Has Latin American Inequality Changed Direction? Looking Over the Long Run

Topic: 
Poverty - Inequality - Aid Effectiveness
Review by: 
Jeffrey Williamson
Year: 
2017
Author(s): 
Luis Bértola
Jeffrey Williamson
Publisher: 
Spinger
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After the structural reforms of the 1970s and 1980s, most Latin American countries had shown that they could achieve fast growth. However, accelerating growth was followed by increasing inequality and, in some parts of Latin America, even increasing poverty. Noting this experience, observers began to wonder whether inequality had become a permanent feature of Latin American development and whether it contributed to the region’s disappointing long-run development performance (Bertola, Prados de la Escosura, Williamson 2010).

By 2014, we were debating something quite different. Latin America had recorded fast growth for more than a decade and, contrary to what was going on in other parts of the world, inequality was falling. Had Latin America permanently changed its long-term direction? To what extent was decreasing inequality dependent on those high growth rates, and thus was it only temporary? What roles did market forces, institutions and political ideology play during the inequality downturn? To start a search for answers, we organized a conference in Buenos Aires with support from the Economic Commission of Latin America and the Caribbean (ECLAC), the Inter-American Development Bank (IADB) and the International Bank for Reconstruction and Development (IBRD). The conference gathered together economic historians that had long been working on the history of Latin American inequality and poverty, with economists engaged in the study of inequality in the recent period.

Two years later, the debate had changed yet again. Even if it is too early to guess what will happen to inequality in the near future, we know for sure that the commodity-driven boom during the first years of the 21st century has come to an end. In 2014, Latin America was already growing more slowly than the OECD, and prospects for 2015 were even worse. The expected GDP growth rate for the years ahead is sufficiently low to conclude that Latin American catch up on the leaders has come to a halt.

Thus, the question posed at our conference is now even more relevant. Has Latin America changed direction and was the recent inequality downturn just the result of a globally-induced economic boom, similar to so many other previous booms in Latin America since the 19th century? Were the recent inequality events transitory with no permanent change in political, institutional and other fundamentals, ones that have been a feature of the region for the past two centuries or even longer?

The origins of Latin American inequality

Most studies of Latin American development written between the 1950s and the 1970s stressed colonial heritage as the main explanation of its underachievement. Competing schools of thought at least agreed on this point: dependency theories, modernization theories, Marxist theories, and even development theories, all agreed that Latin America’s colonial heritage contributed to its  dependency on foreign powers, and inequality in civil rights, property rights and political power. Things were made even worse given that the imperialists, Portugal and Spain, were relatively backward themselves compared with Western Europe.

Each of these studies thought that independence was jeopardized by the lack of a real social revolution, by the weakness of the local elites, by the failure to create a Latin American federation, and the development of new forms of unequal international relations, led by British “informal” imperialism, later followed by US hegemony. Countries implemented reforms during the last quarter of the 19th century, by which the lands of the church, the peasant communities and the state were privatized thus passing it on to an increasingly powerful landowning elite. Wage labor became dominant, but a varied array of coercive labor market mechanisms persisted. The land-owning elite, together with merchants, foreign powers, state bureaucracies and the military, formed an alliance which left the majority – mainly those of Afro-American and Indian ethnic origin – without property, civil rights and education.

This process took varied forms in different Latin American regions. The literature identified three main groups. The Indo-American group – the Andean, Central American and Mexican regions -- was the center of the colonial period, densely populated and rich in gold and silver. There, the interplay between the haciendas and the peasant communities, together with centralized forced labor for the mines, were at the heart of social relations as the region drifted towards capitalism. The Afro-American regions (northern Brazil, coastal Columbia, coastal Venezuela, and the Caribbean) were those in which tropical crops were produced with slave labor on large plantations. The indigenous peoples of the mountain and inland regions (Peru, Ecuador, Mexico and Central America) worked the mines and farmed the haciendas. The Euro-American regions (Chile, Argentina, Uruguay, and southern Brazil) were less densely populated, labor was scarce, and European settlement played a dominant role. Even in these southern regions the concentration of land holdings took place. These interpretations of Latin American underdevelopment help explain different attempts to introduce economic, social and political reforms in the middle decades of the 20th century, including an active state involvement in the economy.

