Poverty and inequality in Latin America: a story of two decades.

AuthorGasparini, Leonardo
PositionDevelopment, Trade, and Inequality

Latin American countries have succeeded in reducing poverty and income inequality over the last decade thanks in part to both economic growth and deliberate social policy measures. This study provides an overview of the available evidence of the changes in income distribution that have occurred in Latin America over the past two decades and their causes. While some attribute the improvements in distribution to changes in the international economy and the positive trend in the Latin American countries" terms of trade, others highlight the influence of changes in public policy. Both of these two sets of factors may have played an important role and may have interacted with one another in various ways.

INTRODUCTION

Both poverty and income inequality decreased significantly in Latin America during the first decade of the twenty-first century. At the start of the century, 25 out of every 100 people in the region were living on less than $2.50 per day; today, only 14 out of every 100 are in that situation. (1) Other indicators of income poverty and of various types of material deprivation are consistent with this result. The region's income inequality has also declined considerably, with the mean Gini coefficient falling from 0.534 in 2002 to 0.499 in 2010. (2)

These improvements in social indicators have been linked to at least two factors: on the one hand, most of the region's economies have been experiencing robust growth together with upswings in employment and labor income; on the other, a majority of the countries have boosted social spending and have put wide-ranging social protection systems in place or have greatly expanded the scope of their existing systems.

These inroads into poverty alleviation notwithstanding, the social situation in Latin America remains a cause of concern. Over 150 million Latin Americans live on less than $4.00 a day at purchasing power parity, and 80 million of them are below the poverty line of $2.50 per day. (3) In addition, despite the progress made in the last decade, the degree of inequality is far from negligible. In fact, the available empirical evidence suggests that the only countries outside of Latin America that have comparable levels of income inequality are several sub-Saharan African nations and some countries in Southeast Asia. (4)

In the rest of this paper we document the changes that took place in the levels of poverty and inequality in Latin America during the 1990s and the 2000s and analyze some of the main arguments about the determinants of those changes. (5)

POVERTY AND INEQUALITY: THE EVIDENCE

Following the disappointing economic performances of the 1980s and the turbulent 1990s, Latin American economies expanded and became more equal in the first decade of the twenty-first century. The combination of rapid growth and improvements in income distribution triggered a steep reduction in income poverty that marks a stark contrast with the region's performance during the preceding decades. (6) Figure 1 shows the aggregate poverty rates for Latin America based on the poverty lines of $2.50 and $4.00 per day. Income poverty declined slightly in the 1990s in the wake of the 1994 Mexican crisis--known as the "Tequila crisis." Thereafter, the net result of opposing trends in different countries held nearly steady until 2003 and then began to fall sharply and continued to do so until the end of that decade, despite the global financial crisis from 2008 to 2009.

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As in the case of poverty trends, the region's performance in terms of income distribution has changed a great deal in recent decades, with income inequality climbing in the 1980s and 1990s before falling off sharply in the 2000s. The break in this trend appears to have occurred around 2002 (Figure 2). Although some countries had begun to exhibit a more equal distributional pattern in the late 1990s (e.g., Brazil and Mexico), others did not begin to do so until the early 2000s (e.g., Argentina, Peru, and Venezuela). By 2002, distribution patterns in all the countries of the region were becoming more equal. While these distributional changes were not on a large scale, the downtrend in inequality certainly stands in contrast to the trend seen in the preceding decade.

It is also interesting to note that while inequality was declining in Latin America, it remained unchanged or was on the rise in other parts of the world. The

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region's positive performance in this respect--both in absolute and relative terms-is particularly remarkable when viewed against the backdrop of its long-standing difficulties in achieving fairer distributional patterns. The "excess inequality" that has typified Latin America as compared to other world regions is now somewhat less marked than it was a decade ago. (7) The narrowing of the inequality gap between Latin America, Asia, and Eastern Europe is especially noticeable, as the sweeping economic changes occurring in these latter two regions have tended to heighten existing income inequalities in recent decades.

POVERTY, INEQUALITY, AND GROWTH

In order to work out what factors are behind these changes in poverty levels, we must first assess the changes that have occurred in terms of economic growth and income inequality. Figure 3 traces trends in growth, inequality, and poverty. During the 1990s, Latin American economies expanded at a moderate pace, providing a driving force behind a modest decrease in aggregate poverty, although inequality increased in a number of countries. The years around the turn of the century saw stagnant per capita GDP together with shifts toward greater inequality, which translated into higher levels of poverty. The 2000s, on the other hand, were a time of strong GDP growth, at least until 2008, coupled with improvements in wealth distribution. The combination of these factors, in addition to the global financial crisis having a limited impact on the region, contributed to a sizeable decrease in poverty in Latin America.

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A decomposition exercise can be carried out to measure the quantitative influence of the "growth effect" and the "distribution effect" on changes in poverty? The former is the change in poverty that would have occurred if incomes had grown at the same rate, and hence the distribution had remained unaltered. The distribution effect is the change in poverty that would have occurred if only distributive changes had taken place, with no growth in mean income. In the...

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