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Falling Inequality in Latin America: The Role of Fiscal Policy

Published online by Cambridge University Press:  09 June 2020

Judith Clifton
Affiliation:
Professor of Economics, Universidad de Cantabria, Spain and Visiting Academic, University of Cambridge
Daniel Díaz-Fuentes
Affiliation:
Professor of Economics, Universidad de Cantabria, Spain and Visiting Research Fellow, Department of International Development, University of Oxford
Julio Revuelta
Affiliation:
Senior Lecturer in Economics, Universidad de Cantabria, Spain.
Corresponding
E-mail address:

Abstract

Latin America is one of the world's only regions to have witnessed a fall in income inequality during the 2000s. This paper evaluates the role fiscal policy played in this change. Recent scholarship has examined this in individual countries; lacking is a regional perspective. We examine the effects of nine fiscal instruments on income inequality in 17 countries between 1990 and 2014. Fiscal policy had a positive – albeit small – effect in reducing income inequality, especially from 2003, working best at the urban level. Public spending on education, personal income taxes and social contributions were especially instrumental in reducing income inequality.

Spanish abstract

Spanish abstract

América Latina es una de las únicas regiones del mundo que observó una disminución en la desigualdad del ingreso durante la década de 2000. En este artículo se evalúa el papel que desempeñó la política fiscal en este cambio distributivo. Estudios recientes han examinado este cambio en países individuales; lo que falta es una perspectiva regional. En este trabajo examinamos los efectos de nueve instrumentos fiscales sobre la desigualdad del ingreso en 17 países entre 1990 y 2014. La política fiscal tuvo un efecto positivo, aunque exiguo, en la reducción de la desigualdad del ingreso, especialmente a partir de 2003, funcionando mejor a nivel urbano. El gasto público en educación, los impuestos a la renta personal y las contribuciones a la seguridad social fueron especialmente importantes para reducir la desigualdad del ingreso.

Portuguese abstract

Portuguese abstract

A América Latina é uma das únicas regiões do mundo a testemunhar uma queda na desigualdade de renda durante os anos 2000. Este artigo avalia o papel da política fiscal nessa mudança. Estudos recentes examinaram isso em países de forma individual; o que falta é uma perspectiva regional. Examinamos os efeitos de nove instrumentos fiscais sobre a desigualdade de renda em 17 países entre 1990 e 2014. A política fiscal teve um efeito positivo – embora pequeno – na redução da desigualdade de renda, especialmente a partir de 2003, funcionando melhor no nível urbano. Os gastos públicos em educação, imposto de renda, taxas e contribuições sociais foram especialmente úteis para reduzir a desigualdade de renda.

Type
Research Article
Copyright
Copyright © Cambridge University Press 2020

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References

1 See, for instance, Alvaredo, Facundo, Chancel, Lucas, Piketty, Thomas, Saez, Emmanuel and Zucman, Gabriel (co-ords.), World Inequality Report (Cambridge, MA: Belknap Press, 2018)CrossRefGoogle Scholar; Milanovic, Branko, The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality (New York: Basic Books, 2010)Google Scholar; Milanovic, Branko, Global Inequality: A New Approach for the Age of Globalization (Cambridge, MA: Belknap Press, 2016)CrossRefGoogle Scholar; Piketty, Thomas, Capital in the Twenty-First Century (Cambridge, MA: Belknap Press, 2014)CrossRefGoogle ScholarPubMed.

