Lessons from the World’s Most Unequal Region

10 Jul 2013

Heraldo Munoz, UN Assistant Secretary General and Director Regional Bureau for Latin America and the Caribbean

Remarks at Thematic Discussion on Inequality, General Assembly
United Nations, New York, NY

By most measures, both income and non-income based, Latin America and the Caribbean continues to be the most unequal region in the world. Equity gaps start at birth, and continue throughout the life cycle –generating inequality of opportunity, exclusion, and discrimination from childhood to old age.

We know inequalities are inter-connected: they are not circumscribed to the labor market, the schooling system or mechanisms of political representation. They permeate our societies in ways visible and invisible. That’s why they are hard to tackle.

I would like to share some of the things we have learnt over the past few years, from government and societies in our region. These are lessons learnt from the world’s most unequal region.

I

First, we have learnt that income-based inequality can be tackled through deliberate social policies and dynamic labor markets.

Sixteen of 17 countries for which we have comparable data have shown a reduction in income-based inequality.

In some countries, inequality has come down quite rapidly. In Nicaragua, Bolivia, and Ecuador, the Gini Coefficient declined, on average, by almost 2% annually. The regional average reduction reached 1% per year.

Why has income inequality come down?

There a number of pathways, and a few hints at causal mechanisms.

-          First, and foremost, we have seen that inequality reduction is mostly about improvements in labor income of the poor and vulnerable, which accounts for between 40 and 60 percent of reduction. This is significant, because it shows the power of dynamic labor markets in labor-intensive sector –in LAC’s case, mostly services.

-          The second pathway is social transfers, which accounts for between 10 and 20 percent of inequality reductions. LAC has been a leader in conditional cash transfers for over a decade now, and has improved targeting and leakage problems in recent years. CCTs are primarily geared towards accumulating human capital over time –by keeping kids in school and making sure mothers get good maternal health care—but they are also income transfers, directly impacting the well-being of a poor or vulnerable household.

-          The third pathway is demographic, which accounts for up to 10 percent of reductions. Latin American and the Caribbean benefitted from a baby boom two decades ago, that now has a record number of youth joining the labor force. Not all is well in this respect, there still are a large number of “NINIs” in our economies –youth who don’t work, and don’t’ study--  but overall, the gradual improvement in female labor participation and youth employment have to do with long demographic waves. The current wave is already showing signs of ageing. We know that our demographic dividend will run out in the next 10 to 20 years.

The key casual mechanism explaining inequality reduction bridges labor markets and the educational systems, and is captured by “returns to education”: the rate at which someone with a college diploma benefits from the high wages, compared to someone with a primary-school diploma. The rates of return have narrowed in Latin America –both because of a massive increase in access to education, but also because our pattern of growth this decade have rewarded relatively low-skilled sector workers –in the service sectors mostly. 

II

Second, we have learnt that the process of reducing inequalities is not merely technocratic, it involves society at large –it is about emerging middle classes with rising expectations, it involves new political challenges –and sometimes, even includes episodes of social conflict.

This is the first moment in our history that the poor are no longer the largest group of the population. Today, the middle strata of our societies, account for anywhere from 40 to 70 percent of our total populations.

The largest single group is made up of people who earn between 4 and 10 dollars a day (39%).  We follow the academic convention of calling this group “vulnerable” rather than middle class, because their educational, labor and housing characteristics are closer to those of the poor that to the middle classes.

The key political challenges of emerging middles has to do with social cohesion –meeting rising expectations in ways that are progressive and do not end up leading to frustration or to a new status quo.

One thing that has become more prominent, particularly in the past few years is that social conflict often accompanies the very process of social change and emerging middles. We have also learnt a few things from our work on social conflict in the region.

-          First, most social conflict in the region revolves around “distributive” matters: salary negotiations, land distribution rights, and policy measures that affect diverse groups differently. A smaller group of protests revolves around institutional and public service issues, and a third group, increasingly, around cultural, identity and ethnic rights. Sometimes, conflict that starts in one arena moves to the next.

 -        Second, the features that tend to translate conflict into progressive outcomes are broad-based: political legitimacy, institutional capacity to address inequality gaps and cumulative trust-building --not breaking promises between state and society. Popular discontent can prove a destabilizing force if citizens perceive that they are not being adequately represented by their governments.

-          Third, while most social change involves conflict in one arena or another, there are also cases where social conflict does not lead to, nor involves social change. Some conflicts over political spoils, natural resource rents and the responses of powerful actors outside the rule of law –crime, narco-trafficking and human trafficking-- often fall under this category.

The challenges for social cohesion are different in each case.     

III

Finally, we can anticipate that closing inequality gaps will be the key concern for middle income countries over the next 10 to 15 years. 

Should the reduction of inequality figure implicitly or explicitly in a future agenda of development? To the extent that Latin America and the Caribbean sustain our rates of economic growth and poverty reduction, we believe we need to tackle the question of inequalities head-on.

We have learnt that the hardest to reach poor and vulnerable groups are usually excluded from dynamic labour markets and existing social safety nets. They include working-age women and youth, indigenous peoples and afro-descendants and rural citizens throughout the region.

Without specific and deliberate polices targeting their inclusion –confronting inequalities upfront—we are unlikely to sustain the pace of social and economic achievement of the past decade.

Some obvious challenges to middle income countries, are fiscal and institutional:

-          On the fiscal side, our region will need to raise its fiscal pressure to OECD rates (around 30% of GDP) from the current 22% average rate. It needs to do so in ways that do not hurt the poor and vulnerable sectors of our economies. Direct taxes need to rise, indirect taxes that are regressive need to come down. Existing expenditures need to become more effective. While OECD countries help reduce inequality by as much as 20 percentage points by their fiscal policies, most Latin American and Caribbean economies only see a small effect –as little as 2 or 3 percentage points through fiscal policy. One hand takes away (through indirect taxes) what the other hand gives (social transfers and in-kind social services). This needs to change.

-          On the institutional side, we all know that the quality of our services need to rise. We have seen how social grievances that start from less-than efficient social or public services, move to other arenas that question the very legitimacy of government in our region. These send a strong message: transparent, accountable and effective institutions are as important as strong fiscal resources. Without them, our development agendas look good on paper, but not on the streets of our inner cities.

As economies slow-down from lower commodity prices and tighter monetary policies, we will find that we will need to do more to stay the same.

Economic growth was never a panacea, but as growth slows down, we need to get better at translating the little growth we have to better services, more human development and more equality of opportunity.

We have learnt plenty from the world’s most unequal region. Most critically, we have learnt to keep the eye on the ball. There still is much to do. The inequality agenda will become all middle-income countries’ agenda in the future. Latin America and the Caribbean will continue to stay vocal about this on the global stage.