Friday, April 4, 2014

Latin America: Modest Progress on Inequality

When thinking about the national economies of Latin America, I have a tendency to think of past problems and controversies: the hyperinflations and debt defaults of the 1980s; the arguments over whether and how to follow a "Washington consensus" of market-oriented reforms in the 1990s; and the history of being the highest-inequality region in the world. But as one looks back over the last 25 years, what stands out is not so much the country-by-country issues and problems, but the economic progress the region has made. Did you know that according to World Bank data, Brazil already ranked in 2012 as the 9th-largest economy in the world and Mexico as 10th, putting those two countries just ahead of Italy, Canada, and South Korea. Some progress is happening with regard to poverty and inequality in the region, too.

The World Bank has published a report called "Social Gains in the Balance: A Fiscal Policy Challenge for Latin America & the Caribbean." To set the stage, here's the progress against poverty in the Latin American region in the last decade or so. The share of "extreme poor," classified as those living on less than $2.50 per day, fell by half since 2000. The share of "moderate poor" living on $2.50 to $4 per day also fell sharply. The share of those "vulnerable" to falling back into poverty at $4 to $10 in consumption per day stayed about the same. But bit increase was the "middle class," which refers to those living on between $10 and $50 per day. Indeed, of these four groups, the "middle class" is likely to become the largest in the next few years.

The World Bank has a simple measure of whether economic prosperity is being "shared." It compares the growth rate of income for the bottom 40% of the income distribution to the overall average. That measure helps to explain why inequality in Latin America has declined since 2000--although that reduction in inequality has stagnated in the last few years.

The reduction in inequality and gains in shared opportunity are quite real. For example, here's a graph showing various measures of progress in Brazil.

So far, most of the reduction in inequality in Latin America has come from economic growth. As the World Bank also estimates: "About 68 percent of poverty reduction between 2003 and 2012 was driven by economic growth, with the remaining 32 percent arising from decline in inequality." Moreover, given that shared economic growth was also reducing inequality, only a portion of the decline in inequality is due to government redistribution. 

Some of the decline in inequality is being pushed by government fiscal policies, especially in the form of in-kind transfers where more money is spent on education and health care for the poor. "Between
2000 and 2011, social spending as a share of GDP rose from 11.7 to 14.5 percent, with public spending on education rising from 3.9 to five percent, capital expenditures from 3.5 to 4.5 percent, and health spending from three to nearly four percent across the 18 countries tracked by the Economic Commission for Latin America and the Caribbean. . . .To support the higher spending, the region increased tax collection from 16 to 20 percent of GDP between 2000 and 2010."

However, despite these modest steps, the amount of redistribution in Latin America remains small by the standards of high-income countries. The light blue squares show the distribution of income in various countries, as measured by the Gini coefficient (a measure discussed in yesterday's post). Notics the in terms of pre-tax, pre-transfer income, the nations of Latin America have relatively high inequality--but not remarkably so. However, the governments of Latin America still do so relatively little to reduce inequality, and so their after-tax, after-transfer level of inequality is well above that of the high-income countries.  

The severe degree of inequality in Latin America over the decades has meant that it was underinvesting in the education and health of a large proportion of its population.