Leading the world in inequality
Latin America and the Caribbean is one of the regions of the world with the greatest inequality — of incomes, access to basic services, voice, assets and opportunities. This is the summary offered by David de Ferranti, the World Bank's vice-president for the area, of a study the bank released on 8 October in Mexico city. `This inequality,' says de Ferranti, `slows the pace of poverty reduction, and undermines the development process itself.' The study has a go at identifying its causes and proposing solutions.
The problem, while hardly unknown, is dramatically presented in Inequality in Latin America and the Caribbean: Breaking with History? The richest tenth of the population of Latin America and the Caribbean, it notes, earn 48% of total income, while the poorest tenth earn only 1.6%. In industrialised countries, by contrast, the top tenth receive 29.1%, while the bottom tenth earn 2.5%. Using the Gini Index of inequality in the distribution of income and consumption, the study finds that Latin America and the Caribbean, from the 1970s to the 1990s, appeared nearly 10 points more unequal than Asia, 17.5 points more unequal than the 30 countries in the OECD, and 20.4 points more unequal than Eastern Europe.
Inequality in the region's least unequal country, Uruguay, is higher than in the most unequal country in Eastern Europe and the industrialised countries. On average, income inequality has tended to worsen slightly in the region, though experiences have varied. Some relatively equal countries, including Argentina, Uruguay and Venezuela, have experienced rises in inequality; Argentina dramatically so. By contrast Brazil, historically the most unequal country in the region, has experienced a modest, but significant improvement. Mexico may also have enjoyed a small improvement.
Ethnicity, the study says, is an enduring determinant of opportunities and welfare in Latin America: indigenous and Afro-descended people are `at a considerable disadvantage with respect to whites.' In seven countries surveyed (Brazil, Guyana, Guatemala, Bolivia, Chile, Mexico and Peru) the study found that indigenous people (men and women) earn 35% to 65% less than whites.
In contrast to those enduring gaps correlated to ethnic differences, Latin America has experienced progress in narrowing sex differentials in income and education. In much of the region, girls and young women are actually overtaking boys and young men in educational attainment.
Weight of history
The study suggests that the unequal distribution of resources that characterises the region today has deep historic roots: it follows a pattern set by specific traits of European colonisation of the region. Elites shaped institutions and policies to serve their interests first. For instance, most countries in the region did not achieve high levels of literacy until well into the 20th century. Low levels of support for basic education contrasted with generous financing for universities, where the children of the élite were trained.
Political institutions in the region, typically, have been weak. And while transitions to democracy have brought valuable gains, patterns of influence remain highly unequal, with traditions of clientelism and patronage often continuing despite national and local elections.
To address the deep historical roots of inequality in Latin America, and the powerful contemporary economic, political and social mechanisms that sustain it, the World Bank study proposes four broad areas for action by governments and civil society groups to build coalitions that might break this destructive pattern:
- Build more open political and social institutions that allow the poor and historically subordinate groups, such as Afro-descendants and indigenous people, to gain a greater share of agency, voice and power in society.
- Ensure that economic institutions and policies seek greater equity, through sound macroeconomic management and equitable, efficient crisis resolution institutions that avoid the large regressive redistributions that occur during crises, and that allow for saving in good times to enhance access by the poor to social safety nets in bad times.
- Increase access by the poor to high-quality public services, especially education, health, water and electricity, as well as access to farmland and the rural services the poor need to make it productive. Protect and enforce the property rights of the urban poor.
- Reform income transfer programmes so that they reach the poorest families, including use of measures that are conditional on keeping children in school and attending health services, so as to improve their lifelong income-earning capacity.
Institutions as the key
`The key to reducing inequality in Latin America is institutional reform,' says Guillermo Perry, the bank's chief economist for Latin America and the Caribbean and co-author of the study. `To overcome the inequality that undermines their efforts to get out of poverty, poor people must gain influence within political and social institutions, including educational, health and public services institutions. To enable them to achieve such influence, the institutions must be truly open, transparent, democratic, participatory — and strong.'
The study concludes that success in `breaking with the long history of inequality in Latin America' depends on `strong leadership and broad coalitions' to achieve progress in the first area for action, to mobilise `the political agency of progressive governments and the poor.' As institutional reform proceeds, allowing poor people to gain purchase on decision-making, policies to reduce inequality, it suggests, are more likely to be adopted.
Three areas are identified as those where specific reforms would have most impact in reducing inequality: fiscal and financial institutions, public services and the region's `truncated, elitist welfare state'. The study offers some specific measures as illustrations of what is possible. For example, targeted income transfers conditioned on keeping children in school and attending health services. In making the case for expanded use of conditional cash transfers, the research team cites examples of successful programmes under way in Mexico, Brazil and Nicaragua.
Brazil is most unequal, Mexico mixed
Points made during the presentation of the study by the World Bank's regional vice-president, David de Ferranti, chief economist Guillermo Perry, poverty and human development adviser Michael Walton, and consultant Francisco Ferreira.
- Brazil is the most unequal country in the region, even though its tax revenues exceed those of Mexico. It spends more than Mexico, but the distribution is unequal.
- Mexico shows marked inequality in the distribution of services and income, between the indigenous and other groups, and between various parts of the country.
- In the 1990s the poorest sectors of the population in Mexico, Brazil and Chile saw their incomes shrink. In Brazil it happened in the big cities; in Mexico also in rural areas, like Chiapas.
- Nafta has had positive effects on most of Mexico, but Chiapas, Guerrero and Oaxaca have not benefited as much as the rest. These three states are the poorest, have economies based on agriculture, and have the largest indigenous populations.
- Argentina is the perfect example of what not to do if one wants to avert crises: instead of saving in the good times (1996-99) it increased spending excessively; when the bad times came it lost its financing and was unable to avoid the crisis.
- Among the successful targeted programmes, Mexico's Oportunidades has helped 4.2m families finance education and healthcare costs. Brazil's Bolsa scheme, which subsidises education and food, has also shown promising results.