Latin America Left Behind: "It’s Inequality Stupid”?

March 21, 2014

Min Zhu, first deputy director of the International Monetary Fund (IMF), includes this amazing and terrifying chart of Latin America’s growth record in a recent blog post on the IMF website.  

The chart shows (on the horizontal axis) that in the last five decades there has been no increase in per capita income in Latin America relative to per capita income in the United States. Since 1990, Latin America has not shared at all in the much-ballyhooed convergence of emerging markets with the advanced economies in the last two decades. Average per capita income in Latin America was approaching 30 percent of the average in the US in the early 1970s, but fell back to 20 percent in the last two decades, and is now about 25 percent of the level in the US. Even more worrisome, as shown here, is that Latin America’s income gap has widened with respect to other emerging market economies at similar levels of development.

Meanwhile in average per capita income in Asia has increased from less than 15 percent of USA per capita income in the late 1960s to 40 percent today.

One theory is that Latin America is caught in a middle-income trap.  More likely, given growing evidence of the effects of inequality on growth, is that the region is caught in an inequality trap — in which a high concentration of economic and political wealth and privilege rooted in its colonial origins and its longstanding dependence on commodity exports stifles opportunities for investment and innovation.

(Mainstream economists are compiling mounting evidence that inequality matters for growth. Go here for a good summary of recent economic studies, and here for an essay of mine on why inequality hurts growth. Though inequality has recently fallen in Latin America, it is still high, and the politics of continuing the recent declines are far from certain.)

Of course there are many reasons why Asian countries (on average) are converging to rich country living standards and Latin American countries (on average) are not. The historical record suggests that high inequality in Latin America is not a consequence of low growth.  But it does not follow that it is a cause; it could be that low growth and high inequality are outcomes of a common set of other factors. Whatever the specific nature of the relationship between growth and inequality, the following charts suggest they’re worth unpacking. Note that the East Asian countries cluster in the happy northwest corner where inequality is low and growth is high; the Latin American countries cluster in the unhappy southeast corner where inequality is high and growth is low.

Economic Growth and Initial Income Inequality, East Asia and Latin America

Source: CGD calculations, based on Deininger and Squire (1996), World Bank PovcalNet, and World Bank WDI


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.