Reversing Inequality in Latin America

Annett Victorero

Latin America has for a long time been synonymous with high inequality, economic instability and authoritarian politics. However, over the last ten years, the region has started to show considerable improvement in all of these areas. Growth has been sustained, the region has withstood the financial crisis of 2009, democracy has taken root in practically all countries, and income inequality has fallen, often markedly, in 14 of the 18 Latin American countries. This is a remarkable achievement in relation to the region’s past, and in comparison to many other parts of the world, both developed and developing.

On 5th September 2011, a public round table was organized at the University of Buenos Aires to report and discuss some of the preliminary findings of the UNU-WIDER project ‘The New Policy Model, Inequality and Poverty in Latin America: Evidence from the Last Decade and Prospects for the Future’. The project is directed by a former UNU-WIDER director, Giovanni Andrea Cornia, now of the University of Florence, who moderated the panel of experts at this event. The panellists included Nora Lustig (Tulane University, USA), Roberto Frenkel (CEDES, Argentina), Ricardo Ffrench Davis, (University of Chile), Guillermo Cruces (CEDLAS, University of La Plata, Argentina) and Saul Keifman (University of Buenos Aires, Argentina). A video of the round table ‘Democracy, Public Policy and the Descent of Inequality in Latin America in the Past Decade’ is forthcoming: keep an eye on UNU-WIDER’s news tab:

Reducing inequality

The overall consensus is that although Latin America is still the most unequal region in the world, in the last decade there has been a significant and generalized drop in inequality, and most Latin American countries are now largely back to the levels of inequality witnessed before the neoliberal era. Nora Lustig pointed out that this trend, with varied intensity, is present for most of the region—with right-wing and left-wing governments alike, in countries with historically low, or persistently high, levels of inequality, be they exporters of primary commodities or manufactures.

The reasons for this decline are multiple and varied, but some factors are shared across the region. The round table panel was in agreement that the shift of the region towards democratic governance is one key factor. Nora Lustig pointed out that other important variables include the demographic transition (including the interaction with health and education) and increasingly progressive fiscal policies (including a more pro-poor focus in public spending). Roberto Frenkel pointed out that there has also been an almost universal change in the region’s macroeconomic policies, including a radical reduction in public debt. Still the causal effect of this factor on the region’s inequality levels can only be seen in some countries.

The case of Chile

The Chilean economist Ricardo Ffrench-Davis elaborated on the example of his own country, which went through a wrenching economic liberalization after the 1973 coup d’etat. The reforms were savage in their social effects, raising income inequality and poverty, widening the wage gap, and accentuating wealth inequality. A bout of macroeconomic instability, in the early 1980s, hit growth. Ffrench-Davis argued that the transition to democracy, starting in the late 1980s, accompanied by increased social spending, has reversed the impact of the Pinochet era and today Chile is back to the same level of inequality as prevailed before the military takeover. Nevertheless, the transition from the neoliberal model has been slower than expected and the challenges of equitable growth, managing capital flows (and the associated macroeconomic volatility) and the full provision of public services have yet to be adequately met by any Chilean government.

The way forward for Chile, according to Ffrench-Davis, is to regulate capital flows to encourage investment in social progress and innovation nationally—especially in small- and medium- sized enterprises—and considerably more investment in the labour force and human capital. Only then can opportunities be created at every level of society.

Prospects for the future

There are many challenges to maintaining the decline in inequality. These include the general lack of access to tertiary education, the dependency of falling inequality on the present commodity boom (which might not sustain itself), and institutional problems in achieving further increases in redistributive public spending. Saul Keifman maintains that there are many steps that can be taken to secure the continued erosion of inequality in Latin America, such as restructuring production to lessen the region’s dependency on exports of primary commodities. Access to land and credit are also key challenges for the future. Furthermore, the accumulation and redistribution of human capital through expanded educational opportunities has to be part of the solution. Guillermo Cruces called for a rethink of policies for social protection. Whereas social transfer programmes have had an equalizing effect over the last decade, their scope and effect are ultimately limited. It is crucial to design new social policy models for the region, taking account of the specific context of each country. In this task, the role of rigorous research and analysis cannot be over emphasized.

About the author

Annett Victorero is a Research/Project Assistant at UNU-WIDER.

WIDER Angle newsletter
September 2011
ISSN 1238-9544