After the 1980s, however, the academic and political climate in Latin America changed. The region was confronted with failing state-led industrialization, by the debt crisis, and by a “lost decade” of very poor economic performance. Pro-market reforms were introduced, often combined with authoritarian regimes. The story told by a new political voice said that the problems faced by Latin America were not market failures that the state had tried to overcome, but rather state involvement itself. Efforts were made to liberalize trade and capital flows, as well as to implement macro stabilization policies, and these were consistent with pro-global policies flourishing all over the world.

The pattern of development adopted by most Latin American countries since the 1980s was fueled by export growth, but the domestic sector did not keep pace. Inequality increased after every crisis, divergence with world leaders deepened.

Increasing dissatisfaction spread and developed a more powerful voice. In the context of the continent’s democratization, the dominant liberal model was challenged by neo-institutional thinking. The neo-institutionalists agreed with conventional theory that free trade and unfettered capital movements were good for growth, but they argued that domestic institutions were the ultimate factor explaining economic growth and inequality. Furthermore, institutions could not be expected to change their character very quickly, since they tended to reproduce themselves in a path-dependent way. Thus, it was naïve to expect that the imposition of rules from outside sources would produce the expected results. Quite the contrary, foreign attempts to foster liberal reforms instead reinforced the power of rent-seeking elites and their extractive institutions.

When modern neo-institutional thinking entered Latin American debate, it re-discovered only one part of what we already knew: that domestic institutions were extractive, that most of the population worked under coercive mechanisms, that large parts of the population did not have civil rights or wealth, and that ethnic features were the key carriers of social and political relations. Neo-institutional theories argued that colonialism was a problem only in colonial times, seeming to vanish afterwards, while only reproducing themselves in different clothing. The origin of bad institutions might reside with the colonizing power (North, Summerhill and Weingast 2000), or with the endowments the conquerors found (Engerman and Sokoloff 1997, 2012), or the domestic interplay between economic and political institutions (Robinson 2006). In any case, the problems Latin America faced at the end of the 20th century had to be interpreted in the light of the institutions established shortly after the region was colonized. Changes in international economic and political relations, due to industrial revolutions, the war of independence, the transport revolution, mass-migration, globalization, and more, were not taken into consideration by neo-institutional thinking. This literature is consistent with the traditional histories that believed that Latin America was a relatively unequal place in the mid-late 19th century, that this inequality was consistent with institutions that were extractive and rent-seeking, and that these facts helped explain Latin America’s disappointing growth performance.

Coatsworth (2008) challenged neo-institutional approaches. He argued that the problem faced by the independent Latin American economies was their lack of inequality. The elites were not powerful enough to expropriate land from inefficient peasant communities and a strong state was missing that would otherwise have invested in growth-enhancing infrastructure. It was during the first global century’s trade boom, from the mid-19th century to World War I, that nation states consolidated, inequality soared, accumulation rates rose, and economic growth quickened. Coatsworth´s view was reinforced by the Inequality Possibility Frontier approach (Milanovic, Lindert and Williamson 2011) which argued that per capita income had to be high in order to produce a large surplus that could be appropriated by the elite, thus generating great inequality. In spite of this colonial legacy, inequality was no higher in Latin America just prior to its belle époque and early industrialization than in the western leaders prior to their industrial revolution (Williamson 2010). We also now know that inequality in Latin America was no higher than in the United States in 1860 under slavery or in 1870 after emancipation (Lindert and Williamson 2016). We also know that inequality in Latin America grew significantly from 1870 to 1929 (Prados de la Escosura 2007; Bértola et al. 2010), due in part to the impact of a secular commodity price boom that raised land rents relative to wages, but also because of the class power structure. Of course, not all inequality is the same (Bértola 2011). Inequality can be good for growth if it simply reflects rewards to those accumulating skills, taking risks and innovating. Inequality can be bad for growth if it simply reflects successful rent-seeking or rising rents to land and mineral resources. While the assertion has not been confirmed with historical evidence, it seems plausible to think that late 19th century Latin American inequality was more of the “bad” kind while it was more of the “good” kind in the industrial leaders. After all, inequality is not only a matter of income and wealth, but also a matter of opportunities, property rights, access to education, and civil rights. A continent with 25 percent slaves and 60 percent Indian peasants with very limited access to property, civil rights, education and political power.

