Tmd Discussion Paper No. 66 Distribution and Growth in Latin America in an Era of Structural Reform

The first section of this paper reviews the most recent evidence on inequality in 18 Latin American countries and shows that in all but four the changes in inequality over the 1990s were small and insignificant. The distribution depends on the ownership and rate of return on assets, particularly human capital. In the short run changes in these two variables tend to be offsetting-growth widens skill-differentials which is regressive, but advances in education are progressive. The two effects roughly cancel each other out absent severe macroeconomic shocks or revolutionary changes in the rules of the game. The paper then summarizes various recent papers as well as the author’s recent work on the impact of structural reforms on inequality. That work shows that the recent reforms have had a negative but small regressive impact on inequality mainly because many of the individual reforms had offsetting effects. Trade and tax reform have been unambiguously regressive, but opening up the capital account is progressive. Finally, the paper presents evidence of a significant slowdown in the growth rate and argues that given this fact and the insensitivity of the distribution to feasible policy measures, the main problem facing the region at present is not how to improve the distribution but rather how the increase the growth rate. 1 Prepared for a OECD conference on the effects of globalization on poverty and income inequality in developing countries in Paris 30 November-December 1, 2000. Support from the Ford Foundation in the preparation of this paper is gratefully acknowledged.