Editors' Summary

This volume of Economía has five empirical papers, which address five crucial policy issues in the region and present five very surprising results. The first two papers deal with microeconometric questions, the following two study the banking sector, and the last concentrates on the aggregate impact of oil—a macroeconomic issue.

The first paper, by Carlos Medina and Leonardo Morales, studies the effect of public utility services subsidies on Colombian households. In Colombia, as in many developing economies, public utilities (that is, electricity, piped gas, piped water, and sewerage) are subsidized for the poorest households as a way of transferring income to them. Targeting methods vary, however. Some programs define the treatment group according to household characteristics, while others focus on where the families reside (for example, by region or type of house).

Medina and Morales concentrate their analysis on a public sector subsidy in Bogotá that targets beneficiaries based on household characteristics. The authors ask the very relevant question of who benefits from the subsidy in the context of a well-functioning housing market. In other words, they examine whether the subsidies are offset by distortions in the housing market, in terms of both sale prices and rental rates. If the subsidy is fully accounted for in the price of the home, the subsidy is less effective.

Medina and Morales find, using a regression discontinuity approach, that the prices of subsidized homes increase by roughly the same amount as the net present value of the typical subsidy, after controlling for the residence properties. Questions remain about the discount rate and the distortion in public utility consumption caused by the subsidy. Even so, the fact that the price captures a sizable proportion of the subsidy should drive policymakers to seriously question the targeting system.

In the second paper, Gary Fields, Robert Duval Hernández, Samuel Freije, and Maria Laura Sánchez Puerta summarize the literature on mobility studies in Latin America. Most policies and programs in the region are evaluated on the basis of their impact on poverty and income distribution. For instance, when assessing the cost of a financial crisis, most academics and practitioners point to the deterioration of the income distribution and the increase in the incidence of poverty as the main indicators. Fields, Duval, Freije, and Sánchez Puerta convincingly argue that this is not enough. Changes in the shape of the income distribution are important, but how individuals move within that distribution might play an even bigger role. Simply put, if moving down in the income distribution causes a higher utility loss than moving up, then shocks that redistribute income while keeping the distribution invariant are welfare reducing.

Fields, Duval, Freije, and Sánchez Puerta find, first, that Latin American income distributions are changing significantly. In fact, mobility is much greater than the conventional wisdom suggests. Second, the lowest earners have gained at least as much as middle and high earners. This implies that there is a high convergence rate between high and low earners within the countries studied. Third, the same factors affect income mobility throughout the business cycle. That is, the variables that improve income in booms are the same variables that reduce income in downturns. Finally, the mobility patterns confirm the idea that countries differ in the mechanisms by which they adjust to macroeconomic shocks. These results highlight the fact that mobility studies provide a different picture than aggregate analysis based on poverty measures or the income distributions alone.

The third paper, by Meral Karasulu, measures the degree of competition in the Chilean banking sector. This question has traditionally been addressed by measuring the degree of concentration in the sector. However, the relationship between concentration and competition is thin with regard to the banking sector. The United Kingdom, for example, has one of the most competitive banking sectors in the world, yet a handful of banks controls the market. Nevertheless, the question regarding the connection between concentration and competition remains. In light of this conventional wisdom, it is not surprising that "the concentrated structure of the Chilean banking market has raised concerns of insufficient competition in the sector...