Poverty, Inequality, and the "New Left" in Latin America

The Latin American Program's project on Democratic Governance and the ‘New Left' in Latin America joined with the Center for Global Development to sponsor a seminar on the approaches of "New Left" governments to fighting poverty and inequality. Economist Nora Lustig, Samuel Z. Stone Professor of Latin American Economics at Tulane University and Nonresident Fellow at the Center for Global Development, presented the results of research commissioned by the Wilson Center that examines trends in poverty reduction by left as well as non-left governments in Latin America. Commentators Santiago Levy, Vice President for Sectors and Knowledge, Inter-American Development Bank, and Carolina Sánchez-Páramo, Senior Economist of the Poverty and Reduction Group at the World Bank, critiqued Lustig's findings and offered alternative explanations for broader social and economic trends in the region.

Poverty, Inequality, and Political Regimes

Nora Lustig began by underscoring that Latin America continues to be "the most unequal region in the world." However, she said, since 2000 inequality in most Latin American countries has gone down and extreme poverty has declined at a faster rate than in the past. These trends coincide with the advent of left governments that now govern about two-thirds of the region's population. For purposes of her analysis, Lustig divided the Left into social democratic regimes (Brazil, Chile, and Uruguay) and populist regimes (Argentina, Bolivia, Ecuador, Nicaragua, and Venezuela).

Lustig found that in countries now governed by the Left, "poverty and inequality either began to decline, or declined more rapidly, than under previous regimes." An exception was Venezuela, where the evolution of poverty and inequality has been more volatile. In addition, from 2003 to 2006, reductions in inequality, poverty, and extreme poverty occurred with greater frequency in leftist than in non-leftist countries. Furthermore, "inequality and poverty declined at rates twice or three times faster (or more in the case of extreme poverty) in countries governed by the Left."

Lustig noted three important caveats regarding her findings. First, the results are limited to a small set of countries and reflect trends over a short period of time. Second, descriptive statistics, which identify a correlation, do not necessarily indicate causality. Third, the redistributive policies of populist regimes in particular may be at the expense of macroeconomic stability and growth in the medium term.

Lustig examined the initial results of the statistical analysis by controlling for certain factors such as the boom in commodity prices. A regression analysis of 17 countries between 1988 and 2008 upheld the finding that political regime affects outcomes concerning poverty and inequality. In addition, she found that, even though public spending in Latin America as a whole is not progressive, public spending tends to reduce inequality under both social democratic and populist regimes. However, when controlling for the 2002-2008 boom in commodity prices, the inequality-reducing impact of public spending in the populist regimes of Argentine, Bolivia, and Venezuela disappears. By contrast, even when controlling for the commodity price boom, Lustig found that "inequality fell faster in the social democratic regimes (Brazil, Chile, and Uruguay), where public spending in particular reduced inequality."

Further Analysis

Santiago Levy stated that he was "not convinced" that the rate of decline in inequality was linked to political regimes, given the insufficiency of data currently available. Levy suggested that using a classification system dividing regimes according to the policy instruments they implement to address the problem of poverty and inequality, as well as the sources of revenue to finance those instruments, would be better than the political classification (populist, social democrat, or right) used in Lustig's study. As an example he cited Brazil's Bolsa Familia, a conditional cash transfer (CCT) program financed through better taxation efforts, and compared it to the Mexican CCT program which has paid for with oil revenues. In taking advantage of the oil boom to fund social programs, Levy argued, Mexico resembles left populist regimes, not a country of the Right.

With respect to Venezuela, Levy argued that the data available (household surveys, for example) do not register in-kind rather than monetary transfers. Therefore, the impact of the misiones, Venezuela's leading mechanism for income re-distribution, is difficult to capture.

Levy addressed the downward trend in poverty and inequality in the region, noting that the transition to democracy had put greater pressure on both right and left governments to improve social conditions. The unusually favorable international scenario characterized by high commodity prices and growth in the world economy, combined with domestic factors such as the better targeting of social programs and improved macroeconomic stability, help explain the region-wide trend. Finally, Levy raised the question of fiscal sustainability of re-distributive efforts in Latin America in light of the current global economic crisis. He concluded by noting that neither right nor left governments had been able to design social programs geared toward higher productivity.


A Different Perspective

Carolina Sánchez-Páramo of the World Bank also questioned whether left governments have managed to decrease poverty and inequality beyond what would have been predicted by economic growth. Similarly, she asked whether, in light of growth, the changes were more frequent or larger under left rather than non-left governments. She presented anecdotal evidence suggesting similar advances in reducing poverty, and possibly inequality, in countries with comparable rates of growth and non-left governments. Chile and Peru, for example, were similar, as were Mexico, Argentina, Brazil, and Uruguay. At the same time, she said, the decline in poverty in Argentina, Brazil, and Chile was larger than would have been projected by economic growth alone. Sánchez-Páramo stated that neither the levels nor the changes in social expenditure seem to be related to the political ideology of the regime in power. That is, safety nets have been expanded and consolidated in heterogeneous fashion throughout the region.

The decline in poverty during the last decade was accompanied by stagnant or declining labor productivity, she argued. Non-labor income, such as CCTs and remittances from abroad, had been driving the reduction in poverty. Sánchez-Páramo questioned whether poverty and inequality could decline further without improvements in labor productivity, noting that what could be improved through CCTs was reaching its limits. Finally, she reiterated concerns regarding the sustainability of existing social programs at a time of falling commodity prices and economic crisis.