to population growth and demand for imports. Such an event would be accompanied by very violent fluctuations in the volume of exports, of exchange rates, and consequently, in import capacity.
The external imbalance generated by this situation would not only manifest itself through demand, it would have a two-fold influence on internal costs. It would act through the chronic devaluation of the currency due to the deficit in budget payments, and through the conditions underlying the substitution of imports. Costs are particularly sensitive to devaluations, due to the importance of imported inputs to industries that produce for popular consumption.
The substitution of imports encounters difficulties that can be attributed to the simultaneous effect of three factors: the limitation of basic natural resources for industry and production of consumer goods; the limitations of the market for industry and for production of capital goods; and finally, the much lower productivity of industry compared to mining for export. These factors cause an increase in the average level of real costs.
The internal pressure would be derived from the inability of agricultural production to meet the increasing demand for food. This would be a consequence of the slow penetration of technological advances in this field, and of its semi feudal type of organization.
The basic pressures would then have a multiple origin. The first would be the relative sluggishness of exports and of long-term payment capacity, which has very strong short-term fluctuations. Another would be the inability of agricultural production to rise in response to demand. The latter would be characteristic of a high-cost industry that is strongly dependent on imported inputs. [2]
One should add to all this the notion of the so-called "propagation mechanisms," which complicate matters even further.
Noyola points out:
The mechanisms of propagation that are identified with fiscal income and expenses, with expansion of credits, and with price and income regulatory mechanisms, have been at work in the milieu generated by these conditions. Tributary income carries its fluctuations over to an administration's economy because of its dependence on external trade. Its taxation of internal activities shows a growing regressive behaviour. [ibid.]
The fiscal mechanisms between 1929 and 1953, according to Noyola, had a tendency toward a heavier taxation of export mining and toward transferring the tax burden from the higher income brackets to the salary-dependent lower brackets. As far as expenses are concerned, there was a tendency to compensate the negative effect of internal taxation through an increase in current expenses and transfers.
Unfortunately, it is not possible to analyze the current economic policy in Chile, which is characterized by complete self-dependence. Prices and the distribution of economic resources are free to balance themselves through the interaction of market forces. The salaried worker is at a disadvantage from the start because he is powerless to participate in the decision mechanisms that affect his economic status. This, in addition to a deliberate policy of massive unemployment and of wage controls, contributes further to the unequal distribution of wealth.
In order to understand the specific differences between Chile and the Dominican Republic, it is necessary to look at some socio-economic indicators in the two countries. The comparison is between an industrial, modern, urbanized society in Chile and the basically agricultural, just-beginning-to-modernize rural society of the Dominican Republic. In actual fact, while in Chile the manufacturing-industrial sector represents about 19.9 per cent of all production (3), including steel, the chemical industry, and the manufacturing and assembly of vehicles, in the Dominican Republic, the manufacturing sector, including the sugar industry, constitutes about 12.7 per cent of total production (4), which is predominantly concerned with production of food, beverages, and hand-crafted goods.
In 1960 the GNP in Chile was 6.7 times larger than in the Dominican Republic, and per person, it was 2.6 times higher (5).
The structures of employment and production are also quite different. While in Chile, about 24 per cent of the total labour force is associated with agricultural production, which, in turn, represents about 10.9 per cent of total production, in the Dominican Republic, 46.9 per cent of the labour force is involved in agriculture, which accounts for 28.8 per cent of total production.
The relationship between the numbers of agricultural labourers employed and the amount of arable land also illustrates two very dissimilar situations. In Chile, there is one worker for every 20 hectares; in the Dominican Republic, there is one worker for 7.4 hectares. The situation for the latter is worsened by the fact that there is no possibility of increasing the amount of land under production.
From the viewpoint of social indicators such as literacy, there are also some very relevant differences. According to studies carried out by CEPAL (6) in the 1960s, among the population older than 15 years, 20 per cent were illiterate in Chile, while in the Dominican Republic illiteracy was found in 57 per cent of this age group.
Despite their different structural configurations, which are the consequences of their different historical, social, and economic processes, the similarities between their income distribution and nutritional status are quite striking. Even though the Chilean society and its economy have followed the path of industrial transformation and modernization, and of political and social development, and even though Chile's absolute per capita income level is higher than in the Dominican Republic, it is noteworthy that widespread poverty remains in Chile. The unequal distribution of income and the inadequate nutritional status of at least 50 per cent of the population are similar in both countries.
