Americas

Decline of Inequality and Poverty in Latin America

A Brazilian woman shows her Bolsa Familia social plan card in Serra Azul, north of the state of Minas Gerais in Brazil.

Over the past decade, income inequality and poverty in Latin America have been on the decline. These two key socio-economic indicators have historically plagued the region, inhibiting it from prospering. Although most of the countries in Latin America and the Caribbean still suffer from very high levels of inequality and poverty, the region has made important initial strides in reducing these statistics. Some countries have improved far more than others, when measured by the Gini index, a statistical measurement for inequality ranging from 0 to 1. For example, Uruguay, at .433 in 2009, and Venezuela, at .412 in 2008, recorded lower Gini coefficients than the United States (.468) in 2009. Peru (.469), El Salvador (.478), Ecuador (.500) and Costa Rica (.501) all recorded Gini coefficients within range of the United States, and in 2009, Argentina, Chile and Uruguay each had lower poverty rates than the United States. 

The effects of poverty and inequality can prove devastating on the social and economic landscapes of a country and a region. Income inequality and economic growth are likely to directly impact poverty, as both high economic growth and a greater degree of equality in income distribution will help to alleviate poverty. It is true that strong economic growth has helped to reduce poverty in Latin America. However, scholars have noted that the reduction of inequality and poverty over the past decade is partially due to increased levels of effective income distribution, in addition to the reduction in the earnings gap between high and low-skilled workers. Policies that have been introduced to increase and yield such results include increased spending on education, as well as conditional cash transfer programs (CCT)—a monthly grant to low-income households attached to requirements such as mandatory school attendance. Bolsa Familia in Brazil and Chile Solidario in Chile are examples of such programs.

Due to strategic counter-cyclical spending measures, the Latin American economy was able to recover from the 2008 economic crisis faster than other regions. Following a 1.9 percent decline in GDP for 2009, the region's economy grew by 6 percent in 2010. Regional poverty levels, which had increased slightly in 2008, bounced back to pre-crisis levels in 2010. In 2008, at the height of the crisis, 33 percent of the region's population lived in poverty. After increasing to 33.1 percent in 2009, this number dropped to 32.1 percent in 2010. Many economists and scholars attribute this slight, yet important success to the recovery and growth of the economy. The regional economy has been projected to grow 4.7 percent in 2011 and to continue to show positive growth in the years to come; however, this does not mean that the social spending and transfer programs of the past decade should be reduced or terminated in the post-crisis decade. As we have learned from the global economic crisis, as well as from past crises, many external factors can inhibit or even halt economic growth. In order to effectively reduce poverty, income inequality must be reduced. The reduction of inequality, and therefore poverty, most likely will be attained through efficient and substantial social spending and transfer programs.

In the 1990s, Latin America was assaulted by a wave of neoliberal reforms. These reforms were accompanied by an increase in inequality and poverty, which were largely reversed in the following decade. In response, a wave of left-leaning governments took power in Latin America during the 2000s, during which time both inequality and poverty declined. Despite Brazil's and Chile's strikingly contrasting levels of inequality and poverty, these countries have instituted development models based on strategies of effective pro-poor policymaking in the 21st century. Brazil has retained its historically high levels of inequality and poverty, whereas Chile has experienced lesser amounts of both. Nonetheless, these two regional economic and political powerhouses have managed to continue their push to reduce poverty and inequality, while encouraging growth and setting forth an optimistic example for the region through beneficial social spending and economic-transfer programs.

Brazil: a work in progress

Although Brazil historically has experienced one of the highest levels of inequality and poverty in the world, over the past decade, the region's largest country has made great strides in reducing the magnitude of its numbers. In 2001, Brazil's Gini coefficient on income inequality was .558, an extremely high figure. By 2009, it had reduced that value to .537—still very high, but a solid decrease. Additionally, the percentage of persons living in poverty in 2001 was 37.5 percent, while those living in indigence were 13.2 percent. Fortunately, by 2009, poverty had been reduced to 24.9 percent and its level of indigence to 7 percent. In fact, Brazil met its first Millennium Development Goal by reducing the proportion of the population living in extreme poverty by half, almost a decade before the 2015 deadline. According to the Economic Commission on Latin America and the Caribbean, distribution contributed to 54 percent of the decline in poverty from 2001 to 2009, whereas economic growth contributed to 46 percent. Therefore, while Brazil's strong economic growth has played an important role in raising overall wealth in the country, its politically mandated social policies have certainly helped to distribute it.

