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Explaining Inequality in Latin America

Christopher Lee DeSa

Inequality 1 has been an endemic feature of life in Latin America.

According to almost

every economic and social indicator, especially those of income inequality such as the Gini

Coefficient, Latin America is the most unequal region on the planet.

And while other regions

have made great strides toward reducing inequality in the past two decades (e.g., East Asia),

Latin America has largely been left behind.

I argue that the persistence of inequality in Latin America is best understood as a function

of the three interrelated factors: (1) high concentration of human and physical capital assets; (2)

inequality-enhancing social and political institutions; and (3) “weak” state capacity to provide

key public goods. This is not to say that a linear causal relationship exists between these factors;

rather, as will be shown, they have interacted with one another in a circular manner throughout

time and circumstance, producing a number of byproducts, the most salient of which is the

measurable inequality so familiar to the region. 2

1 For purposes of this essay, references to inequality are to income inequality. It is an interesting question, however, whether we ought to be primarily concerned with inequality in outcomes (e.g., inequality in income or consumption levels) or opportunities. Many argue that the latter is a better measure of social fairness than the former. Whether or not we agree on which is the better measure, inequality of opportunity is particularly difficult to measure. Income inequality is used here therefore largely for the very pragmatic reason that data on the subject is the most readily available. For a broad discussion of this debate, see World Bank (2004).

2 An important observation is in order at the outset of our discussion. I take the minority position that the persistence of inequality in Latin America is not best explained by macroeconomic factors such as economic growth, high inflation, monetary policy, structural and demographical trends like migration, etc. The most famous of such explanations for inequality was expounded in 1955 by Nobel laureate, Simon Kuznets. Kuznets argued that once a critical level of national income was met, further economic growth would reduce inequality—i.e., Kuznets inverted U hypothesis. The persistence of inequality was therefore a function of insufficient levels of growth. While these factors clearly impact inequality in the region, I take the position that a better explanation for the persistence of inequality emphasizes the patterns of concentration of human and physical capital in the region and sociopolitical institutions and government decision-making. However, a full defense of this position is beyond the scope of this essay and would require detailed comparison of the two positions.

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The persistence of inequality in Latin America can be seen therefore as the result of the

“double” capture by the elite of not only the region’s productive assets but also available means

for their dispersion. The result is a vicious circle: Initial, historical patterns of asset distribution

perpetuate specific social and political institutions, which thereby limit the available mechanisms

to disperse such assets amongst a wider segment of the population.

High concentration of human and physical capital assets

A capital asset is an instrument with the distinct ability of producing other goods or

services for monetary value (i.e., it is capital generating). Human capital assets, for example, are

comprised of individual skills—knowledge, capability, or expertise—and health, as they enable

individuals to produce any good or service for value. Physical capital assets, on the other hand,

are financial assets such as money holdings, property, rents, capital stock used for production, or

any other form of physical capital used to produce a good or services (i.e., capital goods)

(Szekeley 2006).

The most important feature of human and physical capital assets in Latin

America have been (1) their relative concentration of control among a relatively small, select

portion of the population and (2) their particularly high rates of return.

The concentration of human and physical capital assets in the hands (minds?) of the

privileged few was ubiquitous in the Spanish and Portuguese colonies. The Portuguese colonists

employed their knowledge of slave-gathering techniques and “gang labor” technology to create

low-cost sugar production on plantations in Brazil.

Similarly, the Spanish elite employed

encomienda (the right of Spanish conquistadores to Amerindian labor), mita (forced labor), and

repartimiento (forced sale of goods to the Indians) labor technology to their new territory, which

had the advantage of simultaneously lowering production costs and facilitating the privileged

extraction of rents on profits (World Bank 2004).

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Ownership of land and mineral resources, the

most important physical capital assets at the time, was highly concentrated.

Moreover, the

Spanish and Portuguese immigrants had exclusive knowledge of the legal and economic

institutions established in the colonies.

Combined with abundance of labor from slaves and

natives, the marked inequalities in the control of human and physical capital assets by a small

group of elites facilitated the extraction of large rents and bolstered their position in the region. 3

The initial concentration in the control of human and physical capital persisted in Latin

America into the 19 th and 20 th centuries.

