Income inequality may have a negative impact on economic growth and generate social unrest due to disparities in access to economic opportunities and basic services, such as education and health care. Although recent evidence shows that income redistribution has improved in the region since 1990, some LAC countries are among some of the most unequal in the world, both in terms of income and access to services (Brezzi and De Mello, 2016).
In LAC countries for which data are available, income inequality was lower in 2017 or the latest available year compared to 2000. Bolivia has reduced inequality the most (from a Gini coefficient of 0.59 in 2000 to 0.44 in 2014). Uruguay had the lowest inequality (with a Gini 0.40) and Paraguay the highest (0.52). However, income inequality is higher in all LAC than in the five most unequal OECD countries (which have an average Gini of 0.38).
Another way to look at inequality is to compare the share of income held by the top quintile of the population to that held by the bottom quintile (i.e., S80/S20). When such an indicator is considered, data show that most countries (with the exception of Paraguay) managed to reduce income inequality, when comparing 2000 or earliest available year with the latest available year. The largest improvements are observed in Bolivia, which in 2000 had an S80/S20 ratio more than three times higher than in 2014, and Ecuador, that more than halved its S80/S20 ratio over the same period.
Governments can reduce income inequality by applying a progressive tax policy, fighting policy capture of benefits by interest groups and redistributing income through transfers to poorer households. In LAC countries with available data, there are divergences regarding the role of government in reducing inequalities. For instance, in Brazil in 2013, the Gini after taxes and transfers was 0.47, down from 0.58 before taxes and transfers. This reduction was similar to that of the five most unequal OECD countries. The reduction is much smaller in Chile, where in 2017 the Gini before taxes and transfers was 0.50, only four points higher than after redistribution (0.46).
Although not comparable, recent evidence for a larger set of LAC countries shows that governments from the region play a much smaller role in reducing inequalities than in OECD countries (OECD, 2017). Additionally, vulnerable groups in LAC face the risk of falling back into poverty with a deterioration of economic conditions (Brezzi and De Mello, 2016).