Between 2001 and 2007, the per-capita income of the poorest 10 percent of the Brazilian population grew by 7 percent per year. The national average in per-capita growth was 2.5 percent, but only 1.1 percent for the richest 10 percent of the population. Therefore, the poor's income growth has been far greater than in comparison with the country's rich. Brazil was able to accomplish such a feat through the growth of both its labor income, in which inequality was reduced with the expansion of education, along with non-labor income, in which inequality was reduced through efforts in public transfers and social security; yet, non-labor income decidedly played a greater role. Public transfers accounted for more than 80 percent of Brazilian families' non-labor income and for 49 percent of the total reduction in non-labor income inequality.

Brazil's most famous and effective CCT is Bolsa Família. This program aims at eliminating both short-term and long-term poverty through immediate cash transfers and long-term investment in the country's human development. Bolsa Família is the successor to previous CCTs implemented in 1999 by the Cardoso administration. In 2003, President Luiz Inácio Lula da Silva of the Partidos dos Trabalhadores (PT) expanded the program and was able to increase the number of families partaking in the Bolsa Família program from 6.5 million in 2004 to 11 million by 2006. Currently, there are more than 12 million family recipients. In June 2011, President Dilma Rousseff announced the "Brazil without Misery" plan, which aims to eliminate dire poverty by 2014. The plan aspires to improve access to public services, such as education, health care, running water, electricity and sewage; improve vocational training and micro-credit; and extend the coverage of Bolsa Família. The CCT program will now benefit an additional 1.3 million children.

In addition, changes in social security benefits contributed to 30 percent of the overall decline in non-labor income inequality. Social security has the largest coverage of all public transfer programs in Brazil, as 30 percent of the population lives in a household that receives social security benefits. Also, reductions in labor income inequality have been linked to the expansion of education. Educational equality in Brazil has been on the rise over the past decade as a result of increased public spending in education, along with greater enrollment numbers. Net secondary school enrollment increased by 13 percent between 2000 and 2008, from 68.5 percent to 81.5 percent. The reduction of education inequality, along with the expansion of enrollment in schools, has been a direct result of the PT's policies.

The expansion of Bolsa Família, together with changes in social security and increases in public education spending and enrollment—all initiatives implemented by the PT—have played an important role in reducing inequality and poverty in Brazil. But while Brazil has made significant strides, it still faces a long road ahead. Its role as regional leader will depend not only upon reduction of these two important factors, but also on continued economic growth. If the progressive spending measures taken over the past decade are to be continued, and even enhanced, it may be realistic to anticipate the prospect of greater equality.

Chile: South America's OECD

Compared to Brazil, as well as other Latin American countries, Chile historically has had lower levels of inequality and poverty. Chile experienced significant economic growth in the late 20th and early 21st centuries, earning the moniker of the "Chilean Miracle." There is no denying that the country's economic growth had played a vital role in the reduction of poverty after the brutal military dictatorship of Augusto Pinochet; nevertheless, until 2000, income inequality had been on the rise in Chile. Each Concertaciónpresident produced different effects on poverty and inequality, as their social spending policies lacked homogeneity. However, after 2000 and the presidency of Ricardo Lagos, income inequality and poverty began to decline in Chile. The percentage of Chileans living in poverty in 2000 was at 20.2 percent, and by 2009, that percentage had fallen to 11.5 percent. By way of comparison, the official poverty rate in the United States in 2009 was 14.3 percent. Indigence levels also fell in those respective years, from 5.6 percent to 3.6 percent.

In addition to economic growth, social spending (and to some extent cash transfers) has played an important role in the reduction of inequality and poverty. As a result of changes in social policy, per-capita social spending increased from $686 in 1998 and 1999 to $945 in 2008 and 2009. Social spending on education (as a percentage of GDP) also increased during this period, from 3.6 percent in 1998 and 1999 to 4.3 percent in 2008 and 2009. Education has proven to be an essential factor in lessening inequality between low-skilled and high-skilled labor wages.

