Download Gini coefficient (simple averages)

International Conference on Financial Instability
and Inequality in an Economically Integrated World
Tsingua Sanya International Mathematics Forum
(TSIMF)
Thoughts on finance, commodities and inequality
Esteban Pérez Caldentey
[email protected]
In the past decades the evolution of developed and developing
economies is charactetized by three stilized facts
• Rising inequality trends in terms of the indome distribution and functional distribution of
income
 The current levels of income inequality are the highest in over three decades and the
most significant increase occurred during the ´Great Moderation.´
OECD :GINI coefficient and ratio of the income of the highest to the lowest decile,1985-2013
10.5
0.33
10
0.32
9.5
9
0.31
8.5
8
0.3
7.5
7
0.29
6.5
6
0.28
1985
1990
1995
2000
2005
2007
2008
Income of the highest to the lowest decile (left axis)
Source : OECD (2014)
2010
2011
GINI (Left Axis)
2012
Inequality in most of the developing regions has also increased
Gini coefficient (simple averages) 1990-2010
Source: Alvaredo y Gasparini (2014). Handbook of Income Distribution 2
During the same period the wage share has declined for most developed
economies
EU14
Others Europe
North America
Asia
Germany
Austria
Belgium
Denmark
Spain
Finland
Franve
Ireland
Italy
Luxemburg
Netherlands
Portugal
United Kingdom
Sweden
Island
Norway
Switzerland
Canada
United States
Australia
South Korea1
Japan
New Zealand
México
Average
1980-89
…
61.2
63.0
58.9
62.3
62.5
62.5
62.7
61.1
54.3
65.7
60.8
60.3
51.6
…
53.9
…
58.4
61.0
61.0
…
70.1
…
Developing
…
countries
Source: AMECO. Notes: 1/ 2012 last year available
Wage share as percentage of GDP
Average
Avreage
Average
1990-99
2000-07
2008-09
59.1
56.8
55.7
58.8
54.6
54.5
61.5
60.5
59.7
56.1
58.0
54.9
60.5
58.3
56.8
58.2
55.3
52.9
57.0
56.5
55.8
55.3
54.0
46.7
55.3
53.5
51.7
50.6
54.1
51.8
62.3
58.5
58.5
59.2
57.1
58.9
58.3
60.3
59.5
49.1
49.2
48.1
…
57.8
64.1
51.4
46.9
46.1
66.1
64.2
65.2
58.3
56.0
55.3
60.4
58.5
59.8
58.3
53.5
55.5
69.7
65.1
62.9
65.8
59.8
61.3
46.6
49.0
45.5
40.7
39.1
41.0
Average
2010-15
56.4
55.4
60.5
56.7
55.6
56.5
57.5
49.7
53.5
53.1
59.7
54.2
59.2
49.8
58.6
47.8
65.5
55.8
56.8
53.3
59.9
59.4
46.1
36.9
At the same time the financial sector has experienced significant
growth
• This is reflected by the growth of the financial sector relative to GDP on a national
accounting basis which allows a comparative basis for different countries
• The growth in the financial sector is observed for both developed and developing
and emerging market economies.
Rate of growth of the financial sector and GDP for selected regions/countries of the world
1980-2005
9.5
10
9
8.0
8
7
6.8
6
5
3.6
4
2.9
3
2.7
2
1
0
United States
Source: On the basis of Beck (2012)
OECD
Financial Sector
Developing countries
GDP
At the global level the expansion of finance can be illustrated
by the change in the stock of financial assets
Financialization. World GDP, stock of global financial assets, derivatives, 1980-2014
800
711
692
700
648
598
586
600
604
636
601
500
418
400
299
300
242
211
222
243
261
272
262
285
294
178
200
108
95
100
51
11 12 1
23
13
47
33
51
57
63
60
65
73
74
76
78
0
1980
1990
2000
2005
2006
Worlrd GDP (US$ Billion)
Source: On the basis of Deutsche Bank (2014)
2007
2008
2009
2010
Stock of global financial assets (US$ billion))
2011
Derivatives
2012
2013
2014
Studies analyzing the relationship between these three stylized facts
tend to focus on the causality from income inequality to finance
Income inequality
(Personal income)
Inequality
(functional
distribution of
income)
Finance
• Four transmission mechanisms
 Downward pressure on aggregate demand (demand is wage-led)
 Financial deregulation losens the external constraint opening the way to
debt-led growth
 Higher inequality contributes to household debt
 Rising inequality increases the propensity to speculate
Source: Goda, et al. (2014), Rajan (2010), Stockhammer (2013), Perugi et al. (2016).
