Inequality Stagnation in Latin America in the Aftermath of the Global Financial Crisis

• Author: Leonardo Lucchetti,Daniel Valderrama,Louise Cord,Carlos Rodríguez‐Castelán,Oscar Barriga‐Cabanillas,Liliana D. Sousa
• Date: 01 February 2017
• DOI: http://doi.org/10.1111/rode.12260
• Published date: 01 February 2017

Inequality Stagnation in Latin America in the

Aftermath of the Global Financial Crisis

Louise Cord, Oscar Barriga-Cabanillas, Leonardo Lucchetti, Carlos

Rodr

ıguez-Castel

an, Liliana D. Sousa, and Daniel Valderrama*

Abstract

Between 2003 and 2010, Latin America experienced a solid record of economic growth, coupled with a

notable reduction in income inequality. The regional Gini coefficient fell from 0.556 to 0.521 and declined

in all 15 out of 17 countries in which frequent data are available. However, previous studies have warned

about problems in the sustainability of the decline in income inequality and this study presents evidence of

stagnation on this front between 2010 and 2013. The results are robust to various measures of income

inequality, but differ across the region. While largely attributable to the recovery from the global financial

crisis in Mexico and some countries in Central America, the results are also supported by the

demonstrated slowdown in inequality reduction in other countries, including Brazil, Ecuador and Bolivia.

1. Introduction

Over the first decade of 2000s, Latin America has experienced strong income

growth, particularly in the lower deciles of the income distribution, generating a

notable reduction in income inequality. Between 2003 and 2010, the regional Gini

coefficient fell from 0.556 to 0.521 and declined in all 15 out of 17 countries in

which frequent household survey data are available. Reductions in inequality are

important in lifting more people out of poverty because less inequality generates a

higher elasticity of poverty reduction to economic growth (Bourguignon, 2003).

1

Countries have translated growth into declines in poverty at different rates, but, in

general, countries with lower levels of income inequality have experienced a higher

growth elasticity of poverty reduction.

Several studies have shown evidence of a steady decline in income inequality in

Latin America over the first decade of the 2000s (De la Torre et al., 2014;

Gasparini et al., 2009; L

opez-Calva and Lustig, 2010; Lustig et al., 2013; World

Bank, 2011a). This result is robust to the choice of time period, welfare aggregate,

inequality measure and data source. The studies also find that the decline in

inequality has been driven mostly by improvements in labor income. In particular,

greater access to education has increased the supply of skilled workers and lowered

*Rodr

ıguez-Castel

an (Corresponding author): World Bank, 1818 H Street, Washington, DC, 20433,

USA. E-mail: crodriguezc@worldbank.org. Barriga-Cabanillas: University of California, Davis, CA,

95616, USA. Cord, Lucchetti, Sousa and Valderrama: World Bank, Washington, DC, 20433, USA. The

authors would like to thank the anonymous reviewers, as well as Jos

e Antonio Cuesta, Leonardo

Gasparini, Guillermo Beylis, and Julian Messina in the office of the Chief Economist in the Latin

America and Caribbean Region of the World Bank, as well as participants at the 2014 LACEA LAMES

conference held at Universidade de S~

ao Paolo and the Summer Initiative for Research on Poverty,

Inequality, and Gender of the World Bank for their thoughtful comments and useful suggestions. The

findings, interpretations, and conclusions in this paper are entirely those of the authors. They do not

necessarily represent the views of the World Bank Group, its Executive Directors, or the countries they

represent.

Review of Development Economics, 21(1), 157–181, 2017

DOI:10.1111/rode.12260

©2016 John Wiley & Sons Ltd

the excess demand for skilled labor, leading to a reduction in the skill premium

(Gasparini et al., 2011). In addition, this body of literature has concluded that

public monetary transfers, often in the form of conditional cash transfers, have

contributed to the decline in income inequality throughout the region because of

the expansion in their coverage and better targeting.

2

Nonetheless, at least one of these studies warned about problems in the

sustainability of the redistributive momentum observed across the region over the

past decade. In their conclusion, Lustig et al. (2013) argue that the decline in

inequality observed in Latin America during the first decade of the 2000s, may be

difficult to sustain because of factors such as the limited access to good-quality

education and the less favorable terms of trade. Moreover, Cam pos et al. (2012)

find evidence that labor incomes in Mexico in 2010 were unequalizing, and Lustig

et al. (2013) ask whether this was a result of the knock-on effects of the global

financial crisis of 2007/08 or a new trend. A recent report of the World Bank

(2014a) finds evidence that inequality has been stagnating in Latin America since

2010 and that the Gini coefficient has remained fairly constant, at 0.520, since then.

This study extends the analysis of Lustig et al. (2013). It examines regional trends

in income inequality between 2010 and 2013. It contributes to the existing literature

by exploring the sources of the stagnation in income inequality experienced after

2010 in the region in more detail. It uses comprehensive harmonized household

survey microdata (the SEDLAC database)

3

that allow cross-country comparisons

and scrutiny of changes in the sources of household income.

4

These microdata

cover 17 countries in Latin America and over 90% of the population in the region.

The study presents evidence of the stagnation in inequality in Latin America,

thereby confirming that the reduction in inequality has stagnated in the region, as

reported by the World Bank (2014a). It verifies that these findings are robust to

various measures of income inequality. It identifies the geographical source of this

stagnation and establishes that the trends reflect widening inequality gaps or a

reduction in the gains achieved in inequality in Mexico and some countries in

Central America (Costa Rica, the Dominican Republic, Honduras and Panama), as

well as a recent slowdown in the reduction in inequality in Brazil, Ecuador and

Bolivia.

Finally, the study investigates the underlying changes in the sources of household

income that drove the gains in income inequality in the region prior to 2010 and

that have driven the stagnation since then. It focuses on labor market incomes. The

stagnation experienced since 2010 reflects to a significant degree the fall in income

among higher-income workers in Mexico during the crisis and the subsequent

recovery of high earners following the crisis. Even in some countries in which

income inequality continued to narrow, the narrowing was driven by zero or

negative growth among the top income decile, rather than greater income growth

among the poorest. Though the global financial crisis and then the recovery in the

labor markets in Mexico are likely to be the immediate reason behind the observed

stagnation in regional inequality reduction, the weakened ability of labor markets

to absorb low-skilled workers and the falling relative returns to secondary

education have also contributed.

The remainder of this paper is organized as follows. Section 2 presents evidence

on the recent stagnation between 2010 and 2013 in income inequality in Latin

America and illustrates differential trends within subregions. Section 3 considers

the contribution of various sources of household income to the observed stagnation

in inequality and links the stagnation in inequality to developments in the

158 Louise Cord et al.

©2016 John Wiley & Sons Ltd