In the case of human capital, whereas the United States

probably had the most literate population in the world beginning of the 19 th century, even the

most progressive Latin American countries—Argentina and Uruguay—were more than 75 years

behind and most of the region only achieved high levels of literacy well into the 20 th century

(World Bank 2004).

Moreover, despite the fact that educational expansion has occurred in the

past 40 years, recent evidence suggests that the quality is so low that it has no impact on

development or inequality (Pritchett 2001 and World Bank 2004).

The continuing contribution of educational attainment (or the lack thereof), and human

capital more broadly, to inequality in Latin America has been two-fold.

First, the dispersion of

educational endowments (e.g., years of schooling) has ranged from high to moderate levels of

3 Compare this to the colonies in New England. Although the British initially attempted to adopt the Spanish colonial model in Jamestown, Virginia, the result was utter failure. Unlike Spanish and Portuguese America, there was no gold and relatively few Amerindians to exploit. The result was labor scarcity and cheap land. According to David Galenson, this had important consequences for equity in the colonies (Galenson 1996, p. 144):

Although the establishment of large estates to be worked by tenants and landless laborers was the initial model on which these proprietary colonies were usually based, the greater economic power conferred on settlers by the New World’s labor scarcity prevented these English tenures and practices from effectively taking hold, and proprietors were often forced to adapt by simply selling their land outright to settlers. Thus, prior to the arrival of slaves to the region, the North American colonies were much more homogenous and equitable in terms of human capital, wealth, and political influence than their southern counterparts (World Bank

2004).

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concentration amongst the population (World Bank 2004).

High levels of concentration are

further exacerbated by low quality education.

However, although certainly contributing to

inequality, these factors alone are not particularly troublesome. As the World Bank aptly put it,

“Latin American countries appear to have ‘too much’ income inequality, given the levels of

inequality in years of schooling” (World Bank 2004, pg. 153).

Rather, it is a second aspect of educational attainment that has made the greatest

contribution to inequality:

The high rate of return on education in the labor market, especially

for higher education.

The statistics are telling—the difference incomes between someone with

no schooling and someone with incomplete primary schooling is 18 percent; complete primary

schooling,

37

percent;

incomplete

secondary

education,

61

percent;

complete

secondary

education, 91 percent; and (most strikingly) higher education, 152 percent (Szekeley 2006).

Moreover, the wage gap associated with higher education has steadily increased in the past two

decades (Szekeley 2006).

When combined with the fact that a very low proportion of the

population attains higher education in Latin America, the result is an exponentially cascading

rate of return on this capital asset for an increasingly concentrated segment of the population.

The distribution of physical capital since colonization has had a similar effect on

inequality in Latin America.

Land ownership rates in the early 1900s suggest remarkably high

levels of concentration. Only 2.4 percent of total heads of household owned land in rural Mexico

in 1910, for example, compared to 74.5 percent in the United States in 1900 (Engerman and

Sokoloff 2002). More recently, economists have begun to measure capital per worker as a proxy

for the accumulation of physical capital in the region. 4

The region’s small capital stocks are

usually associated with high rates of return (Szekeley 2006).

Although capital per worker

4 Capital per worker refers to “the total value of physical capital of an enterprise, including inventories and fixed equipment, per each unit of labor employed” (Szekeley 2006 pg. 616)

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increased in the region from 1965 to 1975, a slowdown occurred thereafter through the 1990s

(Szekeley 2006). Because physical capital has historically been concentrated among the rich, the

result has been particularly high rates of return on this asset for a small segment of the

population.

Statistical studies using the Gini coefficient on arable land use confirm this

hypothesis (Deininger 1996).

The combined effect of the dense concentration of human and physical capital with high

rates of return has been very high levels of inequality. According to the bulk of literature on the

subject, this state of affairs has basically persisted since the colonial period into the 21 st century

(see Calvo, Torre, and Szwarcberg 2002; Diaz-Alejandro 1970; and Randall 1978).

As argued

above, this is largely attributable to the capture of these productive assets by a small segment of

the population.

