The great social inequality is an important obstacle to development in Latin America. If the continent is to finally achieve sustainable growth, social mobility must be increased.
The coronavirus will have serious economic consequences for Latin America. It is therefore understandable that the focus at the moment is on coping with this difficult situation. But the economic problems in the region are not only due to global economic fluctuations, but they also have structural causes. Despite favorable signs, these have not been adequately addressed in the past twenty years. Reforms are urgent because they will only be effective in the long term.
From the turn of the millennium to 2013, Latin America experienced an unusual economic boom. The long boom in commodity prices caused strong economic growth and high revenues for the state treasury in most countries. Social programs and the better labor market situation caused the proportion of poor people in the region to almost halve in the region, according to the World Bank, from 43 to 23 percent. In absolute numbers, around 120 million people managed to rise from poverty to the lower middle class.
But it quickly became apparent after 2013 that growth was once again unsustainable. Millions of ascended people have fallen back into poverty or are at least threatened with the descent. The renewed economic downturn has caused serious unrest in several Latin American countries last year. These were, of course, the most violent in Chile, which with its liberal economic policies had long been considered the region’s model of success. The triggers were different, but in most cases, it was essentially a protest against the great social inequality. Latin America is the world’s region with the greatest income inequality.
Hardly any social mobility
There is some evidence that great inequality is a key factor in the development difficulties in Latin America. It is rightly argued that a certain inequality can be beneficial or even necessary for a liberal market economy. It gives individuals the incentive to do more to improve their material status. But this presupposes that social mobility exists. It must be possible that you can ascend with appropriate performance. This is usually hardly the case in Latin America. Social mobility is very limited compared to East Asian countries or Europe, as one new study by the World Economic Forum shows once more.
The negative consequences are numerous. The workforce is poorly exploited because a significant proportion of young people do not have access to good school education and therefore cannot develop their skills. Furthermore, it should not be a coincidence that Latin America has the highest crime rates as well as the greatest inequality. In the absence of social mobility, crime is an alternative way to advance materially. A high crime rate brings great costs for the economy and society. And thirdly, the great inequality is always the reason for serious domestic conflicts and political destabilization. This was most recently evident in the unrest in Chile, which has caused great economic damage.
Inequality has roots that go far back in history. The cornerstone for this was laid in Spanish-speaking Latin America during the three hundred years of colonial rule. A rigid social order at that time assigned the population their place in society and business strictly according to the origin and skin color (the same applies to Brazil). At the top of the hierarchy were the whites born in Spain. Only they were allowed to hold high government and church offices and to carry out wholesale trade. In second place were the descendants of Spanish immigrants born in Latin America. They were allowed to own large lands for agriculture and animal husbandry and received concessions for the exploitation of mines.
The multiracial mestizos with Spanish and Indian ancestors were able to work as craftsmen, shopkeepers and, in middle and lower positions, in the army. They were followed by the indigenous peoples. They were often enslaved or subject to tribute to whites and mostly lived in the areas assigned to them. The lowest place in the hierarchy was occupied by African slaves, who often worked on plantations.
Even two hundred years after the end of Spanish colonial rule, the traces of this inequality have surprisingly not disappeared. The wealth concentrated above all in large estates was passed on in independent Latin America and remained the most important form of wealth in the 19th century. In the 20th century, it was this land-owning class that invested in the beginning industry and the service sector.
East Asian experiences
Latin America is often given the example of the so-called Asian tiger states South Korea and Taiwan as an alternative development model. After the end of the Second World War, they achieved an economic miracle. Although many Latin American countries were more advanced at the time, the two Asian countries overtook them within a few decades while they were on the move themselves.
It is interesting that in both East Asian countries, with extensive agricultural reforms, the traditional political and economic power of large landowners was broken. The wealth situation was thus reorganized and capital was made available for industrialization. In Latin America, there was no comparable replacement of the class of large landowners.
Experience since World War II has shown how difficult it is to reduce social inequality in Latin America. The left’s recipe was to force the state to redistribute income distribution. Various heads of government have tried this. In the end, their measures were unsuccessful, or they even led to poverty spreading to even more heads. A particularly daunting example of this is Venezuela, where Hugo Chávez and Nicolás Maduro plunged almost the entire population into poverty and, through their inability, caused the mass flight of almost five million compatriots.
The right, in turn, recommended reducing inequality through economic growth. However, in the recent past in Latin America, this has not solved the problem either. The prime example of this is Chile, which experienced an average annual gross domestic product growth of around five percent over the past thirty years. Nevertheless, inequality has decreased only slightly – and has remained high in regional comparison.
Education makes you mobile
But the countries of Latin America need not accept social inequality fatalistically. The best recipe, on the other hand, is to create skewers of the same length for the growing generation, so that opportunities arise for everyone and social mobility levels the differences. To do this, the state must ensure that all social classes have access to good quality education.
The example of Chile, in particular, shows how, despite successful economic development, and inadequate education system can lead to the continuation of social differences. Because this segregates according to the social origin, with expensive private schools for the upper class, state-subsidized private schools for the middle class and poorly equipped public schools for the lower class. The education system thus cemented the existing inequality.
Education reforms are not easy. Governments are generally of little interest since the fruits can often only be harvested after a generation when the politicians are no longer in office. But it is not hopeless. Such reforms favor a young generation who can put pressure on street protests, for example. Foreign governments and international lenders can make financial support dependent on educational reforms. South Korea and Taiwan can also serve as models for education. Both countries have set up high-quality elementary schools for everyone. Education is very important in society.