Bucking the Trend: Poverty Reduction and Inequality in Latin America

Recent data show that poverty is falling around the world. Today, 43 percent of people are considered to be living in “poverty” (on less than $2 per day), compared to 30 years ago when almost three-fourths of the developing world’s population was doing so. Yet, while poverty is declining, the world is not becoming a more equal place, as a preponderance of income and wealth remain concentrated in the richest segments of populations. Indeed, as the adage goes, “rising tides raise all ships.” But as reality shows, these tides have differentiated effects on equality across income groups.

Interestingly, this phenomenon—mobility out of poverty accompanied by higher income concentrations and persistent inequality—is evident in all regions of the world, with the exception of one: Latin America and the Caribbean (LAC). Bucking the global trend, the LAC region has managed to reduce both poverty and inequality (on the aggregate) over the past decade, even as countries dealt with the worst of the global economic crisis. So how did they do it?

As I highlighted in a recent presentation at the Inter-American Development Bank, there are several reasons why the region was able to reduce poverty and inequality simultaneously. First, as compared with other regions, a stronger labor market has increased employment and raised wages for unskilled workers, especially those in the lowest deciles of the income distribution. Second, demographic shifts have allowed for greater female labor market participation in the region, growing from 35% in the 1980’s to more than 55% today. Third, progressive fiscal policy especially in the form of redistributive transfer programs—such as Oportunidades, Bolsa Familia, and the like—have greatly improved the opportunities of the poor. And last, governments in the region have taken a more pro-union stance which has raised minimum wages and increased pensions.

An especially impressive example in the LAC region is my home country, Brazil. A happy outlier among its fellow BRICS countries, Brazil managed to turn the corner on inequality between 2002 and 2009, as those in the bottom 50% were able to increase their share of total income by more than 15%. In fact, according to a recent issue of Inequality in Focus, “Inequality in Brazil declined at a faster pace than elsewhere in Latin America: After 1997, inequality declined by 0.8 percent per year; from 2001 on, the rate of decline accelerated to 1.07 percent per year, well above the regional pace of 0.63 percent.”

Although progress is admirable in Brazil and the rest of the region, inequality in outcomes and opportunities remains high. Thus, I agree with Latin American governments that support policies to maintain macro-economic stability, expand access to education and health services, and strengthen social protections and safety nets. Only by doing so can the region sustain reductions in both poverty and inequality without compromising growth in the future.