It is often noted that Montesquieu’s The Spirit of the Laws is the book that sets forth the concept of branches of government: executive, legislative, and judicial. Through his influence on the French liberals, Montesquieu is one of the key figures of the 1789 French Revolution, whose cry was “Freedom, Equality, Fraternity.” There is, however, another central part of The Spirit of the Laws describing environmental determinism, arguing that every people ends up establishing laws that reflect the context of their climate and lands.
The French Revolution, which had a significant influence on the thinking surrounding Latin American independence, brought concepts like republic and liberty to our shores. Today, however, equality seems even further away, perhaps hobbled by the determinism that Montesquieu describes, which condemns its peoples to laws and institutions that distribute incomes very unequally. Among many other ills, this inequality makes fraternity amongst the small number of rich people and vastly more poor people impossible.
Yet the evidence contradicts this view of things. Using historical data to reconstruct the income distribution in different regions of the world, Williamson (2015) comes up with two interesting findings. First, “most Latin American societies have today a much higher Gini than they had 150–200 years ago.” Latin America’s original sin turns out not to be so original. Second, compared to the rest of the world, inequality in the region was not as high in the decades following independence. Rather, it became high compared to countries that grew into developed economies after the First World War and after those countries established policies to promote more egalitarian societies. Today, those countries have reduced inequality by changing public policy and institutions, a process undertaken at a much smaller scale in Latin America. A recent IDB report, The Inequality Crisis, analyzes the inequality trend over the last 30 years, why it declined, and who the beneficiaries of this decline were.
Inequality Trends in the Region
The availability of relatively good data over the last 30 years has enabled researchers to identify three distinct periods: the 1990s, the first decade of the 21st century, and the second decade of the 21st century. Figure 1 shows the evolution of the Kuznets 90/10 ratio after 1990, averaged across 17 countries in the region. From 1990 to 2002, inequality in the region was stable: the richest 10% of the population earned 45 times what was earned by the poorest 10%. After several economic crises in the 1990s, especially in Argentina, Brazil, Ecuador, Mexico, and Uruguay, the 21st century saw the emergence of favorable external conditions, which, coupled with structural reforms in many countries, brought macroeconomic stability. From 2002 to 2012, the difference in the Kuznets ratio declined on average at an annual rate of 1.68 points. During the third phase, the reduction in inequality continued, but more slowly. Between 2012 and 2018, the income ratio declined at an annual rate of 0.62 points, less than half the rate of the previous period.
The figure also shows that, compared to OECD countries and other countries with levels of development similar to Latin America and the Caribbean, the decline in measurements of observed inequality was notable. However, the region is still far from reaching the levels observed in other economies, where the ratio stands at around 10 for 2018, less than half of what it is for Latin America and the Caribbean (where the richest 10% earns 22 times more than the poorest 10%).
Figure 1. Ratio of Income of the Richest 10% / Poorest 10% of the Population
Where Does the Reduction in Inequality Come From?
Reducing inequality means, in large part, increasing incomes. The commodities boom between 2002 and 2012 led to an increase in demand for unskilled labor. The increasing participation of women in the workforce also played a role in reducing inequality. However, public policy was crucial. Increased access to education and increases in minimum wages played an important role.
Another more direct form of public intervention that also reduced inequality is the various social transfer programs, which account for between a fourth and a third of observed reductions in inequality. This was accomplished with two policy innovations: first, a significant expansion at the start of the 21st century of conditional and unconditional cash transfer programs, which, by 2008, had expanded across the region. These programs were established to fight poverty and designed to increase consumption and reduce the opportunity cost of investments in the health and education of children. The second policy innovation, in a region where the informal economy is so important, was the creation or expansion of non-contributory health and pension programs, which did a lot to expand coverage and reduce poverty, especially among older persons.
Who Benefits from This Reduction in Inequality?
The households benefiting from this drop in inequality belong to the lower end of the wage distribution. If we classify people by income level, those considered poor have daily incomes of less than US$5 per day (in 2011 constant dollars, purchasing power parity adjusted). Next is the middle class, which comprises two sets of people: those close to the poverty line and therefore more at risk of reverting to poverty during a crisis (the so-called vulnerable population) and the established middle class.
The drop in inequality was concentrated in poor households that had moved toward the middle class. Figure 2 shows the corresponding percentage of each category. There was a considerable decline in the percentage of persons below the poverty line. The poverty rate dropped from 42% to 23%. The percentage of the population considered middle class rose from 23% to 38%. As poverty rates declined, the percentage of people moving into the middle class increased.
While poverty decreased over the last 20 years, and many people rose into the middle class, the percentage of income earned by the highest-earning 1% stayed constant, at around 20%. Here we find one of the reasons for the region’s high inequality: the amount of total income earned by the richest 1% is double what it is in other regions. In OECD countries, the richest 1% earns 10% of total income, and in countries whose level of development is similar to the region’s, the richest 1% earns 11%.
Figure 2. Changes in Different Segments of Income Distribution
The progress made during these first two decades of the 21st century was significant, but reductions in income inequality through poverty reduction remain fragile. A high percentage of the population that is not technically poor but vulnerable to fall back into poverty is once again falling into poverty because of the economic shock and health crisis brought on by the COVID-19 pandemic. The region once again needs two things: policies that encourage growth through job creation and rethink more effective redistributive fiscal policies. In conclusion, to paraphrase Churchill, “Never has so much wealth been owned by so few” is not exclusive to Latin America and the Caribbean. As demonstrated toward the beginning of this century, good policies can reverse this supposed curse and help the region recover the dream of independence. The spirit of the laws is remade each day, by good governments and wise decisions. And that is at least one place where Montesquieu was wrong.