Saturday, February 07, 2015

Origins of Latin American Inequality

In an NBER Working Paper, Jeffrey Williamson take an economic historical look at inequality in Latin America and concludes that it stems from the commodity boom of the 1870-1913 period and not because of colonial legacies.

Most analysts of the modern Latin American economy have held the pessimistic belief in historical persistence -- they believe that Latin America has always had very high levels of inequality, and that it’s the Iberian colonists’ fault. Thus, modern analysts see today a more unequal Latin America compared with Asia and most rich post-industrial nations and assume that this must always have been true. Indeed, some have argued that high inequality appeared very early in the post-conquest Americas, and that this fact supported rent-seeking and anti-growth institutions which help explain the disappointing growth performance we observe there even today. The recent leveling of inequality in the region since the 1990s seems to have done little to erode that pessimism. It is important, therefore, to stress that this alleged persistence is based on an historical literature which has made little or no effort to be comparative, and it matters. Compared with the rest of the world, inequality was not high in the century following 1492, and it was not even high in the post-independence decades just prior Latin America’s belle époque
and start with industrialization. It only became high during the commodity boom 1870-1913, by the end of which it had joined the rich country unequal club that included the US and the UK. Latin America only became relatively high between 1913 and the 1970s when it missed the Great Egalitarian Leveling which took place almost everywhere else. That Latin American inequality has its roots in its colonial past is a myth. 

A very interesting and provocative paper written in a rather combative style. He concludes with the question, "why?" I can't speak to the data, so would like to see comments from someone more well versed in it. Some points/questions that occurred to me:

1. As Piketty argues, World War I was an essential part of the "Great Egalitarian Leveling," as Williamson puts it. Latin America was largely unaffected by the war, so had almost no similar experience. Same goes for World War II. A rather sick trade-off: inequality stays high, but you don't suffer millions of deaths.

2. The role of the U.S. would have to be taken into consideration. During the 1913-1970 period in particular, the U.S. government often attacked "leveling" efforts in the region.

3. If a commodity boom increased Latin American inequality in 1870-1913, why did the same phenomenon level inequality in the 2003-2015 period?

h/t Robin Grier


Guillermo Quijano 11:10 PM

"The Stolper–Samuelson theorem is a basic theorem in Heckscher–Ohlin trade theory. It describes the relationship between relative prices of output and relative factor rewards—specifically, real wages and real returns to capital.

The theorem states that—under specific economic assumptions (constant returns, perfect competition, equality of the number of factors to the number of products)—a rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor."

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