The Economy and Latin America

The going gets tougher
Sustaining recent social progress may require a squeeze on the richMar 1st 2014 | From the print edition

FOR Latin Americans, the past dozen years have been remarkable. The region has seen a magical combination of faster economic growth, falling poverty and declining income inequality. Is this unprecedented period of progress over?

Growth has certainly slowed, to below 3% in the past two years compared with an annual average of 5% in 2003-08. But poverty continues to fall. In a report* released this week, the World Bank reckons that in 2012 only a quarter of Latin Americans were “poor”, a category defined as those living on less than $4 a day at purchasing-power parity (see chart). The largest social group in the region is made up of those whom the bank defines as “vulnerable” to sinking back into poverty. But they are set to be surpassed in size by the middle class sometime in the next three years. That is significant, not least because the bank uses a more realistic definition of the middle class (a daily income of $10-50) than those often bandied about in the region.
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As growth slows, however, so will the pace of the fall in poverty. The bank expects the annual decline in the number of poor to have dropped to only 0.8 percentage points since 2012, from 1.8 points in 2003-12. It also thinks the fall in income inequality has come to an end. The region’s Gini coefficient—a standard measure where zero means that income is equally shared and one means one person takes it all—fell from 0.57 in 2000 to 0.52 in 2010, but the bank reckons it has more or less been stuck there since. This still leaves Latin America as the world’s most unequal region, along with sub-Saharan Africa.

That assessment may be a bit pessimistic. The bank pools data from 17 countries in the region to come up with averages (it excludes Venezuela, whose statistics are not verifiable by outsiders). Nora Lustig, an economist at Tulane University in New Orleans, has crunched the household-survey numbers for individual countries. She thinks the fall in income inequality is continuing in many countries, and has accelerated in Argentina, Bolivia and Ecuador—though not in Mexico, where it seems to have reversed in 2010. But she, too, thinks there is a risk of the fall in inequality petering out.

Government cash-transfer programmes to the poor, and demographic changes—a smaller proportion of dependents and more women going out to work—have played a role in reducing inequality. But the big change has been in wages: unlike in many developed countries, differentials between higher and lower earners have fallen in Latin America. The expansion in education, especially secondary schooling, has reduced the premium this previously attracted in the labour market. In some countries big rises in the minimum wage have also helped.

Such gains may have largely run their course. The poor quality of the region’s public schools risks holding back the expansion of higher education (together with slow economic growth, that seems to be the problem in Mexico, says Ms Lustig). Growing fiscal constraints and competitiveness problems mean the scope for rises in the minimum wage is limited.

So what can governments do to keep progress going? The most important answer is to undertake the structural reforms required to boost economic growth as the commodity boom wanes: 70% of the fall in poverty in 2003-12 was due to a rise in incomes from employment, not from social programmes, according to the bank. This message will be reinforced by a likely rise in poverty in Venezuela and Argentina, whose economies are suffering stagflation after years of handouts.

Keeping the fall in inequality going will require a crusade to improve the quality of education—which is easier said than done. Many governments need to spend more on health and education, especially for brown, black and rural Latin Americans, whose opportunities continue to lag behind. That means raising taxes (see page 80). But since most countries rely excessively on consumption taxes, this in turn risks aggravating inequality rather than reducing it.

Data on income from capital are skimpy. But because taxes on property, inheritance and capital gains are all low to non-existent, it is clear that, compared with their peers elsewhere and their salaried fellow-countrymen, rich Latin Americans pay less than their fair share of taxes. Keeping the fall in poverty and inequality going may require a squeeze on the rich—but done cleverly, so as not to deter growth-enhancing investments.

* “Social Gains in the Balance: A Fiscal Policy Challenge for Latin America and the Caribbean”, February 2014

From the print edition: The Americas

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