Fighting inequality in Latin America: The road ahead

Last week, I was in Santiago attending a high-level conference hosted by Chile’s Ministry of Finance and the International Monetary Fund.

Along with policy-makers, academics, opinion leaders, and financial sector executives, I was exploring challenges and opportunities for securing inclusive and sustainable growth in Latin America.

Latin America is proof that the global trend of rising economic inequality can be reversed, if the political will exists. Despite historically being the most unequal region in the world, it is the only region that has managed to reduce inequality during the past decade.

This success is the result of the right mix of government policies that focus on poor people. Increased spending on health and education since 2000 has had the greatest impact on inequality reduction. As a result of social public expenditures, many of the region’s poorest citizens have been able to access essential services without having to become indebted to pay for them. For Latin American youth, education is not only an equalizer but it will stimulate innovation, entrepreneurship and growth.

Increasing the minimum wage, public pensions and employment opportunities has also created secure livelihoods for millions.

But this is not the end of the road. Despite these advances, Latin America is still the world´s most unequal region.

Close to a third of the population live in poverty – while the annual income of Latin America’s 113 billionaires this year is equal to the public budget of El Salvador, Guatemala and Nicaragua put together. That same income is equal to the public health expenditure of nine Latin American countries.

So, the question is: Can Latin America remain an example for the world, and maintain and sustain inequality and poverty reduction trends?

Oxfam thinks it can – if Latin American governments continue to invest in health, education and social protection, if alternatives are found to primary commodities exports as the engine of growth, and if progress is bolstered by progressive fiscal reforms.

Growth in Latin America over the last decade has been largely driven by the commodity boom. Several economies in the region depend on oil and other extractive industries. This makes their economies vulnerable. Indeed, growth in LAC has now has stalled, and new drivers of growth are being sought. There is a need to diversify from primary commodity sectors, to sectors which can create many jobs.

As the IMF has pointed out, “the challenges of growth, job creation, and inclusion are closely intertwined.” Growth gives women job opportunities, but women’s participation in the labor market is also a part of the growth and poverty-reducing equation.

There has been a steady increase in women’s participation in the labor market in recent decades, but in most countries in the region women are much more likely than men to hold low-paid jobs. The wage gap between men and women is also substantial, lagging behind OECD countries.

Closing this gap will go a long way to equitable and sustainable development – triggering growth and reducing inequality.

Inequality can also be reduced by progressive taxation – an under-used instrument to reduce in Latin America thus far. A recent Oxfam report highlights the low tax collection levels in the region, in comparison to the great social needs. Our research shows tax systems are largely skewed towards benefitting economic and political elites – rather than the majority of the people.

More than half of tax in Latin American and the Caribbean comes from consumption taxes, such as VAT. This means the poorest devote a greater share of their income to pay taxes than the rich.

Further, corporate tax exemptions in the region amount to $138,000 million per year. In the Dominican Republic tax exemptions for free zones, tourism and other industries are about $720 million - enough to double the health budget. In Nicaragua in 2008 tax exemptions amounted to $415.6 million, 40 per cent more than the Ministry of Health’s total budget that year.

Enormous tax evasion in the region is also a problem. Oxfam’s calculation is that money hidden in tax havens would be enough for 32 million people to be lifted out of poverty. That is, all people living in poverty from Bolivia, Colombia, Ecuador, El Salvador and Peru.

Latin American leaders should improve their domestic resource mobilization systems, cooperate to stop the race to the bottom on corporate tax exemptions, and demand a say in the G20/OECD-led negotiations to reform global tax rules for curbing illicit financial flows.

Courageous steps have been taken by many Latin American leaders in the last decade, and the successes speak for themselves. Now more courageous reforms are needed, to achieve a fiscal system which will dislodge entrenched inequalities and benefit all Latin America’s people equally, and in the long term.

Originally published on the Huffington Post as: Inclusive, Sustainable Growth Latin America: The Road Ahead

Photo: Emelina Dominguez, agricultural technician, 42, tending to her vegetables. Honduras, 14 January 2007. Photo: Gilvan Barreto/Oxfam

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