Inequality in Latin America And The Caribbean

World Bank
October 8, 2003

New World Bank study shows deep institutional and policy reforms needed to solve region's persistent inequality

To break with the long history of inequality in Latin America and the Caribbean, societies need to undertake deep reforms of political, social and economic institutions, improve access by the poor to vital services and assets—especially education—deliver income transfers to poor families, and adopt specific policies to help indigenous people and Afro-descendants, a new World Bank study says.

Inequality in Latin America and the Caribbean: Breaking with History?(Chapter 1 | Chapter 2) released here today, is the World Bank's major annual research study on Latin America and Caribbean. It explores why the region suffers from such persistent inequality, identifies how it hampers development, and suggests ways to achieve greater equity in the distribution of wealth, incomes and opportunities.

"Latin America and the Caribbean is one of the regions of the world with the greatest inequality," said David de Ferranti, World Bank Vice President for Latin America and the Caribbean who, with Guillermo Perry, Francisco H.G. Ferreira and Michael Walton, guided the team that produced the report. "Latin America is highly unequal with respect to incomes, and also exhibits unequal access to education, health, water and electricity, as well as huge disparities in voice, assets and opportunities. This inequality slows the pace of poverty reduction, and undermines the development process itself."

The richest one-tenth of the population of Latin America and the Caribbean earn 48 percent of total income, while the poorest tenth earn only 1.6 percent, the research team found. In industrialized countries, by contrast, the top tenth receive 29.1 percent, while the bottom tenth earn 2.5 percent. Using the "Gini Index" of inequality in the distribution of income and consumption, the researchers found that Latin America and the Caribbean, from the 1970s through the 1990s, measured nearly 10 points more unequal than Asia, 17.5 points more unequal than the 30 countries in the Organization for Economic Cooperation and Development, and 20.4 points more unequal than Eastern Europe.

The data show that inequality in the least unequal LAC country—Uruguay—is higher than in the most unequal country in Eastern Europe and the industrialized countries. On average, income inequality has tended to worsen slightly in the region, though experiences have varied. Some relatively equal countries, including Argentina, Uruguay and Venezuela have experienced rises in inequality—Argentina dramatically so. By contrast Brazil, historically the most unequal country in the region, experienced a modest, but significant improvement. Mexico may also have enjoyed a small improvement.

Race and ethnicity: two determining factors

The report singles out race and ethnicity as enduring determinants of one's opportunities and welfare in Latin America. Indigenous and Afro-descended people are "at a considerable disadvantage with respect to whites," the report says, with the latter earning the highest wages in the region. Focusing on seven countries—Brazil, Guyana, Guatemala, Bolivia, Chile, Mexico and Peru—the study found that indigenous men earn 35-65 percent less than white men. The disparity between white women and non-white women was in the same range.

In contrast to enduring gaps correlated to racial and ethnic differences, Latin America has experienced progress in narrowing gender differentials in income and education. In much of the region, girls and young women are actually overtaking boys and young men in educational attainment.

A deeply rooted and complex problem

Inequality is as deeply rooted as it is complex. The World Bank's research team drew data from 20 countries based on household surveys covering 3.6 million people, and reviewed extensive economic, sociological and political science studies on inequality in Latin America. The team found that the unequal distribution of resources that characterizes the region today follows a pattern set with specific traits of European colonization in the region.

In modern times as in the early colonial periods, elite populations shaped institutions and policies to serve their interests first, the report found. For instance, most LAC countries did not achieve high levels of literacy until well into the 20th century. Low levels of support for basic education contrasted with generous financing for universities, where the children of the elite were trained. Political institutions in the region, typically, have been weak. And while transitions to democracy have brought valuable gains, patterns of influence remain highly unequal, with traditions of clientelism and patronage often continuing despite national and local elections.

Four ways to break the inequality pattern

In a global economy, where "human capital" is critical to competitiveness, inequalities which result in a failure to develop people's skills and knowledge to optimum levels, among other factors, can actually slow down the rate of economic growth, and weaken the poverty-reducing impact of the growth that does occur.

To address the deep historical roots of inequality in Latin America, and the powerful contemporary economic, political and social mechanisms that sustain it, the World Bank report outlines four broad areas for action by governments and civil society groups to build coalitions to break this destructive pattern. They are:

  • Build more open political and social institutions, that allow the poor and historically subordinate groups, such as Afro-descendants and indigenous people, to gain a greater share of agency, voice and power in society.

  • Ensure that economic institutions and policies seek greater equity, through sound macroeconomic management and equitable, efficient crisis resolution institutions, that avoid the large regressive redistributions that occur during crises, and that allow for saving in good times to enhance access by the poor to social safety nets in bad times.

  • Increase access by the poor to high-quality public services, especially education, health, water and electricity, as well as access to farmland and the rural services the poor need to make it productive. Protect and enforce the property rights of the urban poor.

  • Reform income transfer programs so that they reach the poorest families, including use of measures that are conditional on keeping children in school and attending health services, so as to improve their lifelong income-earning capacity.

    "The key to reducing inequality in Latin America is institutional reform," said Guillermo Perry, the Bank's Chief Economist for Latin America and the Caribbean, and co-author of the study. "To overcome the inequality that undermines their efforts to get out of poverty, poor people must gain influence within political and social institutions, including educational, health and public services institutions. To enable them to achieve such influence, the institutions must be truly open, transparent, democratic, participatory—and strong."

    Perry and fellow research team leaders Francisco H. G. Ferreira and Michael Walton concluded that success in "breaking with the long history of inequality in Latin America" depends on "strong leadership and broad coalitions" to achieve progress in the first area for action, namely to mobilize "the political agency of progressive governments and the poor."

    As institutional reform proceeds, allowing poor people to gain purchase on decision-making, policies to reduce inequality are more likely to be adopted. Based on a review of policy experiences in Latin America, the World Bank research team identified three areas where specific reforms would have most impact in reducing inequality: fiscal and financial institutions, public services and the region's "truncated, elitist welfare state".

    In addressing this complex agenda, the report focuses on a specific set of measures as an illustration of what is possible. For example, targeted income transfers conditioned on keeping children in school and attending health services could be an important part of a more equitable welfare state. In making the case for expanded use of conditional cash transfers, the research team cites examples of success programs such as those underway in Mexico, Brazil and Nicaragua.

    These promising results indicate that the long history of inequality in Latin America and the Caribbean can be broken, the report says.

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