But it is also important to consider how finance can also ´cause´inequality
• The chain of causality from finance to inequality is relevant to both developed
and developing economies.
• In the case of developing economies this relationship is a central obstacle to
development.
• Three transmission mechanisms can be distinguished
 Impact of financial crisis
 Crisis tend to have permanent effects on the economy and the distribution of
income.
 Labor market (wage disparity)
 In both developed and developing economies financial sector employees
are concentrated at the top of the income distribution and their earnings
exceed those of other employees with simila rprofiles (age, gender or
education) (OECD, 2015).
 Induces the financial sector to act as a rent seeker.
 The production structure
Selected empirical analyses on the relationship between finance and income distribution
Authors
Sample
Findings
Beck et al. (2007); Clarke et Developed, emerging
al. (2006)
developing economies
Jauch and Watzka (2012); 49 advanced and
Gimet and Lagoarde-Segot income countries
(2011)
Fournier and Koske (2012)
and Faster levels of financial
development are accompanied
by faster reductions in income
inequality and poverty
middle Faster levels of financial
development are
not
accompanied
by
faster
reductions
in
income
inequality and poverty
Micro data set of OECD
countries
Bahmani-Oskooee and Zhang
(2015)
OECD (2015)
Greater share of financial
activities in GDP translate into
greater earnings dispersion
The positive impact of finance
on the distribution of income
is transitory
OECD countries 1974-2011
Higher levels of credit
intermediation and stock
markets are related with a
more unequal distribution of
income
Since the 1980´s LAC´s rate of growth has remained stuck at 2%
.
Rate of GDP per capita growth for Latin America and the Caribbean and East Asia and
the Pacific (1962-2014) (In percentages)
7
5.9
6
5.4
4.9
5
4
4.3
1
East Asia and the Pacific
3.4
3.7
3
2
6.1
2.5
3.0
2.1
2.0
2.0
Latin America and the Caribbean
0
1962-69 1962-79 1962-89 1962-99 1962-09 1962-14
Asia del Este y Pacífico
América Latina y el Caribe
Since the 1980´s LAC´s rate of growth has remained stuck at 2%
.
Rate of GDP per capita growth for Latin America and the Caribbean and East Asia and
the Pacific (1962-2014) (In percentages)
7
5.9
6
5.4
4.9
5
4
4.3
1
East Asia and the Pacific
3.4
3.7
3
2
6.1
2.5
3.0
2.1
2.0
2.0
Latin America and the Caribbean
0
1962-69 1962-79 1962-89 1962-99 1962-09 1962-14
Asia del Este y Pacífico
América Latina y el Caribe
Some crises have permanent effects on output and the distribution of
income
.1
Distribution of the rate of growth of real GDP for Latin America and the Caribbean
before and after the Debt Crisis (1980-1983)
.08
Two-sample Kolmogorov-Smirnov test for
equality of distribution functions
0
.02
.04
crec
.06
Smaller group
1
2
Combined K-S
Source: On the basis of World Bank development Indicators (2015)
D
0.0
-0.87
0.87
P-value
1.0
0.0
0.0
Inequality in Latin America has declined since 2002
Gini coefficient for Latin America (18 countries), 1980-2002
Source: Cornia y Martonano (2012); Amarante (2014)
Given the structure of financial markets increases in the rate of
pro-cyclical policies that follow crises tend to increase inequality
Interest Rate
Notional credit demand
Actual credit demand
C
D
A
Commercial
bank interest
rate
Central bank
bank interest
rate
Illiquidity
B
and risk
Loans
Source: Wolfson (1996)
United States
Wages in the financial sector relative to
non-farm prIvate sector, 1929-2006
Securities, commodities, venture
capital, private equity, hedge
funds, investment banks
OECD
Share of financial sector employees
among the top 10%, 1% and 0.1% earners,
2010
Source: Philippon and Reshef, 2010; OECD (2015)
The financial sector is an important extractor of rents
• Mainstream macro-financial models include explicitly or implicitly a financial
intermediation equation
• Intermediation costs are supposed to reflect the compensation financial
intermediaries receive for pooling funds, share risks, transfer resources, produce
information and provide incentives.
