In the past decade, income inequality has declined throughout Latin America while it has been growing in China, India, South Africa and most of the advanced countries.
Given that Latin America is the most unequal region in the world (with a Gini coefficient of around 0.52 for the region as a whole) – and that during the 1980s and 1990s inequality increased – this is great news.
Declining inequality in Latin America has been pervasive: of the 17 countries for which comparable data is available, inequality fell in 12 or 13, depending on the years. Between 2000 and 2008, the average decline in the Gini coefficient was close to 1 percent a year.
Inequality declined in countries which grew fast such as Chile and Peru and countries whose growth was modest, such as Brazil and Mexico; in countries with high inequality such as Brazil and in countries with comparatively low inequality such as Argentina; and, in countries governed by the left such as Argentina, Bolivia, Brazil and Chile; and in countries governed by non-leftist regimes such as Mexico and Peru.
In most countries, the decline in inequality continued during the global financial crisis in 2009.
Two leading factors account for the decline: the narrowing of the earnings gap between skilled and low-skilled workers and the increase of government transfers to the poor.
Educational upgrading – an increase in the average years of schooling and a decline in the years of schooling inequality – and the petering out of the unequalizing effects of skill-biased technical change and market liberalization in the 1990s, caused the skill premium to fall.
More competitive politics following democratization triggered a more equitable use of fiscal resources. Large scale conditional cash transfers targeted to the poor in the millions have blossomed in the region following the two pioneers Brazil’s Bolsa Familia and Mexico’s Oportunidades (earlier called Progresa).
Although inequality declined in countries governed by leftist and non-leftist regimes, the social democratic left countries of Brazil under president Lula da Silva and Chile under presidents Ricardo Lagos and Michelle Bachelet have been more redistributive than their non-left and left-populist counterparts. In the latter, expansive fiscal policies may become unsustainable if commodity prices fall.
In spite of the good news, there is no room for complacency.
Latin America continues to be the most unequal region of the world. In a mostly middle-income region, millions of inexcusably poor people still live side-by-side with some of the wealthiest on earth.
Sadly, one of the key equalizing forces – education – will soon lose its steam. The upgrading of education for lower income groups will sooner or later face difficult barriers, mainly due to supply constraints in post-basic education, the low quality of education at preceding levels and higher opportunity costs.
Moreover, despite the progress in making public policy more pro-poor, a large share of government spending continues to be either neutral or regressive, and in most countries the collection of taxes on personal income and wealth is very low. Even the most successful large-scale cash transfer programs such as Oportunidades leave millions of the extreme poor out by design or mistake.
Nor do countries have adequate programmes to help the poor cope with, for example, rising food prices.
Improving the quality of public services for the poor – especially in education – expanding the supply of post-secondary education, closing the egregious coverage gaps in the safety net system and making public spending and taxes more progressive are key to continuing on the path towards more equitable societies.
Nora Lustig is Samuel Z Stone Professor of Latin American Economics, Department of Economics, Tulane University (nlustig@tulane.edu) and non-resident fellow of the Center for Global Development and the Inter-American Dialogue.