Latin America has long suffered from one of the worst levels of income inequality in the world. This remains a serious problem as for every Carlos Slim the region produces there are tens of millions more that live in poverty. Yet as the disparity between rich and poor continues to widen in many developed countries such as the United States, Latin America is one of the few regions on earth where the gap is currently closing, as a result of recent economic growth and a trend toward left-leaning governments that prioritize the reduction of poverty.
More than 50 million people have joined the ranks of the middle class in Latin in the last 15 years and by 2011 Latin America and the Caribbean had more people in the middle class than in poverty for the first time in recorded history, the World Bank noted in a 2013 report. “From 2003 to 2011, mean real per capita income for the region’s population as a whole grew by about three percent, while the rate for the bottom 40 percent was considerably faster, almost five percent,” the World Bank observed.
Economic Growth and Poverty Reduction
This improvement is partly due to economic growth in the region, which has brought greater tax revenue, enabling governments to increase expenditure on state-run primary and secondary schools and other programs targeting the poorer sectors of society.
“Economic growth created greater demand for domestic goods, moving more people — particularly the poor — into the labor force, driving wage increases. This helped reduce the wage gap between college-educated workers and those without a college degree,” Heraldo Muñoz, the U.N. Assistant Secretary-General and Development Program Director for Latin America and the Caribbean, wrote recently in the Miami Herald. “Universal access to massive primary and secondary education in Latin America was the secret ingredient for this equalizing effect in the 2000s.”
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The second major factor in decreasing income inequality in the region has been government commitment to reducing poverty, Muñoz argued: “Latin America leads the world in social programs that give financial aid to people in poverty, conditional on keeping their children in school and keeping up with vaccines and medical checkups. These transfers make up between 0.5 percent and 3 percent of GDP, but they account for nearly a third of the decline in inequality and are the principal means of poverty reduction for 18 countries in the region.
“Over 25 million families, 113 million people, or 19 percent of the population, have benefited from them. Social transfers cannot substitute for weak or nonexistent social services, but they have moved financial resources into the hands of the poor — without much intermediation,” Muñoz added.
Measuring Income Inequality
Income inequality is determined by the Gini coefficient, which measures the distribution of income, with a score of 0 denoting perfect equality and 1 donating maximal inequality.
Uruguay has the best Gini coefficient in Latin America, according to 2013 study by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). The fight against inequality is led from the top-down by Uruguayan President Jose Mujica, who is often described as “the world’s poorest president” because he shuns the privileges of power, choosing to live in a very modest farmhouse instead of the presidential palace, and donating about 90% of his monthly salary of $12,000 to charity.
As a recent Nearshore Americas study showed, Uruguay is also the most transparent country in the region. However, there does not seem to be a clear correlation between corruption and income inequality, because Venezuela was ranked the least transparent nation in Latin America yet it has the second lowest level of income inequality in the region.
Other studies show Uruguay’s neighbor Argentina is also among the countries with the lowest levels of income inequality in Latin America, but ECLAC did not have any data for Argentina.
Unsurprisingly, countries with more socialist or left-leaning governments such as Uruguay, Venezuela, Ecuador, Bolivia and Nicaragua feature prominently among those with the lowest levels of wealth inequality. Such administrations tend to prioritize a more equitable distribution of wealth more highly than centrist or right-wing governments, hence their countries’ more favorable Gini coefficients.
More Work to Be Done
Despite the progress made, the World Bank noted last year that “around 80 million people in the region still live in extreme poverty – of whom half are in Brazil and Mexico – with a further 40% of Latin Americans at risk of falling back into poverty in the event of economic shocks or due to the effects of climate change on the region.”
“With global tides changing and favorable economic winds subsiding, Latin America faces a daunting challenge,” the World Bank added, and even if current levels of growth are maintained, it would take 41 years for Latin America to close the gap in wage inequality with global top performers.
In their 2011 study, The rise and fall of income inequality in Latin America, Leonardo Gasparini and Nora Lustig also observed that “Latin America still remains a region with very high income inequality, in which governments redistribute relatively little through taxes and transfers.”
“Despite the evident progress in making public policy more pro-poor, a large share of government spending is neutral or regressive, and the collection of personal income and wealth taxes is relatively low. In order to continue on the path towards more equitable societies, it is crucial that public spending is made more progressive and efforts are redoubled to improve access to quality services (education, in particular) for the poor,” Gasparini and Lustig argued.
The World Bank also advised that governments maintain an equitable, efficient and sustainable fiscal policy that fosters shared prosperity; strengthen fair, transparent institutions that deliver quality public goods and services; enable an environment of well-functioning markets that are accessible for all economic levels of society; and improve risk management at both the macro- and household levels.
Reducing income inequality will bring a positive economic impact, the World Bank concluded: “Equity-oriented policies can enhance a region’s capacity to grow in a sustained manner. Enabling people who are currently marginalized to improve their living conditions will unleash their inherent economic potential, increasing overall productivity and thus spurring growth.”