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April 18, 2016
Following about 10 years of narrowing the inequality gap that has long been a defining characteristic of Latin America, the trend of inequality is slowing and is even stagnating in some countries of Latin America. Researchers and policymakers have focused on Latin America which is famously the most unequal region in the world in order to try and prove that inequality can in fact be beaten and reduced. Data shows that out of 17 Latin American countries, 16 of them between the years of 2000 and 2010 registered an unambiguous decrease in income inequality. However, new data collected by the World Bank that focuses on household data has found that the inequality trend is stagnating.
The stagnating of the income inequality figures does not mean that there is a reversal of the inequality trend but in fact that the rate of decline in the narrowing of the inequality is slowing and in some countries stagnating. The Gini index used by the World Bank to measure inequality shows that between 2000 and 2010, inequality declined on average by 0.94% per year whilst in 2011 it fell by 0.33% and in 2012 just by 0.02%. These trends can then be peeled back further to assess the results on a country by country basis. The UN Development Programme commented in their recent research on inequality in Latin America that Mexico, Panama and to a lesser extent, Brazil have seen a slowing down in their reduction of inequality between 2002 and 2012. However, more countries from the region such as Chile and Paraguay are added to this group of plateauing inequality when studying just the data from the years 2007-2011.
Some Latin American countries are witnessing stagnation in the reduction of their inequality gaps due to a number of reasons. Lower growth in labour income at the bottom end of the income pyramid, less effective social assistance due to fiscal constraints or changes in targeting and a lower impact of pensions as a result of the previous reasons outlined are adding to this stagnation. The labour market seems to be the main culprit especially in the low-skilled segment in the service sector which saw the biggest gain in job numbers during the commodity boom in Latin America. A growth in labour income can be seen as both a benefit for society as it reduces poverty whilst also being a cost to businesses through higher labour costs.
By beginning to introduce structural reforms that in turn translate into an improved business environment, the labour costs to businesses can be reduced as it frees labour markets and deregulates labour benefits. Following Mexico’s recent reforms, a number of fiscally-constrained countries will take this path to combating stagnation. This could however have a negative effect with a ‘race to the bottom’ strategy where low wages cannot be used to measure development success as is the case in Peru. Another way to tackle stagnating inequality is to strengthen social protection networks especially encouraging returns to education across the different labour market segments. Instead of a race to lower labour costs this is a battle between education and technology and is the reason why some countries such as Colombia are able to sustain growth with increases in productivity rather than through booming external prices. This route is very likely to be followed by the commodity boom nations of Brazil and Chile.
Whilst the above options for tackling stagnating inequality may apply or be followed by some of the countries in Latin America, the more likely course of action will be to do nothing as reforms that concern inequality are intensive both in terms of political and institutional capital. Countries that adopt the ‘do nothing’ strategy will instead attempt to sustain the declines in poverty through a more intensive economic growth. However they are likely to find within at least the next 5 years that ‘more of the same’ does not yield the same. What is for certain is that the Latin America is likely to show a renewed appetite for structural reforms in the not too distant future.
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