The income distribution problem in Latin America and the Caribbean

Foreword At the start of the new decade,the debate on economic policy centres on the consequence of the reforms implemented in Latin America and the Caribbean in the last two decades.Trade and financial liberalization and the privatization of production activities have radically altered the rules of the game governing labour and business.The macroeconomic policy changes that accompanied or preceded the reforms sometimes strengthened the latter 's specific objectives, especially the growth of exports,but on other occasions they had the opposite effect.That combination of factors prompted the emergence of new market structures and transformations in microeconomic behaviour. Assessing the effects of the reforms on economic growth,employment and income distribution is of more than academic interest.Governments, political parties and social actors require a thorough evaluation of the results, so as to devise or propose policies that complement the reforms or counter their unwanted consequences.The Economic Commission for Latin America and the Caribbean (ECLAC);actively participates in this process. This book is part of a project carried out by ECLAC,in conjunction with researchers from nine countries,to study the impact of the reforms. Directed by Dr.Barbara Stallings,the project has produced 14 books and 70 working papers.The summary appears in the first volume,entitled Growth, Employment and Equity: The Impact of the Economic Reforms in Latin America and the Caribbean It is complemented by four issue-specific volumes analysing investment,technological change,employment and equity.Additionally, another nine country volumes examine the particular characteristics of the reforms in Argentina,Bolivia,Brazil,Chile,Colombia,Costa Rica,Jamaica, Mexico and Peru.The working papers are available at ECLAC 's web site (www.cepal.cl);. One feature of the project that distinguishes it from other comparative studies of economic reform is that it specifically addresses the interaction between macroeconomic and microeconomic processes.To understand the impact of the reforms more fully,it is necessary to disaggregate the regional level and to study the differences between countries and in the microeconomic behaviour of firms according to sector,size and ownership.The globalization of the economy and government policies such as structural reform affect different countries and groups of firms in different ways.Some have been able to exploit the new opportunities,while the situation of others has deteriorated.The outcome of such developments gives rise to aggregate trends that others have observed and measured,but to design economic policy measures and improve future performance,it is essential to know what underlies those aggregates. This book by Samuel Morley,currently a visiting researcher at the International Food Policy Research Institute (IFPRI);and formerly a consultant of ECLAC,deals with a topic of growing concern in Latin American and Caribbean countries:the distribution of income.Distribution in the region is the most unequal in the entire world,a situation that has been true for as long as the statistics have been kept.Since 1980,inequality has increased.No doubt some of that is due to the recessions of the 1980s,but recent studies indicate that the region 's economies saw very little improvement in the 1990s as they recovered from their earlier recessions.The consensus is that distribution has stayed about the same or even worsened slightly since 1990. Morley identifies three contributing factors that help explain Latin America 's high level of inequality.First,Latin America has a highly unequal distribution of education and the highest skill differentials for university graduates in the world.Second,the combination of a highly skewed distribution of land and an increase in the growth rate of the labour force in recent decades has driven down the relative wage of the unskilled.Third,the rich in Latin America are much richer relative to the remainder of the population than they are elsewhere. Unfortunately it does not appear that growth will improve the distribution very much,if at all.One reason is that growth is more skill intensive now than it used to be.This may be simply a Latin American phenomenon,but more likely it reflects changes in technology that are being felt all over the world.Skill-intensive growth has favoured university graduates.So far,this group contributes less to overall inequality than the rich do because many in the group are not rich.Unlike the rich,however, Morley shows that this group 's contribution to inequality rose sharply in the post-reform period.In the nine-countries examined in the book,inequality would have fallen in every case had it not been for the rising relative incomes and size of the university group. The evidence is mixed on the impact of the structural reforms on income distribution,because it is difficult to separate the effect of the reforms from all the other changes that were happening at the same time.In the aggregate,the reforms appear to have had a regressive effect on distribution,but the effect is small and only marginally significant.The reason is that reforms in different areas have offsetting effects on equity.Tax and trade reforms are unambiguously regressive though not highly significant,but opening the capital account is unambiguously progressive.Results for other reforms were not consistent enough to give a clear answer. ECLAC could not have carried out a project of this scale without the cooperation of many individuals and institutions.We wish to thank the researchers that participated in each of the nine countries,as well as the coordinators of the thematic and national volumes.We are also indebted to the members of the project 's External Advisory Committee:Nancy Birdsall, Director of Economic Programs at the Carnegie Endowment for International Peace;René Cortázar,Executive Director of Chilean National Television; Norman Hicks,senior economist at the World Bank;Juan Antonio Morales, President of the Central Bank of Bolivia; Pitou van Dijck, Professor of Economics at the University of Amsterdam;and Dorothea Werneck,Executive Director of the Brazilian Agency for Export Promotion. External financing came from a number of international donors.First, we wish to recognize the central role of the Netherlands Ministry for Development Cooperation,which provided the project 's basic donation.The International Development Research Centre of Canada (IDRC);also made a substantial contribution that allowed us to expand the scope of the project significantly.These two sources were supplemented with funds from the Ford Foundation and the Swedish International Development Agency.We offer our deepest thanks to all the donors,without whose support this project would not have been possible. José Antonio Ocampo Executive Secretary Economic Commission for Latin America and the Caribbean