This explanation, however, fails to provide the reasons for the persistence of

inequality in the region, despite significant political and social changes which may have

suggested the contrary.

Why, for example, hasn’t Latin America followed parts of Europe or

East Asia, where economic inequality fell in the 20 th century (Morrison 2000)?

More

specifically, why haven’t the lower and middle income segments rallied to implement effective

policies to disperse the region’s productive assets more widely and thereby reduce the high

benefits of control?

The following two sections seek to address these questions.

Inequality-enhancing social and political institutions

Social and political institutions in Latin America have been shaped by, among other

things, the initial distribution of human and physical capital that the Spanish and Portuguese

encountered in the region and changes during the post-independence period—and it is the very

survival and/or evolution of these early structures and institutions which account for the

persistence of inequality in the region (Engerman and Sokoloff 1997).

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More specifically,

privileged groups in Latin America have sought to insulate themselves from competition for

these valuable assets by further “capturing” 5 the social and political means (i.e., the institutions)

by which any possible dispersion could occur.

The previous discussion of the colonial period suggests that early institutions—slavery,

forced Amerindian labor, etc.—reflected the concentration of human and physical capital among

the Spanish and Portuguese.

However, the petrification of institutions which favored existing

distribution patterns occurred even during periods of substantial political upheaval.

In Mexico,

for example, the struggle for independence was motivated precisely because Creole elites wanted

to buck the liberalizing trends of the Spanish Constitution of 1812 (Bakewell 1997). In fact, the

evidence suggests that inequality probably increased in the region in the post-independence

period (World Bank 2004).

Under the banner of republican democracy, political power was

consolidated in the hands of a newly-independent elite, both through formal—wealth, literacy

requirements to vote—as well as informal—force, electoral fraud, lack of secret ballots, implicit

coercion—institutions.

Private and user-fee primary and secondary schooling (and therefore the lack of public

schooling) gave wealthy families privileged access to the high rates of return on education. This

also explains why public funds were only used to subsidize higher, and not primary and

secondary, education—university students, who were the children of the wealthy, had already

been funneled through private schooling, eliminating the risk of “mass” distribution of this

highly valuable asset. The distribution of public land served a similar function. As the republic

governments technically “owned” all public lands, they could control its availability for

5 It is worth clarifying that the usage of “capture” in this essay is not meant to denote any sense of mens rea by specific actors. While some elites undoubtedly manifested such sinister intentions, a more likely explanation is that it was achieved through their tacit approval or unconscious acceptance.

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distribution, set prices and minimum and maximum acreages, provide credit, and design tax

systems.

Instead of implementing broad-based land distribution schemas as had occurred in

North America (e.g., the Homestead Act of 1862), Latin American governments (with the

exception of Argentina and Brazil) either failed to effect such policies, or worse, compounded

the problem by distributing land to the elite as occurred under the Porfiriato in Mexico. In both

cases, the beneficiaries had little or no incentive to change the high concentration of human and

physical capital, and the capture of the vote effectively ensured that any change would favor the

elite.

Social institutions have often served a similar function.

Slavery and forced labor, as

lowest-cost methods of capturing the returns on human and physical capital, have evolved into

institutional racism, albeit at a higher cost. In the case of Brazil, for example, racism has helped

keep key productive assets out of the control of a significant portion of the population.

Likewise, social signaling mechanisms such as class-based language and behavior patterns have

helped consolidate the most productive of capital assets among a privileged group at a relatively

low cost. Belonging to the right clube atlético (athletic club), it turns out, is often the difference

between landing a job in investment banking or as the local teller.

This is true anywhere in the

world, but the degree and pervasiveness of it in Latin America is remarkable.

There are myriad additional cases of elite capture of political and social institutions

which could be highlighted here—the rule of law, household formation and marital sorting, job

match quality, capital markets, etc.

(See the discussion of clientelism and corporatism below).

However, the broader picture is the same: Institutions have developed that reflect initial patterns

of distribution of highly productive assets in the colonial and post-independence periods and

have ensured that the benefits of control of these assets (i.e., high returns) are directed to elites.

