The Costs of Inequality in Latin America

Lessons and Warnings for the Rest of the World

Diego Sánchez-Ancochea

• Éditeur: I.B. Tauris
• Année: 2020
• ISBN:
  9781838606251
• Édition: 1
• Sujet: Economics
• Sous-sujet: Economic Policy

From the United States to the United Kingdom and from China to India, growing inequality has led to social discontent and the emergence of populist parties, also contributing to economic crises. We urgently need a better understanding of the roots and costs of these income gaps. The Costs of Inequality draws on the experience of Latin America, one of the most unequal regions of the world, to demonstrate how inequality has hampered economic growth, contributed to a lack of good jobs, weakened democracy, and led to social divisions and mistrust. In turn, low growth, exclusionary politics, violence and social mistrust have reinforced inequality, generating various vicious circles. Latin America thus provides a disturbing image of what the future may hold in other countries if we do not act quickly. It also provides some useful lessons on how to fight income concentration and build more equitable societies.

Chapter 1

INTRODUCTION: LESSONS FROM THE LAND OF INEQUALITY

Occupy Wall Street, anti-austerity protests in Spain and Greece, the electoral successes of Trump, Salvini, Erdogan, and Brexit, the 2008 financial crisis, the casualization of work… We thought that the first two decades of the twenty-first century had been turbulent and then the COVID-19 outbreak made things even more complicated. The world seems to be in a continuous state of shock, with millions of people struggling.

Although poverty has been reduced in many countries and the world is wealthier than ever, a growing number of people are discontented. They see the rich becoming richer and worry about their own stagnant living standards. Many believe their children will fare worse than them, suspect that the economy is rigged, and doubt that politicians will do much to change things. The pandemic may have diverted our attention in the short run, but it is likely to make things worse, creating even larger income gaps.

The growing instability in the face of inequality is unsurprising for those of us who study Latin America. We know well the catastrophic consequences of the concentration of income and opportunities in a few hands. In Latin America—one of the most unequal regions in the world—inequality has historically contributed to many social ills, from low economic growth to weak democratic institutions and high levels of violence. Populism, financial crises, bad jobs, social polarization: Latin America has struggled with all these problems for more than a century.

This is why I decided to write this book. Little by little I have come to realize that much of the world—from the US all the way to India—looks more and more like the region I study and love. “As some western economies have become more Latin American in their distribution of incomes, their politics have also become more Latin American,” the Financial Times commentator Martin Wolf wrote recently.¹ If you want to understand why our economies are failing to sustain growth and create good jobs for all, why our politics is increasingly broken, and why social trust is at risk, you would do well to learn more about Latin America’s struggles.

Recent events in the continent have only increased the relevance of this book. Social protests in Chile and Colombia, indigenous revolts in Ecuador, and political tensions in Bolivia have shown once again how difficult it is to sustain democratic institutions and economic development in highly unequal environments. These cases also point to a growing risk across the world: the consolidation of vicious circles that become increasingly hard to break. As the wealthy become more powerful, they exert more control on the political system, people become more dissatisfied, and economic and social instability intensifies, resulting in an even worse distribution of income.

This book thus uses the Latin American experience to show the economic and political costs of inequality. We will see how large income gaps between rich and poor can hamper economic growth and contributed to a lack of good jobs. Across Latin America, the wealthy have faced limited incentives to invest in new sectors—they make healthy profits anyway—and have been unwilling to pay enough taxes to fund public social spending. Inequality has been one of the drivers of weak institutions and the emergence of anti-system politics. The poor and the middle class—losers of what they consider a rigged system—have tended to distrust traditional political parties. Often in Latin America’s history they have gravitated toward leaders who promised rapid gains based on easy solutions. Inequality has also had serious social costs, from high levels of violence to urban segregation, ethnic discrimination, and lack of social trust.

The book will also help you understand how vicious circles contribute to the perpetuation of income polarization. It is not only that inequality has shaped political and economic institutions in Latin America; these institutions have in turn contributed to more inequality. For example, labor market duality (with large differences between good and bad jobs) has led to growing income gaps between workers. Politics and economics have also reinforced each other: inequality has contributed to the election of leaders who, in their search for easy solutions, have ended up triggering economic crises and ultimately favoring the wealthy.

Although the book primarily constitutes a warning, it also provides ideas on how to change path. Drawing from the Latin American experience as well as broader policy debates, I emphasize the link between ideas, policies, and politics. As you will see, I do not propose radically new solutions, because we already know much of what needs to be done to create a more equitable future. We need to strengthen social movements and make them more politically influential; we must consider distributional implications when making any policy proposal; we should renew our belief in the power of democratic institutions and also reject dominant individualistic ideals. Let’s only hope that the way we react to the COVID-19 pandemic and its aftermath reinforces these messages.

I hope that readers attracted to Latin America find this account of the region’s long struggles with inequality insightful. More broadly, the book should be of interest to anyone concerned with the high costs of inequality today and in the future. As we will see in the next chapters, Latin America’s history provides a painful reminder of the dangers of income concentration and the urgent need to reduce it. While focusing on income, the book will consider at times its connections to inequalities in gender, race, and ethnicity.