When Michelle Bachelet assumed the presidency of Chile in 2006, she attempted to make equality and personal protection a main priority of her administration. She aimed to do so by creating a universal minimum state pension, extending free healthcare for numerous illnesses, and building crèches for poor children. These efforts have put Chile on track to accomplish all eight of the United Nation's Millennium Development Objectives by 2015, making it the only Latin American and Caribbean country to do so.

Chile's current CCT, Chile Solidario, was created in 2000 and implemented in 2003 by social-democratic president Ricardo Lagos. It replaced the prior CCT program, Subsidio Unico Familiar, which was created in 1990. The conditions of the current program include mandatory school attendance and health check-ups for all family members; it also assigns a social worker to each Chilean family. Yet, unlike Brazil's Bolsa Família, Chile Solidario targets only the poorest section of the population.

Chile was one of the few Latin American countries that practiced an effective counter-cyclical spending policy prior to the global economic crisis. The Bachelet administration had saved money during the boom period through its Economic and Social Stabilization Fund. Prior to the crisis, $18.1 billion from copper production had been invested in the sovereign wealth fund, which later helped to finance the economic stimulus implemented during the crisis, including increased benefits for the poor. Chile's strong economic growth, combined with robust social spending and well conceptualized counter-cyclical spending, had contributed to some of the lowest levels of inequality and poverty in Latin America. As the Chilean economy rebounds, President Sebastian Piñera will need to continue to strengthen social spending policies that were so effectively implemented under the more recent Concertación presidents.

A path toward continued progress

Although considerable progress has been made in reducing inequality and poverty in Latin America, many countries continue to be plagued by a range of detrimental socio-economic factors and have a lengthy road ahead to travel. Without effective, if not aggressive policymaking, there will be little hope in breaking the cycle of inequality and poverty. As regional economies grow, as is projected in the years to come, they should be met with progressive social spending initiatives that have been proven to reduce inequality and poverty over the past decade. The examples of left-leaning, social democratic policies of both the PT in Brazil and the Concertación in Chile indicate that their social programs can be effective when carefully crafted and implemented, with some consistent fidelity to principles.

Statistics illustrate that, over the past decade, left-leaning governments in Latin America have experienced relatively equitable economic growth compared to the performance levels of right-leaning governments, while reducing inequality and poverty at a greater level. Of course, no single universal policy prescription can be prescribed as an elixir that will function equally well in every Latin American country. Unique factors including size, intrinsic wealth, benign institutions and economic markets will often differentiate one country from another. Yet, progressive spending in Latin America, even in many different forms, has proven to be effective in reducing inequality and poverty.

It will, most likely, be much easier for middle-to-upper income countries, such as Brazil and Chile, to implement these types of ameliorative policies. These countries have the funds to pay for social programs and public transfers such as CCTs, as well as to invest in public education. Smaller, poorer countries encounter more difficulties due to their shortage of government funds and traditionally slower pace of economic growth. One option for the poorer countries is to look toward more mature economic policies that promote regional integration and cooperation, or find niche markets in order to grow their economies.

Another option is to seek funding from other regional institutions such as Banco del Sur (Bank of the South), which can provide loans with more favorable rates and terms than the IMF or The World Bank are prepared to promote. Richer countries, such as Brazil, Argentina and Venezuela, can help fund these projects through investment in the regional bank, while increasing regional cooperation. Meanwhile, both low-income and middle-income countries should continue their counter-cyclical spending policies that already have helped them recover from the global economic crisis, as such policies allow a country to save during good times, while spending (e.g. social spending) during the bad.

Some economists and social scientists have predicted that the current decade will be the "Decade of Latin America." Although current projections do not necessarily support such an optimistic viewpoint, they do indicate that Latin America will continue to grow at a steady, moderate pace. In looking back at the progress that has been made in reducing inequality and poverty over the past decade, it is not unreasonable to predict that progress in the hemisphere will continue into the current decade. How it all plays out, however, will depend upon the degree of dedication that this generation of leaders has in choosing policies that reasonably serve their constituents.

Mark Loyka is a research associate with the Council on Hemispheric Affairs (COHA). This article was originally published by COHA: www.coha.org.

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