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At a more theoretical level, we can think of this in terms of opportunity costs. Initial economic

conditions in the colonies resulted in high rates of return on human and physical capital assets

and therefore extremely high benefits of control. Dispersion of these productive assets amongst

a broader segment of the population would almost certainly have resulted in lower rates of return

and therefore the costs of redistribution were particularly high (World Bank 2004).

Thus, the

beneficiaries of control had strong incentives to use their influence to capture the potential means

of redistribution, resulting in political and social institutions which reflect this fact.

This story

has more or less continued throughout the 20 th and 21 st centuries.

“Weak” state capacity

The latter discussion emphasized the evolution of institutions and their effect on the

distribution of human and physical capital during the colonial period and on through the 19 th

century.

But what has happened in 20 th century?

Moreover, the discussion thus far has

explained these processes through the eyes of the region’s elite—i.e., their incentive to capture

the benefits of controlling high returns on capital.

Yet this still fails to account for the lack of

sustained, organized social movements and collective actions to disperse the region’s productive

assets to the poorer and middle income segments of society.

I argue that, even after the (re)extension of democracy in the region, efforts to effect

sustained, organized policies to disperse human and physical capital more equitably have been

hindered by social and political institutions captured by the elite, especially through the twin

culprits of clientelism and corporatism.

It is argued that the cumulative effects of inequitable

social and political institutions during the last century has been “weak” state policies to provide

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public goods. 6 This weakness exacerbates inequality because Latin American governments have

done a poor job not only providing public goods in general (property rights, citizenship, social

protection), but also the very goods which could directly (health, land reform, education) or

indirectly (macroeconomic stability, infrastructure) result in wider dispersion of human and

physical capital among the population.

The pervasiveness of clientelism, an institution marked by an unequal patron-client

relationship between elite and poorer groups, in the region has been well documented—Brazil

(Leal 1948, Carvalho 1997); Mexico (Cornelius 1977, Grindle 1977); Colombia (Schmidt 1977,

Archer 1990); Peru (Stokes 1995); and Venezuela (Powell 1977). The net effect of these types of

patron-client relationships is to effectively “weaken” the state’s capacity to provide broad-based,

geographically-neutral public goods.

According to the World Bank,

[C]lientelist politicians draw support from relatively narrow, geographically-defined

constituencies and concentrate on providing tangible material goods (that is, support for

patronage) that is narrowly targeted to a specific group of supporters in exchange for

their support (World Bank 2004, pg. 126, emphasis added).

Thus, this system of patronage may assure material benefits for specific groups, but it noticeably

fails to effect the kind of broad policies that could directly or indirectly disperse human and

physical capital to lower income segments. To that extent, recent empirical evidence has shown

that clientelism results in less than optimal levels of public goods production (Keefer 2002 and

Robinson and Verdier 2002). Further, clientelism and systems of patronage in general may serve

6 This, of course, is not to say that Latin American governments have been “weak” in terms of the exercise of political force or coercion or achieving specific objectives. In fact, the history of military regimes in Brazil, Argentina, Chile, and Uruguay clearly shows that Latin American governments were actually quite strong in that sense. Rather, it is meant to convey the frail ability to produce public goods of broad application, especially those that foster the dispersion of human and physical capital.

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as an undesirable cathartic mechanism as well.

Political elites may strategically use the

narrowly-targeted provision of material benefits to “release” healthy, legitimate tension, pacify

interest groups and ultimately reduce incentives for collective action.

Corporatism, a state-society relationship through which governments co-opt “working

class or peasant movements into national, institutionalized, patronage-based systems,” serves a

similar function (World Bank 2004).

Classic examples of corporatist co-option of labor have

been undertaken by Lázaro Cardenas in Mexico (resulting in the Partido Revolucionario

Institucional, or PRI), Juan Perón in Argentina, Getúlio Vargas in Brazil, and the Bolivian

Movimiento Nacional Revolucionario. Like clientelism, corporatism may achieve tangible gains

for co-opted groups rather well, but this is done at the expense of widespread dispersion of

public goods, including human and physical capital, to unrepresented groups.

In Brazil, for

example, social security systems were “captured” by organized labor in the formal sector, almost

entirely to the exclusion of the informal sector (Malloy 1979).

