Latin America’s Income Disparity: A Deep Dive into Inequality

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Table of Contents

Introduction
Income Distribution
Rationales for the Inequality Patterns
Inequality Trends Brazil and Argentina
Conclusion
Works Cited

Introduction

Huge income disparities continue to bedevil Latin America several years after its independence. Inequality among citizens of Latin America affects key socioeconomic variables such as income, education, resources, and availability of basic services, among others (Barro 2). Inequality is highly pervasive and persistent in Latin America making it one of the most unequal places in the world.

Inequality, particularly in income distribution and land ownership, affects the well-being of citizens of developing nations. From the 1980s to the late 1990s, countries in Latin America experienced a sharp rise in economic inequality. However, beginning in 2000, economic inequality in most Latin American nations, such as Brazil, Argentina, and Mexico, begun to decline largely due to improved resource allocation and labor market growth (Barro 4). Before then, the 1990s economic reforms and the 1980s financial crises led to high levels of income inequality in the region.

The inefficient macroeconomic policies and structures failed to cushion the lower and middle class from the effects of inflation, widening the gap between them and the rich. This led to a fall in income, which expanded the earnings gap between the rich and the poor and exacerbated the inequality levels. In addition, unequal access to land, basic services, and educational opportunities had an ‘unequalizing’ impact on the citizens. This paper will analyze income inequality trends in two modern Latin American economies of Brazil and Argentina. It will also examine possible explanatory factors and theories behind the recorded economic inequality trends in these nations.

Income Distribution

African and Latin American nations are among the most unequal economies in the world in terms of income distribution. According to Barro, of the 15 most unequal nations, ten are from Latin American (8). The ‘Gini’ index, an indicator of income distribution in an economy, for this region stands at 0.525, which is close to the average value for most African nations (Barro 4). The Gini index ranges between zero and one with unequal economies scoring a value close to 1 or 100 percent. The mean Gini value for Latin American countries exceeds that of developed and Asian nations by 20 and 17 points respectively (Barro 6).

Graph 1: Gini Index for Latin America compared to other regions (Barro 7)

With regard to expenditure, the Latin American region also scores lowly on the Gini scale, making it among the most unequal places globally (Ferreira, Leite, and Litchfield 16). Studies also indicate that inequality in this region exceeds the forecasted level by a huge margin. The ‘additional inequality’ makes the income disparity in this region to be pervasive and persistent (Ferreira, Leite, and Litchfield 18).

Thus, though the region may be rated higher on the Gini scale, the actual value may be lower than expected. According to Barro, the total earnings of a fifth of Latin America’s poor constituted 3 percent of the net income in the 1970s (11). This was the lowest value reported by any developing nation at the time. On the other hand, a tenth of the population (wealthiest) in this region took 40 percent of the GDP during the same period (Barro 16), making the region highly unequal.

The Gini estimates for Latin America has risen and fallen over the past three decades. In the 1980s, the mean Gini value stood at 0.5 for this region (Atolia 487). In contrast, over the same period, the average value for other developing nations was 0.39. Inequality has been higher in Latin America compared to European and Asian nations, which also underwent ‘unequal’ economic reforms in the last few decades.

Graph 2: Trends in Gini Index in Latin America

Moreover, inequality in Latin America has remained relatively high since the 1980s, despite major political, socioeconomic, and demographic changes occurring in the region. The region has the “highest income share among the rich” compared to other nations, subjecting a large proportion of the bottom classes to absolute poverty (Atolia 491).

Different perspectives exist in regards to Latin America’s pervasive economic inequality. Atolia holds the view that the uneven distribution of resources in this region has roots in the colonial conquest by the Europeans (467). This shows that the colonial social and economic structures entrenched an unequal and unchanging system in the Latin American society.

Others subscribe to the argument that the inequality experienced in this place emerged in the post-independence era (Williamson 227) and therefore, it can be reversed through proper equalizing policies. The European colonial era featured a sharp rise in economic inequality, but this was a widespread phenomenon in other colonies. Thus, the persistent inequality has its origins in the unequal distribution of wealth in the post-independence era.

Inequality in the 16^th century rose sharply following numerous disease outbreaks that killed a large proportion of the native population (Atolia 472). In the 19^th century, revolutionary changes lowered the inequality levels significantly as the region transformed into an economic hub towards the turn of the 20^th century. The distribution of resources during this period was small, but sufficient.

Analysis of inequality during this period is limited due to the absence of reliable data, which only became available in the 1970s when household surveys first begun. In the 1970s, income disparities in Brazil and Mexico declined, but increased in Argentina (Atolia 473). A rapid rise in income disparities characterized the 1980s, which is christened the ‘lost decade’ because most Latin American economies experienced the highest levels of inequality during this period.

