Friday, 30 November 2012

The World Bank’s view on inequality in Latin America: a cautionary note

By Carlos Fortin

Latin America is the region of the world with the highest level of income inequality. Until now the evidence appeared to indicate that, despite a fairly respectable performance in terms of growth in the last decade, inequality had not been decreasing and might even have been worsening.

Supporters of the neoliberal economic model that prevails in the continent have therefore enthusiastically received a recent report from the World Bank1  that seeks to show that things are not as bad as have been depicted; in doing so, however, the report confirms the fears of the critics of the model with regard to the prospects for equality.

The report’s main message is that inequality has in fact decreased in the period 2000-2010 2:
  • In 12 of the 15 countries for which there are comparable data the Gini coefficient has gone down by an average of 5 points (unweighted);
  • In the three largest economies of the region, Brazil, Argentina and Mexico, the decrease was 5, 6 and 7 points respectively.
The report attributes this to what it terms ‘sustained German-like growth rates for the top tenth of the income distribution, combined with Chinese-like growth rates for the bottom tenth, over a 10-year period’, and goes on to comment that ‘It is difficult to overstate the importance of this achievement’(p. 18).
The picture, however, is not all that benign: 
  • Even after this improvement the levels of inequality in Latin American remain ‘unacceptably high’(Ibid.): the average Gini  in 2010 for the 12 countries that are improving was 0.482, compared with 0.257 for the Scandinavian countries.
  • Furthermore, the rate of improvement over the 10 years is very modest indeed; should the tendency be maintained it would take the 12 countries 50 years to reach the level of equality of Scandinavia.
More worrying is the fact, also recognised by the report, that the reduction in income inequality is not the result of structural change leading to a more equal primary distribution of income –i.e. before taxes and transfers. Instead it is the outcome of favourable international conditions (the Chinese demand for commodities) and especially of government redistributive transfers. This is particularly the case in the high performers; the Benefício de Prestação Continuada and Bolsa Família programs in Brazil and the Oportunidades social assistance program in Mexico account for between 18 and 20 per cent of the decline in income inequality in those countries.

The ability of the governments to maintain that level of support depends on whether the economies will continue to perform well. This in turn is highly dependent on the international economic context remaining favourable, an uncertain prospect at best. The gains are therefore fragile, and do not relieve the governments from the need to engage in serious structural reforms as the only solid basis for a reduction in inequality.

1 Francisco H. G. Ferreira, Julian Messina, Jamele Rigolini, Luis-Felipe López-Calva, Maria Ana Lugo, and Renos Vakis, Economic Mobility and the Rise of the Latin American Middle Class, Washington D.C., The World Bank, 2013. At (Pdf)
2 Based on data in the Socio-Economic Database for Latin America and the Caribbean (SEDLAC). At