Resource booms and income distribution

Via Vox Eu comes a piece looking at the distributional consequences of resource booms – using Australian data.  Their conclusion:

We need good time series data from developing countries to see whether the distributional impact is bigger there than what we find for Australia. Until then, the analysis here seems timely and relevant, not just for Australia, but for all resource-rich developing countries as the price volatility experienced by the former since the late 19th century was greater than that for the average commodity-exporting low-income country.

The distributional impact of commodity-price shocks in Australia (Canada and New Zealand) should yield important lessons for primary producers from the developmental south.

True – the idea that taxation should be more progressive the more dispersed income and wealth is is an old and widely accepted idea.  And this gives us another way to conceptualise it, with a relevant shock for the NZ and Australian context.  However, a couple of things to keep in mind when thinking about these issues are:

1. What to do?  The commodity boom is increasing aggregate income – we need a view on inequality, and how it relates to underlying factors, to know what appropriate policy would be.
2. How does it compare to what we are doing?  It is also about counterfactual distributions – in NZ we have seen inequality stay unchanged, even as we have experienced a similar change in the population distribution to other countries which have seen inequality rise.  As a result current policy settings (including the introduction of working for families) are already leaning against this.
3. Redistribution is not free:  We need to remember there is an equity-efficiency trade-off such as the one we discussed when talking about tax.  By creating a wedge between social and private value in individual product markets, in order to deal with issues of how people value inequality, we are trading off between two types of value – lets try not to ignore either!
4. Let us be clear about what we value:  There may be reasons we care about inequality.  But remember it is not poverty, and this measure of inequality is measuring quite a specific change (return to those who are strongly associated with markets selling commodities).  So thinking about what this inequality means, and some of the frameworks we may use to justify concern about it, matters!