Bértola and Ocampo (2012: Chapter 1) identified three Latin American societies and all with different inequality histories. During the 20th century, the Indo-American and the Afro-American societies seemed to converge towards labor markets which behaved like the Lewis unlimited-labor-supply model. In these regions, state-led growth and industrialization may have created new forms of inequalities: a highly concentrated industrial sector was able to create many jobs for relatively skilled and well-organized workers, while a large share of the labor force remained marginalized in low productivity jobs. The Euro-American societies in the southern cone experienced a different growth pattern. In Uruguay, the increasing inequality of the belle époque was followed by a slight reduction up to the 1930s. Inequality then declined more significantly up to the 1960s. Contrary to what happened in previous booms (and contrary to the logic of the preceding bust of the 1930s), the institutional and political environment produced a significant inequality reduction: wage councils, industrial protectionism, welfare policies, and multiple exchange rates, were tools that favored the egalitarian trend in a way that resembled the “Keynesian” atmosphere in the advanced countries (Bértola 2005). Many of these features could also be seen in Argentina and Chile. What happened after the 1960s in the Southern Cone is better known. Thus, the century-long trends appear to be ones of increasing inequality up to WWI, decreasing inequality up to the 1960s, and increasing inequality up to the turn of this century. This pattern replicates, though not as dramatic, the Great Leveling experienced by the leaders from World War I to the 1970s (Williamson 2015; Lindert and Williamson 2016: Chapter 8). Was this southern cone pattern repeated elsewhere in Latin America, or did most of the region miss the Great Levelling which occurred among the industrial leaders?

Our forthcoming co-edited book Has Latin American Inequality Changed Direction? contains fresh new contributions to this Latin American inequality debate. Part I gives the economic historians a chance to speak to those issues by looking back before the recent downturn, and Part II gives the economists a chance to look again at the recent downturn with Part I in their rear view mirror. Part I has nine chapters written by economic historians with specialized knowledge about inequality in Latin America’s past, but they write with an eye on the recent inequality experience. Part II has seven chapters written by academic economists  and policy-makers representing ECLAC, IADB, and IBRD. They offer an analysis of the present inequality experience, but they keep an eye in the rear view mirror. 

What about the Future?

What do we conclude about recent Latin American inequality trends? While there has been great variety across Latin America, it appears that the recent inequality reduction was due, at least in part, to very specific conditions associated with the commodity boom. The boom raised labor participation and lowered unemployment, favoring those at the bottom of the distribution and thus reducing inequality. What the boom giveth, the bust can taketh away. But the boom combined the impact of long-run improvements in human capital formation (lowering skill premiums), with an increased demand for unskilled work linked to the export-led boom. More fundamentally, a cluster of socio-political shifts favored labor. The new wave of democratization strengthened the voice of the poor, and their demands for education, health and social transfers. A number of leftist governments and center-left alliances promoted the development of different labor market institutions, which contributed to the income leveling. Tax reforms were introduced in many countries, which, combined with better designed spending, has helped improve conditions in the lower deciles. Minimum wages were raised in several countries, having an important impact on distribution.

