Keys to Reduce Inequality

The relationships between wealth generation and distribution, and the review of the determining factors of inequality and social spending help us draw a set of conclusions regarding the distribution gap. If the prevailing view in a country is the one that deems it a priority to carry out structural reforms involving redistributions of key assets, the government is more than likely to tend to give preference to political fights to the detriment of efforts to improve the design and implementation of social policies that only pay off after persistent long-term actions. If, conversely, we are capable of separating political-electoral times from the periods devoted to exercising governance via efficient and effective policies, the economic, social and institutional conditions can be created to ensure the achievement of sustainable economic growth in the long term.In the first place, it should be said that aiming at “ending social differences and inequalities” is a utopian goal. It does make sense, however, to believe that it is positive to reduce today’s differences, and that this may be conducive to a better functioning of society as a whole.

As far as income distribution is concerned, it is repetitively said that Latin America is the world’s most unequal region: its top 10% concentrates, in most countries, more than 35% of the income and, in general, the income of that layer is 20 times greater than that of the lowest 40%. No progress has been made in terms of inequality reduction.

Inequality Determinants

It is necessary to make clear that economic inequality will not be reduced in the short term. It stems from a set of determinants that have to do with wealth, educational and occupational aspects, which are hard to be changed and usually take considerably long periods of time to be modified.

(i) Wealth

Wealth in Latin America is even more concentrated than income. For long periods, the political agendas have not included proposals designed to modify asset ownership. In some countries and during certain periods, large-scale agrarian reforms were carried out and, today, the initiative has reappeared in other countries. The latest Brazilian administrations have taken steps in that direction, in response to the demands of the Sem Terra Movement, expropriating farming estates and distributing lands. Likewise, in Bolivia (where a major agrarian reform had already been adopted in 1852 during the Paz Estenssoro administration), Ecuador, Paraguay and Venezuela, similar projects are being contemplated. The likelihood of touching other types of assets (business ownership or stockholding) is remote.

The only “asset” over whose “redistribution” there seems to exist consensus is education, understood as human capital, the possession of which will enhance individuals’ chances to get a well-paid job which, in turn, will benefit society as a whole by making it more productive and competitive in an internationalized market.

(ii) Education

The educational factor is also decisive when explaining income differences. There exist huge educational inequalities among the region’s population. Those have to do, on the one hand, with schools (how they work, duration of the school day, and academic quality) and, on the other hand, with extra-school factors inherited from students’ homes (their social and economic level, possible house overcrowding, educational environment at home –which is related to the years of schooling of the adults living in it– and even with the family organization, i.e., whether it is a single-parent or two-parent family, and the type of union that characterizes it). The number of years of education that a person has determines the type of job he may get when joining the labor market. And it is through the participation in this market that the worker gets the income to meet his own, and his family’s, needs.

School conditions the possibility of reducing inequity by providing children coming from different socio economic levels with very different educational tools. Only half of those who start primary school finish the cycle and those who do so have an average performance which is way below that of his or her peers in industrialized countries. Nowadays, the educational threshold consists of 12 years of formal education. Those who have achieved such level can aspire to work-positions furnishing them with an income that places them above the poverty line. Educational devaluation should also be taken into account. When the amount of people with schooling grows, competition in terms of work posts becomes higher. This factor forces people to rely on more years of study in order to differentiate from those competing for the same job. The availability of people with higher instruction makes it possible to do without those who are less educated even for tasks the latter could appropriately fulfil. Repetition rate is high and desertion is strong. Out of the 9 million Latin American children who enter school annually, around 4 million fail in the first year. The additional cost of teaching those who have failed reaches US$ 4.200 million annually.

An important share of income inequality can be accounted for by the educational achievements differences. This has positive aspects. It implies that the market rewards the educated and this constitutes a stimulus for families and people to be interested in having their members take the most of the educational offer. Also, education is an asset that can be distributed without having to deny it or take it away from others. Human capital increase –mainly based on more education- is fundamental in order to ensure the continuity of economic growth in the long run, on more modern bases.

Likewise, there are major differences in the proportion of youth being between 25 and 29 years old from layers I and V who have been able to attend each one of the three levels of the educational system.