On the other hand, the 1990s showed mixed results with regard to inequality levels in the region. In most countries, inequality was modest while in others it rose sharply. Only a few countries experienced a drop in income inequality. On average, the region witnessed only a small increase in inequality during the 1990s (Williamson 228). Beginning in 2000, income inequality in Latin American countries started declining. Household survey data from 2002 to 2008 indicate a decline in inequality in 14 Latin American nations out of the 17 economies making up the region (Williamson 232). In addition, the region shed 2.3 points on the Gini index during the same period, compared to 2.9 dropped by 16 developing countries drawn from the other continents (Williamson 234).

Rationales for the Inequality Patterns

Several factors account for the equality patterns in modern Latin America. In the 1980s, a combination of huge fiscal shortfalls and global economic downturn, i.e., a slump in real interest rates in the US, created unequal local market conditions (Gaviria 126). In addition, reduction in external credit injected into the local economy created an imbalance in payments given to workers resulting in unequal distribution of wealth.

Statistics indicate that the GDP growth rate for Latin American countries during the 1980s was zero or negative (Gaviria 129). To tackle this economic crisis, the nations opted for intensive trade reforms to tame domestic spending. Fiscal austerity measures and currency devaluations were some of the measures that the governments undertook to shield the local markets from external shocks (Gaviria 131).

The reforms implemented can be grouped into three groups, namely, trade expansion, financial liberalization, and privatization (Williamson 229). The goal was to increase the flow of foreign direct investment into the region. The income inequality experienced in modern Latin America stems from the 1990s trade reforms and the economic downturns that hit the region a decade earlier. The trade policies had a big influence on income distribution.

Evidence shows that the market stabilization programs deepened the disparity between the lower and higher income groups and created rural and urban poor (Williamson 239). In general, the different policies created uneven distributive conditions that did not favor the poor during the reform process. Their share of the national income declined while that of the wealthy increased significantly.

The market-oriented policies also had “offsetting and regressive effects” on economic inequality in Latin America (Gaviria 133). The reforms led to enhanced trade and capital liberalization, which created uneven distribution. Another explanation for the huge income inequality levels relates to the skilled-biased technical change (SBTC) (Gaviria 133). The reform period was characterized by rapid structural and technological changes to absorb the skilled labor.

Workers who possessed the requisite skills secured jobs while the unskilled ones failed to get employment, widening the income gap between the two groups. Other studies have made different findings. Barro’s survey of Latin American economy between 1977 and 1998 found no significant correlation between the disparities in wages and the trade policies (28). However, the study finds a disparity in technology absorption between the poor and the rich. In this regard, it concludes that inequality in Latin America stems from differential technology adoption among the citizens.

Technology dissemination often involves trade channels. In this regard, trade modulates the effects of technology on wage inequality within a country. In Latin America, “weak labor and social institutions” (Williamson 244) that could not withstand the economic changes compounded the inequality levels. Thus, the governments implemented the trade reforms without first establishing strong social institutions to ensure even distribution of wealth. In Brazil, Argentina, and Mexico autocratic governments unilaterally set the minimum wages and weakened labor unions through tight regulatory policies (Williamson 245). Thus, the social policies in place could not foster equal distribution of wealth generated by the economic reforms.

In the late 1990s, Latin America faced economic stagnation as the GDP in countries such as Argentina and Uruguay dropped substantially (Atolia 468). This increased the poverty levels and widened the inequality gap in these countries. Beginning in 2000, the level of inequality begun to decline in this region, partly due to the universalistic social policies adopted in the late 1990s (Atolia 469). The declining trend has been observed in all countries, including Brazil (the region’s leader in terms of inequality), Argentina (least unequal), and Mexico (a nation with a distinct political model), among others. The reduction in inequality is attributable to the income from the commodity boom experienced in both larger and smaller economies in the region.

In addition, researchers attribute the downward trend that began in 2000 to a number of economic factors. One of these factors is an improvement in economic growth. Statistics indicate that Latin American economies grew during the 2000s period, creating more jobs for its citizens (Atolia 489). The expanding economy reduced unemployment rates, increased the minimum wage levels for the unskilled labor, and thus, reduced the income inequality gap in the region. The second factor is the growth in the education sector. Inequality in basic education has, for a long time, led to unequal access to employment opportunities. During the 2000s period, expansion in education and training has increased skills and thus, improved wage earnings of lower cadre workers.