It is surprising that nutritional status is not better in Chile, considering that per capita income is 2.6 times as high there as in the Dominican Republic.
In order to compare the distribution of income in Chile and in the Dominican Republic as clearly as possible, the different income brackets used in each case must be defined. In Chile, the concept of "vital salary" i.e., minimum wage level) is used to describe income distribution, and in the Dominican Republic, the term is "monthly available income."
The criteria are comparable because they represent the same buying power as a function of the relative price of goods in the two countries. They therefore respond to a stratification of society that reflects a degree of wealth or poverty that is similar in both cases. In Chile (7) in 1970, half of the lowest income groups spent 82 per cent of vital salary to acquire basic food items ( national average). Similarly, in that same year in the Dominican Republic (8), one-half of the lowest income group had to spend 82 per cent of monthly available income to purchase basic foods (Table 1). It is obvious from table 1 that income distribution is grossly unequal, considering that half or more of the populations in the two countries are in the lowest income groups (7, 8).
There is no doubt that in the Dominican Republic, one of the main causes of unequal income distribution is unjust land distribution, which is closely connected to the concentration of the other economic activities under control of a minority of the population. To this must be added the presence of large multi-national corporations involved in producing sugar cane and its by-products, and in banking and mining operations.
Although I do not have specific facts to support this assertion, the same economic conditions existed in the years 1969 to 1974. This is because in this period, despite a growth in production that reached an annual rate of 10.4 per cent, income distribution became regressive.
First of all, in this period, foreign investments increased noticeably in the production of iron, nickel, gold, and silver mining, and in oil refineries. In addition, the exchange rates were favourable. The price of sugar rose to $6.90 per 100 Ibs. in 1966, to $8.07 in 1970, to $10.29 in 1973, and to $53.30 in November, 1974. The price of coffee went from $30.05 per 100 Ibs. in 1966 to $65.18 in 1973, and to $66.87 in December,
1974. The price of cacao rose from $19.44 per 100 Ibs. in 1966, to $65.18 in 1973, and to $66.87 in December, 1974.
External resources were also available through long- and short-term loans for both the public and private sectors. From 1966 to 1973, the external Dominican Republic debt rose from $158 million dollars to $721 million, and was one of the main sources of financing. Internally, monetary and financial factors contributed an incentive to increasing production in the country. Commercial banks increased their credit operations from 177.6 million pesos in 1969 to 645.1 million in 1974, with 86.2 per cent of the total going to the private sector.
From the standpoint of investments, Law Number 299, for "Industrial Incentives," was very generous and promoted an assignment of 174 million pesos in favour of the manufacturing sector in the period 1969-1974.
Finally, thanks to a policy of holding down salaries, which allowed the public sector to maintain a low level of spending, and to the stimuli created to activate savings and investments, particularly through construction of houses, the Dominican Republic had available in this period savings of 1,979 million pesos (by 1962 prices). Of these, 75 per cent reflected the internal effort, and the rest, direct foreign loans and investments. Of this amount, 58.8 per cent was used for construction in a very concentrated manner in favour of a small number of contractors. Another 38.7 per cent was used for the installation of equipment, and 2.5 per cent was used for renewal of stocks.
Although this whole process led to obvious national economic growth, income distribution was regressive because most of the money was concentrated among those who owned the companies producing the goods. But this is not the only cause. Any gains from increased productivity benefited only the industrialists.
While in the period 1966-1973, productivity per worker increased from 3,302 to 4,607 pesos, or at a cumulative rate of 2.3 per cent, the overall effect on salaries was to lower them by 4.8 per cent. This means fewer salaried people participating in the economic gains (Table 2). However, if the relation between product and invested capital is examined, the cumulative rate is 11.5 per cent (4). The subsequent redistribution of income in the period 19701973, in the light of factors cited and the discussion that follows, did not help the lowest income groups (Table 3; 8).