2 Cornia, Giovanni Andrea (ed.), Falling Inequality in Latin America: Policy Changes and Lessons (Oxford: Oxford University Press, 2014)CrossRefGoogle Scholar; Cornia, Giovanni Andrea, ‘Inequality Trends and their Determinants: Latin America over 1990–2010’, UNU-WIDER [United Nations University World Institute for Development Economics Research] Working Paper, 9 (2012)Google Scholar; United Nations (UN) Economic Commission for Latin America and the Caribbean (ECLAC), Social Panorama of Latin America 2016 (Santiago de Chile: ECLAC, 2017)Google Scholar; Franzoni, Juliana Martínez and Sánchez-Ancochea, Diego, ‘The Double Challenge of Market and Social Incorporation: Progress and Bottlenecks in Latin America’, Development Policy Review, 32: 3 (2014), pp. 275–98CrossRefGoogle Scholar; Paus, Eva, ‘Latin America and the Middle Income Trap’, Financing for Development Series (ECLAC), 250 (2014)Google Scholar.

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7 Kenneth M. Roberts, ‘The Politics of Inequality and Redistribution in Latin America's Post-Adjustment Era’, in Cornia (ed.), Falling Inequality, pp. 49–69.

8 See Cornia, Giovanni Andrea, Gómez-Sabaini, Juan Carlos and Martorano, Bruno, ‘A New Fiscal Pact, Tax Policy Changes and Income Inequality: Latin America during the last decade’, UNU-WIDER Working Paper, 70 (2011)Google Scholar; Grugel, Jean and Riggirozzi, Pía, ‘Post-Neoliberalism in Latin America: Rebuilding and Reclaiming the State after Crisis’, Development and Change, 43: 1 (2012), pp. 121CrossRefGoogle Scholar.

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10 See, for instance, Giovanni Andrea Cornia, ‘Income Inequality in Latin America: Recent Decline and Prospects for its Further Reduction’, Working Papers – Economics, Università degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa, 14 (2014), which finds inequality reduction was virtually generalised across the region, being driven more by economic growth than by the political orientation of governments; Sánchez-Ancochea, Diego and Revuelta, Julio, ‘Inequality in Latin America: An Introduction’, Revista de Economía Mundial, 43 (2016), pp. 1520Google Scholar; Siegel, Karen M., ‘Fulfilling Promises of More Substantive Democracy? Post-Neoliberalism and Natural Resource Governance in South America’, Development and Change, 47: 3 (2016), pp. 495516CrossRefGoogle Scholar.

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14 Cornia et al., ‘A New Fiscal Pact’.

15 See Carlos Acevedo and Maynor Cabrera, ‘Social Policies or Private Solidarity? The Equalizing Role of Migration and Remittances in El Salvador’, in Cornia (ed.), Falling Inequality, pp. 164–87; Verónica Amarante, Marco Colafranceschi and Andrea Vigorito, ‘Uruguay's Income Inequality and Political Regimes over the Period 1981–2010’, in ibid., pp. 118–39; Bucheli, Marisa, Lustig, Nora, Rossi, Máximo and Amábile, Florencia, ‘Social Spending, Taxes, and Income Redistribution in Uruguay’, Public Finance Review, 42: 3 (2014), pp. 413–33CrossRefGoogle Scholar; Raymundo Campos-Vazquez, Gerardo Esquivel and Nora Lustig, ‘The Rise and Fall of Income Inequality in Mexico, 1989–2010’, in Cornia (ed.), Falling Inequality, pp. 140–63; Dante Contreras and Ricardo Ffrench-Davis, ‘Policy Regimes, Inequality, Poverty, and Growth: The Chilean Experience, 1973–2010’, in ibid., pp. 94–117; Higgins, Sean and Pereira, Claudiney, ‘The Effects of Brazil's Taxation and Social Spending on the Distribution of Household Income’, Public Finance Review, 42: 3 (2014), pp. 346–67CrossRefGoogle Scholar; Jaramillo, Miguel, ‘The Incidence of Social Spending and Taxes in Peru’, Public Finance Review, 42: 3 (2014), pp. 391412CrossRefGoogle Scholar; Stephan Klasen, Thomas Otter and Carlos Villalobos Barría, ‘The Dynamics of Inequality Change in a Highly Dualistic Economy’, in Cornia (ed.), Falling Inequality, pp. 188–210; Lustig, Nora, Lopez-Calva, Luis F. and Ortiz-Juarez, Eduardo, ‘Declining Inequality in Latin America in the 2000s: The Cases of Argentina, Brazil, and Mexico’, World Development, 44 (2013), pp. 129–41CrossRefGoogle Scholar; Lustig, Nora and Pessino, Carola, ‘Social Spending and Income Redistribution in Argentina during the 2000s: The Increasing Role of Noncontributory Pensions’, Public Finance Review, 42: 3 (2014), pp. 304–25CrossRefGoogle Scholar; Lustig, Nora, Pessino, Carola and Scott, John, ‘The Impact of Taxes and Social Spending on Inequality and Poverty in Argentina, Bolivia, Brazil, Mexico, Peru and Uruguay: Introduction to the Special Issue’, Public Finance Review, 42: 3 (2014), pp. 287303CrossRefGoogle Scholar; Arauco, Verónica Paz, Molina, George Gray, Aguilar, Ernesto Yáñez and Pozo, Wilson Jiménez, ‘Explaining Low Redistributive Impact in Bolivia’, Public Finance Review, 42: 3 (2014), pp. 326–45CrossRefGoogle Scholar; Juan Ponce and Rob Vos, ‘Redistribution without Structural Change in Ecuador: Rising and Falling Income Inequality in the 1990s and 2000’, in Cornia (ed.), Falling Inequality, pp. 73–93; Scott, John, ‘Redistributive Impact and Efficiency of Mexico's Fiscal System’, Public Finance Review, 42: 3 (2014), pp. 368–90CrossRefGoogle Scholar.

