Redistributing Income to the Poor and the Rich: Public Transfers in Latin America and the Caribbean

This study measures the extent to which publicly-subsidized transfers in Latin America and the Caribbean (LAC) redistribute income. The redistributive power of 56 transfers in eight countries is measured by their coverage, size, absolute incidence, simulated impacts on poverty and inequality, and by their distributional characteristic, a statistic derived from taxation literature. Our findings suggest that public transfers can be effective instruments to redistribute income to the poor. Yet frequently they have not managed to do so. Indeed, Robin Hood works in both directions in LAC, with public transfers redistributing income to both the rich and the poor. The redistributive impacts from social insurance are limited - and even regressive in some countries. This regressivity derives from two main design factors: a truncation in coverage due to requirements of membership in formal labor markets which exclude the majority of the poor, and highly generous unit benefits for those in the upper quintiles. Moreover, this regressivity applies to net social insurance transfers, which are subsidized by government budgets at the expense of all taxpayers. The more recent emergence of social assistance only partially offsets this historical truncation of public transfers in LAC. Despite coverage and distributional patterns that favor the poor, small unit subsidies limit the redistributive, poverty and inequality impacts of even the most targeted social assistance programs. The authors also find considerable variation among social assistance programs, with many food-based programs and scholarships being regressive.