Economic inequality in Latin America has historically been – and is currently – higher than in much of the rest of the world. For a time, it seemed that large pro-poor programmes, particularly conditional cash transfers (CCTs) – conditional mainly on attending schools and health visits – made some dent on inequality. Such CCTs were pioneered in Mexico, though it has now discontinued that policy, and have been pursued in a major way in Brazil, Colombia, Chile and elsewhere. Have these – and other transfer programmes – made a significant difference?

Conditional cash transfers, originally introduced in the late 1990s and in the 2000s, were definitely an important innovation in Latin American social protection systems. They broke with the historical pattern of social security benefits linked exclusively to formal sector employment that had been prevalent in the region since the 1930s and 1940s. I have elsewhere called that previous system a “truncated welfare state” because retirement pensions, health insurance and unemployment benefits did exist, but were restricted to the “working aristocracy”, and excluded the poorest workers, who were typically informal, and often accounted for 40-60% of the labour force. CCTs were generally well-targeted, were not related to formal employment, and did reach most of the poorest people in the countries that adopted them.

Transfers accounted for about a fifth of the overall decline in inequality during the 2000s – not negligible by any means, but nowhere near as important as changes in the labour market

They did contribute to a measurable reduction in poverty, particularly in the countries with the larger programmes, like Brazil, Mexico and Colombia. But their effect on inequality was not as large as is sometimes thought, because the transfers themselves were fairly small. Research by Joao Pedro Azevedo, Gabriela Inchauste and Viviane Sanfelice found that transfers – both conditional and unconditional – accounted for about a fifth of the overall decline in inequality in the region during the 2000s. Not negligible by any means, but nowhere near as important as changes in the labour market, where an expansion in the educational levels of workers led to higher incomes at the bottom of the wage distribution and – via declining returns – reductions at the top.

How is inter-generational inequality – that which is transmitted down through parents’ education, income, ethnic status, neighbourhood, and so on – in Latin America compared to middle-income developing countries elsewhere?

There is the usual problem of making comparisons with Africa, where poverty and inequality are typically measured in terms of consumption expenditures, whereas in Latin America household incomes are generally used. That said, a group of us has been building a database on the intergenerational transmission of inequality – the Global Estimates of Opportunity and Mobility – where we find that intergenerational persistence is very high in Latin America and the Caribbean.

On average, factors like your parents’ educational levels and occupations, your race and gender, and your region of birth, account for 55% of current levels of observed inequality – ranging from 46% in Argentina to 66% in Brazil. And because many other inherited factors are not observed, or cannot be fully exploited because of sample size limitations, these figures are almost certain to be an underestimate.

On average, inherited factors – like your parents’ educational levels and occupations, your race and gender, and your region of birth – account for 55% of current levels of observed inequality

The database covers 72 countries, and income is used as the main wellbeing indicator in 56 of them. Amongst these, only one has a higher share of inherited inequality than the Latin American nations: South Africa, where the share is 77%. The next six highest are in LAC, then we have India and Cyprus, and then more Latin American countries. So, LAC is not only a region of very high levels of income inequality; it is also a region where socioeconomic status is highly persistent, mobility is low, and opportunities are unequal.

Nearly 50 years back Edmar Bacha (a Brazilian economist) and Lance Taylor (an American economist) wrote a widely-noted article tracing the impact of inequality on the typical Latin American growth pattern, which they called “Belindia”, where one small part of the economy is as rich as Belgium whereas the rest of the economy is as poor as India. Do you see any change in that growth pattern now?

It is interesting that you bring up Belindia – a testimony to the lasting power of Bacha and Taylor’s allegory, which has remained influential in Brazil’s self-image to this day. Does it remain true today? I think that’s a matter of degree and it varies across the region. In the least developed countries in the region – some of which are also amongst the most unequal – the situation has changed little. Guatemala and Honduras spring to mind. In other countries, particularly the more dynamic ones, like Chile, Costa Rica and Mexico, the commodity boom of 2002-2015 (or thereabouts) saw a substantial expansion of the middle class. Back in 2013, using an income-based definition of the middle class, we found that countries like Argentina, Chile and Uruguay were majority-middle-class countries. And while the rate of progress has slowed or even stagnated since then, I don’t think there has been a substantial reversal.

