Inequality in Latin America: Understanding Its Evolution in the 1990-2013 Period

Historically, Latin America has been the most unequal region in the world (De Ferranti, 2004). From colonial times to neoliberal reforms (Rodrik, 2002), the region experienced the consolidation of stratified societies with low levels of social mobility (Torche, 2014). Nevertheless, a new phenomenon appeared in the first decade of this millennium: while in all the developing world inequality was growing, in Latin America it was falling (Milanovic, 2011).

This paper examines the causes of the dynamics of inequality in the 1990-2013 period in Latin America, arguing that the intervention of a new trend of progressive-left governments influenced the reduction of the income gap after the 2000s. I operationalize government intervention with the quantitative measure of Social Expenditures per Capita and the level of inequality with the Gini Coefficient of income. Neoclassical authors in Latin America argue that the dynamic of inequality is driven mainly by economic growth (Rojas-Suárez, 1998); I claim that this latter factor is only partially responsible for the reduction of inequality in the region. Social Expenditures per capita, however, are unlikely to have uniform effects across countries.

This paper uses panel data to estimate the causal effect of government spending in the levels of inequality in Latin America for the period 1990-2013. Improving previous contributions, controlling effects of related variables and fixed effects first, the study suggests three conclusions: 1) there is a negative effect between government spending and levels of inequality, 2) there are institutional factors that influence the reduction of inequality, most notably the role of the minimum wage and the presence of unions and, 3) the validity of progressive policies when addressing income inequality. The research proposes an interrelation of forces determining inequality, and suggests that income inequality can be reversed with political and institutional will: an important message to the developed world, where signals of a feasible reduction of inequality are needed.