What Latin America’s inequality and political instability can teach the rest of the world

In a landmark speech about social mobility in 2013, the then United States president, Barack Obama, warned against the problem of growing inequality in the starkest possible terms: “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to … our way of life.”

He was talking primarily about America, where the income share of the top 1% almost doubled between 1980 and 2015. But he could have been equally talking about Poland, the United Kingdom or a number of other wealthy countries as reflected in the graph below.

Covid-19 has made things even worse. The pandemic has enabled the global elite to increase their wealth rapidly – in some cases by enormous amounts – at the same time as many workers lost their jobs.

Income share of top 1% in wealthy countries

Things could get much worse in years to come. To understand how and why, it is worth looking at Latin America, one of the most unequal regions of the world.

This is evident when using the Gini coefficient (an indicator of income distribution that goes from 0 for the most equal situation to 1 for total inequality) as the following figure does. The differences between Latin America and Eastern Europe and Central Asia are particularly striking.

In my recently published book, The Costs of Inequality in Latin America, I show the social, political and economic effects of wealth and income concentration over the long run. For more than a century, Latin America has experienced a damaging combination of high inequality, poor economic performance and weak political institutions.

This has contributed to persistent political volatility and social discontent. A small elite, which still controls a large share of land and wealth, has had limited incentives to increase productivity or invest in new sectors of the economy.

Why would they move to risky sectors or spend in innovation when they are making large profits on activities with low competition? The elite have also refused to support high-quality public education for all.

As a result, Latin American countries such as Brazil and Mexico have suffered from a lack of well-paid jobs to a much greater extent to the wealthier economies. During much of the 20th century, economic activity concentrated on large plantations and capital-intensive manufacturing activities that created limited formal employment. Most workers had low-paid jobs that did not provide access to social benefits.

Failed reforms

The neoliberal package implemented across the region since the late 1980s has done little to help. The economic elite made of individuals (usually men) with large amounts of wealth, political connections – or both – benefited from the privatisation of public companies. Much has been written about the relocation of jobs from the US to Mexico, but the truth is that a large number of Mexicans still work in the informal sector and receive wages below the poverty line.

The lack of economic dynamism had much to do with the control of policymaking by the wealthiest 1%. They successfully pressured for low taxes – particularly on personal and corporate income. Most Latin American countries have never spent enough on public healthcare and education and have paid too much attention to programmes for the wealthy. Until the 2000s, support for universities and hospitals was high, while spending on pre-school education and rural health clinics was insufficient.

Populism rules

Given all this, it is not surprising that citizens have repeatedly supported populist politicians. Leaders, including Juan Domingo Perón in Argentina in the 1940s and 1950s or, more recently, Hugo Chávez in Venezuela, promised to provide good jobs and adequate social benefits not only to the poor but also to large segments of the excluded middle class.

These leaders enthusiastically supported wealth redistribution, but their policies were often unsustainable and failed to truly confront the power of the top 1%.

Over the long run, inequality has created a vicious circle. Large income gaps between the poor and the wealthy have been one of the drivers of violence, one of the reasons that Latin America is the region with the highest homicide rate in the world. The violence is concentrated in low-income neighbourhoods, creating anxiety and personal insecurity and discouraging inward investment, which might create jobs and improve services.

Some of the same challenges of inequality are increasingly evident in other parts of the world. Donald Trump’s election in the US and Brexit in the UK reflected growing dissatisfaction with the status quo among a large segment of the population who opposed the growing influence of the economic elite and what they saw as diminishing economic opportunities for people like them.

What the Latin American experience shows is that things could easily become even worse in the future as income gaps consolidate and become harder to confront.

Diego Sánchez-Ancochea is the Head of the Oxford Department of International Development at the University of Oxford.

This article first appeared on The Conversation.