Want to reduce inequality? Look at Latin America!

March 19, 2009

     By Duncan Green     

I was at DFID again this week (I should be on a retainer) , presenting a paper on the impact of the global crisis on Latin America (it should be on the Oxfam website by the middle of next week). One interesting glass-half-full v glass-half-empty discussion was over income inequality: I said the region was doing well in reducing the gulf between haves and have-nots, but another NGO colleague disagreed, saying that only 9 out of 18 countries in the region reduced inequality from 2002-2007. Hang on a minute – ‘only’? Show me one other region in recent times where half the countries have reduced inequality. So I went back to the source, the excellent ‘Social Panorama of Latin America and the Caribbean’ published by the UN Economic Commission for Latin America and the Caribbean (ECLAC, or CEPAL in Spanish). Here’s what it says:

‘Changes in the structure of income distribution between 2002 and 2007 reveal three clearly distinct situations. Nine countries (Argentina, Bolivarian Republic of Venezuela, Bolivia, Brazil, Chile, El Salvador, Nicaragua, Panama and Paraguay) have significantly narrowed the gap between the groups at the extreme ends of the spectrum, both by increasing the poorer groups’ share of total income and by lowering that of the highest-income households. The most notable reductions in the two aforementioned indicators (36% and 41%, respectively) were recorded in the Bolivarian Republic of Venezuela. Significant improvements were also observed in Bolivia, Brazil and Nicaragua, where both indicators fell by about 30% (see figure).

The second group consists of countries in which income distribution has remained relatively unchanged. These countries are Colombia, Costa Rica, Ecuador, Mexico, Peru and Uruguay. Although the income gap has tended to shrink in most of them, the variations have not been highly significant.

Meanwhile, the income gap has widened between the richest and poorest segments of society in the Dominican Republic, Guatemala and Honduras.’

That’s amazing: in a region renowned for its high and ever-rising inequality, all but three relatively small countries have bucked the trend. This should be getting far more attention from development wonks.

Cepal’s explanation? ‘Most of the improvements in income distribution were generated by changes in labour income. Higher wage income was in fact the main factor of income growth in the lowest quintile.. Unemployment rates in the poorest decile of households fell from 30.2% to 23.8% in 2002-2006…. The percentage of informal workers in urban areas dropped from 47.2% to 44.9% between 2002 and 2006.’ (Workers in the informal economy generally have worse wages and conditions, so the recent formalization of the economy is good news).

Increased spending on social protection and other government transfers to poor people must also be playing a part, and in the longer term, increased spending on health and education should help reduce the transmission of inequality to the next generation in particular.

What Cepal fails to point out, perhaps unsurprisingly, is the politics of all this. Hugo Chavez‘ Venezuela as the fastest improver? A pile of centre-left governments (Evo Morales in Bolivia, Lula in Brazil and -ahem – Daniel Ortega in Nicaragua) following close behind? This is provocative stuff. Don’t get too excited, though. These improvements only get us back to the level of the early 1990s, (though that’s no small achievement in a world where inequality generally goes in the opposite direction). Moreover, a lot of these positive trends are now under threat from the impact of the global crisis, which is cutting regional growth to zero (from 5%), hitting employment and wage levels and reversing the trend towards formalization. Sigh.