What is Behind Latin America’s Declining Income Inequality?

IMF Working Papers, July 15, 2014

Source details

Income inequality in Latin America has declined during the last decade, in contrast to the experience in many other emerging and developed regions.
Despite the decline, Latin America remains the most unequal region in the world.
Using a panel econometric analysis for a large group of emerging and developing countries, the study finds that the Kuznets curve holds.
Notwithstanding dataset and cross-country regression limitations, results suggest:
- almost two-thirds of the recent decline in income inequality in Latin America is explained by policies and strong GDP growth;
- policies alone explain more than half of this total decline.
The most important policy and structural drivers identified:
- Higher education spending (most important driver).
- Stronger foreign direct investment.
- Higher tax revenues.
Results indicate that policies, and to some extent positive growth dynamics, could play an important role in lowering inequality further.

Empirical approach: panel econometric analysis for a large group of emerging and developing countries.
The study documents the declining trend in income inequality in Latin America and proposes various reasons behind the development.
Limitations acknowledged: dataset constraints and general limitations of cross-country regression analysis.

Continued and increased public policies can materially contribute to further reductions in income inequality.
Priority policy focus areas suggested by the empirical results:
- Increase education spending to target inequality reduction.
- Foster conditions that attract stronger foreign direct investment.
- Strengthen revenue mobilization to increase tax revenues that can finance redistribution and public services.
Leverage positive GDP growth dynamics alongside policy measures to sustain and amplify inequality reduction.

_wp14124 - References
- _wp14124 - References (Markdown version)
- _wp14124 - References (PDF)