The third reason relates to the changes in the market reforms initiated in the 1990s. The market reforms increased people’s accessibility to resources and opportunities. Another reason for the declining trend of inequality is the economic recovery from the shocks of the 1990s (Atolia 489). The recovery from these crises has been accompanied with a drastic decline in income inequality based on the Gini indicators. Lastly, new governments undertook various measures to improve the minimum wage for the citizens. They created conducive environments for social institutions and labor unions to thrive, resulting in an ‘equalizing effect’ on the economy. The policies also fostered a progressive social spending to stimulate growth and reduce inequality.

Inequality Trends Brazil and Argentina

The two Latin American countries of Brazil and Argentina constitute the largest economies in the region. They have gone through times of high and low inequality since the 1980s, culminating in a period of declining income disparity in 2000. The inequality patterns are unique in each case due to differences in political models, labor laws, and economic reform policies.

Brazil

Brazil’s income disparity gap has increasingly grown over the years. Its worst ever Gini index value was 0.63, which was recorded in 1988 (Sokoloff and Engerman 223). Throughout the 1980s, the disparity levels rose steadily due to the economic downturns experienced in Latin America. However, compared to Argentina, Brazil’s economic reforms in the 1990s did not increase inequality in wages. Since 1998, Brazil’s Gini index has been declining and currently stands at 0.55. Over the same period, poverty has also declined due to a rise in GDP.

Nevertheless, the 1990s debt crisis hit Brazil hard with its GDP declining from a high of 8.5% in the 1960s to a low of 1.5% in the 1990s (Sokoloff and Engerman 227). Its inflation rate increased throughout the 1990s with a fifth of the population receiving a mere 2.8 percent of the national income during the same period.

The rise in inflation and unemployment rate contributed to Brazil’s high inequality, partly because of the trade liberalization policies the country adopted. Trade liberalization affected the skills required in all sectors of the economy. However, unlike Argentina, trade reforms led to fall in “skill premium by 14.3 percent between 1988 and 1995” largely because of lower liberalization tariffs for sectors employing unskilled workers (Ferreira, Leite, and Litchfield 8). Thus, trade reforms in Brazil evened out the wages for the skilled and unskilled labor.

However, the high inflation rate between 1980 and 1992 caused inequality levels to soar up (Ferreira, Leite, and Litchfield 7). A sharp drop in family per capita income characterized the hyperinflation years. It is after 2001 that family per capita income begun to rise again with the bottom 20% sharing 7% of the national income compared to 1.1% distributed among the top ten percent (Ferreira, Leite, and Litchfield 12). Moreover, the decline in inequality has contributed to an estimated 66% reduction in poverty and a GDP growth of 4% per annum (Ferreira, Leite, and Litchfield 12). Labor market adjustments undertaken by the government are reflected in the income distribution among various households. The labor market policies also narrowed the income disparity between people of distinct skill sets and employed in different firms.

Another notable development during this period is the rise in minimum wage and non-labor income contributing about 50 percent decline in income inequality (Sokoloff and Engerman 222). On the other hand, though there were changes geared towards fair distribution of income, poor families got far fewer jobs than rich ones during the 2001-2007 periods.

Nevertheless, changes in labor demand and supply and improved access to educational opportunities helped to reduce the income inequality. Up to 49 percent of the decline is attributed to public transfers comprising of non-labor income (Ferreira, Leite, and Litchfield 18). Pensions paid to the disabled and elderly constituted the non-labor cash transfers that contributed to a decline in income inequality in Brazil.

Brazil’s cash transfer program (called ‘Bolsa Familia’) allowed low-income households to educate their children and afford basic health services. The program covered over 22% of Brazil’s 50 million poor households and reduced economic inequality by 10 percent (Sokoloff and Engerman 223). The broadening of coverage and the increase in the amount paid out contributed to the reported decline in income inequality. Between 2000 and 2007, the program’s coverage rose by 10 percent, netting an additional 17% of poor families (Sokoloff and Engerman 223).

On the other hand, the government raised the minimum wage to increase the income of lower cadre employees. On average, Brazil’s minimum wage rose by 35 percent between the year 2000 and 2007 (Sokoloff and Engerman 226). Therefore, a rise in the minimum wage served to reduce the inequality gap caused by skills-based employment. The social security program also facilitated the redistribution of wealth in Brazil resulting in a more equitable formula for sharing the national income.

Argentina

Income inequality in Argentina has been rising and falling since the 1960s affecting the lower and middle classes. Inequality in income distribution rose sharply from 0.4 to 0.5 (on the Gini index) between 1974 and 2006 in Buenos Aires. In Argentina’s history, the 1974 to 2006 period involved immense political and economic changes. Sokoloff and Engerman split this era into six periods with the first one covering the 1970s military rule that weakened social institutions and labor unions (219). This period was characterized by a sharp rise in income inequality among Argentineans.

