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Inequality in Latin America: Two New WIDER Working Papers

Annett Victorero

Latin America has been traditionally a continent of high inequality, in both income and wealth, fundamentally reflecting a skewed distribution of productive assets. High social stratification benefits the personal wealth, power and status of national elites, and is further sustained by their allies. But such stratification imposes social costs that cannot be borne in the long run, not least a distorted development pattern with limited (or no) poverty reduction.

But a new political wind is blowing through Latin America, one that is changing old economic and political patterns of life and behaviour. This in turn has affected the discourse around poverty. The new UNU-WIDER research project ‘The New Policy Model, Inequality and Poverty in Latin America: Evidence from the Last Decade and Prospects for the Future’ directed by former UNU-WIDER director, Giovanni Andrea Cornia, is taking a hard look at what has been happening in the region. Changes for the better can be seen—some reduction of poverty and inequality over the last decade, for example—but a great deal more still needs to change. Two new working papers have just been published from this project, both are summarized here.

Inequality and a new fiscal pact

The paper by Giovanni Andrea Cornia, Juan Carlos Gomez-Sabaini, and Bruno Martorano entitled ‘A New Fiscal Pact, Tax Policy Changes and Income Inequality in Latin America During the Last Decade’ analyses the distributive impact of recent changes in taxation by contrasting policy changes and their effects in the last decade as opposed to those implemented over 1980-90. The earlier period was one of immense economic adjustment as the region went through some wrenching policy changes, often with devastating social effects.

The authors find that changes in tax policy combined with an enabling external environment have led to an increase in the tax/GDP ratio for the region as a whole. They argue that these changes in taxation have been generally more progressive, sometimes slightly, in other cases more substantially so, depending on the country. As a result income inequality as measured by the Gini coefficient has improved, on average, by 0.4-0.8 points. Thus redistribution through taxation has improved in Latin America, especially in the Southern Cone, when compared to the 1990s. This is attributed to greater reliance on direct taxes and a reduction in excise taxes.

However, not all the news is positive. Mexico lags behind in the tax effort, and taxation remains regressive in one-third of the region’s countries (over the last five years). The authors offer four recommendations on how the new fiscal pact could be improved and developed so that the tax/GDP ratio reaches its potential.

First, lagging countries need to increase their tax mobilization to at least catch up with international standards. A second priority is to strengthen direct taxation and simultaneously reduce reliance on regressive taxes. Third, as elsewhere in the world, improve the revenue stream through increasing tax compliance and reducing tax evasion. The authors recommend reducing tax exemptions and other privileges left over from previous governments and regimes.

Their fourth recommendation relates to the historical, sociopolitical, structures of power in Latin America. The historical delegitimation of the social contract, and thus political institutions, through the power of special interests and elites—via their influence on policy at all levels—has presented a major obstacle to the adoption of equitable tax reforms. Citizens have resisted tax compliance due to their lack of confidence in the state, but now trust in a new, fairer and inclusive social contract slowly being built by democratic governments—trust which strengthens as the quality and quantity of services in health, education and social assistance are increased. This revitalization of the social contract needs to be further encouraged to enable a ‘new fiscal pact’ to evolve and strengthen.

Social protection reform: ‘a game of two halves’

Project contributor, Armando Barrientos tracks recent changes and components of one facet of this new social contract in his new paper, ‘On the Distributional Implications of Social Protection Reforms in Latin America’. Barrientos describes the last two decades of social protection reforms in Latin America in football terms as ‘a game of two halves’. The 1990s reforms of social insurance funds were part of the liberalization project driven by the region’s structural adjustment programmes. These reforms aimed at reducing fiscal deficits and expanding social coverage. In the event, neither of these goals was attained. Barrientos describes the social protection system in Latin America at the beginning of the new millennium as ‘truncated’. The years since 2000 have been characterized by an attempt at expanding social protection through state subsidized social assistance. Groups excluded from traditional forms of social insurance have been provided with a form of social protection via large-scale anti-poverty programmes in the upper middle-income countries. In the lower middle-income countries this trend has been more limited and tentative. Social assistance has, nevertheless, become a significant part of social protection in Latin America.

Barrientos concludes that there is some evidence that the expansion of social assistance has had a small equalizing effect in the region. But the institutionalization and expansion of the role of social assistance in social protection policy is vital; for open economies characterized by liberalized labour markets, social assistance provides ‘a floor to household consumption and investment in human development’. The expansion of social assistance in the region will likely result in social protection institutions that are more comprehensive and distributionally progressive.

There are many lessons to be learned from the history and more recent experiences of Latin America. Both of these new UNU-WIDER working papers advance our knowledge of the region, and provide pointers for the future. Further working papers from this UNU-WIDER project will be appearing soon in our working paper series.

Annett Victorero is UNU-WIDER Communications Assistant.

WIDER Angle newsletter
November 2011
ISSN 1238-9544

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