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Latam/Caribbean 'Most Unequal' Place on Earth

By Abid Aslam, IPS, 15 November 1998

WASHINGTON, Nov 15 (IPS) - Latin American and Caribbean countries have the world's most unequal distribution of income, says the Inter-American Development Bank (IDB) in its latest portrait of the region.

"On average, the countries of the region suffer from the greatest income inequalities in the world," according to 'Facing Up to Inequality in Latin America', the Bank's latest biennial report on economic and social progress, released here Sunday.

Brazil and Guatemala rank among the region's most skewed economies, with the richest 10 percent of the population amassing half of all national income while the poorest 50 percent of their compatriots scrape together little more than 10 percent. By contrast, inequality is "relatively low" in Costa Rica, Jamaica, and Uruguay.

The IDB rejects as "populist diatribe" explanations of inequality as stemming from privilege and political exclusion. Rather, according to the report, "the top earners in Latin America are mainly employees and professionals who receive very high returns for their education and experience."

"Very often when people think of inequality in Latin America they think of something like the top 15 families," says IDB Chief Economist Ricardo Hausmann. "But what makes Latin America the most unequal region in the world is not the top 0.0001 percent of the population, but the top 10 percent...people with average incomes eight times greater than those in the bottom 30 percent."

Apart from attributing large gaps between haves and have-nots mainly to educational levels, the Bank invokes theories which it admits "were long dismissed as tantamount to racism."

For example, it draws correlations between latitude and income distribution, observing that "equality is far from the equator." Countries in tropical zones - hot places with no changes of season - face a heavier burden of diseases.

Malaria alone affects some 500 million people and accounts for a shortfall of two percentage points in the annual rate of economic growth in the worst-affected countries. Outdoor workers in tropical countries also are capable of less physical exertion than their counterparts in temperate zones, the Bank argues, because "the only effective remedy for heat is rest.

The only effective remedy for cold, on the other hand, is shelter and work."

Compounding those factors are land tenure patterns. Technologies used to produce major tropical crops such as cotton, sugar and tobacco require large plantations, so land ownership is concentrated in the hands of a few. Land tenure also has been affected by land-grant policies dating back to colonial days, according to the report.

Reliance on agricultural and natural commodities is a risky business. Crops, forests and oil fields are exposed to "natural shocks"(drought, floods, hurricanes, plagues of insects) and to price fluctuations in international commodity markets. Investors and employers keep workers' wages low to protect profits against those swings even as they ask governments for tax incentives and guarantees against political and financial risks.

According to the report, the resulting combination of low incomes and tax volatility make for barren ground for long-term investments in health and education needed to boost opportunity and reduce inequality. Yet, the report adds, the countryside represents a "poor but generally equal baseline" compared to cities, which swell as disaffected peasants chase higher-paying urban jobs.

"Since incomes are higher and grow faster in the cities, the urbanisation process will contribute to gradually increasing inequality," it says. The effect is pronounced in Latin America, where there are four rural people for every six city-dwellers. Eventually, however, "when most workers have made the transition to the urban sector, the rural-urban earnings gap will affect only a small fraction of the population, and its effect on the country's income inequality will thus be small."

Inequality also should decline with growth in the proportion of workers employed in the factories and offices of the formal sector, not the street markets of the 'informal' sector.

"Incomes in the formal sector tend to outstrip those of the informal sector, introducing a similar source of inequality in the initial stages of this process," the report notes. At least statistically, the gap will narrow because workers in the formal sector earn similar hourly wages for similar work whereas wages differ wildly in the informal sector.

"Much of the region's inequality is associated with large wage differentials," the report emphasises. "In other words, it results not only from differences between owners of capital and workers, but from a divergence of incomes among workers." It also highlights the level of schooling, gender, and current labour legislation as causes of wage disparity.

"In general, Latin America's labour legislation is antiquated," says Hausmann. Minimum wage laws - while appearing just and progressive - are seldom honoured and can serve to choke job growth, he argues.

Countries must grope for public policy solutions to inequality because disparity breeds social discontent and "harms the ability of the political system to undertake policies that promote growth," Hausmann says. He concedes that some countries "may want a more equal society because they perceive that it is a good in itself."

The report asserts that the right responses are those the Bank has been pushing: market-friendly economic policies supported by social security, tax, health, education, and judicial 'reforms'.

It defends the "bold and decisive" structural adjustment programmes of the past decade as enabling countries to resist the worst effects of global financial crisis.

Those programmes appear to have accentuated inequality, as the report admits: "Our best measures indicate that income distribution improved in the 1970s, worsened considerably in the 1980s and has remained at high levels in the 1990s."

However, the Bank glides over the apparent contradiction, blaming the situation on "deep long-run causes" and urging countries to keep faith in its vision of development, which remains a work in progress.

Rather than wait for things to get better, the report adds, governments should intensify those reforms and seize the "unique window of opportunity" presented by falling fertility.

"Since the fertility rate is falling, the proportion of people of working age is rising faster than the number of children," the report says, so the number of dependents per worker should fall, too - assuming jobs can be found for everyone. (END/IPS/aa/mk/98)