During this period, the increase in consumption that was prompted by the rapid growth of the economy stimulated the agricultural sector, but in general, the response was weak. Between 1969 and 1974, agricultural production grew at a cumulative annual rate of 4.5 per cent, but this was very low when compared to the growth of the rest of the economic sectors. It seems that this rate of growth was enough to satisfy the higher demand occasioned by the increase in population growth and the urbanization process. However, even when, from 1973 on, food imports began to be significant, the agricultural sector failed to be flexible enough to increase food supplies to satisfy the needs of the country as a whole. Land ownership among the large holders means that they retain credit control, rights to commercialization, and political power, all of which are mitigating factors against the production of food. The largest tracts of land, and the land belonging to agricultural enterprises, are limited to the production of exportable goods rather than of food for the internal market.
In 1976, close to 10 per cent of all agricultural land was devoted to the cultivation of sugar cane, to the neglect of growing food crops and raising cattle-the latter was even a smaller proportion of the agricultural sector. This was because of a dramatic rise in the world price of sugar. Even though land reform was begun in 1972, structural rigidity has not been overcome, because changes in land ownership to foster agriculture had little significance in the global context of the agricultural sector (Table 4; 8).
With the structure of land ownership shown in table 4, in which 56 per cent of the producers do not have more than a hectare (2.47 acres), land reform could hardly be called significant. Until 1976, a total of 36,000 families benefited from this programme, representing 8.4 per cent of the rural population, but the average tract per family was only 4.9 hectares. This comprised 20.5 per cent of the farming population who occupy 9.3 per cent of the total amount of agricultural land. Some 92 per cent of the so called "land reform tracts" are owned by individuals who are heavily influenced by the Government, which administers what is grown. It is frequently noted, as a public act, that the president himself distributes the awarded tracts!
In terms of production, the "reformed" agricultural sector is restricted to growing only a few crops. For instance, it produces 92.7 per cent of all peanuts, which are usually cultivated on marginal land. It produces close to 60 per cent of the guandul and name crops, the first an important export product, the second a tuber that is commonly consumed in the country. Curiously, the reformed sector, in its concentration on producing peanuts and guandul, is closely related to an agricultural system belonging to very powerful enterprises in the country. These are almost monopolies, and therefore have great control over fixing prices.
The current structure of land ownership is directly responsible for the lack of agricultural development in the Dominican Republic. The problem of land reform has not been taken seriously, as has been pointed out time and time again. The agricultural economy of the country has been stagnating since 1973. Drought has contributed to the problem. Moreover, even though the volume of food imports has been rising at a cumulative annual rate of 7.5 per cent, the availability per person has decreased. This is because a large portion of the imports has been used to compensate for the reduction in the stock of staple foods, largely rice and corn.
According to studies being carried out to develop the Medium Term Plan for the agricultural sector, the amount of calories and proteins available per person per day has been reduced by an average of 11.8 per cent and 3.9 per cent, respectively. The cost of the basic food basket has increased by about 64.2 per cent.
The reason why the availability of protein in grams per person has decreased less drastically is that the production of chickens increased during this period. Chicken is produced at the industrial level and has received strong credit backing.
On the other hand, according to preliminary results of research carried out by the Central Bank in 1976, there was a real deterioration in the average monthly income per family in the city of Santo Domingo. This income would be, in real terms, lower by 33 per cent compared to the average income in 1969.1 n 1976, the nominal income was 387.32 pesos, which, in 1969 currency, would be equivalent to 198.76 pesos, while the average monthly income per family in Santo Domingo reached 297.57 pesos in 1969.
The result of this situation is reflected not only in a decrease in the real buying power of Dominican families, but also represents a loss of an already modest social wellbeing. The decrease in availability of food (already 64.2 per cent more expensive) came at a time when the composition of family expenses changed in compensation for the previous food consumption level. Effectively, according to the Central Bank, the proportion of income spent for food rose by 7 per cent against other items like housing and clothing.
In Chile, income distribution fell into about the same patterns, in that the appropriation of the economic surplus and the concentration of property in the hands of a few were comparable to the situation in the Dominican Republic. There is a large volume of literature on the subject, so there is no need to repeat it here. What is interesting is the redistribution of income experiment between 1970 and 1971 and its consequences in the consumption structure by socio~economic levels.
