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A Rougher Road for Redistribution

Progress in the struggle against inequality seems to have stalled in the deeply divided societies of Latin America. What next?

High and persistent inequality, notes Tulane University economist Nora Lustig, sits at the historic root of Latin American political and economic instability. [1]

High and persistent inequality, notes Tulane University economist Nora Lustig, sits at the historic root of Latin American political and economic instability.

The nations that make up Latin America have historically displayed precious little of a commitment to equity. Latin America entered the 21st century as the world’s most economically unequal region.

Latin America’s rich today remain “world class,” by any measure. Only four individuals in the entire world, for instance, have amassed a greater fortune [2] than Mexico’s Carlos Slim.

Nearly a quarter of Latin Americans, meanwhile, make less than $4 per day. Overall, according to World Bank figures [3], nearly two-thirds of Latin America’s population makes less than $10 daily.

What can Latin America’s governments do to address this stunning maldistribution of income and wealth? What are they doing? Tulane University economist Nora Lustig is working on the answers.

Lustig is currently directing Commitment to Equity [4], a joint effort of Tulane and the Inter-American Dialogue that’s helping governments, multilateral institutions, and nongovernmental organizations “build more equitable societies.” She shared some of her insights on Latin American inequality — and the struggle to overcome it — last month in an interview with Too Much editor Sam Pizzigati.

Too Much: Thanks to economists like Thomas Piketty and Joseph Stiglitz, many of us today have a fairly clear sense of the historic trajectory of inequality in the United States. Inequality decreased significantly between the start and the middle of the 20th century, we now understand, and has been increasing significantly ever since. Has inequality in Latin America followed a similar trajectory?

Nora Lustig: The data we have prior to the 1980s are too scant to make any sweeping statement about trends in Latin America. But we can say that, broadly speaking, inequality rose in the 1980s and 1990s and then has declined since the start of the millennium. Some indicators show that, since 2012, the decline in inequality has not continued.

Inequality trends in Latin America rest on data that almost universally do not incorporate information on the rich.

Too Much: Over recent years, several major Latin American nations have launched efforts to “level up” the poor with government transfers of various sorts. What has been driving this more progressive tilt in public spending?

Lustig: The factors include, in no particular order, the “discovery” of government’s ability to distribute cash on a large scale to the extreme poor, the democratization and the predominance of leftist regimes, and, in South America, the increase in government fiscal space associated with the commodity boom.

Too Much: Which of these redistributive transfer programs have been the most effective? How much of an overall impact have they had on reducing inequality?

Lustig: Research shows that old-age noncontributory pensions and conditional cash transfers such as Bolsa Familia in Brazil and Oportunidades — now Prospera — in Mexico explain on average about a fifth of the decline in inequality observed between 2000 and 2010.

Too Much: A handful of Latin Americans — Mexico’s Carlos Slim, for one — now rank among the world’s richest billionaires. What impact does the concentration of wealth at the top in Latin America have on efforts to end poverty at the bottom?

Lustig: Inequality trends in Latin America are based on data that almost universally do not incorporate information on the rich. That’s a problem because the rich are so very rich in the region.

That the region includes individuals who are so rich could be seen as good news by some observers, in the sense that this wealth creates room for redistributive fiscal policy. However, in reality, the concentration of wealth is associated with a lack of support for the provision of high quality public goods by the state — education and health services, for example — and state capture. Both perpetuate poverty and exclusion in the region.

Societies where wealth concentrates poorly support high quality public goods.

Too Much: How has the emergence of more radical left governments in countries like Venezuela and Bolivia affected political elites in other Latin American nations?

Lustig: Hard to tell. We could imagine that some of the political and economic elites would rather avoid similar left regimes in their own countries and be more willing to contribute their share for a more inclusive growth.

Too Much: Would you see yourself as more optimistic or more pessimistic about the prospects for reducing Latin American inequality over the near future?

Lustig: More pessimistic. With the commodity boom over, most governments face rather severe fiscal constraints, and options for redistributive fiscal policy will be rather limited or even nonexistent.

Prospects for economic growth are also not particularly auspicious in the short term, so demand for low-skilled labor is likely to be weak. That will put downward pressure on wages at the bottom.

Too Much: Latin America seems to have experienced staggeringly deep levels of economic inequality for a longer period of time than the United States. How has that inequality disfigured democracy in Latin American nations?

Lustig: High and persistent inequality sits at the root of both Latin American political and economic instability and the prevalence of authoritarian regimes throughout the region’s history. In the past, inequality has placed democracy in jeopardy all too often in Latin America. The last 25 years have been different. We don’t know if this change is here to stay, but let’s hope so.

Too Much: Do you see any signs of that same disfiguring now emerging in the United States?

Lustig: Inequality is unleashing undesirable forces in the United States, no doubt about it. But I don’t see how these forces could lead to the type of authoritarian regimes that have been so common in Latin America.

Sam Pizzigati edits Too Much [5], the Institute for Policy Studies commentary on excess and inequality. His latest book: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970 [6] (Seven Stories Press).