In search of the lost box

Growth with equity is one of the major challenges which national economies throughout the world are facing and which gives rise to the greatest differences even amongst developing countries. Although there is a certain amount of consensus regarding the fact that State and public policy play a fundamental role in redistributing wealth more equitably, there is still resistance to the concept of equality of rights. A glance at the latest data from Latin America and the Caribbean shows the principal obstacles to combining growth with equity.

In 1992, in a study published several months after his tragic death, Chilean economist Fernando Fajnzylber produced a chart in which Latin American countries were organized from larger to smaller according to two criteria; economic growth and inequality. Once each country was situated according to the combination of these two variables, one box remained empty: the one in which high growth is combined with low inequality.

According to the inequality index devised in 1912 by Italian statistician Corrado Gini, Latin America is the most unequal region in the world, with an average value of 0.53 in 2009. Venezuela, Uruguay and Costa Rica, the least unequal countries in Latin America, show a greater Gini coefficient than the United States, the most unequal country of those considered to be “developed”, and are more unequal than any in the Middle East or North Africa.

Nearly two decades after Fajnzylber’s diagnosis regarding the lack of correlation between growth and equity, the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) has just published its Economic Survey for Latin America and the Caribbean 2009-2010, in which the economy of each country in the region, and of the whole region, is analysed. At a time when the world is shaken by financial and economic crises, Latin American performance is spectacularly good.

In the words of Alicia Bárcena, ECLAC Executive Secretary: “Unlike previous crises, this time countries in the region were not part of the problem, but part of the solution, and have shown strong signs of fiscal responsibility, financial sobriety and concern for people.”

However, ECLAC points out that the box continues to be empty and that no Latin American country has yet been able to combine high growth with equity.

During the period analysed in the report, the crisis forced governments to “promote measures of different kinds in order to soften the negative impact on economic activity and the social situation” and thus, “the role of the State and of active policies has been strengthened”. The problem now is, “the capacity to put these policies into practice”, “to broaden the area of public policy”, and ensure the availability of resources and strengthen the institutions which must implement them.

Rather than point the finger at the misfortunes of others, the ECLAC takes as a focus of its report the distributive impact of public policy.

As a result of a variety of external factors, the current high rate of economic growth will slow down as from late 2010 and certainly during 2011, experts say. Within such a context, it is necessary to “deploy public policies which will help protect the more vulnerable sectors” within a “broader strategy which will include not only the social area, but also macroeconomic and productive policies, in order to allow the countries in the region to attain a more inclusive form of development.”

The ECLAC’s report refers to the social failure of the economic policies of the previous decade: “It was predicted that economic reforms, and above all commercial and financial liberalization, as well as the deregulation of the labour market, would benefit the more intensive use of the most abundant factor, which would presumably be unskilled labour, thus increasing employment and income.”

However, “empirical evidence has proved not to favour this hypothesis” and there has been a widening of the gap between the income of the élites and the income of those with a middle or low level of education. Similarly, the wage gap between men and women has stopped decreasing.

The fact that the market has not solved the problem does not mean, however, that any kind of State intervention is good. The report argues that it is necessary to continue to ensure macroeconomic stability, but this must be accompanied by tax equity, with a greater increase in income tax and the reduction of VAT, as well as the reduction of tax evasion and informality.

The ECLAC reports that the new Latin American tendency is to channel more resources towards the poorer sectors. The role of social development in the strengthening of productive development and economic growth is now being acknowledged and there is a clear tendency to increase social public expenditure. The proposal, therefore, encompasses “the notion of equal rights, not only equal opportunities”.

The box must not remain empty for another decade.

An X-Ray of Inequality

Secular inequality is deeply rooted in our history, ECLAC maintains, and dates back to colonial times and the Republican era (the process of independence). Over time, the pattern of development and modernization perpetuated the socio-economic chasms based on race and ethnic origin, social class and gender. The productive structure and educational opportunities continue to keep inequality alive.

Thirty-five per cent of the total income in Latin America is concentrated in ten per cent of its wealthiest households.

In Uruguay and Venezuela, the top decile’s income share in the total resources is reduced to twenty-eight per cent, but in Brazil and Colombia, it exceeds forty per cent. At the other end of the scale, forty per cent of households with the lowest income takes in an average of a mere fifteen per cent of the total income, with the lowest values to be found in Honduras, Dominican Republic and Bolivia, where the average does not exceed eleven per cent.

Inequality is also territorial. With the exception of the smaller Central American countries and of Uruguay – which display better indicators with regard to equity, smaller size and unitarian organization of the State – the geographic gaps are very high and exceed any of those to be found in any European country. For example, whereas in Europe the per capita GDP of the wealthiest jurisdiction almost doubles that of the area with the lowest income in the same country, in Latin America the same ratio is six times greater from one area to another.

* This article is a summary of the article published in Agenda Global on 29 July 2010: http://agenda.item.org.uy/2010/08/02/en-busca-del-casillero-perdido/