Latin America’s distribution of income and wealth has long been the most unequal in the world—but poverty and inequality have been falling consistently since 2000 in most countries of the region. What has changed in Latin America? Are the region’s governments more committed to equality than in the past? Have their tax and spending policies improved? Which governments are most committed? Which least? What policies and programs have been most effective in redistributing income? Are they sustainable? What is holding Latin America back from faster gains? What --more or less--should governments be doing?
As a follow-up to CGD and Inter-American Dialogue’s publication Fair Growth. Economic Policies for Latin America’s Poor and Middle-Income Majority (Nancy Birdsall, Augusto de la Torre and Rachel Menezes), the Commitment to Equity project (CEQ) is working to answer these and many related questions. A joint effort by the Inter-American Dialogue and Tulane University, the CEQ is designed to measure the impact of taxes and government spending on inequality and poverty in every country of Latin America. The CEQ project also contributes to CGD’s Latin America Initiative which seeks to create a body of policy advice to help the region develop and secure widely shared prosperity. CEQ studies have now been completed on seven countries—Argentina, Bolivia, Brazil, Mexico, Paraguay, Peru, and Uruguay.
The early conclusions of the CEQ project point to a wide variation among countries in their policy choices, and the impact of those choices on income redistribution and poverty reduction. Some examples are:
- Government size varies greatly in Latin America. Government spending is around 40 percent of GDP in Argentina and Brazil, similar to that of some European nations and the US, while it is only half as much in Mexico and Peru.
- Taxes and transfers reduce inequality and poverty by nontrivial amounts in Argentina, Brazil, and Uruguay, less so in Mexico and relatively little in Bolivia and Peru.
- Personal income tax varies from around five percent of GDP in Uruguay to nearly zero in Bolivia. In all countries in which they exist, direct taxes are progressive, but because direct taxes are a small percentage of GDP almost everywhere their redistributive impact is small.
- Cash transfers have reduced extreme poverty by more than 60 percent in Uruguay and Argentina, but only by seven percent in Peru, which spends too little on cash transfer to achieve much poverty reduction. Bolivia spends five times more than Peru (as a share of GDP) but because funds are not targeted to the poor, the amount of redistribution and poverty reduction has been limited. It is only slightly higher than Peru.
- In Brazil and Bolivia, indirect taxes wipe out most of the positive effect of direct transfers, and poverty is almost the same after as before taxes and cash transfers. ·In contrast, poverty in Mexico is lower after indirect taxes and subsidies because the poor pay little in the form of indirect taxes due to exemptions and informality.
- Public spending on education and health is more equalizing than cash transfers in all the countries.
The largely positive redistributive picture of Argentina, Brazil and Uruguay hides some unpleasant facts.
- For instance, about 16 percent of Brazilian social spending goes to tertiary education, mostly benefitting the five percent of the population with incomes above US$50 per day.
- Uruguay, too, allocates subsidies to upper income students.
- Argentina’s sharp rise of public spending during the 2000s has been increasingly financed by distortionary taxes and unorthodox and unsustainable revenue-raising mechanisms.
Nora Lustig is the Samuel Z. Stone Professor of Latin American Economics at Tulane University and nonresident fellow at the Center for Global Development and the Inter-American Dialogue.
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.