Many of the measures on quantifying progress by countries towards reducing income inequality have focused on indices that measure trends in inequality over time (Gini coefficient for example) and compare countries without considering the differences between their socioeconomic structures.

However, these indices do not paint the complete picture about how countries are performing, especially when compared to one other in achieving Sustainable Development Goals and what policies and investments may be needed to support them. This research project will provide an alternative measurement of income inequality by taking into account the developing countries’ structural or predetermined conditions (mineral assets, type of institutions etc.) in assessing their progress towards reducing inequality and the impacts of climate change. 

The project focuses on the following objectives: 

1. Firstly, it will compare each country with its potential to reduce income inequalities by measuring the scope for improvement for each country at every year. This will allow a better understanding of the key factors that hinder a country’s effort and performance in reducing inequalities and of the policy and investments that are needed to tackle inequalities more efficiently.
2. Secondly, it will investigate how climate – temperature, precipitation and extreme weather events– influence the efficiency of countries in combining inputs to reduce inequality.
3. Thirdly, it will look at adaptation or intensification effects across regions, particularly in LDCs and SIDS and will identify the needed scale of investments.

Building on a panel database on 145 countries, including countries from Least Developed Countries (LDCs) and Small Island Developing States (SIDS) from 2000-2020, the project will use a stochastic frontier approach, an economic modelling technique, to estimate feasible frontiers for income inequality for each country and year.

You will find below the different research papers related to this project:

• Reducing Inequalities Despite Climate change? Rethinking Progress Towards Reducing Income Inequalities and the Impact of Climate Change in Developing Countries

South Africa’s Economic Reconstruction and Recovery Plan was launched in October 2020 by the Presidency in response to the economic impacts of the Covid-19 pandemic. Besides the Presidential Employment Stimulus program, it included emergency social protection measures, among which the introduction of a special Covid-19 Social Relief of Distress grant (SRD), providing ZAR350 per month for unemployed people not covered by any other form of support. The South African government now seeks to develop options for the future of SRD grant.

Find out more about the Extension in South Africa

The objective of this research project is to produce motivated recommendations on how the SRD should be designed going forward into the longer term, in order to maximize the impact of the grant on employment outcomes and to ensure it effectively reduces poverty, while maintaining its cost to an acceptable level:

1. To maximise the impact of the grant on employment, the project needs to understand how to design and label the grant to encourage its use for job search.
2. To ensure the grant effectively reduces poverty, the project must figure out the most cost-effective way to target and assess the eligibility of recipients. Moreover, poverty reductions can be scaled up by determining measures that could encourage take up among the most disadvantaged. 

Once these goals have been achieved, and in order to inform public decision-making, these findings must be communicated to a number of stakeholders in government and civil society.

This project is part of a wider research program conducted with several South African research centres and in close collaboration with the South African Presidency. Four other research projects analysing the externalities of the Covid-19 stimulus policy are currently being developed as part of the first pillar of the Extension's activities in South Africa.

This research project uses the model generated to conduct the 2014/2015 fiscal incidence assessment and introduces updated data for 2019-2021. It simulates five scenarios around eligibility criteria, targeting mechanisms, value, disbursement model and conditionalities and computes the potential impact on poverty and employment outcomes.

You will find below the research paper related to this project: 

• Proposal for the extension, redesign and repurposing of the SRD for the goal of poverty reduction

It is worth noting that another paper has been published on the implications of the SRD grant, funded by AFD outside the Research Facility on Inequalities: Systemic exclusion from a South African social assistance transfer (February 2024)

Research has already shown that some population groups have been harder hit by Covid-19 than others and that the pandemic exacerbated existing inequalities in many areas, including health, education, work, and gender.

In this context, inequality has become a central issue for governments willing to fight the effects of the pandemic and to better prepare for future shocks. In April 2020, the Togolese government set up a cash transfer program called "Novissi", with the financial contribution of AFD, to support any eligible Togolese citizen who lost his or her income due to the adoption of the response measures against Covid-19. 