The second period covers the 1980s, which are distinguished by democratic regimes that promoted economic growth and stability, created conditions for labor unions to thrive, and distributed resources more equitably. The next period runs between late 1980s and early 1990s. It was characterized by a rise in inflation and shocks to the economy, which stabilized towards the end of 1991 (Sokoloff and Engerman 221). In the 1990s, Argentina went through economic stability with its national currency remaining relatively stable against the US dollar. This fourth episode made the economy more open and flexible creating an unbalanced resource distribution in the country.

The crisis that affected the Argentinean economy in the late 1990s and early 2000s falls in the fifth period (Sokoloff and Engerman 223). Among the events that featured in this period are strong currency devaluations and economic downturns, which led to a rise in inequality followed by a decline in disparity levels after the economy stabilized. The sixth period spans from 2004 to date. It is characterized by a rapid economic growth, price stability, and a decline in inequality levels. In Argentina, inequality has dropped to the same level as it was before the 1990s.

The highest inequality in Argentina occurred in 1990s, a period characterized by trade reforms and an increase in GDP. During this period, the “Gini index value (family per capita income)” for urban households rose from 0.45 in 1991 to 0.51 in 2001 (Galiani and Sanguinetti 501). This resulted in a drop in salary for unskilled workers and in household income enlarging the inequality gap between the skilled and inexperienced workforce.

Evidence indicates that changes in production processes altered the skill requirements in most sectors, resulting in a surge in demand for college-educated workers (Atolia 488). The technologies adopted in production required specialized labor force. This led to a significant reduction in the number of unskilled workers employed in many manufacturing firms. In addition, social protection policies and institutions were lacking.

The rise in the number of the unemployed during the 1990s affected the economic status of many young people and women in the country. The high unemployment rate also had a long-term effect on the minimum wage. It reduced the aggregate labor demand resulting in poor pay for the lower cadre workers. This increased the income inequality between the middle and lower classes. This phenomenon is called ‘credentialism’, which is the “process by which skilled workers begin to perform economic activities traditionally reserved for the unskilled and semi-skilled” (Galiani and Sanguinetti 497). Thus, this process affects the economic fortunes of the unskilled by rendering them unemployed or by reducing their wages. Thus, the economic changes of the 1990s indirectly contributed to income inequality in Argentina.

However, as aforementioned, beginning in 2002, Argentina entered a period of sustained economic growth. The Gini index declined from a high of 0.5 recorded in 2002 to a low of 0.4 in 2009 (Galiani and Sanguinetti 499). During this period, unemployment declined by a whopping 16% to stand at 8 percent as the economy absorbed unskilled workforce (Galiani and Sanguinetti 501). In recent years, strong labor unions and currency coupled with a shift from skill-biased employment to an inclusive approach have reduced the inequality gap significantly in Argentina.

Conclusion

Income inequality trends in Latin America are characterized by three episodes, namely, dictatorial regimes (1980s), trade reforms (1990s), and an era of declining disparity (2000s). Income inequality was more pronounced in the 1980s due to weak institutions. This necessitated the adoption of trade reforms in the 1990s in a bid to bring it down. Since 2000, inequality has declined, partly due to effective labor laws that created employment for the unskilled and a rise in cash transfers (social security benefits). This has helped reverse the macroeconomic conditions that made inequality to soar up during the 1980s and 1990s periods.

Works Cited

Atolia, Manoj. “Trade liberalization and rising wage inequality in Latin America: Reconciliation with HOS theory”. Journal of International Economics 71.1 (2007): 467–494. Print.

Barro, Robert. “Inequality and Growth in a Panel of Countries”. Journal of Economic Growth 5.1 (2000): 5–32. Print.

Ferreira, Francisco, Phillippe Leite, and Julie Litchfield. “The Rise and Fall of Brazilian Inequality: 1981-2004”. Macroeconomic Dynamics 1.1 (2007): 1-32. Print.

Galiani, Sebastian and Pablo Sanguinetti. “The impact of trade liberalization on wage inequality: evidence from Argentina”. Journal of Development Economics 72.2 (2003): 497-513. Print.

Gaviria, Alejandro. “Social Mobility and Preferences for Redistribution in Latin America”. Journal of Lacea Economia 1.3 (2007): 125-134. Print.

Sokoloff, Kenneth and Stanley Engerman. “Institutions, Factor Endowments, and Paths of Development in the New World.” Journal of Economic Perspectives 14.3 (2000): 217-232. Print.

Williamson, Jeffrey. “Five Centuries of Latin America Inequality”. Journal of Iberian and Latin American Economic History 28.2 (2010). 227-252. Print.

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