NS4540 Winter Term 2019 Latin America: Income Distribution Reyes and Sawyer, Second Edition chapter 1

Overview Oxford Analytica, “Latin America: Income Distribution Gains Will Slow”, October 5, 2016 Between 2003 and 2013 income inequality declined across Latin America, although the income share of the wealthy remained high. Contributing to these results: positive labor market outcomes and Inclusive social policies Since 2013 however, the gains have slowed, and inequality has again increased in some countries.

Analysis/Impacts I Improvements in the Gini coefficient are slowing across the region – in Bolivia and Mexico inequality has risen Further deterioration of public services and increasing segmentation in both social delivery and labor market outcomes appears likely Shift to the center-right and fiscal constraints may reduce efforts to implement progressive income taxes or protect labor rights At a time when many other countries income gaps expanded, Latin America’s contracted The regional Gini coefficient decreased to 0.47 in 2012 from 0.54 in 2003 The improvement took place across the region with Costa Rica and Honduras the only exceptions

Analysis/Impacts II The poorest 20% of the population expanded their share of total income more than any other group in all countries Honduras and Peru exceptions In some countries – El Salvador the bottom 20% more than doubled their shares This contributed to a rapid reduction of poverty – people below the national poverty line decreased to 28% in 2013 from 44% in 2002 Improvements in income distribution were particularly impressive in Argentina Brazil Ecuador El Salvador, and Peru

Factors Behind Trend I Creation of Formal Employment – between the early 2000s and the early 2010s unemployment decreased significantly El Salvador fell to 4% from 13% Uruguay from 17% to 7% Chile to 7% from 10% and Brazil to 6% from 9% Most new jobs created in the formal sector Reduction in the Skill Premium – unlike the 1990s, wages of low-skilled workers increased faster than those of skilled workers, particularly in commodity exporting countries Demand for unskilled workers particularly in services expanded particularly fast

Factors Behind Trend II Expansion of non-contributory programs – governments across the region focused on the poor Policy innovations went well beyond conditional cash transfers programs. Creation of new health care programs for low income groups and rapid growth of non-contributory pensions were more relevant Electoral competition contributed significantly to promoting inclusionary social programs Social spending increased in countries where left not in power such as Colombia and Mexico

Inequality at the Top I According to household surveys, share of the top decile fell significantly during the 2000s However these surveys cannot adequately capture the income of the very rich These groups tend to be under-represented and Their answers regarding capital income are often inaccurate. Recent years have seen attempts at measuring top 1% through other means Tax receipts and Estimations based on the national accounts

Inequality at the Top II Using these methods, the share of the top 1% (and as a result that of the top 10%) is higher than previously estimated (2009) ranging from: Uruguay 14% Brazil 25%, and Chile more than 30% These shares substantially higher than in U.S. and all OECD countries, where this has become a political issue. Based on the new data Latin America inequality is much higher in Columbia The share of the top1% did not decline

Inequality at the Top III Means the very rich have succeeded in protecting their economic power despite economic and political transformations – reasons: Dominance of oligopolistic markets The concentration of capital and land in few hands and Low effective income tax rates However this does not mean that progressive redistribution between the upper middle class and the poor did not take pace during the 2000s.

Recent Slowdown End of the commodity boom and subsequent reduction of economic growth has contributed to the slowing of income equality Job creation has stagnated and likely to affect unskilled workers disproportionally Maintaining the expansion of minimum wages in countries such as Argentina, Brazil or Ecuador will be hard – negative implications for labor income Growth of non-contributory pensions faces severe fiscal constraints, particularly in Brazil and Ecuador. To improve health and education, governments would need to implement reforms opposed by powerful interest groups Trade unions will try to block any attempts to expanding working hours and implement

Assessment Further improvements in income distribution face economic and political obstacles Deteriorating economic conditions The weakening of the center-left, and The difficulty of reforming health care and education Still anti poverty policy will remain popular due to their low cost and the electoral support they generate among some sectors.