Studies using updated data and capturing the potential effects of the Covid-19 pandemic on income inequality and poverty in Togo are relatively scarce. This research project aims to fill the gap in academic literature by analyzing the impacts of Covid-19 on inequality in Togo, and evaluating the effects of the Togolese social policy « Novissi » on mitigating the impact of Covid-19 on inequality.

Using rich microeconomic data from a survey conducted by Togo's Institut National de la Statistique et des Études Économiques et Démographiques (INSEED) aimed at analysing the impact of the Covid-19 pandemic, the research team will estimate an econometric model based on the model developed by Dang and Nguyen (2021).

Due to methodological limitations and data availability constraints, this project did not lead to a publication. Further information is available upon request.

Despite several efforts to promote pro-poor growth, South Africa remains one of the most unequal countries in the world. While the country's colonial history and apartheid are known to have contributed to this inequality level, the nature and dynamics of its impact on society are yet to be fully understood.

Literature suggests that better institutions and lower level of inequality improve subjective wellbeing. However, evidence that examine how the interaction between these two variables explain variation in wellbeing is relatively scarce. This study will thus contribute to a deeper understanding of inequalities in South Africa. 

This research project has two main objectives:

1. Explore how variations in governance (such as audit outcomes) across South Africa's district municipalities explain the variation in the well-being of individuals.
2. Investigate how the interaction between the variation in governance across local government municipalities and inequality among individuals explains variation in subjective well-being.

To investigate the interactions between the quality of institutions and of the governance, the level of spatial inequality and the subjective wellbeing, researchers will use the National Income Dynamics Study (NIDS), a nationally representative survey of individuals across South Africa, which is repeated over five waves between 2008 and 2017. They will also use audit outcomes of local municipalities to proxy for the quality of governance.

You will find below the research paper related to this project:

• Spatial Inequality, Sub-regional governance and Subjective Well-being - The case of South Africa

This project is a follow-up of the research project developed by CEEY and El Colegio de México in the first phase of the EU-AFD Research Facility on Inequalities. The results showed the need for structural changes to break the bottlenecks of social mobility and reduce inequality in Mexico. 

Based on the above, the new phase of the project focuses on the knowledge base that will inform the setting up of care systems in the states of Guanajuato and Nuevo Leon and in the municipality of San Pedro Garza Garcia. 

Guaranteeing the right to care in the Constitution is essential to advance on the basis of social consensus. In order to define the articulation mechanisms in a law, it is necessary to understand the care systems at different levels as transversal and multipurpose policies that are worth discussing collectively, as they imply much more than the already great challenge of expanding the existing infrastructure of services and social spending. The Care Economy also implies creating fiscal strategies to redistribute paid and unpaid work, adapted policies for those who require care and for caregivers, social co-responsibility and co-responsibility of the private sector.

Therefore, it requires more and better statistical information, strengthening surveys and data systems, as well as developing studies to make visible the interdependence of care with multiple agendas, identifying care needs and their characteristics, available supply and unmet demand, allowing for strategic planning and follow-up from the short to the long term, starting with priority groups that include children, people with disabilities, the sick and elderly, and their caregivers.

Find out more about the Extension in Mexico

Given the above context, the objective of this project is the construction of two products that address two identified needs:

1. a design proposal for a state and municipal-level care system: it is necessary to develop a care system designs that address the structural inequalities for which their creation is sought. In this sense, it is necessary to establish a complete, functional and sustainable design.
2. a proposal for the collection and systematization of primary information for the design and/or monitoring of the care system: a second need arises from the above in terms of systematization of primary and administrative information that feeds, as far as possible, the original design of the care systems, as well as their monitoring over time. 

