A Multidimensional Analysis of Inequality in Latin America and How to Reduce It
Clemente Ruiz Durán and Moisés Portillo
Our hypothesis is that inequality is a multidimensional problem, that cannot be addressed based on the change of one variable; it requires simultaneous actions that could allow the rise of the income at the base at a more rapid pace than the increase of incomes at the top. For that purpose, we proopose a micro-simulation analysis that could explore some Latin American countries, for the period 1990 to 2015.
The paper explores the inequality in five Latin America countries –Argentina, Brazil, Colombia, Chile and Mexico–, and how it has evolved through the behavior of Gini coefficients. In this region, inequality levels are among the highest in the world: according to World Bank data, Colombia’s coefficient is the worst (53.49), followed by Brazil (52.87), Chile (50.45), Mexico (48.07) and Argentina (42.28). In all cases, the last data available show that there has been a reduction on inequality, with exception of Colombia.
In order to explain the evolution of inequality and to design an agenda to reduce it, an analysis in four dimensions will be delivered:
- The first analysis will be the accumulation rate; low rates hinder GDP growth and, with it, the expansion of formal employment, producing a large informal network and, hence, larger inequality. Latin American countries have had low rates of investment, compared with those in East Asia: the lowest rate of investment as ratio of GDP of the countries analyzed is observed in Argentina, with 17 percent of GDP, and the largest one in Colombia, with 25 percent, compared with 30 percent in South Korea, or 50 percent in China.
- The second dimension of analysis will show how productive specialization in the region, has been biased toward capital, giving as result low employment multipliers creating a large informal sector, that is characterized by low incomes and lack of competitiveness, increasing inequality.
- The third dimension will be wage analysis, which brings in the framework for analyzing business and unions relations: few contracts in the regions have productivity clauses, bargaining depends mainly on inflation targets, and minimum wage that should be considered the baseline for subsistence has remained low. Minimum wage in Mexico was 137 dollars per month in 2000 and in 2011 was 174, while in Brazil rose from 125 to 297 dollars, in Chile from 260 to 468 dollars and in Colombia from 263 to 396 dollars. All this has brought in an increase in inequality.
- The fourth dimension will be the institutional framework, where welfare policies play a very important role, but due to the weakness of Latin American States, that have one of the lowest tax to GDP ratio of the world, public expenditure is low and does not have universal coverage, increasing inequality.
From this analysis, an agenda will be described to show the path of growth that is required and with what sort of institutional framework, in order to prevent this countries from being trapped in the midle income dilema, with large inequalities arising due to the lack of growth and to the weak institutional framework, that avoid the role of the State to be effective and efficient.