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17 Moreno-Brid, Juan Carlos, Caldentey, Esteban Pérez and Nápoles, Pablo Ruíz, ‘The Washington Consensus: A Latin American Perspective Fifteen Years Later’, Journal of Post Keynesian Economics, 27: 2 (2004), pp. 345–65Google Scholar; Serra, Narcís and Stiglitz, Joseph E. (eds.), The Washington Consensus Reconsidered. Towards a New Global Governance (Oxford: Oxford University Press, 2008)CrossRefGoogle Scholar.

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19 Cornia, , ‘Income Inequality in Latin America’; López-Calva, Luis Felipe and Lustig, Nora (eds.), Declining Inequality in Latin America: A Decade of Progress? (Washington, DC: Brookings Institution Press, 2010)Google Scholar.

20 See Bértola and Ocampo, The Economic Development of Latin America; ECLAC, The Inefficiency of Inequality; Milanovic, Branko and de Bustillo, Rafael Muñoz, ‘La desigualdad de la distribución de la renta en América Latina: Situación, evolución y factores explicativos’, América Latina Hoy, 48 (2008), pp. 1542Google Scholar; Huber, Evelyne, Nielsen, François, Pribble, Jenny and Stephens, John D., ‘Politics and Inequality in Latin America and the Caribbean’, American Sociological Review, 71: 6 (2006), pp. 943–63CrossRefGoogle Scholar.

21 Atkinson, Anthony B., ‘On the Measurement of Inequality’, Journal of Economic Theory, 2: 3 (1970), pp. 244–63CrossRefGoogle Scholar; Atkinson, Anthony B., ‘More on the Measurement of Inequality’, Journal of Economic Inequality, 6: 3 (2008), pp. 277–83CrossRefGoogle Scholar.

