Income Disparity and Development Term Paper

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Income Disparity and Development in Latin American Countries

The income disparity in the Latin American countries is the largest in the world and has a dramatic and complex impact on the development of these countries on many related levels. As one commentator states, "Inequality is as Latin American as good dance music and magical-realist fiction. Like those other regional products, it thrives." (Inequality in Latin America. A stubborn curse.)

Statistics from the World Bank indicate that the richest tenth among Latin Americans earn 48% of total income, while the poorest tenth earn just 1.6%. The equivalent figures for rich countries are 29.1% and 2.5%. (Inequality in Latin America). While fifteen years of market reforms have resulted in income levels that are above those of Africa, yet " ... income disparity is the largest in the world and 222 million people live in poverty." (SANCHEZ M. 2005) Numerous studies and reports document the extremely high disparity rates in various countries in the region. Ironically Latin America is also rich in natural resources. "One of the traits that make Latin America's poor income distribution especially conspicuous at the international level is the high percentage of resources concentrated in the richest 10% of households. " (LATIN AMERICA AND THE CARIBBEAN: SITUATION AND TRENDS ON THE ROAD TO THE MILLENNIUM DEVELOPMENT GOALS)

This has resulted in the fact that the "The reduction of such disparity will be the central economic challenge for the Inter-American Development Bank, the region's largest lending institution." (SANCHEZ M. 2005) According to a report by the Office of the Chief Economist of the Inter-American Development Bank, "The gap between rich and poor is likely attributable to education -- the wealthiest 10% of the working population are individuals who have completed secondary school." (WAGE DISPARITY IN LATIN AMERICA) However, as will be discussed there are numerous other complex factors to consider in terms of the reasons for this disparity and the way that it relates to the prospects for future development in the region.

A Gini coefficient as a measure of equality and inequality indicates 0 as a measure of perfect income equality, while a measure of 1 would imply that all wealth is concentrated in a single person. For 95 out of 100 countries for which comparable data are available, Gini coefficients range between 0.26 and 0.60. However in Latin America and the Caribbean, "they range from a high of 0.59 in Brazil to a low of 0.43 in Uruguay" ( CONSTANCE P.) In simple terms, according to the Gini coefficient, " Latin America is the world's most unequal region, with a Gini coefficient of around 0.5; in rich countries the figure is closer to 0.3." (Economics A-Z)

This situation is expressed in the following description

... If the Gini coefficient is calculated for the other 90% of the region's households, the resulting figure is much lower than the result for the total population. The reductions in the values of the Gini index for the Latin American countries obtained using this procedure range between 0.116 (Uruguay) and 0.192 points (Brazil). These variations are much greater than those found in the case of the United States, for example, where the reduction in the Gini coefficient obtained by excluding the top decile does not exceed 0.040 points. The data confirm that Latin America is a region with high levels of income concentration and that, furthermore, those levels are increasing.


Figure 1. General disparity in Latin America.


The levels of inequality in the Latin American region as a whole increased during the 1980's and 90's. The levels of disparity in the 1990's, measured in terms of share of income in households in the top decile of the income ladder, showed an increase in Argentina, Brazil, Chile and Venezuela, among others. (INTERNATIONAL FORUM FOR SOCIAL DEVELOPMENT EQUITY, INEQUALITIES AND INTERDEPENDENCE) This translates into the following statistics. The average share of the upper income groups in the region was 37% of total income which is " ... nineteen times above the average of the bottom 40% households." In other terms this means that the " ... average per capita income in Latin America is between the seventh and eight deciles, which means that between 67% and 77% of the population is below that average." (INTERNATIONAL FORUM FOR SOCIAL DEVELOPMENT EQUITY, INEQUALITIES AND INTERDEPENDENCE

United Nations, New York, 5-6 October 2004. )

Figure 2: Trends in Latin America countries in the 1990's. (Gini index)

Researchers claim that one the main obstacles in advancing development in this area is the reality of inequality. While there is consensus that the broad and extreme poverty levels in these countries are due in part to low income levels, the main problem that inhibits development is the " ... persistence of highly unequal income distribution." (LATIN AMERICA AND THE CARIBBEAN: SITUATION AND TRENDS ON THE ROAD TO THE MILLENNIUM DEVELOPMENT GOALS) As stated, the region also has a high percentage of valuable resources. However this point also reflects on the disparity in the distribution of wealth in that most of these resources are concentrated in ten percent of the wealthiest households. (LATIN AMERICA AND THE CARIBBEAN: SITUATION AND TRENDS ... )

Figure 3. Disparities in countries.


The disparity between the different countries is graphically illustrated above. The average Gini coefficient for Latin American countries increased from 50.5 to 51.4 during the 1990s. In some countries such as Argentina inequality worsened. (Inequality in Latin America. A stubborn curse)

Poverty in the region based on household surveys was estimated at 211 million people in the region in 1999. This is a significant increase on the figure of 136 million in 1980 and the figure of 200 million in 1990. The demographic breakdown also points to various causative aspects. A total of 134 of the 211 million reside in urban areas, while 77 million are in the rural areas. This has led to the conclusion that "... poverty in Latin America tends to become an urban phenomenon, but tends also to become more extreme in rural settings. " (INTERNATIONAL FORUM FOR SOCIAL DEVELOPMENT EQUITY, INEQUALITIES AND INTERDEPENDENCE.) Importantly, there was only a slight increase in the poverty rate of by two tenths of a percentage point between 1999 and 2002. This slight change has been attributed to another important factor -- namely the poor economic growth in the region during 2001.

The data supplied by the Gini Coefficient and the various statistics on the alarming disparity in income levels, coupled with the poverty rate, has a direct impact on the countries development and particularly on the target of halving extreme poverty by 2015, as indicated in the Millennium Declaration. The importance of income distribution for these countries, and it consequences for their development is made clear by the Gini Coefficient

Improvements in income distribution can magnify the effect of economic growth in terms of poverty reduction in the region. For example, a 5% reduction in the Gini index (equivalent to approximately 0.025 points of the value of that indicator) can cut down the amount of time needed to halve extreme poverty from two to five years.


Furthermore, studies show that - " ... If economic growth were combined with redistribution, countries such as Mexico and Brazil could meet the target before 2005, whereas, without any improvement in distribution, none of them will do so by then." (LATIN AMERICA AND THE CARIBBEAN: SITUATION AND TRENDS)

It is also noteworthy in this regard that the target reduction of poverty of Costa Rica, Ecuador, Guatemala, Panama and El Salvador could be achieved before or during 2009, but " ... without a change in distribution, this is not a feasible outcome." (LATIN AMERICA AND THE CARIBBEAN: SITUATION AND TRENDS ... )

In addition, the picture of disparity is widened by the fact that employment, gaps in wages and remunerations have worsened in the majority of Latin American countries. Wage differentials in various areas and market segments have also become "more pronounced," especially between the informal and formal sectors. "Within each sector of the economy, wage disparities also increased between workers with higher and lower skills. (INTERNATIONAL FORUM FOR SOCIAL DEVELOPMENT EQUITY, INEQUALITIES AND INTERDEPENDENCE. )

The reason for this situation are varied and complex. One view is that the disparities are largely historically founded and are based on an unequal access to land and education in the 19th Century. (Inequality in Latin America. A stubborn curse) (

Inequalities and disparities in income have concomitant effects on the development of countries in many differences but related ways. Research has established the negative effect that income disparity has on these countries. (Alesina and Rodrik 1994) This and other studies refer to the fact that income disparity also has negative consequences for countries stability.

There is the view that democracy and a reduction in income disparities are linked. Barro in Democracy and Growth…

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