• Inequality at the crossroads | George Gray Molina

    04 Apr 2014

    farmers in Peru
    Sustainable agriculture in Apúrimac, Peru. (Photo: UNDP in Peru)

    After recording a drop in income inequality for the past decade, new data shows the trend has stagnated across Latin America – and in some cases, there has even been an increase in the concentration of income.

    This analysis is based on the latest revision of household data coming from the  Socioeconomic Database for Latin America and the Caribbean (SEDLAC) and published by the World Bank.

    The regional Gini coefficient (the index most frequently used to measure income inequality) decreased by an average of 0.94 percent per annum, whereas in 2011 it fell by just 0.33 percent, and by a meager 0.02 percent in 2012.

    Based on these figures, our UNDP estimates indicate that in six of the 16 countries under review, inequality levels have stagnated between 2010 and 2012.

    How to account for such stagnation? With no appreciable fluctuations in social transfers or in pensions for this period, the culprit appears to be the labor market, namely the segment of low-skilled workers in the service sectors – sectors that provided most of the new jobs during the economic boom. As growth in earned income is both a benefit to society (leading to poverty reduction) and a cost for businesses (due to higher unit labor costs), it opens up an interesting political debate at the current crossroads.

    One way of tackling inequality stagnation would be structural reforms aimed at improving the business environment: a straightforward way to reduce unit labor costs is liberalizing labor markets and deregulating work benefits. In fact, several countries in the Eurozone are currently following this strategy. From a human development perspective, this remedy is worse than the disease itself, in terms of the long-term social and economic damage.

    Another way
    of tackling this problem would be to strengthen social safety nets, with a specific focus on enhancing returns on education for the labor market. It is more a question of a “race between education and technology” rather than a race to lower labor costs. Few countries will choose this route, as there is little political advantage to be derived from betting on the medium- and long-term potential of such a strategy.

    A third way of dealing with inequality stagnation would be to do nothing. This is  the most likely scenario for the region, as the reforms needed to address the problem would mobilize significant political and institutional resources. In these instances, countries will try to maintain the pace of poverty reduction through higher economic growth. Looking towards 2020, they will probably come to see that “more of the same” does not usually produce the same results.

    In any case, we will see a renewed appetite for structural reforms in the region. And, as in the poem by Robert Frost, when the two roads diverge in a yellow wood, we will be sorry for not being able to travel both.