Research uptake
The New Policy Model, Inequality and Poverty in Latin America: Evidence from the Last Decade and Prospects for the Future

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 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, takes a hard look at what has been happening in the region in the last decades in terms of inequality.

Study objectives and key research questions

The gloom and doom caused by the 2008-09 financial crises, and again, by the 2011-12 sovereign debt crisis of Europe have obscured the positive changes that have occurred in Latin America since the early 2000s. Between 2002 and 2009 income inequality fell in practically all countries of the region, and the initial data for 2010 show that this trend is being continued in several countries, while poverty incidence has dropped markedly. It is important to underscore that during the same period inequality rose or stagnated in all other developed, developing and transitional regions, with the exception of 3-4 countries in South East and East Asia and some twelve countries (out of 44) in sub-Saharan Africa. Latin America therefore stands apart from the other regions, and its open economy policy model could be heralding a new approach emphasizing simultaneously growth, inequality and poverty reduction. It is therefore necessary to understand what exogenous or endogenous factors—and in particular which public policies—explain these results, with the objective to draw lessons for policy making in Latin America itself but also for other middle-income developing and transitional economies.

To achieve this the UNU-WIDER research project focuses on a number of key research questions:

  • What are the policy lessons (for Latin America and other countries) arising from the ‘open economy redistribution with growth’ (OERWG) model developed during the last decade? Particular attention was paid to the gains in the field of growth, inequality and poverty reduction.
  • Did the policy shift which followed the transition to democracy and the election of centre-left and other regimes contribute to the growth acceleration, and inequality decline of 2002-08?
  • What are the prospects for the future sustainability of the OERWG model, given the hurdles Latin American governments still face?
  • What are the problems of the OERWG model in the fields of industrial policy and diversification of output-exports towards the technology-intensive manufacturing sector?
  • How can Latin America can raise its domestic savings and reduce its costly dependence on volatile foreign savings?
  • How can the OERWG model be extended to address the structural handicaps still hampering improvements in the field of growth, inequality and poverty reduction in the region?

The project draws upon UNU-WIDER’s extensive expertise in development economics and close connections to policy makers and researchers in the region, a number of whom have worked on past UNU-WIDER projects. It looks at the various issues identified as contributing to new Latin American policy models that emphasize simultaneously growth, inequality and poverty. Contributors to the project utilize a wide variety of established quantitative and qualitative research techniques to ensure a well-rounded overall picture is produced.

Key findings and evidence
  • While the trade liberalization of the 1980s and 1990s was associated with a sharp increase in inequality levels once enough time is allowed for the economy to adjust to openness, no further pressure over inequality is observed, and the liberalization of trade in previous decades did not represent a permanent obstacle for improvements in income distribution thereafter.
  • 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. 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.
  • There is broad agreement that the shift of the region towards democratic governance is one key factor. 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. There has also been an almost universal change in the region’s macroeconomic policies, including a radical reduction in public debt. The causal effect of this factor on the region’s inequality levels can only be identified in some countries.
  • The declining levels of inequality have coincided with a basic shift in the political and economic landscape—a shift from the politics of market-based structural adjustment to a new, post-adjustment era in which democratic competition has repoliticized social inequalities and placed redistributive policies at the forefront of the political agenda.
  • In terms of education in Latin America, the evidence indicates a significant difference between the 1990s and the 2000s in terms of both the assessment of the equity of the education expansion and its impact on the income distribution. In particular, changes in the 2000s seem to have had an equalizing impact on earnings, given the more pro-poor pattern of the education upgrading and a more stable or even increasing relative demand for low-skill labour.
  • 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. Key to maintaining the decline in inequality is 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.
  • While 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.
Research uptake

The final studies from the project were published as UNU-WIDER working papers during March 2012. None the less, some dissemination and research uptake has already taken place. A public event to disseminate the research results was organized on 5 September 2011 at the University of Buenos Aires in co-operation with this institution, the University of La Plata and CEDES (a think tank based in Buenos Aires). The event—during which five of the researchers contributing to the project made short presentations followed by questions from the audience— was attended by about 60 scholars, diplomats and a few journalists, and generated a much longer list of contacts of people potentially interested in the activities of UNU-WIDER. Research output The project director is proving guidance and editorial comments to the project team on how edit their studies for inclusion as individual chapters in the proposed Oxford University Press volume.

The studies from the project have been published as UNU-WIDER Working Papers and are freely available on the UNU-WIDER website.

Inequality in Education: Evidence for Latin America WP/2011/93 Guillermo Cruces; Carolina García Domench; and Leonardo Gasparini

A New Fiscal Pact, Tax Policy Changes and Income Inequality: Latin America during the last decade WP/2011/70 Giovanni Andrea Cornia, Juan Carlos Gómez-Sabaini and Bruno Martorano

On the Distributional Implications of Social Protection Reforms in Latin America WP/2011/69 Armando Barrientos

Uruguay’s Income Inequality and Political Regimes during 1981–2010 WP/2011/94 Verónica Amarante, Marco Colafranceschi, and Andrea Vigorito

The Rise and Fall of Income Inequality in Mexico, 1989–2010 WP/2012/10 Raymundo Campos, Gerardo Esquivel, and Nora Lustig

Redistribution without Structural Change in Ecuador: Rising and Falling Income Inequality in the 1990s and 2000s WP/2012/12 Juan Ponce, and Rob Vos

Social Policies or Private Solidarity? The Equalizing Role of Migration and Remittances in El Salvador WP/2012/13 Carlos Acevedo and Maynor Cabrera

Changes in Labour Market Conditions and Policies: Their Impact on Wage Inequality during the Last Decade WP/2012/14 Saúl N. Keifman, and Roxana Maurizio

The Dynamics of Inequality Change in a Highly Dualistic Economy: Honduras, 1991–2007 WP2012/17 Stephan Klasen, Thomas Otter and Carlos Villalobos Barría

Macroeconomic Policies, Growth, Employment, and Inequality in Latin America WP2012/23 Mario Damill and Roberto Frenkel

Did Trade Openness Affect Income Distribution in Latin America? Evidence for the years 1980–2010 WP/2012/03 Miguel Székely, and Claudia Sámano

Policy Regimes, Inequality, Poverty and Growth: The Chilean Experience, 1973-2010 WP2012/04 Dante Contreras, and Ricardo Ffrench-Davis The Politics of Inequality and Redistribution in Latin America’s Post-Adjustment Era WP/2012/08 Kenneth M. Roberts

Inequality Trends and their Determinants: Latin America over 1990-2010 WP2012/09 Giovanni Andrea Cornia