INEQUALITY AND ECONOMIC GROWTH: EVIDENCE FROM ARGENTINA’S PROVINCES USING SPATIAL ECONOMETRICS DISSERTATION Presented in Partial Fulfillment of the Requirements for The Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Alejandro A. Cañadas, M.B.A. * * * * * The Ohio State University 2008 Dissertation Committee: Approved by Professor Claudio Gonzalez-Vega, Adviser Professor Mark Partridge ____________________________ Professor Joseph Kaboski Adviser Graduate Program in Agricultural, Environmental and Development Economics Copyright by Alejandro Cañadas 2008 iii ABSTRACT This dissertation analyzes whether or not the spatial distribution of inequality in the provinces of Argentina affects real per capita economic growth. The primary objective is to decouple the effect of inequality into within inequality, which is the own province i level of inequality, and the spillover of inequality from the closest provinces to province i. Furthermore, another important objective is to decouple the influence of inequality into long-run and short-run effect To accomplish this, I based the analysis on a framework used by Partridge (2005), which starts considering a very simple model, called a “parsimonious” model with a few key variables. Building on that simple model I started adding a set of important control variables in order to get a more fully specified model, called “base” model. The main idea of using this methodology is that the “parsimonious” models, with only a few variables (income distribution and a few other control variables), not only reduces multicollinearity but also it is a test for robustness in the relationship between inequality and growth (Perotti, 1996; Panizza, 2002; Partridge, 2005). In addition, following Partridge (2005), I considered that income distribution might have an entirely separate effect at the middle versus the tails of the distribution. Therefore, I decided to include the Gini that controls for the overall distribution, and the third Quantile share (Q3) that controls for middle-class consensus and the role of the ii median voter. The purpose of having two variables of income distribution is that when the Q3 is included in the model, the Gini controls for the overall distribution, especially at the tails, while Q3 controls for middle-class consensus and the role of the median voter. Additionally, a key difference from Partridge (2005) framework, apart from the decoupled effect of inequality into within inequality, which is the own province i level of inequality, and the spillover of inequality from the closest provinces to province i, is the explicit consideration of possible spatial autocorrelation in the models. To achieve this, I used two of the simplest spatial specifications: the spatial lag and spatial error models. In the dissertation I have found very robust evidence that the own province i inequality, and the inequality of the neighboring provinces of province i, affects negatively the economics growth of the provinces of Argentina in the period 1991-2002. Morerover, I have also found robust evidence that the third Quantile (Q3) affects negatively the economics growth, which is not consistent to the vibrancy of the middle class. The overall pattern of my results are not consistent with a long-run classical/incentive interpretation but to a political economy interpretation, in which the distortionary redistribution policies and social or political conflict are generated by the difference in inequality among provinces. iii Dedicated to my beloved family, my lovely wife, Cynthia, my son Santiago, and my daughter María Camila iv ACKNOWLEDGMENTS This dissertation is the end product of a five-year journey that began when I started working toward my Ph.D. at The Ohio State University. Many people have walked (and stumbled) with me throughout these years. First and foremost, I would like to thank my advisor Dr. Claudio Gonzalez-Vega. His encouragement and guidance have been invaluable to go through some turbulent moments of the Ph.D. program, particularly the first year. I also want to thank Don Claudio for giving me the opportunity to work as his assistant since 2003. I learned a great deal from him and I will always remember him as a smart thinker, generous person, and enthusiastic teacher. I also want to thank Dr. Mark Partridge and Dr. Joe Kaboski, who played a fundamental role in helping me develop this research. They were always ready to read my draft, give me precious advice, and offer suggestions that help me to be ready for the job market. Moreover, I am very grateful to Dr. Dave Kraybill and Dr. Ian Sheldon for teaching the best classes I have ever had and inspiring the topics for this dissertation. I am also very thankful to Stan Thompson, Fred Hitzhusen, Mario Miranda, and specially my advisor from the PFF Program (Preparing Future Faculty) Dr. Robert Ebert, from Baldwin Wallace College, for all his support. I am very grateful to Ricardo Martinez ([email protected] ) from the CEPAL office in Buenos Aires, who provided me with Argentina's provincial per v capita GDP and to Dr. Leonardo Gasparini from CEDLAS, Universidad Nacional de La Plata, Argentina ([email protected] ), who offered me useful comments in the manipulation of the survey from the EPH. Working as a staff member at AEDE, I have had the pleasure to work with Joan Weber and Susan Miller, who always have been very kind to me. During these years, I shared wonderful moments with fantastic people that I want to mention: Franz Gomez-Soto, Francisco Monge-Ariño, Erik Davidson, Mauricio Ramirez, Maria Jose Roa, Carlos Alpizar, Jose Pablo Barquero, Malena Svarch, Paula Cordero-Salas, Carolina Castilla, Emilio Hernandez, Scott Pearson, Carolina Prado, and Marcelo Villafani. I extend my love to my family, my dad, mom, Angeles and Marita, as well as my friends, Hernan Bourbotte, Diego Sica, Octavio Groppa, Mariano Massano, Juan Pablo Tiepolt, Jill Gerschutz, Ana Maria Gilmore, and William Hamant, and I thank them for believing in me and for supporting my dreams from a distance. Nothing would have been possible without my wife’s unconditional support, care and love. She gives me the strength and courage to do things I would have never imagined I could. I thank God for her and for our precious little son, Santiago, and our daughter, María Camila, and for all God’s strength through all these years. vi VITA March 13, 1972………Born – Jujuy, Argentina. 1995 – 1996…………..Economist, Arthur Andersen 1997…………………..B.S. (Licenciatura) Economics, Universidad Católica Argentina 1996 – 2000…………..Marketing Researcher, Telefónica de Argentina 2000 – 2003…………..Masters of Business Administration, University of Dayton, Ohio 2004– 2008…………...Graduate Research Associate, Rural Finance Program, Agricultural, Environmental and Development Economics, The Ohio State University vii FIELDS OF STUDY Major Field: Agricultural, Environmental and Development Economics Minor Fields: Development Economics viii TABLE OF CONTENTS Page Abstract....................................................................................................................... ii Dedication................................................................................................................... iv Acknowledgements...................................................................................................... v Vita............................................................................................................................. vii List of Tables ............................................................................................................xiii List of Figures........................................................................................................... xvi Chapters 1. Introduction...................................................................................................... 1 1.1 Motivation............................................................................................... 1 1.2 Growth, Distribution and Poverty........................................................... 3 1.3 Spatial Dependence and Convergence.................................................... 6 1.4 Research Questions and Objectives........................................................ 6 1.5 Research Strategy.................................................................................... 8 1.6 Hypotheses.............................................................................................. 9 1.7 Contents ................................................................................................ 11 1.8 Significance and Relation to the Present State of Knowledge.............. 11 1.9 The Influence of Inequality on Growth ................................................ 13 ix 2. Argentina........................................................................................................ 18 2.1 Argentina, a Beautiful Country............................................................. 18 2.2 Initial Conditions .................................................................................. 19 2.3 Argentina as a Puzzling Country .......................................................... 23 2.4 What Went Wrong, and When?............................................................ 26 2.5 Volatility of Growth.............................................................................. 27 2.6 The Argentinean Economy ..................................................................