There are a couple of interesting elements that emerge from this figure. First, as it can be seen the two lines cross between the 80th and 90th percentiles, an indication that the reported inflation rate in practice tends to correspond to the consumption basket of the very rich. In other words, observed inflation rates can offer limited information when interest center on the welfare of the poor. Second, on a more positive note, the curve measuring the inflation rate of the different viniventiles of the distribution trends up very markedly. This is a reflection that for these spells the inflation rate suffered by the poor has been consistently lower than the average inflation rate.<sup>11</sup> The implications of these findings are far reaching. To begin, the message that emerges from figure 2 may exaggerate the relative loss of welfare of the Latin American poor. True, the income of the non poor may have increased faster but the prices they have faced have also increased faster. Second, it is possible that concerns about the negative distributional impacts of reforms have probably been overstated. Third, incorrect deflation potentially confuses the relationship between different types of growth strategies and their impact on poverty.

For instance, liberalizations, devaluations etc. all have, _by their design_ , the goal of changing relative prices of goods within the economy. When we ask what the impact of, for instance, trade liberalization is on the poor, then, we need to ask not only what the impact is on the side of real incomes, but also on the basket of goods that they consume. NAFTA’s liberalization of trade in corn in Mexico might have led to lower prices that negatively impact the income of poor corn producers. But we must also take into account the fact that the cost of maize, a key element in the consumption basket of the poor fell, and hence the CPI of the poor fell relative to that of the well-off which, as shown above, is what the national CPI measures. The poor are in fact better off than using the national CPI would suggest.

# _II.4 Inequality and mobility_

So far we have been talking about contemporaneous measures of income inequality. Yet, it could be argued that measures of income inequality (such as the gini coefficient) provide a very limited picture of the fairness of the income distribution. For example, income inequality can measure differences in opportunities (undesired from a social point of view) but also rewards to differences in effort or risk taking aversion by the different members of society (desired from a social point of view). Moreover, high inequality combined with equality of opportunities can be good for growth, because it would provide individuals with the incentives to put effort, be innovative, and take risks, all elements conductive to faster growth. On the contrary high inequality with low mobility will provide few incentives to work. If you are born poor (rich) and you have few chances to escape poverty (become poor) then you will find few reasons to work hard and take risks. In other words, standard income inequality indicators provide just a snapshot at a point in time and do not consider lifetime dynamics (i.e. in absence of additional

> 11  Goñi, Lopez, and Serven (2005) analysis covers 9 spells and find that there is only one example where prices exert a negative contribution on nominal inequality.

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