An important conclusion is then, that it is not possible to reduce the explanation of inequality reduction to a single cause. Inequality was reduced even in countries, as Mexico and El Salvador, that did not experience an inequality boom. The inequality boom cannot per se explain inequality reduction: Latin American economic history shows that commodity booms often led to increasing inequality and the the actual results of booms and busts in terms of inequality cannot be understood without political economy considerations. When considering political economy issues, the role of the past becomes important, in the sense of understanding the origins and development of Latin American economic, social and political forces.

The big question is whether this process of declining inequality will be sustained and deepened. Many of the forces that were driving the leveling of incomes now are gone. The commodity boom has disappeared, and some of its positive impacts may be reversed. The activity rate will probably decline and unemployment will probably rise. Demand for unskilled work will probably decline. On the other hand, investment in social spending may favor education in its race with technology, pressing inequality downwards.

Democratic rule is now a permanent feature in Latin America. We can, of course, doubt its quality. State powers are still weak, domestic and foreign elites still have an influence on governments, and state bureaucracies are still lacking important capabilities. The risk of mismanagement of social revenues and expenditures is always present, and the possibility that anti-democratic regression might prevail in critical situations cannot be excluded.

The future of inequality is not only a matter of market forces, but also a matter of how labor market institutions and the political climate evolve.


References:

Bértola, Luis and Jeffrey Williamson (eds.) (2017), Has Inequality in Latin America Changed Direstion? (Springer: forthcoming).

Bértola, Luis; Leandro Prados de la Escosura; and Jeffrey Williamson (2010), “Latin American Inequality in the Long Run,” Revista de Historia Económica 28, 2 (September): 219-26.

Bértola, Luis and José Antonio Ocampo (2012), The Economic Development of Latin America since Independence (Oxford: Oxford University Press).

Bértola, Luis (2005), “A 50 años de la Curva de Kuznets: Crecimiento y distribución del ingreso en Uruguay y otras economías de nuevo asentamiento desde 1870”,  Investigaciones en Historia Económica, v. 3: 135-76,

Bértola, Luis (2011), “The Institutional Roots of Latin American Divergence”, Chapter 2 in Ocampo and Ros (eds), The Oxford Handbook of Latin American Economics (Oxford: Oxford University Press).

Engerman, Stanley and Kenneth Sokoloff (1997), “Factor Endowments, Institutions, and Differential Paths of Growth Among New World Economies,” in How Latin America Fell Behind, ed. by S. Haber, (Palo Alto, Cal.: Stanford University Press), pp. 260-304.

Engerman, Stanley and Kenneth Sokoloff (2012), Economic Development in the Americas since 1500: Endowments and Institutions (New York: Cambridge University Press).

Lindert, Peter and Jeffrey Williamson (2016), Unequal Gains: American Growth and Inequality since 1700 (Princeton, N.J.: Princeton University Press).

North, Douglas; Barry Weingast; and William Summerhill (2000), "Order, Disorder and Economic Change. Latin America versus North America." In Bruce Bueno de Mesquita and Hilton Root (eds.), Governing for Prosperity (New Haven, CT: Yale University Press), pp. 17-58.

Milanovic, Branko; Peter Lindert; and Jeffrey Williamson (2007), “Measuring Ancient Inequality,” World Bank Development Research Group Poverty Team Working Paper Series 4412.

Prados de la Escosura, Leandro (2007), “Inequality and Poverty in Latin America: A Long-Run Exploration,” in Timothy Hatton, Kevin O’Rourke, and Alan Taylor (eds.), The New Comparative Economic History (Cambridge, Mass.: MIT Press), pp. 291-315.

Robinson , James (2006), ‘El equilibrio de América Latina”, in F. Fukuyama (ed.), La brecha entre América Latina y Estados Unidos (Buenos Aires: Fondo de Cultura Económica).

Williamson, Jeffrey (2010), “Five Centuries of Latin American Inequality,” Journal of Iberian and Latin American Economic History 28, 2 (September): 227-52.

Williamson Jeffrey (2015), “Latin American Inequality: Colonial Origins, Commodity Booms, or a Missed 20th Century Great Leveling?” Journal of Human Development and Capabilities (special issue).16 (August): 324-41.