22 Cornia, ‘Income Inequality in Latin America’; López-Calva and Lustig (eds.), Declining Inequality in Latin America.

23 Additional caution should be exercised when considering data derived from household surveys, which can underestimate inequality, due to under-reported top incomes. Complementary use of other sources (such as tax data) and mixed methodologies can mitigate this challenge (see, for instance, Piketty, Thomas, Saez, Emmanuel and Zucman, Gabriel, ‘Distributional National Accounts: Methods and Estimates for the United States’, Quarterly Journal of Economics, 133: 2 (2018), pp. 553609CrossRefGoogle Scholar; Bustos, Alfredo and Leyva, Gerardo, ‘Towards a More Realistic Estimate of the Income Distribution in Mexico’, Latin American Policy, 8: 1 (2017), pp. 114–26CrossRefGoogle Scholar; Campos-Vazquez, Raymundo M., Chavez, Emmanuel and Esquivel, Gerardo, ‘Estimating Top Income Shares without Tax Return Data: Mexico since the 1990s’, Latin American Policy, 9: 1 (2018), pp. 139–63CrossRefGoogle Scholar). However, inequality measures from these methodologies are not available in a comparable and systematic format for the Latin American countries during the period analysed in this research. For this reason, we use inequality measures from household surveys as the best available metric for inequality, which allows a comparison in a large sample of Latin American countries between 1990 and 2014.

24 Data for Latin America are unweighted regional averages based on national data provided by ECLAC on its CEPALSTAT website, https://estadisticas.cepal.org/cepalstat/WEB_CEPALSTAT/estadisticasIndicadores.asp?idioma=i (last accessed 15 Jan. 2020).

25 Ibid.

Ibid

26 Gasparini, Leonardo, Cruces, Guillermo and Tornarolli, Leopoldo, ‘Chronicle of a Deceleration Foretold: Income Inequality in Latin America in the 2010s’, Revista de Economía Mundial, 43 (2016), pp. 2545Google Scholar.

27 ECLAC, CEPALSTAT website.

28 ECLAC, Social Panorama of Latin America 2017 (Santiago de Chile: ECLAC, 2018).

29 ECLAC, Social Panorama of Latin America 2014 (Santiago de Chile: ECLAC, 2015).

30 Alvaredo et al. (co-ords.), World Inequality Report; Bárcena, Alicia, ‘Structural Constraints on Development in Latin America and the Caribbean: A Post-Crisis Reflection’, CEPAL Review, 100 (2010), pp. 727Google Scholar; ECLAC, Time for Equality: Closing Gaps, Opening Trails (Santiago de Chile: ECLAC, 2010); López-Calva and Lustig (eds.), Declining Inequality in Latin America.

31 Tsounta and Osueke, ‘What is behind Latin America's Declining Income Inequality?’

32 Cornia, ‘Income Inequality in Latin America’.

33 Saúl N. Keifman and Roxana Maurizio, ‘Changes in Labour Market Conditions and Policies, and their Impact on Wage Inequality during the Last Decade’, in Cornia (ed.), Falling Inequality, pp. 251–73.

34 Tsounta and Osueke, ‘What is behind Latin America's Declining Income Inequality?’

35 Francesca Bastagli, David Coady and Sanjeev Gupta, ‘Income Inequality and Fiscal Policy’, IMF Staff Discussion Note, SDN/12/08 (2012).

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39 Lustig and Pessino, ‘Social Spending and Income Redistribution in Argentina’.

40 Paz et al., ‘Explaining Low Redistributive Impact in Bolivia’.

41 Higgins and Pereira, ‘The Effects of Brazil's Taxation and Social Spending’.

42 Scott, ‘Redistributive Impact and Efficiency of Mexico's Fiscal System’.

43 Jaramillo, ‘The Incidence of Social Spending and Taxes in Peru’.

44 Bucheli et al., ‘Social Spending, Taxes, and Income Redistribution in Uruguay’.

45 Cornia (ed.), Falling Inequality.

46 Ponce and Vos, ‘Redistribution without Structural Change in Ecuador’.

47 Contreras and Ffrench-Davis, ‘Policy Regimes, Inequality, Poverty, and Growth’.

48 Amarante et al., ‘Uruguay's Income Inequality and Political Regimes’.

49 Campos-Vázquez et al., ‘The Rise and Fall of Income Inequality in Mexico’.

50 Acevedo and Cabrera, ‘Social Policies or Private Solidarity?’

51 Klasen et al., ‘The Dynamics of Inequality Change in a Highly Dualistic Economy’.

52 Sabaini, Juan Carlos Gómez and Martner, Ricardo, ‘América Latina: Panorama global de su sistema tributario y principales temas de política’, in Martner, Ricardo (ed.), Las finanzas públicas y el pacto fiscal en América Latina (Santiago de Chile: CEPAL, 2008), pp. 6990Google Scholar.