Now, don’t get me wrong: this does not mean that inequality is now low in these countries. Only that the extreme polarisation into two groups – the dualism implicit in the Belindia allegory – is probably too simplistic a description of these more complex economies today.

Some economists emphasise labour market policies – minimum wages, promotion of trade unions, job training, and so on – more than transfer policies to help the poor. Trade unions have declined everywhere. Do you see any prospects for their rejuvenation in Latin America, so that they may advocate and support those labour market policies? I spoke to Dani Rodrik recently, who thinks that for “good jobs” we have to look to the (new technology-enabled) service sector, rather than the manufacturing sector. Do you have a view on this in the context of Latin America?

As I said earlier, most of the progress against inequality – and even poverty – in Latin America this century has indeed come through the labour market, rather than transfers – though the transfers have also contributed. I think the dominant view is that the main channel operating through the labour market was the effect of a substantial change in the educational composition of the labour force. The share of workers who completed secondary school in countries like Brazil and Peru, and tertiary education in countries like Argentina and Chile, rose very sharply. This increased their own incomes and, as relative scarcity changed, it also raised returns to those less educated than them.

But labour market institutions played a role too. While unions have been historically important in some countries – notably Argentina, but also Brazil during the birth of the Workers Party in the 1970s and 80s – the most economically important labour market institution or policy in the region has been the use of minimum wages. These have often – but not always – contributed to reductions in inequality. They have typically worked best when set some way below median wages, and when minimum wage increases coincided with economic expansions. I know of at least one case when raising minimum wages during a period of stagnation actually made things worse, by raising noncompliance and increasing informality.

Indeed – a distinctive characteristic of the typical Latin American economy is that a majority (about 55%) of workers are informal – the share is high, though not as high as in South Asia or Sub-Saharan Africa. Since most of these workers cannot directly benefit from minimum wages, trade unions or pensions, what do you think are the prospects of some universal policies that can particularly benefit informal workers, like a universal basic income supplement, universal child care or universal health care?

That’s right, informality is a defining feature of our economies and labour markets, and it acts as a real drag on the effectiveness of a number of policy interventions. I mentioned before the limits it places on the effectiveness of minimum wage policies – although I should add that it isn’t completely true to say that they have no effect on informal workers. There is plenty of evidence of what people call a “lighthouse effect”, whereby rises in minimum wages in the formal sector “spill over” into the informal sector. Nonetheless, that link works better when economies are growing, and tends to break down during bad times, which is perhaps when they would be most needed.

In terms of universal policies, I think there is tremendous scope for universal health care and childcare. Brazil’s Sistema Único de Saúde (SUS), for example, although underfunded and very far from perfect, is overall a big success story, with large positive impacts on the wellbeing of the poor. I know less about truly universal childcare systems in the region, but there is plenty of evidence that early childhood development, nutrition, and childcare systems like Chile Crece Contigo, for example, have made a real difference for the better in the lives of many, many children in the region.

I think there is tremendous scope for universal health care and childcare… In Brazil, for example, this has overall been a big success story, with large positive impacts on the wellbeing of the poor

I am a little more sceptical about a full universal basic income scheme in a region as unequal as ours. I am not sure the math works out: when the gaps are so large, extending benefits to everyone requires much larger tax revenues than even pretty generous targeting. The work I have seen so far is not supportive of full-blown UBIs in the region.

Compared to Asia, Latin America seems to have suffered from macroeconomic instability problems more often (Argentina’s, of course, have been perennial). Why do you think that is the case? Why is the domestic savings rate in Latin America in general so much lower than in Asia?