You will find below the research papers related to this project:

• Social mobility, care policies and social protection (August 2024)
• Social mobility, care policies and social protection policies in Nuevo León (September 2024)

This research project proposes to estimate the distributive effect of gasoline taxes using a fiscal incidence considering these effects in the context of Mexico´s fiscal system, including the principal tax and spending instruments. 

In 2014, Mexico’s Finance Ministry (SHCP) introduced a special tax (IEPS) on carbon as a green tax aimed at reducing the green gas emission associated with fossil fuels, mainly gasoline and diesel. However, the tax revenue (4699 million pesos in 2014) and the environmental impact of this tax are marginal: in the past decade, until 2014, this tax had a negative value, thus working as a subsidy. Since that year, it became a tax, which has grown significantly in recent years, representing close to 300 billion pesos in 2019 and 2020. This is therefore in effect by far the most important green tax implemented in Mexico today. 

This analysis is of particular interest for Mexico at present because the transition from fuel subsidies to fuel taxes represents in effect the principal tax reform implemented in Mexico over the last decade in terms of both tax revenue (from -300 to +300 billion pesos in tax revenue) and distribution. Gasoline taxes have significant impacts on all the population, both directly on middle- and higher-income households through private transport, but especially indirectly for lower income households through public transport and transport costs for all goods and services, notably food. Preliminary analysis at the Fiscal Policy Equity Lab (FPEL) reveals that the increase in the indirect tax burden for the poor associated to gasoline taxes may reverse the effect poverty-reduction effect of direct transfers, even after their recent expansion. 

Quantifying these impacts precisely will allow the design of compensatory instruments to protect the poorest and most vulnerable groups from the regressive effects of these taxes. 

Find out more about the Extension in Mexico

This project is a joint undertaking between RIBOS, CEQ Institute and LNPP. It seeks to estimate the effect of green taxes in the context of the overall Mexican tax system through the international methodology developed by the Commitment to Equity Institute (CEQI), using INEGI data from the Encuesta de Ingresos y Gastos de los Hogares (ENIGH) for 2014-2020, among other data sources. 

This methodology will allow an estimation the effect of green taxes in the context of the overall fiscal system. This methodology facilitates comparability in time and space, and generates a wide variety of incidence indicators, including effects on the income Gini coefficient as well as income poverty using national and international poverty lines. 

This project ultimately aims to provide Mexican policy makers and stakeholders with timely analyses of the effects of tax policies on inequality and poverty. The research conducted will therefore result in: 

• a research paper,
• a policy brief whose analysis is based on the collaborative intelligence technique. Two sessions in which the model calibration and hypotheses will be discussed following the collaborative modeling framework. Participants in the sessions will be members of the expert network and key tax policy makers.

You will find below the research paper related to this project:

• Distributive impact of green taxes in Mexico (July 2024)

The policy brief related to this project will be published here soon.

Prior to the pandemic caused by COVID - 19, Colombia had shown positive results with respect to the reduction of poverty and inequality. For example, total poverty was reduced by 6.1 percentage points between 2012 and 2018 from 40.8% to 34.7% as was extreme poverty, which went from 11.7% to 8.2%, according to official statistics. Likewise, although Colombia is among the most unequal countries in the region, it reduced its Gini index by about 0.03 units from 0.539 in 2012 to 0.508 in 2017, according to data from the National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadísticas, 2021). 

However, with the public health contingency, many people lost their jobs or had their incomes reduced due to pandemic containment measures that affected both aggregate supply and aggregate demand. Naturally, according to official statistics, poverty levels increased significantly and inequality rebounded to the levels of five years ago. In fact, by 2020, the country was, according to the latest ECLAC Social Panorama, the most unequal in Latin America (Economic Commission for Latin America and the Caribbean, 2021).

