The Costs of Inequality in Latin America

From the United States to the United Kingdom and from China to India, growing inequality has led to social discontent and the emergence of populist parties, also contributing to economic crises. We urgently need a better understanding of the roots and costs of these income gaps.

The Costs of Inequality draws on the experience of Latin America, one of the most unequal regions of the world, to demonstrate how inequality has hampered economic growth, contributed to a lack of good jobs, weakened democracy, and led to social divisions and mistrust.

In turn, low growth, exclusionary politics, violence and social mistrust have reinforced inequality, generating various vicious circles. Latin America thus provides a disturbing image of what the future may hold in other countries if we do not act quickly. It also provides some useful lessons on how to fight income concentration and build more equitable societies.

Latin America is one of the most unequal regions of the world, but it is not that the poor are poorer. Rather, that the rich are richer. Whether a consequence of colonial political systems or later waves of globalisation – as touched on in chapter 2 – it is through this pattern of elite-driven inequality that Diego Sánchez-Ancochea sees opportunity for lessons to be learned. Where social discontent, emerging and strengthening populist parties or politics, and economic crises are the ever-growing consequences of deepening inequality, Sánchez-Ancochea sees parallels with the history and experiences of a region characterised by instability and the concentration of wealth and power in the hands of a very few.

His opening chapter sets out a case for this thesis, moving beyond simply replicating many of the well-established arguments linking income inequality to adverse social, political and wider economic outcomes. Indeed, the introduction and many of the subsequent chapters are a whirlwind tour of some of the most prominent thinkers on the harmful consequences of inequality. Yet this book does not simply restate those arguments. It asks, and emphatically lays out, what do we do about it, particularly at the political level.

Chapter 2 gives a brief tour of the history of inequality in Latin America, offering a series of compelling statistics that frames the uniqueness of the region and its distinctiveness from other places we would readily equate with high levels of inequality. These include comparing how much a percentage of annual production are controlled by the wealthy in Chile (more than 30) to that in the US (18) or pointing to how much greater the wealth of multimillionaires across Latin America is than annual expenditure on public health (8.5 times) or education (5 times). The following pages debate the history of that staggering concentration of wealth in the elite, raising varying academic and historical perspectives, but despite disagreement as to the starting point, common to all is the favouring of the rich and the control a very powerful elite.

The following three chapters then consider in turn the economic, political, and social costs of inequality. Though peppered with statistics, as you would expect any book with economic inequality at its heart, further differentiating Sánchez-Ancochea’s work from the many others on inequality is its use of case studies. The depth and richness of this approach is illuminating, giving colour, detail, and humanity to the numbers which carve out the ridges and chasms between the have’s and have not’s.

Chapter 3’s opening does much to debunk some of the nefarious claims around the value of having a rich segment of society and what it does for everyone else. Innovation, investment, and growth argue those in favour, lauding the supposedly unique intelligence and creativity of that favoured elite and the benefits to be reaped by all. The relatively lower growth of Latin America empirically suggests otherwise, providing a framework for Sánchez-Ancochea to demonstrate why the size of inequality in Latin America fatally undermines opportunities for innovation, for a strong labour market and ultimately a dynamic economy. He points to the regressive tax policies of Latin America, and the power and political proximity of the elite and the resulting ability to withstand any moves to redistribute wealth. This chapter not only documents the impacts of inequality on (limited) economic development in the region, including the significantly higher number of financial crises faced, it also highlights the circular nature of this relationship. Inequality limits economic development, reducing spending on education, limited income from tax, and weakening incentives for innovation in the market, but these in turn lead to further polarisation. Critically, Sánchez-Ancochea warns that this pattern of high inequality and low dynamic growth that has characterised Latin America for more than a century risks replication in many countries around the world.

Chapter 4 looks at the politics of inequality in Latin America, giving more colour to the stories hinted at in chapter 3. It is not just that the wealthy are proximate to the political elite, but that the wealthy often are the political elite. In these three chapters on the costs of certain types of inequality, Sánchez-Ancochea draws out in careful detail how vicious circles contribute to the perpetuation of income polarisation, the interactions between the political and economic structures, the consequences for societal institutions, and the costs to people’s lives, livelihoods and wellbeing. Inequality exists and persists in societies where there is no routine, systematic and sustained attempt to dismantle it. It is reinforced by the socially stratified power structures that prevail, and insidious in its reach. This is politics, and this is what plays out in chapter 4’s discussion of synergistic political and business interests, competing against those of everyone else and overriding social movements for more just approaches.

