Falling Inequality in Latin America: The Role of Fiscal Policy

Abstract

<jats:title>Abstract</jats:title><jats:p>Latin America is one of the world's only regions to have witnessed a fall in income inequality during the 2000s. This paper evaluates the role fiscal policy played in this change. Recent scholarship has examined this in individual countries; lacking is a regional perspective. We examine the effects of nine fiscal instruments on income inequality in 17 countries between 1990 and 2014. Fiscal policy had a positive – albeit small – effect in reducing income inequality, especially from 2003, working best at the urban level. Public spending on education, personal income taxes and social contributions were especially instrumental in reducing income inequality.</jats:p>

Is productive capacity a key factor to reduce inequalities in South America?

“…As stated in the literature, labor market policies such as the ones related to minimum wage, can reduce wage inequality (Casanova and Alejo 2015;Guzmán 2018); this is the reason why a negative coeffiencient associated with LMRI was expected. Finally, social expenditure has a negative coefficient associated, however, contrary to the claimed by the literature (Clifton, Díaz-Fuentes, and Revuelta 2020), it is not statistically significant (with exception for the first specification).…”

“…Specifically, social spending and monetary transfers. According to Clifton, Díaz-Fuentes, and Revuelta (2020), a new policy and institutional cycle in Latin America, accompanied by the commodity boom that surged at the beginning of the 2000s, played a crucial role on reducing income inequality. They also affirm that, eventhough the effect of social spending in Latin America was small compared to the commodities boom and the institutional framework, it was also important on tackling inequality in the region.…”

The surprising reduction of inequality during a commodity boom: what do we learn from Latin America?

“…This has changed recently: according to calculations from Cornia et al (2011), between the 1990s and the 2000s the redistributive capacity of taxation changed from negative to positive in nine countries and it became less negative in two. In their cross-country econometric study of the role of fiscal policy on income inequality, Clifton et al (2019) show that personal income taxes had a statistically significant and positive effect on inequality in the period 2003-2014 but no impact between 1990 and 2002. They find that one percentage point increase in the share of personal income taxes on GDP led to a reduction between 0.005 and 0.007 in the Gini coefficient.…”

“…By now the reduction of inequality in Latin America during the first decade of the 2000s is well-known (e.g. Clifton et al, 2019;Cornia, 2014;Lustig et al, 2016). At a time when the distribution of income in much of the rest of the world was deteriorating, the Gini coefficient went down in 14 of 18 Latin American countries.…”

“…This paper constitutes one of the first systematic attempts to combine evidence from secondary literature and descriptive statistics to explore these questions. Like Clifton et al (2019) explain in one of the most up-to-date studies on the subject, the recent research on the subject combines single-country studies with either multicountry analyses or cross-country regressions. Although drawing primarily on this second type of evidence, I also use specific country examples when no other data is available.…”