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.

Inequality measures in Latin America

I have arrived to the Kellogg Institute (a fantastic place to work with really helpful people around) for a year on a project on the interactions between political and economic inequality in Latin America.  One of the first problems I am dealing with?  Indicators!  In the case of political inequality, the problem is that there is little agreement on how to measure it and a lack of relevant data.  The case of income inequality is more straight forward, well-known but also frustrating.

We often say that "Latin America is the most unequal region in the world", forgetting the diversity of distributional outcomes within the region.  But which countries are doing best and worst on income distribution?  The answer is that it depends on who is measuring it.  There are two different cross-country databases on income distribution: one from the Economic Commission of Latin America and the Caribbean and one from the World Bank together with the Centre for Distributive, Labor and Social Studies in Argentina.    Both use the same sources (country-level household surveys), but make different adjustments.  The result?  The magnitude of inequality and the order of countries varies (sometimes a lot) depending on which of the two we use.

This is evident when considering the so-called Palma Index (which compares the income of the top 10% with that of the bottom 40%) in both cases:

Note two things: the Palma index as measured with ECLAC data is larger in several countries like Honduras, Guatemala but also Chile and Peru.  Also, the comparative levels of inequality change: Colombia is the most unequal country when using SCEDLAS data but not there are other countries with more inequality when using ECLAC data.

There are several reasons to explain these differences but I want to concentrate on the implications here.  First, much of our econometric results may be driven by data issues... that are seldom fully studied.  In our graph, Honduras is a total outlier that may be eliminated from some regressions in one case or one of many in another.  Second, regional studies that treat the data carefully and are based on descriptive statistics may be more valuable than commonly recognised (more on this at a later stage). Third, at the end, we may need to always work with stylised facts when discussing inequality and triangulate as much as we can.  There is little doubt that Colombia and Honduras are very unequal and that Uruguay is probably the least unequal country in the region... yet what happens in the middle is less clear and needs careful consideration and a lot of triangulation. 

More on all these topics in upcoming weeks; I hope to use the sabbatical to write about inequality in this blog more often.  Feedback most welcome (as it will feed directly in the new project).

Lessons from La Paz

I am glad to come back to the blog after more than a year without writing.  Latin America is in a rather interesting and contradictory moment (e.g. Mexico elects the first leftist candidate in decades while Colombia opts for an Uribista) so it is a great opportunity to write again.  I am also beginning a sabbatical at the Kellogg Institute in Notre Dame soon and will try to write about the region and about my research projects more often.

I had the opportunity to spend last seven days in La Paz, a unique city in Latin America.  As part of the CAF-LAC final agreement (which is finishing in its currently incarnation after six successful years), we organised a conference with the Universidad Católica San Pablo on Social and Economic Development in the Andean countries.

I could reflect on many components issues discussed during the last few days, but let me emphasise two that may require further research:

a. The political economy of structural change in mining/oil economies.  In conversations with John Crabtree, we agreed that finding the right time to promote structural change (for example, through active industrial policies) is rather complicated.  Commodity booms are periods of Dutch disease: rents are high, the exchange rate strong and it is just easier to benefit from mining exports and cheap imports.  There are just not enough political incentives to promote new sectors of the economy (including through a weaker exchange rate).  These are often periods of active state intervention... but not active industrial policy (at least this has been the case in most of Latin America during the 2000s).  In contrast, period of crises (which often take place after commodity booms) lead to the adoption of neoliberal policies and the reduction of state intervention.

Do you know of any cases within Latin America or beyond of active industrial policies in commodity exporters?

b. There is an intense debate in Bolivia about the macroeconomic sustainability of current policies.  Is the government truly committed to stability?  Will it continue reducing reserves at the current (high) speed)?  Will it maintain its high public deficit?  Answering these questions is not only about economics but about politics and about policy learning.   We need to understand the extent to which the current government has LEARNT the dangers of deviating from macroeconomic rigour.  Everyone recognises that the government  was rather careful in recent years--partly because it still remember the hyperinflation of the 1980s.  But, if this is the case, won't it remember those lessons in the near future?  Shouldn't policy learning result in a more careful policy stand after the elections next year?

In discussing these questions with a few friends like Jose Peres Cajías, I realised that we may not have enough research on policy learning and its implications on macroeconomic policy both in good and bad times.

In thinking about the Economics of Latin America

Today I start this year´s course on the Economics of Latin America at the Latin American Centre.  In preparing the first class, I realised an obvious point: how much the region has changed during the last two decades that I have been studying it but also how much continuity there is.  We had ten years of growth in which we were all wondering how much the region had truly become different... and now we are back to a crisis.  Finding better ways to understand both continuities and changes should be one of the primary goals of political economy in the region.

Trump´s impact in Latin America

I have not written much in this blog lately... partly because of the depression regarding Trump´s victory.   Things are going to be rather bleak from now on.

Meanwhile, here is my column in El Periodico on the likely impact of Trump in Latin America (in Spanish).  We have no idea who will be his main advisors in the region so it is all speculation... but there is no doubt that new problems may emerge and some countries should be quite worried.  Comments most welcome!

New Op-Ed on the two oppositions to globalisation

A call to distinguish our position from those of the right-wing nationalism.  The column is in Spanish and will also be published by Agenda Pública.

Discount for our new book

As I have written in this blog in the past, my friend Juliana Martínez Franzoni and I have just finished a book on how to build universal social policy in the South.  I hope to write a longer summary/discussion of the book here soon, but now I would like to encourage all of you to buy it or order it for the library.  You can get a 20% discount here.

Here the abstract:

Universal social policies have the power to reduce inequality and create more cohesive societies. How can countries in the South deliver universalism? This book answers this question through a comparative analysis of Costa Rica, Mauritius, South Korea, and Uruguay, and a detailed historical account of Costa Rica's successful trajectory. Against the backdrop of democracy and progressive parties, the authors place at center stage the policy architectures defined as the combination of instruments that dictate the benefits available to people. The volume also explores the role of state actors in building pro-universal architectures. This book will interest advanced students and scholars of human development and public and social policies, as well as policymakers eager to promote universal policies across the South.