Developmentalism, socialism, and free market reform : three decades of income distribution in Chile

After relatively stable income distribution in the 1960s, and a redistribution toward low income groups under Allende, income shares declined for the 40 percent of the population (low and lower middle income groups) under Pinochet. The top 20 percent benefited most from the income shift away from low income groups. Under Aylwin, the income share of the bottom 40 percent returned to previous levels, but the share of the top 20 percent remained above its pre-1973 historical average. The authors show that in the first years of market oriented reform income for the poor deteriorated, chiefly because of persistent unemployment and a squeeze on the real minimum wage and other wage categories. The share of the middle class (the third and fourth quintiles) in national income declined by an average 3 percentage points during 1974-89 - because of cutbacks in public sector employment and steadily decling public sector wages. Recession with high unemployment especially hurts the poor, and growth does not equalize conditions until it strengthens labor markets. Only when Chile's economy approached full capacity, when wages rose and unemployment dropped to a historic low in the early 1990s, did income distribution for the poor improve. If growth continues and investment grows even faster, as in the past two years, the labor market will remain tighter than in any period in the past 30 years and distribution may improve significantly. Is a liberalized economy compatible with social equity? The authors show that initially income distribution deteriorated under reform, chiefly because of macroeconomic crises and subsequent higher unemployment and depressed real wages. However, it is not clear that trade liberalization and deregulation are socially regressive, though the market outcomes that dominate in a liberalized economy may generate a failure in the labor market that social policy should correct. There is more potential for improving the quality of social services today than in the past, but targeting of social services should be designed to prevent the"poverty trap". Targeting and social policies should be designed to encourage personal efforts to escape poverty and to avoid alienating middle income groups.