Tuesday, January 11, 2011

Lessons from Latin America: how to reduce inequality

Over the past decade, the gap between rich and poor in most Latin American countries fell, in contrast to the rest of the world where it rose.

Recently published research found that there were two key reasons for this. Firstly, there was a decrease in the earnings gap between high-skilled and low-skilled workers; the second was an increase in government transfers to the poor.

Market forces in Latin America were likely to produce and maintain inequality unless government action equalised opportunities and outcomes. Furthermore, these countries are likely to benefit from redistribution not only through improvements in equality but also through improvements in growth.

The research found that social democratic left-leaning regimes have been more effective at reducing inequality and poverty than both non-left and radical left regimes. Inequality fell more quickly in Lula's Brazil than in Chavez's Venezuala.

To sustain the reduction in inequality, the researchers argue that it will be essential to help the disenfranchised to mobilise and to act collectively through political parties as well as to promote the strengthening of legislatures and the restriction of presidential powers. Sustaining equity over time requires a permanent redistributive effort through progressive income and wealth taxation of the very top incomes in particular. They also find that progressive fiscal policy is consistent with prosperity.

There's a lot here that we could learn from in the UK. Reducing the earnings gap between high and low paid workers and cash transfers to the poor really does make a difference in tackling poverty, and government action to counteract market forces can increase prosperity. And social democratic parties which closed the gap between rich and poor won landslide election victories.