• Selected evidence for the US shows that the intermediation cost has increased.
 The increase does not reflect better risk sharing or production information
 Improvements in information technology should have reduced the intermediation
costs.
 Why is the non-financial sector transfering increasing income to the financial
sector? (Philippon, 2012).
• Other wide ranging studies for Europe show that the increase in the profits
accounts for the bulk of the rise in the value added in the financial sector.
 Between 1970 and 2010, the profit share of the income generated by the financial
sector increased from 42% to 47%.
The financial sector is an important extractor of rents
• Mainstream macro-financial models include explicitly or implicitly a financial
intermediation equation
• Intermediation costs are supposed to reflect the compensation financial
intermediaries receive for pooling funds, share risks, transfer resources, produce
information and provide incentives.
• Selected evidence for the US shows that the intermediation cost has increased.
 The increase does not reflect better risk sharing or production information
 Improvements in information technology should have reduced the intermediation
costs.
 Why is the non-financial sector transfering increasing income to the financial
sector? (Philippon, 2012).
• Other wide ranging studies for Europe show that the increase in the profits
accounts for the bulk of the rise in the value added in the financial sector.
 Between 1970 and 2010, the profit share of the income generated by the financial
sector increased from 42% to 47%.
The financial sector is an important extractor of rents
• Mainstream macro-financial models include explicitly or implicitly a financial
intermediation equation
• Intermediation costs are supposed to reflect the compensation financial
intermediaries receive for pooling funds, share risks, transfer resources, produce
information and provide incentives.
•
”How is it possible for today´s financial
industry
significantly
efficient
Selected
evidencenot
for theto
USbe
shows
that the intermediationmore
cost has increased.
 The increase does not reflect better risk sharing or production information
than
the
finance
industry
of
John
Pierpont
 Improvements in information technology should have reduced the intermediation
costs.
Morgan
a century ago?”
 Why is the non-financial sector transfering increasing income to the financial
sector? (Philippon, 2012).
• Other wide ranging studies for Europe show that the increase in the profits
accounts for the bulk of the rise in the value added in the financial sector.
 Between 1970 and 2010, the profit share of the income generated by the financial
sector increased from 42% to 47%.
Finance can also ´cause´inequality through its impact on the
production structure
Finance
Inequality
(functional
distribution of
income )
Inequality (personal
distribution of
income)
• The chain of causality is the reverse the ´income inequality to finance
approach.´
• The finance to inequality view can be illustrated with the case of
commodities.
 Provides a sense of the complexity of the interrelationship between real and
monetary factors.
 Shows how financial factors can dominate real factors.
 Shows how finance can reproduce both social and productive structures.
Commodities have taken on an increasing role as financial assets in
the sense that prices respond to changes in expectations about future
demand conditions
• Some of the manifestations of the growing role of commodities as financial assets
include:
 The growth in activity in commodity future markets including commodity
derivatives.
 Commodity futures trading as well as the derivative industry expanded
significantly around the time of the burst of the bubble dot com and the ensuing
stock market crash in the early 2000s.
 Highly liquid-low interest environment that prevailed before the Global Financial
Crisis combined with the high rate of return of commodity futures relative to
equities provided an incentive to invest in commodities.
o Between January 31, 2004 and June, 2008, commodity futures’ rate of return
(19.5%) more than doubled that of equity (6.0%) (Bhardwaj, 2010).
 Low rate interest environment after the Global Financial Crisis,
 The strengthening of the co-movement among different commodity prices and between
commodities and stock markets.
 The use of commodities as collaterals for loans and credit.