Chapter 5 looks at the social costs of inequality. Just as Latin America is the most unequal region of the world, so is it the most violent. Readers familiar with other key texts on the harmful effects of inequality will not be surprised between these links, and some of the narrative in this chapter will put many in mind of a very famous photo depicting inequality in Latin America. The contrast between a tower of flats with pools and luxury situated next door to a slum characterised by crowding and poverty. Though beginning with violence, this chapter spans housing, education before moving to the pernicious lack of trust between people and institutions in regions controlled by a powerful, inward facing wealthy elite. It signposts the interrelated problem of racism and discrimination, particularly the promoted narrative of a ‘whitening’ of the wealthy elite in Latin America and the contrasting experiences of indigenous relative to non-indigenous populations.

These three chapters on the ‘costs’ offer many warning signals to other regions seeing similar patterns emerge, but the warnings are perhaps imbued with a sense of hopelessness given the synergism of the vicious circles of inequality so clearly articulated by Sánchez-Ancochea. However, the remaining chapters begin to carve out the hope and action needed. Despite the power of the wealthy elite in Latin America, the value of community organising, and the impact of grassroots movements shines through in Chapter 6. Their contemporary success rests in their focus on specific problems, with examples given around land reform, indigenous rights and opposition to neoliberalism. For example, the Movimiento dos Trabalhadores Rurais Sem Terra (the Rural Landless Movement) is the largest social movement in Latin America with a goal to reduce land inequality and provide income opportunities for the rural poorer. Through the occupation of private land, they have had many wins, securing schools, roads, credit and better housing. These, and other movements, have inspired activists and academics the world over shining a light on issues of inequality and providing tools to organise and mobilise.

Chapter 7 offers a series of policy levers to pull, to differing degrees depending on a countries level of development or institutional strength, that demonstrably impact inequality. These come out of the critical analysis of the costs of inequality seen in Latin America, and spaces of agitation for change there and the world over. Changing the distribution of endowments spans land reform, taxation reform, and other efforts to promote equality of opportunity (though little here is said of equality of outcome). Next, shifting power in key markets to reconstitute spheres of influence, with a strong emphasis on strengthening trade unions as the most important way to rebalance power in labour markets. Following on from unionising is a call for more and better jobs, with simultaneous support for high-tech activities and low-productivity sectors.

Reform is high on the list of policy levers with reform of the financial markets raised next, stronger regulation and a move away from the consequences of financialization with the goal to limit profits in the financial sector and ensure that financial institutions are to serve the real economy and not the wealthy elite. The final lever relates to the creation of more universal policies, ranging from generous and universal social services to universal education to Universal Basic Income. The possible pitfalls of such universal policies are hinted at, but there is space for far deeper debate as indeed Sánchez-Ancochea signals.

The book concludes with a call for a rethink on politics, an urgency to improve the distribution of income, and the recognition that that is inherently political.  Where politics are the politics of the elite in power, efforts to tackle inequality will fail. Good policies depend on good politics, to paraphrase Sánchez-Ancochea. Most compelling of the lessons learned are the wins from the strong social movements who have catalysed change even amidst such staggering inequality. The final pages restate five of those crucial lessons. Social movements win with clear asks building towards more systemic structural change. They begin locally and then gain momentum and relevance to national spheres. They have a long-term strategy, using a pivot point of sorts to catalyse initial action with a view to the long game. They build a diverse alliance to seek change. Inequality hurts as all, and so this type of ‘cross-class’ collaboration is key to fighting inequality.

“If we combine the right policies with the right politics, we can … create a more equal future”

There are clear lessons to be learned from the experiences of Latin America. Sánchez-Ancochea shows political systems and structures must evolve but highlights that we must also capitalise on the revolutionary ideas of social movements to drive that: pragmatic approaches with radical aims.