The same week as Robert Shiller, the latest recipient of the Nobel Prize in economics, warned that the increasing inequality is the biggest challenge of our times, we got a government without ministry of development. One of the themes that will most likely disappear from Norwegian development policy is inequality, the red-green government’s inclusion of it in the development agenda was never greeted with great enthusiasm by the conservatives and the Progress Party.
However, new research from the only region that has managed to reduce inequality over the past decade shows that inequality reduction is about long-term development, and that policies that have contributed to growth are not at all incompatible with inequality reduction. These are experiences that governments of all colors should be interested in.
Latin America's decade of inequality reduction is now the subject of much research, especially under the auspices of the UN Economic Commission for Latin America (CEPAL / ECLAC) that collaborates with the University of Oslo. Latin America has long held the position as the region in the world with the most unequal income distribution, and it is no longer disputable that inequality is an underlying cause of many of the region's problems, including crime, poverty, lack of tax revenues, social conflicts, limited internal markets and uneven trade balance (affected by the elite’s consumption patterns).
Over the past decade, income became notably more evenly distributed. Only Costa Rica, Colombia and the Dominican Republic have not experienced any inequality reduction of importance. However, we see no change in the relationship between wages and capital, and we recognize that we are not able to capture what the richest earn.
Nevertheless, if for example Brazil continues its development since 2002, the country will have as evenly distributed revenues as Canada in 2020, measured by the so-called Gini coefficient. It's not bad for a country that a few years ago had the world’s worst income distribution.
What can explain the decline? There is not one definitive answer, but two main groups of explanations are explored. One focuses on taxes and government transfers. Income before taxes and transfers is not much more unequally distributed in Latin America than in Europe. Europe's relatively even distribution is in other words a result of that European countries tax the wealthiest more and the poor less, while social security, social assistance and pensions increasingly target the poor.
In Latin America over the last decade, social policy has become far more progressive. Programs like "Bolsa Família" in Brazil, a support scheme for families with children, has received much of the credit for poverty and inequality reduction. However it turns out that such programs can only explain between 15 and 20 percent of the reduction in inequality over the past decade. Certain states have also managed to change the tax system, social security and pensions. Nevertheless, they have faced two obstacles: political opposition, and the fact that nearly half of the population works in the informal sector, either undocumented or in industries that the government does not detect and control.
Thus, it is rather the reduction in differences in wages which is the main reason why inequality has decreased over the past decade. One explanation is the change in the so called “education premium”. Latin America has very large differences in wages between people with higher education and those with lower education. But from the 1990s there has been an educational explosion in Latin America. Therefore, the supply of qualified labor has become larger than the demand, and the price of highly educated workers declined. At the same time, the demand for unskilled labor increased, partly due to the expansion of the service industry. The low wages are also driven up by higher minimum wages.
But there is one last factor that will have a major impact on the continuity of the reduction in income inequality: if countries manage to shift production patterns towards activities where productivity is high, meaning that each worker produces more value per invested hour. Similarly, it is important to reduce the productivity gap within sectors.
Much of the inequality in Latin America can be explained by the fact that a large proportion of the population works in sectors with low productivity. They account for a small proportion of total income but a large portion of the jobs. Countries in Latin America that have seen a significant inequality reduction have increased employment in knowledge-intensive sectors, where productivity is highest. In these countries there is also less difference between companies within the same sector. Should this process continue, an industrial policy that facilitates high productivity sectors and labor market policies that ensure workers' share of the profits generated by productivity growth are needed
Such structural changes might sound technical and uninteresting. In reality these ideas are not new in Latin America, but were described almost as been described as quackery from the 1980s and up until recently. In the 1990s such policies were taboo: The only labor policy that was accepted was the one who contributed to greater flexibility and the best industrial policy was no industrial policy.
Active policies in industry and labor can have its negative sides: it can be used to favoring political supporters, establishing a privileged aristocracy among workers, and contribute to macro-economic instability. However, today we know about the benefits, and that it is possible to avoid the negative consequences.
Researchers also find a clear link between leftist governments and reduction in inequality, even though there has also been a slight inequality reduction in countries with right-wing governments. However, more important than the debate about the color of the regime, is it that there is a growing acceptance among all types of governments in the region that the fight against inequality is important. When you look at the policies proposed for the next phase of inequality reduction, they are not at all incompatible with a capitalist development.
However, they do question the narrow neo-liberal focus on growth and how they lost sight of “development” in the traditional sense of the word: the change towards more a more advanced economy and social structure. At the same time it is also clear that some of the basis for the decline in inequality was made before the leftist governments came to power, not least by investing in education.
To understand how states can get a more even distribution of income is neither to be against growth or capitalism. Latin America is trying today to ensure increased productivity through increasing the technology and knowledge content in production, as a means to achieving further decrease in inequalities.
Leveling of inequality should thus not be considered solely a leftist agenda or creeping socialism introduced under the guise of promoting development. Latin Americans know this and it should not be such a hard sell to our new government either.