The following pages show how much inequality has increased in developed countries in recent years and why we should be worried about it.² The chapter also explains why Latin America is the region to study if we want to understand the long-term costs of a bad distribution of income. It also describes the main tools used in this book—case studies—and why they constitute an important (if at times undervalued) approach to making sense of the world. In the concluding pages, I describe the argument of the book and reflect on some potential ways to tackle the inequality plague we are witnessing.

Inequality is Growing in Developed Countries… and it is Even Higher in Latin America

Here (on Nantucket in Massachusetts) “you don’t feel bad because you want a nice bottle of wine. If you order a $300 bottle in a restaurant, the guy at the next table is ordering a $400 bottle” explained Michael Kittredge, an entrepreneur then worth half a billion US dollars, to a New York Times journalist in the mid-2000s.³ Kittredge was part of the small elite of American CEOs, hedge fund managers, and entrepreneurs who most benefited from changes in US policy since the early 1980s.

In the last decade, the power and influence of this economic elite has become even more evident in politics and the media. In 2013 President Obama warned Americans that “the combined trends of increased inequality and decreasing mobility pose a fundamental threat to … our way of life,” decreasing the trust in institutions, reducing opportunities for personal growth, and weakening democracy.⁴

The data on the growing concentration of income in a few hands—made popular by Thomas Piketty’s bestseller Capital in the 21st Century (2013)—is staggering. Figure 1.1 compares the share of the total income generated in each economy of the wealthiest 1 percent in 1980 and 2015. In the US, the share of pre-tax income in the hands of the top 1 percent almost doubled between the early 1980s and the present, going from 11 percent to 20 percent. Between 2000 and 2007 this group received 65 percent of all economic growth generated in the country!⁵ In social democratic Sweden, the share of the top 1 percent more than doubled during the same period—from 4 to 9 percent. The US and Sweden were not exceptions: in fact, in the last 25 years, the income share of the wealthy has increased in every developed country in the graph. Things are likely to worsen as a result of the COVID-19 pandemic, as many workers lose their jobs and struggle for new opportunities, while the wealthy rapidly recuperate from the crisis.

Wealth inequality—i.e. the gap in the amount of assets such as stocks and houses owned by different groups—is even higher. Today the top 1 percent controls around 40 percent of US net wealth, compared to 25 percent in the late 1980s.⁶ In the more egalitarian Norway, the share of wealth controlled by the top 1 percent has grown by seven percentage points, from 16 to around 23 percent. The rich compete with each other for the best paintings, yachts, and palaces in the French Riviera. In 2010 many people were scandalized when an Andy Warhol self-portrait sold for $32.6m—more than twice the expected $15m.⁷ Nevertheless, just three years later, another Warhol reached the astonishing price of $105m.⁸

Figure 1.1 Income share of top 1 percent in some wealthy countries, c.1980 and c.2015. Source: Author’s own, based on data from the World Income Inequality Database.

The bestselling book The Spirit Level (2011) demonstrates how this high inequality contributes to many social ills, including mental illness, drug abuse, homicides, and lower life expectancy.⁹ It also has negative implications for politics. The “winner-takes-all” economy in which a few company managers, financial investors, and successful professionals receive huge rewards has also contributed to a “winner-takes-all” politics. This is a term coined by political scientists Jacob Hacker and Paul Pierson to describe the outsized influence that the wealthy exert in policy decisions in the US. Rich individuals and large firms have used campaign contributions, media influence, and lobbying to push for pro-rich measures in areas such as taxes, social program reform, and financial (de)regulation.¹⁰ In Europe, lobbying is more constrained, but the economic elite (and right-wing parties) have still found alternative ways to promote a regressive agenda.¹¹

None of this is surprising for Latin American experts. For a century—if not more—wealthy Latin Americans have controlled a larger share of income than anywhere else in the world. The region’s staggering inequality can be illustrated through the Palma ratio, based on the work of the Chilean economist Gabriel Palma. In several studies published in the last few years, he compares the income of the richest 10 percent with that of the poorest 40 percent across the world. In many developed countries, this ratio hovers around 1:1; that is, both groups receive a similar income share. The situation in Latin America is quite different. The average Palma ratio in the region is 2.75:1—the income share of the top 10 percent of the population is almost three times higher than that of the b...

Table des matières

• Cover
• Half-Title Page
• About the Author
• Title Page
• Contents
• Acknowledgments
• Chapter 1 Introduction: Lessons from the Land of Inequality
• Chapter 2 Latin America: Always the Most Unequal Region?
• Chapter 3 The Economic Costs of Inequality
• Chapter 4 The Political Costs of Inequality
• Chapter 5 The Social Costs of Inequality
• Chapter 6 Latin America Also Provides Positive Lessons
• Chapter 7 And Now What? How to Fight Inequality in Latin America and Beyond
• Notes
• Index
• Copyright