Financial reforms and falling inequality in Latin America, 2002-2012: are they connected?

Author:Cornia, Giovanni Andrea

29 October 2014

For the last quarter of the twentieth century, Latin America suffered from low growth, rising inequality, and frequent financial crises; i.e., currency, sovereign debt, and banking crises. For instance, between the early 1980s and 2002 there were at least 26 major banking crises involving 15 countries. Sovereign debt defaults and currency crises were frequent, as were 'double' or 'triple' financial crises (as in the case of the 'Tequila crisis' of 1994, Ecuadorian crisis of 1999, and Argentinean default of 2001-02). The cost of such crises was massive, as during the three years subsequent to their outbreak the cumulative output losses reached up to 98 per cent of GDP. During this period, the high income inequality that had afflicted Latin America for centuries rose further--from a Gini of 48.9 in early 1980s to 54.1 in 2002 (Figure 1)--including because of the impact of devastating financial crises on growth, employment, relative prices, and public subsidies.

Financial crises were seen as the unavoidable downside risk of the life of globalized economies. It was accepted that while in good times international financial integration generated huge beneficial effects on the most open developing countries, in bad times restrictive monetary policies, credit crunches, market downturns (and generalized risk in the OECD area) reverberated most powerfully in these countries. In addition, the vulnerability of Latin America to the vagaries of international capital markets was perceived to be exacerbated by the region's thin financial markets, less diversified portfolios, lax supervision and regulation, unclear bankruptcy norms, and greater inclination to adopt unstable macroeconomic policies.

The fall of income inequality of the 2000s: due also to greater financial stability?

Things have changed significantly since 2002. Indeed since the turn of the century, the region enhanced its growth performance, reduced inequality, improved its macroeconomic stability and avoided major financial crises. In late 2009, an indication of the new ability of the region to deal with such global shocks led Arturo Porzekanski to write a paper called 'Latin America: the Missing Financial Crisis'. Perhaps, the most striking change of the new era was a sizeable drop in income inequality which between 200210 fell--if to a different extent and with different timing--in the region's 18 main countries, with the exception of Nicaragua and Costa Rica. As a result, the unweighted regional Gini coefficient, which had risen by 5.2 points between the early 1980s and 2002, fell by 5.5 points between 200310, thus allowing the region to return in only eight years to its preliberalization level of inequality (Figure 1). During the same years no other developed or developing region experienced such a widespread and sizeable inequality decline.

Statistical decompositions included in a new UNU-WIDER...

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