Despite meaningful progress in the first two decades of this century, Latin America and the Caribbean remains one of the world’s most unequal regions, with gaping disparities in income that most analysts agree puts it in the position of competing with sub-Saharan Africa—with its outliers like Namibia and South Africa—for the unenviable title of the world’s most unequal region. But it is not only income: disturbing inequalities in land ownership, education, and health also afflict the region.
To better understand the dynamics of inequality, the Inter-American Development Bank has teamed up with the London School of Economics, Yale University, the Institute for Fiscal Studies, and academics from more than a dozen leading universities to launch a comprehensive rethink of the inequality problem in Latin America through critical reviews of the literature, new data, and new analyses. This includes understanding to what extent inequality in the region is inherited.
There are many components to the discussion and, to begin with, some uncertainty as to income equality’s exact level in the region. If one considers only the incomes captured in household surveys, the region’s Gini coefficients in 2020 average around 0.5, where 0 is perfect equality and 1 is where all the income is concentrated in the hands of one individual. That’s a very high number by any international standard. But household surveys miss many of the richest households. Research based on tax data suggests that the number could be ten percentage points higher—a truly alarming level—though tax data have their own problems. Still, the position of the region, along with sub-Saharan Africa, as the most unequal seems a sadly safe bet.
There is, of course, substantial heterogeneity within the region, with Brazil, Colombia and Guatemala being more unequal than Uruguay or Argentina. But there are two other features of inequality that most countries in the region have in common: it is multifaceted and interconnected.
Multifaceted because income is not the only thing that is unevenly distributed. The region has the world’s highest level of land concentration as well, and seriously unequal health and educational outcomes. Completion of upper secondary schooling, for example, is 40% higher in urban Peru than in rural areas, with similar gaps in Bolivia and Ecuador.
And inequality is interconnected because wellbeing is correlated across these different dimensions: on average, richer Latin Americans are also healthier and better educated. Consider malnutrition, which is unfortunately still prevalent in many countries of the region. In Guatemala, for example, the stunting rate—the percentage of children more than two standard deviations below their expect height for their age—is 17% among the richest fifth of the population (itself higher than the Latin American average). But among the poorest fifth it is 66%.
Does the Apple Fall Far from the Tree?
What makes these multifaceted and interconnected inequalities most unacceptable is their persistence over time and across generations. It is not only that inequality was high 50 years ago and remains high today; it is that the children and grandchildren of those who were rich then are likely to be well-off today, and the descendants of those who were poor then are likely to be currently worse off than those well-to-do descendants. A recent study found that the correlation between the years of schooling of parents and their children’s is between 0.45 and 0.60 which compares to a range of 0.30-0.35 in the United States, and even lower numbers in most European countries.
A survey of various studies found estimates of the intergenerational elasticity of income—another measure of the association between parents and children—in the 0.55 to 0.70 range: if you are born to a poor family in Latin America and the Caribbean you are considerably more likely to be poor than if you had been born in the United States or in Europe.
Although these are very high values, they focus on a single family variable at a time: the parents’ education, or income, alone, explaining the child’s. Another way to measure the extent to which inequality is inherited is to look at how well today’s incomes can be predicted by a range of different inherited personal circumstances—such as parental education and occupation, as well as sex at birth, race or ethnicity, place of birth, and so on. This approach generates measures of “inequality of opportunity”, or inherited inequality, which paint an even starker picture. A correlation coefficient of 0.6—at the upper end of the range described above—implies that 36% of the variation in today’s educational distribution can be predicted or accounted for by parental education. Modern studies of inequality of opportunity in Latin America and the Caribbean, on the other hand, find that a relatively small set of inherited personal circumstances—including sex, race, and family background—accounts for anywhere between 45% and 63% of the current generation’s income inequality, depending on the country. The regional average is above 50%, and the fact that incomes are measured with error and many important inherited factors are not observed means that these are probably underestimates.
Because of the implication that much of what a person achieves in life is pre-determined by where she started, this extreme level of intergenerational persistence is generally seen as grossly unfair. But beyond unfairness, it also tends to be negatively associated with economic growth and positively associated with current inequality. One famous depiction of the positive cross-country association between intergenerational persistence and current inequality was baptized “The Great Gatsby Curve.” A contemporary version using inequality of opportunity as the measure of inherited inequality is shown in Figure 1 below. Latin American countries, shown in yellow, are not as extreme as South Africa. But they are clearly in the worst possible quadrant, with high inequality of outcomes and opportunities. For individuals, the implications are clear. They may find it extremely difficult to overcome unequal outcomes by their own efforts as these outcomes are largely predetermined by their inherited characteristics. The ineffectiveness of the state and society to provide equal opportunities is partly to blame.
The Short Cycle of Inequality and the Long
What mechanisms drive this intergenerational inequality? Recent work we have been involved in as part of a large team suggests that there are both a lifecycle-scale “short cycle”, and a historical-scale “long cycle”. The “short cycle” includes the mechanisms through which advantages and disadvantages are bequeathed from parents to children, beginning with gaps in vocabulary and cognitive ability in early childhood, which have been documented in many countries in the region. Just as gaps open up even in this critical 0-5 age window, they solidify when children go to school. In Mexico, for example, whereas a child whose parents have not completed upper-secondary education has a 38% chance of doing so herself, that chance is 88% for another child with at least one parent who has completed tertiary education. Gaps are even greater for completion of university education.
Although important, the quantity of education—measured by grades completed—is only part of the story. In Latin America, as in many other parts of the world, poorer children tend to end up in worse schools, whereas richer ones have access to greater resources both at home and at school. This manifests itself in large learning gaps: in Mexico, for example, completion of upper secondary is 50% more likely for children with at least one parent that attained tertiary education than for those whose parents did not complete upper secondary. Inequality increases even further in the labor market, where different levels of human capital lead to very different kinds of employment and correspondingly large wage gaps. There is also a clear correlation between the educational levels of marriage or co-habitation partners, further exacerbating inequality in household incomes and resources and, so, the cycle begins again.
Perverse as this “short cycle” of inequality transmission is, it does not operate in a vacuum. It is underpinned by a “longer cycle” mediated by economic and political institutions shaped over the centuries. In this cycle, great wealth disparities—such as those between slaves and their owners, or the conquistadors and the indigenous people whose land was expropriated and who were forced down the gold and silver mines—yield similarly great power disparities. These disparities, in turn, lead to institutions and policy choices that disproportionately benefit the wealthy.
Contemporary examples abound, but one that is common to many countries in the region is the co-existence of a poorly funded, low-quality public education system and a set of high-quality private schools disproportionately attended by the children of the rich. This segregation of the school system reflects a political equilibrium that has complex historical roots, while at the same time contributing to the mechanisms of the “short cycle.” When opting out of the public system, wealthier families have few incentives to pay taxes or to push for better state-provided services. They are also less likely to push for redistributive policies. Inequality is embedded in the region’s DNA. Reducing it will be neither easy nor automatic. It will require deliberate policy effort, one that is cognizant of the historical and institutional forces that have long shaped political equilibria. That said, the reduction in inequality and the growth in the middle classes that we saw during the 2010s shows that progress can be made and that while much hard work lies ahead, the blight of inequality can be successfully fought.
To learn more about inequality in Latin America and the Caribbean, check out our podcast series (available in Spanish).
Leave a Reply