Facing up to Inequality

It was a difficult year for Latin America and the Caribbean. The East Asian economic crisis and the financial rumblings in Russia generated unsettling aftershocks in emerging financial markets. The bottom fell out of prices for key commodities such as oil and metals, and even nature dealt its blow in the form of El Niño. Volatility has hit again. But thanks to a decade of structural reforms, the region has been better able to cope with economic disruption. Macroeconomic stability may have been at risk in some countries, but the prospects of growth and price stability remain strong. Beyond these recent and hopefully transitory concerns, however, Latin America has a very sad tale to tell. And this is where we have cast our eyes this year. Instead of applauding recent advances, we once again have chosen to address a pressing regional issue. This year’s Report on Economic and Social Progress in Latin America focuses on income distribution, an area where there has been much less progress and where the region still appears to under-perform significantly. On average, the countries of the region suffer from the greatest income inequality in the world. True, there are some countries, such as Costa Rica, Jamaica and Uruguay, where inequality is relatively low by regional standards. But the region also has the countries with the widest income gaps in the world: in Brazil and Guatemala, the top 10 percent of the population amass almost 50 percent of national income, while the bottom 50 percent scrape up little more than 10 percent. More importantly, the problem shows no obvious signs of improvement. Our best measures indicate that income distribution improved in the 1970s, worsened considerably in the 1980s and has remained stagnant at high levels in the 1990s. Even these variations are small relative to the high overall level of income inequality. Thus, income inequality appears to be an enduring phenomenon with deep long-run causes. Addressing income inequality in the region is important for social and political as well as economic reasons. Inequality contributes not only to high rates of poverty, but also to social tension and political disaffection. When only a few can feast on the fruits of economic progress, social stress tears at the fabric of society and political support wanes for the policies that underpin that progress. The issue is on the table in most countries of the region. Despite relatively little evidence, and many unsatisfactory explanations, income distribution is an issue impassioned by strong opinions. This study attempts to assemble the available evidence on inequality, expand it with special statistical information, and use it systematically to test a wide range of potential explanations and remedies.