Emphasis is often insistently placed on the importance of education as a way of ensuring competitiveness and improving income distribution. No doubt, this is a sound recommendation, but the efforts made today in that direction will not translate into immediate distribution improvements. As workforce turnover occurs at a pace of 2% or 3% a year, 80% of the workers who will be employed by the end of the next decade have already joined the labor market. These workers will draw no gain from the improvements attained in the educational system, as these are precisely targeted to individuals who have not entered the labor market yet.

(iii) Occupation

There exist growing differences as to employment quality and remunerations. They stem from the region’s heterogeneity in productivity terms. Employment generation is a serious regional weakness. Few jobs are created in the modern sector; a very significant proportion of the new jobs are created in services and SMBs. Another portion of labor market newcomers, those with little educational capital, seek refuge in the informal sector.

These labor modalities present at Latin American economies are accompanied by different “occupational densities” (number of employed individual per household) at the higher layers and the lower ones: the former have twice as many employed individuals than the latter. Hence, in general, the households with larger number of members have fewer income earners and, therefore, lower per capita income.

Another major factor contributing to income inequality is the growing compensation gap between professionals and formal and informal wage earners. These differences tend to broaden very quickly. In three moments in the 90s it can be seen how this gap grows dramatically.

JOB COMPENSATION GAPS BETWEEN PROFESSIONALS AND FORMAL AND INFORMAL SALARIED WORKERS

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In sum, the best educated can access more productive and better paid jobs. In addition, their partners tend to have similar characteristics. Therefore, the couple accumulates education years, and this is conducive to an educational environment at home that will favor the school performance of the few children they will have and a higher household per capita income, because they have few children. Conversely, those at the bottom of the income distribution scale have little education, which only qualifies them to obtain hardly productive, poorly paid jobs. In addition, these families have many children and fewer salaried members, who, in turn, can only get hardly productive and poorly paid jobs. All these factors contribute to the low per capita income of these households.

Wealth Generation and Distribution

In Latin America there exist different viewpoints about the relationship between wealth generation and distribution.

One first position claims that in the region’s countries there is wealth, though the same is poorly distributed. The countries are rich while their inhabitants are poor because one social group–the “non-people”–appropriates that wealth by exploiting the rest of the population. Such diagnosis leads to the pursuit of a radical redistribution shift. In some cases this connection between diagnosis and proposals becomes more complicated because the State is the owner of the national wealth and, at the same time, is the one that should lead the change process. When this rationale prevails, social policy loses preeminence. Focusing on tasks such as the design and implementation of rational social programs becomes irrelevant. If structural transformation takes precedence, there is no doubt that social policy is shelved, as it requires long-term vision and objectives within stable and reasonably clear conditions.

From a different perspective on the wealth-distribution relationship, wealth can only exist when a daily effort is made to recreate it. These postulates serve as the basis, on the one hand, for the position that growth is the only thing that matters. As 1995 Economics Nobel Prize laureate Robert Lucas said, once the impact of economic growth is perceived, the analyst is tempted to focus on that, and ceases to consider other variables. However, we should insist on the importance of social policy (education, health, housing, etc.), because the incorporation of human capital is a pre-requisite for economic growth. One corollary of this viewpoint is that political decisions should safeguard the continuity of productive processes, preventing investment and job generation disincentives.

In sum, the interpretations now in vogue about the wealth generation-distribution relationships, on the one hand, and the review of the factors determining inequality and public spending, on the other hand, can be used to draw a set of conclusions in regard to the distribution gap.

(i) If the prevailing view in a country is the one that deems it a priority to carry out structural reforms involving redistributions of key assets, the government is more than likely to tend to give preference to political fights (constitutional reforms, changes in government structure, re-election attempts, etc.) to the detriment of efforts to improve the design and implementation of social policies that only pay off after persistent long-term actions.

ii) If, conversely, we are capable of separating political-electoral times from the periods devoted to exercising governance via efficient and effective policies, the economic, social and institutional conditions can be created to ensure the achievement of sustainable economic growth in the long term.

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