In this sense, the country's tax structure plays a fundamental role to the extent that direct, indirect and in-kind transfers are transformed into support for the most vulnerable households so that they can meet their basic needs and balance these inequalities to some extent. In addition, taking into account that progressivity is one of the principles of the tax system, those with higher incomes should pay higher taxes to finance social spending. In this sense, the tax reform that began to take effect in 2018 and now the Fiscal Reform adopted at the end of 2022 made some major modifications to the corresponding statute with the objective of increasing revenues.

Find out more about the Extension in Colombia

The methodology developed by the Commitment to Equity institute (CEQ) has been used to carry out this study. The CEQ methodology allows to do a fiscal incidence analysis, that is, to analyze the redistributive impact of public policy instruments, on the tax side, as well as on the social spending side, on poverty and inequalities. In this sense, based on household surveys, it is possible to assess the redistributive capacity of taxes and transfers (whether direct or indirect) to guide public policy in this area.

The aim of the study was to identify which policies, either from the tax side or from the expense side, allow a greater impact (negative or positive) on inequalities. This then gives us, and the government, a clearer picture of the effects of the fiscal structure.

In addition, the project sought to build a tool that parameterizes the tax structure and social spending and allows making microsimulations that are useful for policy discussions. In this sense, this project sought to accompany the teams of the Ministry of Economy, providing them with a tool that allows them to carry out the necessary simulations to evaluate the impacts of different policies. The recently adopted tax reform was also analyzed through the lens of this tool.

You will find below the research paper related to this project:

• Fiscal incidence and public spending: Public policy scenarios for Colombia (also available in Spanish)

In Colombia, and in other countries, the objective of the Extension of the EU-AFD Research Facility on Inequalities is to provide analysis, methodologies, and statistics that allow understanding the state of inequalities in the country, the dynamics and interrelationships with the different areas, sectors, and regions of the economy. The objective is to provide robust and updated data, to provide evidence for the construction of public policies, but also to identify areas where data collection can be improved, and those where research can be deepened to better understand the context and support the construction of public policies aimed at reducing inequalities...

In Colombia, DANE has made great progress in recent years in the collection and availability of data in order to analyze and better understand the reality of the country. Several studies have been carried out with some of these data, but, for several years, there has been no comprehensive analysis of inequalities at the national level using several databases to get a complete picture of the country's situation. Since mid-2021, AFD has been working hand-in-hand with DANE and Fedesarrollo to carry out a multidimensional diagnostic on inequalities, based on an innovative reference methodology created by AFD. It provides a comprehensive view of the country's situation as it covers a wide range of aspects (health, education, incomes, etc.) all under the prism of inequalities and using different indicators and databases.

This project is framed in a context in which inequalities acquire crucial relevance in the public policy of the current government and in the agreements adopted by it within the framework of the 2030 agenda, as well as in its entry into the OECD.

The project aimed to support and strengthen the production of national statistics on inequalities, promoting exchanges and interoperability between DANE and other national and international institutions. More specifically, the main objectives were:

1. To implement the methodology of the multidimensional diagnostic on inequalities, and therefore create the first national diagnostic on inequalities in Colombia. For this, AFD worked hand in hand with Fedesarrollo and in close collaboration with DANE.
2. To accompany DANE's technical teams in the production, updating and improvement of statistics on inequalities based on the inequality diagnostic methodology. These data will be used to monitor over time the evolution of the indicators considered relevant, and, depending on the outcome of the data collected, to advance in analyses that integrate elements related to climate change and the environment.
3. To support DANE’s technical teams in implementing new methodologies and initiatives to obtain statistics that allow a better understanding of the distribution of income of individuals and households in the country. Workshops and seminars served to share experiences and establish practices that allow high-quality data for decision-making.

The research project led to the publication of the multidimensional diagnostic on inequalities in Colombia. It takes into account multiple dimensions of inequality: income distribution, consumption, labour income, household assets and services, level of wealth in land and financial assets, access to and quality of education and health, access to basic services... This document is key to understanding the gaps that exist in Colombia, and allows for evidence-based decision-making and progress towards reducing inequalities.
 

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