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What is Behind Latin America’s Declining Income Inequality?

Author/Editor: Evridiki Tsounta | Anayochukwu Osueke
Authorized for Distribution: July 15, 2014
Electronic Access: Free Full Text (PDF file size is 910KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Income inequality in Latin America has declined during the last decade, in contrast to the experience in many other emerging and developed regions. However, Latin America remains the most unequal region in the world. This study documents the declining trend in income inequality in Latin America and proposes various reasons behind this important development. Using a panel econometric analysis for a large group of emerging and developing countries, we find that the Kuznets curve holds. Notwithstanding the limitations in the dataset and of cross-country regression analysis more generally, our results suggest that almost two-thirds of the recent decline in income inequality in Latin America is explained by policies and strong GDP growth, with policies alone explaining more than half of this total decline. Higher education spending is the most important driver, followed by stronger foreign direct investment and higher tax revenues. Results suggest that policies and to some extent positive growth dynamics could play an important role in lowering inequality further.
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Series: Working Paper No. 14/124
Subject(s): Income inequality | Latin America | Emerging markets | Developing countries | Social indicators | Cross country analysis | Panel analysis
    Published:   July 15, 2014        
    ISBN/ISSN:   9781498378581/1018-5941   Format:   Paper
    Stock No:   WPIEA2014124   Pages:   35
    Price:   US$18.00
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