53 Mahon, ‘Tax Incidence and Tax Reforms in Latin America’.

54 González, Ivonne and Fanta, Ricardo Martner, ‘Overcoming the “Empty Box Syndrome”: Determinants of Income Distribution in Latin America’, CEPAL Review, 108 (2012), pp. 726Google Scholar.

55 Tsounta and Osueke, ‘What is behind Latin America's Declining Income Inequality?’

56 Cornia et al., ‘Tax Policy and Income Distribution during the Last Decade’.

57 Hanni, Michael, Fanta, Ricardo Martner and Podestá, Andrea, ‘El potencial redistributivo de la fiscalidad en América Latina’, Revista CEPAL, 116 (2015), pp. 726Google Scholar.

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59 Hall, Anthony, ‘From Fome Zero to Bolsa Família: Social Policies and Poverty Alleviation under Lula’, Journal of Latin American Studies, 38: 4 (2006), pp. 689709CrossRefGoogle Scholar.

60 ECLAC, CEPALSTAT website.

61 See, for instance, Cornia, ‘Inequality Trends and their Determinants’; González and Martner Fanta, ‘Overcoming the “Empty Box Syndrome”’; Huber et al., ‘Politics and Inequality in Latin America and the Caribbean’; Norman Loayza, Alfredo Mier y Terán and Jamele Rigolini, ‘Poverty, Inequality and the Local Natural Resource Curse’, IZA Discussion Papers, 7226 (2013); Neal, Timothy, ‘Using Panel Co-Integration Methods to Understand Rising Top Income Shares’, Economic Record, 89: 284 (2013), pp. 8398CrossRefGoogle Scholar; Roine, Jesper, Vlachos, Jonas and Waldenström, Daniel, ‘The Long-Run Determinants of Inequality: What Can We Learn from Top Income Data?’, Journal of Public Economics, 93: 7–8 (2009), pp. 974–88CrossRefGoogle Scholar; Tsounta and Osueke, ‘What is behind Latin America's Declining Income Inequality?’

62 Afonso, António, Schuknecht, Ludger and Tanzi, Vito, ‘Income Distribution Determinants and Public Spending Efficiency’, Journal of Economic Inequality, 8: 3 (2010), pp. 367–89CrossRefGoogle Scholar; González and Martner Fanta, ‘Overcoming the “Empty Box Syndrome”’; Branko Milanovic, ‘Determinants of Cross-Country Income Inequality: An Augmented Kuznets Hypothesis’, World Bank Policy Research Working Paper, 1246 (1994); Williamson, ‘Five Centuries of Latin American Income Inequality’.

63 Darryl McLeod and Nora Lustig, ‘Inequality and Poverty under Latin America's New Left Regimes’, ECINEQ Working Paper Series, ECINEQ WP 2011–208 (2011); Montecino, Juan Antonio, ‘Decreasing Inequality under Latin America's “Social Democratic” and “Populist” Governments: Is the Difference Real?’, International Journal of Health Services, 42: 2 (2012), pp. 257–75CrossRefGoogle ScholarPubMed; Tsounta and Osueke, ‘What is behind Latin America's Declining Income Inequality?’

64 See Roodman, David, ‘How To Do xtabond2: An Introduction to Difference and System GMM in Stata’, Stata Journal, 9: 1 (2009), pp. 86136CrossRefGoogle Scholar; Bruno, Giovanni S. F., ‘Estimation and Inference in Dynamic Unbalanced Panel-Data Models with a Small Number of Individuals’, Stata Journal, 5: 4 (2005), pp. 473500CrossRefGoogle Scholar.