Percentage of statistically significant correlations between returns
and volatilities of commodity prices indices and stock markets
75
80
66.7
70
55.6
60
50
40
30
20
37.8
28.9
20
10
0
1991-2000
2001-2007
Returns
Source: On the basis of Bloomberg (2015)
Volatilities
2010-2014
Another recent illustration of the consideration of commodities
as a financial asset is the use of commodities as collaterals in
financing deals to raise and invest in liquidity
Scatter plot between rate of return on copper and inventories
(July 1997-September 2014)
Source: On the basis of bloomberg (2015)
Another recent illustration of the consideration of commodities
as a financial asset is the use of commodities as collaterals in
financing deals to raise and invest in liquidity
Scatter plot between rate of return crude oil and inventories
(January 1990 and September 2014)
Source: On the basis of bloomberg (2015)
United States Senate Permanent Subcommittee on Investigations
state in its report on Wall Street Bank involvement with Physical
Commodities (November, 2014, p.3):
• “Until recently, Morgan Stanley controlled over 55 million barrels of oil
storage capacity, 100 oil tankers, and 6,000 miles of pipeline. JPMorgan
built a copper inventory that peaked at $2.7 billion, and, at one point,
included at least 213,000 metric tons of copper, comprising nearly 60%
of the available physical copper on the world’s premier copper trading
exchange, the LME. In 2012, Goldman owned 1.5 million metric tons
of aluminum worth $3 billion, about 25% of the entire U.S. annual
consumption. Goldman also owned warehouses which, in 2014,
controlled 85% of the LME aluminum storage business in the United
States.
Those large holdings illustrate the significant increase in
participation and power of the financial holding companies active in
physical commodity markets.”
The commodity spot-future price disconnect
Bloomberg commodity spot and (3 month) future index 1991-2016 (Daily)
600
Index 1991-100
500
400
300
BCOM SPOT
BCOM 3MF
200
100
Pre-Global Financial Crisis
Post-Global Financial Crisis
Source: On the basis of bloomberg (2015); Choski (1984).
1/2/2016
1/2/2015
1/2/2014
1/2/2013
1/2/2012
1/2/2011
1/2/2010
1/2/2009
1/2/2008
1/2/2007
1/2/2006
1/2/2005
1/2/2004
1/2/2003
1/2/2002
1/2/2001
1/2/2000
1/2/1999
1/2/1998
1/2/1997
1/2/1996
1/2/1995
1/2/1994
1/2/1993
1/2/1992
1/2/1991
0
The commodity spot-future price disconnect
Bloomberg commodity spot and (3 month) future index 1991-2016 (Daily)
600
Index 1991-100
500
400
300
BCOM SPOT
BCOM 3MF
200
100
Pre-Global Financial Crisis
Post-Global Financial Crisis
Source: On the basis of bloomberg (2015); Choski (1984).
1/2/2016
1/2/2015
1/2/2014
1/2/2013
1/2/2012
1/2/2011
1/2/2010
1/2/2009
1/2/2008
1/2/2007
1/2/2006
1/2/2005
1/2/2004
1/2/2003
1/2/2002
1/2/2001
1/2/2000
1/2/1999
1/2/1998
1/2/1997
1/2/1996
1/2/1995
1/2/1994
1/2/1993
1/2/1992
1/2/1991
0
3.5
Chile: profit share and natural resource rents as % of GDP in logarithms
(1985-2011)
4.05
3
4
2.5
3.95
2
1.5
1
3.9
3.85
Pinochet Aylwin
Lagos
Frei
0.5
Bachelet
3.75
3.7
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
3.8
log natural resource (left axis)
log profit share (right axis)
Commodity boom
6.5
4.05
6
4
5.5
3.95
5
4.5
3.9
4
3.85
3.5
3
3.8
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Chile: profit share as % of GDP and
copper prices
in logarithms (1985-2011)
log B.M.L. refined copper price nominal
log profit share (right axis)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Salarios/PIB
Colombia
60
Chile
60
55
50
45
40
35
30
25
20
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
60
55
50
45
40
35
30
25
20
Salarios/PIB
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
60
55
50
45
40
35
30
25
20
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Salarios/PIB
Salarios/PIB
The share of wages has also declined in other natural resources
based economies
Bolivia
55
50
45
40
35
30
25
20
Perú
From the functional distribution of income to personal income
inequality
Investment financed by retained
earnings
Capital income
Wage income
From the functional distribution of income to personal income
inequality
Finance
Productive structure
Investment financed by retained
earnings
Capital income
Personal income
distribution
Wage income
Reproduces de
social structure
From the functional distribution of income to personal income
inequality
Finance
Productive structure
Investment financed by retained
earnings
Capital income
Personal income
distribution
Wage income
Reproduces de
social structure