The real reason inequality is so high in Latin America

As we know, Latin America is the most unequal region in the world. This lack of equality that characterizes the region is undoubtedly a major barrier to its economic development. Why is it so difficult for Latin America to reduce inequality in a sustained way?

The main reason Latin America fails to reduce inequality is the precarious tax system and its weak redistributive power. According to World Bank data, Latin American countries have the lowest tax burden. While the average for OECD countries is around 35%, the Latin American average is close to 20%. And without taxes there is no equality. As economist Claudio Lozano explains in his article “Without Taxes, There is No Equality”, published in the magazine Nueva Sociedad, low tax contributions in Latin America prevents real redistribution in the region. According to the ECLAC report, The Equality Imperative, while inequality in OECD countries decreases by 17% after direct fiscal action, according to the Gini index, in Latin American countries the decline achieved after direct taxes and public transfers is only 3%. In fact, in many countries in the region, tax systems have not only been historically modest in their redistribution, but they have even become globally regressive; those with higher incomes have paid comparatively less tax than those with lower incomes.

Even the progressive governments that have governed several Latin American countries in recent years, while they did make significant gains in terms of income distribution, did not achieve substantial tax reforms. To a greater or lesser extent, inequality has fallen in recent decades in several countries in the region, including Brazil, Ecuador, Bolivia, Nicaragua and Argentina. But improvements in the distribution of wealth did not come about thanks to progress in tax systems. The redistribution was mainly due to subsidies financed by other types of income, such as those generated by mining and the export of raw materials. The redistribution of wealth in Latin America has no solid foundation as it is dependent on the commodities boom that is now over, and subsidy systems that can easily disappear. With the return of right-wing governments to many countries in the region, reforms are likely to go hand in hand with lower taxes and less tax redistribution.

Economists know very well that high inequality is a major barrier to economic development, and Latin America is no exception. Unequal structures inherited from the colonial era have prevented Latin American countries from making the most of their potential. Only by involving the entire population in economic progress can a country grow steadily, and for this a strong public sector with redistributive capacity is essential. Its role in economic and social development has been evident throughout history. Both European countries and the successful economies of South-East Asia began to grow steadily after managing to redistribute wealth, doing so through sound tax mechanisms. All developed countries, even the most neoliberal, are aware of the importance of a strong and progressive tax system. Only with a strong tax system, and a social covenant in which those who have the most contribute the most, can essential public goods such as infrastructure, public services and efficient institutions be financed, and then a national identity that goes beyond colors and flags can be achieved.

The aversion to paying taxes in Latin America is a constant, one that is a historical burden. Generally, the upper and upper-middle classes do not feel the moral obligation to contribute to the public coffers, nor are they aware of their importance, not only for reducing inequality, but also for good economic performance of the country as a whole. This is because for many Latin Americans, talking about taxes is synonymous with stagnation, waste and inefficiency, and redistribution is a concept completely alien to the idea of individual responsibilities.

The consequences of our inability to understand the collective good and not decisively attack inequality are serious. An unequal society is a fractured society. And this translates into extreme political positions, which in turn generate permanent social conflict.

David Castells-Quintana, is a professor of economics at the Autonomous University of Barcelona, specialized in international economics, urban economics and economic development.

Latinoamerica21 is a blog about current economic, political and social topics in Latin America that is currently published within the newspaper El Observador de Uruguay and Pagina Siete in Bolivia, and will soon be published in other media outlets within the region. The original version of this blog post is available in Spanish: La distribución de la riqueza y la desigualdad en América Latina

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*Guest blog posts do not reflect the views of FocusEconomics. 

Date: May 7, 2018