65 Cesi Cruz, Carlos Scartascini and Philip Keefer, ‘Database of Political Institutions 2017’. Inter-American Development Bank Numbers for Development. Available at: https://mydata.iadb.org/Reform-Modernization-of-the-State/Database-of-Political-Institutions-2017/938i-s2bw (last accessed 26 Dec. 2019).

66 For instance, Alvaredo, Facundo, Chancel, Lucas, Piketty, Thomas, Saez, Emmanuel and Zucman, Gabriel, ‘Global Inequality Dynamics: New Findings from WID.world’, American Economic Review: Papers & Proceedings, 107: 5 (2017), pp. 404–9CrossRefGoogle Scholar.

67 See François Bourguignon, ‘World Changes in Inequality: An Overview of Facts, Causes, Consequences and Policies’, BIS Working Paper, 654 (2017); Valentin F. Lang and Marina Mendes Tavares, ‘The Distribution of Gains from Globalization’, IMF Working Paper, WP/18/54 (2018).

68 Streeck, Wolfgang, ‘The Rise of the European Consolidation State’, in Magara, Hideko (ed.), Policy Change under New Democratic Capitalism (Abingdon: Routledge, 2017), pp. 3958Google Scholar.

69 Cornia (ed.), Falling Inequality.

70 See, for example, Segura-Ubiergo, Alex, The Political Economy of the Welfare State in Latin America: Globalization, Democracy, and Development (Cambridge: Cambridge University Press, 2007)CrossRefGoogle Scholar.

71 Bird and Zolt, ‘Fiscal Contracting in Latin America’; Cornia et al., ‘A New Fiscal Pact’.

72 Clifton, Judith, Diaz-Fuentes, Daniel and Gómez, Ana Lara, ‘The Crisis as Opportunity? On the role of the Troika in Constructing the European Consolidation State’, Cambridge Journal of Regions, Economy and Society, 11: 3 (2018), pp. 587608CrossRefGoogle Scholar.

73 See, for instance, Goñi et al., ‘Fiscal Redistribution’; Profeta, Paola and Scabrosetti, Simona, ‘Political Economy Issues of Taxation’, in Bernardi, Luigi, Barreix, Alberto, Marenzi, Anna and Profeta, Paola (eds.), Tax Systems and Tax Reforms in Latin America (Abingdon: Routledge, 2008), pp. 6376Google Scholar; and Gómez-Sabaini, ‘Cohesión social, equidad y tributación’.

74 For instance, Cornia (ed.), Falling Inequality; Lustig et al., ‘The Impact of Taxes and Social Spending on Inequality’.

75 UN, World Urbanization Prospects 2018; Berdegué, Julio A., Carriazo, Fernando, Jara, Benjamín, Modrego, Félix and Soloaga, Isidro, ‘Cities, Territories, and Inclusive Growth: Unraveling Urban–Rural Linkages in Chile, Colombia, and Mexico’, World Development, 73 (2015), pp. 5671CrossRefGoogle Scholar.

76 Martínez Franzoni and Sánchez-Ancochea, ‘The Double Challenge’.

77 According to the International Labour Organization, Labour Overview 2017. Latin America and the Caribbean (Lima: International Labour Organization, 2017), pp. 44–5Google Scholar, informal employment in urban areas went from 52% in 2005 to 47% in 2014.

78 UN-Habitat, The State of Latin American and Caribbean Cities 2012 (Nairobi: UN-Habitat, 2012).

79 Deneulin and Sánchez-Ancochea, ‘Urban Inequality’.

80 UNDP, Human Development Report 2016 (New York: UNDP, 2016).

81 Jude Webber, ‘López Obrador Wins Historic Mandate for Change in Mexico’, Financial Times, 2 July 2018.

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