Income inequality in Latin America. Recent decline and prospects for its further reduction

Abstract

The paper reviews the extent of the income inequality decline which has taken place in Latin America over 2002-2010 which reduced the regional Gini index to the level of the early 1980s. The paper then focuses on the factors which may explain such decline. These include a drop in the skill premium following an expansion of secondary education, the adoption of a new development model by a growing number of progressive governments which adopted prudent but more equitable macroeconomic, tax, social assistance and labor policies. For the region as a whole, gains in terms of trade, remittances, FDI and world growth played an important but not determinant role though their impact was perceptible in countries where such shocks were sizeable. Finally, the paper reviews the changes in inequality during the difficult years 2009-2012 and discusses whether and how the recent decline can be sustained over the next decade in the context of sluggish world growth.