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Latin America's Economic Fiesta Ends, Wealth Gap Returns

New America Media, Commentary, Marcelo Ballv Posted: Apr 12, 2009

NEW YORK -- During the past few years, innovative social programs in Latin America have been touted for their role in reducing poverty and helping to create new middle classes in countries like Brazil and Mexico.

But newly published research shows the funding for these programs, where they exist, are a drop in the bucket compared to the billions channeled by the overall fiscal policies of Latin America's governments. Ironically, in a region that has half the world's 10 most economically unequal countries, government actions tend to aggravate, rather than improve, the income gap.

That's particularly worrisome now, since the financial crisis has put the brakes on a half-dozen consecutive years of economic growth in the region. That expansion, as well as remittances from immigrants abroad, helped reduce inequality moderately in Latin America between 2002 and 2008, according to researchers Jeffrey Puryear and Mariellen Malloy Jewers of the Washington D.C.-based Inter-American Dialogue.

"The global economic crisis will almost certainly reduce (economic) growth and remittances significantly, threatening progress in reducing poverty and inequality," they write.

After years of increases, remittances to Latin America may drop by as much as 13 percent in 2009, according to the Inter-American Development Bank.

With the Latin American economic bonanza on pause, and the risk of a jump in poverty high, it may be time for the region's leaders to level the playing field.

"It's well within the means of each government to change their policies and tackle the problem themselves," says Sergio Bendixen, a Miami-based pollster with wide experience in the region. He acknowledges that creating something similar to European social democracies in Latin America will take billions in redirected resources, but argues no amount of foreign loans or investment can have the same effect.

The difficulty of the current situation accounts for the sharp tongue wielded by Brazilian President Luiz Inacio "Lula" da Silva ahead of the recent Group of 20 meeting in London. Meeting with British Prime Minister Gordon Brown in Brasilia, the Brazilian capital, in late March, Lula lashed out at northern country capitalists, saying the world economic crisis was caused by "white, blue-eyed" bankers.

It's unfair, Lula went on to say, that Brazilians will have to suffer the consequences of arrogant financiers in Europe and the United States.

Much of Lula's popularity, after nearly 10 years in the presidency, rests on his progress in reducing poverty in Brazil, hauling millions of people out of the day-to-day grind of survival, and widening their access to health and education.

In a process parallel to China's consumer expansion, though obviously reduced in scale, lower-income Brazilians also began to access lines of credit, goods like DVD players, and a wider range of private services.

Some of that was accomplished thanks to Brazil's Bolsa Famlia program, which according to the World Bank reaches 11 million families with a monthly cash subsidy of roughly $35 (USD) on the condition that parents keep their children in school and take them for health checks.

According to a World Bank report on Bolsa Famlia, 94 percent of the funds reach the poorest 40 percent of the population, with most of the money used to buy food, school supplies, and clothes. Despite its success and visibility, Bolsa Famlia represents a narrow slice of the budget: less than three percent of government spending. A similar program called Oportunidades exists in Mexico, reaching 4 million families.

Other factors also helped to boost the economy and ease poverty: a boom in the price of commodities like soybeans, oil and copper (driven by Chinese demand) fattened Latin America's wallet, and the benefits of the swelling economic piata trickled down to the poor.

In 2007, a headline in The Economist captured the nearly giddy climate: "Latin America's Middle Class: Adis to Poverty, Hola to Consumption." With the global economic black hole now sucking at Latin America, an updated headline might read: "Latin America's Masses: Hola, Once More, to Poverty."

But the blame lies only partly with financial speculation in North America and Europe.

Brazil and Mexico, like Latin America as a whole, could radically improve their wealth redistribution systems. Programs like Bolsa Famlia and Oportunidades are bright spots in an overall grim catalog of government fiscal policies that reward the rich and soak the poor.

"The Latin American state has not done a good job of reducing poverty and redistributing wealth," conclude Puryear and Malloy Jewers in their paper presented at a March social summit in So Paulo, Brazil, sponsored by the Washington D.C.-based Global Center for Development and Democracy, brainchild of former Peruvian President Alejandro Toledo.

Though in the popular imagination Latin America is rife with populist programs and handouts, that's only the most visible part of an overall fiscal policy that tends to do the opposite. Surprisingly, say Puryear and Malloy-Jewers, the United States (not to mention Europe) does a better job at wealth redistribution through its tax and funding policies.

In Europe, taxes and social programs reduce economic inequality by 20 percent, as it's measured by a number called the Gini index, according to Puryear and Malloy Jewers. But in Latin America, they hardly make a difference.

The lower the Gini index, the more equal a society: Denmark has a Gini index of 24, the United States index number is nearly twice as unequal at 45. Brazils is even worse at 57.

Latin American countries indulge in at least a half-dozen policies that keep the income gap wide: A heavy reliance on sales taxes (which disproportionately penalize low-income groups), lax income tax collection and rampant evasion, massive funding of public universities and civil servant pensions that benefit top economic brackets, as well as underfunding of basic services like preventive care at public hospitals and primary schooling.

If they want to put a real dent in inequality, Latin America's governments will have to launch and expand programs like Bolsa Famlia and Oportunidades, but also change the rules of the game, by implementing tax reforms and putting an end to indirect subsidies for the rich.

After all, it's contradictory to talk of maturing democracies when commuter helicopters of the ultra-rich buzz above swelling slums.

Related Articles:

In Global Economic Crisis, Mexico Is Resilient

Will Obama Make the Mistake of Latin American Leaders?

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