Redistribution of income in Chile was accompanied by profound transformations in the national economic structure, and by an extraordinary increase in the GNP. From 1970 until 1971, the GNP grew by 8.3 percent, which meant an increase of 6.4 per cent per person. On the other hand, in the previous year, the same indicators reached only 3.7 and 1.8 per cent, respectively. This redistribution of income was achieved mainly through salary adjustments, which reached an increase of 35 per cent, while in 1971 the Consumer Price Index decreased to 20.1 percent.
Another factor that had some influence on the new economic situation was an increase in availability of work, amounting to 225,000 new jobs. Adjustments in welfare and retirement plans and minimum salaries were greater than 35 per cent, and in some cases probably more than 50 per cent, or over twice the increase in the consumer price level. The general effect of this policy was a rise in the level of per capita consumption in the economy as a whole. While in 1970, consumption per family was 69.1 per cent of the total expense of the GNP, in 1971 it rose to 73.6 per cent. In terms of income, salary redistribution was responsible for allowing salaried people to participate in 63 per cent of the national income, a 10 per cent increase over that in previous years.
This phenomenon is seen in table 5, as a function of the stratification by income measured in minimum wages. Eighty per cent of all families received 41.3 per cent of the total national income (families with up to two and from two to four minimum wages), whereas the minority with the highest incomes decreased from 49.4 per cent to 43.0 per cent of the total available income (families with more than eight minimum salaries). The intermediate group also increased its participation in the economy from 14.7 per cent to 15.7 per cent.
If the effect of income is analyzed from the standpoint of the increase received by each income group, this phenomenon is clearly important, especially for the lowest income group for whom real income increased by 39.5 per cent. Greater employment opportunities favoured this group in particular. At all levels there was an increase in real available income, even for those with the greatest relative income, a factor that was probably most responsible for the growth of the economy.
One of the factors that is difficult to explain from a socio-economic standpoint is the response of the lower income group who, without access to any institutionalized credit, always had expenses that surpassed their incomes. There are two possible explanations. On one hand, it might be the existence of a capacity for permanent indebtedness through the support provided by the intermediary system for consumer goods. This system operates in the overall economy. Or, it might be that the difference between total expenses and family income is not wholly monetary, as the sampling may have included such expenses as housing, clothing, or consumption outside the home. In other words, for some families the need for cash would decrease more or less, depending on the individual family's situation.
Even so, the indebtedness margin of society represents a key category in response to which the elasticity of expense for food consumption prevails over that of income. It is probably more accurate to determine the capacity for indebtedness of a family, rather than its specific income level. In this respect, in both Chile and the Dominican Republic the indebtedness margin is significant and comparable (Table 6), especially for the lowest socio-economic group, where this margin is quite high.
These data reflect not only the fact that the lower the income level, the larger the indebtedness margin, but also indicate that family savings are non-existent except for the higher income groups. As long as the basic needs of the majority of the population are not met, it cannot contribute to the savings and investment process, unless it sacri~ fices a part of its income usually spent for necessities. This must be taken into account to understand the degree of the current sensitivity of income and expense to any variation in prices or income that affects either consumption or the indebtedness margin.
In Chile, progressive redistribution of income led to a 10.3 per cent increase in food consumption, and the indebtedness margin decreased in one year to less than half of its previous value (7).
According to preliminary data from a sampling of income and salary in the Dominican Republic in 1976 (9, p.17), given the regressive character of income and the rise in prices, the population could increase expenditures for food by only 7 per cent. This meant a decrement in other expenses, i.e., the percentage of income spent on housing, clothing, etc. Famiiies were spending more money on a lower quality food basket (9, P.82). This finding is confirmed by the fact that food availability per person decreased by 15.8 per cent between 1973 and 1976, and the cost of the food basket increased by 64.2 per cent in that period. The cost of living increased by 7 per cent. On the other hand, indebtedness capacity reached a limit in that any increase in expenditure for one item meant a decrease for others. The consequence was deterioration in family wellbeing.
Table 7 shows the per cent of income spent on food compared to expenditures for other items, by income group, in the Dominican Republic and Chile. The proportion of income spent on food in the Dominican Republic is the highest for all income groups. The fact that richer families spend a much larger proportion on food than their Chilean counterparts is noteworthy. It explains the difference in caloric consumption between the two countries.