Latin America´s inequality: lessons for the developed world

If we want to forecast the future consequences of growing inequality in United States and Europe, we should pay more attention to Latin America’s experience. For a century (if not longer) the concentration of resources at the top in that region has been higher than in any other part of the Western world. The top 1% today controls around a fourth of total income in Brazil and a third in Chile compared to around 20% in the United States and the United Kingdom and much less in other developed countries.

For more than a century, Latin America has witnessed a negative interaction between high inequality, poor economic performance and weak institutions—contributing to persistent political volatility and social discontent. A small elite, which still controls a large share of land and financial resources, has had limited incentives to increase productivity or invest in new sectors of the economy.  Why would they innovate when they could secure huge returns in low risk activities?

As a result, Latin American countries like Brazil or Mexico confronted a lack of well-paying jobs much earlier than the rich economies. During much of the 20th century, economic activity concentrated on large plantations and capital intensive manufacturing activities that created limited formal employment.  Most workers had bad jobs that paid little and did not provide access to social benefits. The process of market liberalization promoted by conservative economists in the 1980s and 90s did not change this negative relationship between inequality and the economy: the same old elite benefited from the privatization of public companies, while few domestic firms were able to successfully compete internationally. Much has been written about the reallocation of jobs from the United States to Mexico, but the truth is that a large number of Mexicans still work in the informal sector and receive wages below the poverty line.

The lack of economic dynamism had much to do with the control of policymaking by the top 1%.  They successfully pressured for low taxes, particularly on personal and corporate income.  Most Latin American countries have never spent enough on public health care and education and have paid too much attention to programs for the wealthy.  Until very recently, support for universities and sophisticated hospitals for the rich were high, while spending in primary education and rural health clinics insufficient.

Given these exclusionary policies and lack of economic dynamism, it is not surprising that citizens have supported populist responses repeatedly. Leaders like Juan Domingo Peron in Argentina in the 1940s and 50s or Hugo Chavez in Venezuela more recently promised to provide good jobs and adequate social benefits not only to the poor but also to large segments of the excluded middle class. Unfortunately, most often their governments ended up implementing unsustainable economic policies, while failing to confront the power of the top 1%.

Inequality has affected politics negatively in Latin America in many other ways. It has contributed to social polarization and reduced the space for political compromise. The elite had always shown limited willingness to strengthen state capacity or promote effective anti-corruption measures, while social movements have never been powerful enough to advance reform agendas consistently. Brazil’s instability in recent years constitutes a great example of the negative links between weak institutions, corruption and inequality-induced political conflict. Under presidents Lula and Dilma Rouseff, the government implemented some redistributive policies that favored the poor, yet failed to promote transparency or reduce briberies. Conservative forces—which favor the economic status quo—took advantage of this failure to reverse many of the progressive policies, halting the reduction of inequality.

There are, of course, significant differences between Latin America’s history and the United States and Europe today. The American economy is still an engine of technological innovation and has strong institutions—including a successful Federal Reserve. Despite its weaknesses, the European welfare state remains a powerful equalizing machine. Nevertheless, the Latin American experience constitutes a useful warning of what we could become in the future. In particular, it highlights the worrying long-term impacts of growing income concentration, weak labor markets and unresponsive political institutions. When voters felt marginalised in Latin America, populist responses became attractive. Yet populists could seldom resolve their economic problems or create truly inclusive institutions… leading to the kind of vicious cycle that we are starting to see now in other parts of the world.

More to come as I try to develop some of these arguments in a book during this upcoming year.