These are two very good questions, to which I am not sure I know the answer… I think it is plausible that there is a two-way relationship between inequality and macroeconomic instability. There is macroeconomic evidence – with all its perils and pitfalls – that past inflation is associated with higher subsequent inequality. If nothing else, just the differential timing in wage adjustments can mechanically introduce some additional variation in wages and other incomes, although it probably goes deeper than that. With high inflation, the rich are able to better protect their wealth through indexed or interest-bearing assets, whereas the poor end up holding a larger proportion of what they own as cash. The inflation tax is therefore known to be very regressive.

But the more intriguing direction of causation is probably the reverse one. An argument can be made that in very unequal societies, economic policymaking ends up focusing on the distribution of the pie, rather than on collective investment. Willingness to pay taxes and contribute to the fisc is lower, while everyone demands a greater share of government largesse, leading to systemically larger deficits and the attendant instability.

An argument can be made that in very unequal societies, economic policymaking ends up focusing on the distribution of the pie, rather than on collective investment

As for the lower savings rate in Latin America, I haven’t seen a definitive explanation. Possible theories include: (i) comparatively large banking spreads in oligopolistic financial systems, which may lead to lower returns for savers even as capital is very expensive for borrowers; and (ii) low trust in government and a fear of expropriation may discourage savings and asset accumulation. But I don’t really know the answer to that very important question!

The concentration of capital is probably larger in Latin America than in other developing countries. Why do you think that is? Is a major form of entrenchment of capital due to its disproportionate influence on politics through campaign finance and lobbying, as in the US? Are anti-monopoly policies rather weak?

We actually have relatively little solid evidence on wealth inequality in the region. The authors of a recent stocktaking for the Latin American and Caribbean Inequality Review argue that they can only be really confident about top wealth shares for three or four countries in the region. For those, the richest 1% own about 40% of measured wealth – much more than in Europe, but not that different from some countries in the Middle East, or even from the US.

The mechanisms through which these very high levels of wealth inequality are preserved do include various kinds of economic and political capture, through unregulated – or lightly regulated – monopolies and other forms of market power, as well as through the exercise of political influence and lobbying. But the roots of these disparities run very deep, at least to colonial – and, in some cases, pre-colonial – times and institutions.

During most of the colonial period, the dominant economic activity on the Atlantic side of the continent was plantation agriculture, organised around very large landholdings owned by a few European families and operated by masses of entirely dispossessed African slaves. On the Pacific side, mining by indentured indigenous labour shared some of the same essential features. These were societies with almost unimaginable levels of wealth inequality. Although things have obviously changed, some of the wealth inequality we see today – and some of its reliance on the promiscuity between the economic and political power of elites – inevitably harks back to those days.

Compared to many other parts of the world where extreme right-wing politics dominate (or are threatening to), several Latin American countries have centre-left governments of one form or another, as in Brazil, Mexico, Colombia, Uruguay and Chile. Do you see any major difference in the policy ecosystem as a result of this?

My sense is that Latin America actually epitomizes the rising polarisation we see in so many parts of the world. In Brazil, Lula beat Bolsonaro in the last elections by an uncomfortably narrow margin, and the country remains deeply polarised. In Argentina, Milei represents many of the same far-right ideas as his allies in Brazil and the United States, and the main Peronist opposition is a deeply corrupt and incompetent party that has failed repeatedly to govern the country responsibly. Chile, which twenty years ago demonstrated how economic growth and social progress could go hand-in-hand under a centrist coalition – the Concertación – now looks very likely to fall back into the hands of a xenophobic and retrograde right-wing coalition.

At the other extreme, we have left-wing dictatorships in Venezuela, Cuba and Nicaragua which violate basic human and political rights while spectacularly failing to deliver economic prosperity. It is true that the democratic left rules in Colombia and Mexico (and Chile, for a little while longer), with mixed results but, at least in the case of Mexico, massive popular support. The centre left is largely doing a good job in Brazil, Uruguay and Guatemala. But, with the possible exception of Uruguay, polarisation and political extremism abound in the region. It is not a pretty picture, whichever way you look at it.

 

 

 

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