Thus, while on the face of it

corporatism appears to offer a viable means to disperse human and physical capital, say, to the

working middle class, it does so at the exclusion large segments of the population.

The observed effects of clientelism and corporatism on state capacity includes weakened

development of programmatic parties (Shefter 1994).

The lack of the broad, geographically-

diverse social organization of the poorest groups in Latin America, especially as a result of the

lack of programmatic parties in Latin America, has contributed to tensions and dynamics that

were inimical to sustained redistributive change (Collier and Collier 1991).

To restate,

individualized benefits targeting specific poor groups (clientelism) and the working-class

(corporatism) have generally weakened the state’s capacity to provide essential public goods to a

broad social segment.

This includes human capital assets such as high-quality education and

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effective health systems, as well as goods like infrastructure, stable capital markets, credit

facilities, and land reform, which directly or indirectly result in a wider dispersion of physical

capital.

The targeted benefits associated with clientelism and corporatism may also have the

added negative effect of pacifying groups who might otherwise engage in the kind of collective

social and political action needed to effect widespread provision of key public goods. 7

Conclusion

I have argued that the persistence of inequality in Latin America is due to the circular

interaction of three main elements: (1) high concentration of human and physical capital assets;

(2) inequality-enhancing social and political institutions; and (3) “weak” state capacity to provide

important public goods.

The high concentration of human and physical capital assets among

elites contributes to inequality because in Latin America both are associated with unusually high

rate of returns.

This is especially true in the case of higher education, where the return on

investment for an individual with higher education is 152 percent higher than someone with no

schooling.

The persistence of this pattern was due to the fact that the very social and political

institutions which may have altered the situation were “captured” by elites early on in the

Spanish and Portuguese colonies and Latin American republics.

I suggest that this may be

7 The discussion in the paragraph above can also be understood in light of the emergence of populism and

Both can be seen as strategic responses from the political elite to growing

dissatisfaction of the economic status quo by the poor and middle classes. Populist leaders, who were more often than not members of the political elite, utilized corporatist strategies to co-opt popular sectors (e.g., organized labor) in an attempt at reestablishing political equilibrium. However, the success of co-option often led to its very failure, when this newly-empowered political class increased economic and political demands and radicalized (e.g.,

Argentina, Brazil, Chile, and Uruguay) (World Bank 2004).

This, in turn, spurred dramatic action by economic and

authoritarianism in the region.

political elites and, in some cases, ultimately led to an authoritarian response. Put differently, authoritarianism can

Consider the

if effective, broad-based dispersion of public goods, especially those associated with

human and physical capital, had occurred at an early stage in the region’s evolution, it is arguable that the clientelist, corporatist, populist, and authoritarian legacies so familiar to the region may have been severely weakened or even non-existent.

following counterfactual:

be seen as end result of failure of clientelist and corporatist strategies of political appeasement.

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explained at least in part by the incentives created by the opportunity costs of more equitable

institutions for political elites.

Lastly, and no doubt related to the latter, governments in Latin American have been

associated with a “weak” capacity to provide critical public goods.

This is especially true for

those goods that would either directly or indirectly disperse human and physical capital more

widely among the region’s populations.

I argued that in the 20 th century this was due in large

measure to the legacies of institutions such as clientelism and corporatism (and populism and

authoritarianism), which hindered the creation of broad-based, geographically-diverse collective

social movements and organizations with the capacity to effect more equitable political change.

Despite this fact, recent trends in Latin America seem promising. The Gini coefficient for

Brazil, for example, has moderately declined over the past several years. Many argue that this is

primarily the result of relative macroeconomic stability and higher wages.

Others point to the

country’s acclaimed conditional cash transfer program, Bolsa Família, which appears to have

made a modest contribution towards reducing income inequality.

The conclusions of this essay

would suggest that, as opposed to solely analyzing such outward changes, other “internal” shifts

in the equilibrium of human and physical capital, social and political institutions, and the

government’s capacity to provide key public goods were probably the primus motor in Brazil’s

developments.

By focusing our attention to the interaction and relationship between these

factors, we may discover novel prescriptions for reducing inequality in the future.

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Breaking with History?, Washington,