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This might be a “man-bites-dog” moment for Latin America. For about a decade, researchers and policymakers have been saying that the key lesson from the world’s most unequal region is that inequality can – and in fact did – decline. This is supported by a rigorous set of data showing that from 2000 up until around 2010, income inequality unambiguously declined in 16 of 17 countries.
But new data shows the trend has stagnated across Latin America – and in some cases, there has even been an increase in the concentration of income. This analysis is based on the latest revision of household data coming from the Socioeconomic Database for Latin America and the Caribbean (Sedlac) and published by the World Bank.
Inequality trends
Let’s start with the inequality data. The news here is not that there is a reversal in the inequality trend, but that the rate of decline is slowing down – and, in some countries, stagnating. The results show “stagnation” in the inequality trend between 2010 and 2012. Between 2000 and 2010, the regional Gini index (how the world bank measures inequality) declined on average by 0.94% per year, while in 2011 it fell by just 0.33%, and in 2012 it fell a paltry 0.02%.
The trend can also be assessed through country-to-country comparisons. Here, our own UN Development Programme (UNDP) estimates using the Sedlac data, is that Mexico and Panama, and to a lesser degree, Brazil, saw a slow in their narrowing of inequality when comparing 2002-2007 to 2007-2012. However, if we move the comparison period to 2007-2011, we can add Dominican Republic, Chile and Paraguay to the list of countries where inequality is plateauing.
Why is decline of inequality slowing?
The key question is, of course, why inequality is stagnating in some countries. Given what we know about changes in income distribution, the critical factors are the following: lower growth in labour income at the bottom of the income pyramid; less effective social assistance (either through fiscal constraints or changes in targeting) and a diminished impact of pensions, for either of the previous reasons.
Again, assuming not much has moved either on social assistance or pensions in the period 2010-2012, the culprit would seem to be the labour market – particularly the low-skilled segment of the labour market in the service sector which created most of the new jobs during the boom. As “growth in labour income” is both a benefit for society (through poverty reduction) and a cost to business (through higher unit labour costs) another policy debate ensues:
• One way to tackle stagnating inequality is to embark on structural reforms that improve the business environment – a relatively direct way of lowering unit labour costs is liberalising labour markets and de-regulating labour benefits. A number of fiscally-constrained countries, following Mexico’s recent reforms, will follow this path over the next few months and years. From a human development perspective, we fear this might be a “race to the bottom” strategy. While pro-growth strategies can and have reduced inequality in the past – Peru is a good example of this – low wages should not be a measure of development success.
• A second way to tackle stagnating inequality is to strengthen social protection networks, focusing specifically on how to bolster returns to education for different segments of the labour market. This is a “race between education and technology,” rather than a race to lower labour costs. It engages with the question of why some countries are able to sustain growth with increases in productivity, rather than through booming external prices. Some countries, following Brazil or Chile’s example, are likely to follow this route.
• A third way to deal with stagnating inequality is to do nothing. This is, in fact, the most likely scenario, as reforms that address inequality are intensive in political and institutional capital. In these cases, countries will attempt to sustain declines in poverty through higher economic growth. They are likely to find, by the year 2020, that “more of the same” does not often yield the same.
In any event, we will see a renewed appetite for structural reforms in the region. As Yogi Berra, the Yankees baseball manager, once said: “when you come to a fork in the road, take it”.
George Gray Molina is a chief economist at UNDP in Latin America and the Caribbean. Follow @UNDPLAC and @ggraymolina on Twitter.
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