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Income Inequality in Latin America and the Role of Policy

A strong interest in the culture and people of Latin America as well as a background in economics has led Leah Galamba to focus her thesis on the recent changes in income inequality within the region. Data collected here in the United States has allowed her to examine and quantify the effects of various policy changes on the level of inequality in eight different Latin American countries. Additionally, time spent abroad in Peru has given her a first-hand experience of what real inequality looks like and how real people, and the country, are affected by it.
by rjp218 Apr 08, 2016

By: Leah Galamba, Rock Ethics Institute Honors Thesis Fellow

I have two majors here at Penn State: Spanish and Economics. My Spanish courses have always centered around the bright and colorful language and culture of Spain and Latin America. In my economics courses we study the growth and development of nations and why some are more prosperous than others. It seemed these same Latin American countries that are so rich in history and culture are equally as poor in economic standing. I wanted to find out why this was the case and how Latin America grew into one of the most unequal regions in the world. 

Source: Leah Galamba

There are many sources of income inequality, including history and geographic disparities. However, many of these countries were founded around the same time as the United States and under similar circumstances. Many are rich in natural resources and have access to easy trade routes. But still in 2011, 26 % of the population did not have access to basic sanitation and the largest segment of people survive on around five US dollars per day, making them at constant risk into slipping into further poverty. 

Even more unsettling though is the fact that some people in the region are thriving. The wealthiest tenth among Latin Americans control 48% of the total income, while the lowest tenth earns just 1.6%. These inequalities can be linked to a long history of colonialism where European settlers have controlled much more of the wealth than the indigenous peoples. Additionally, policies from the mid-twentieth century that hoped to boost the Latin American economy through neo-liberal tactics mostly only went on to further inequality and solely benefit the “haves” while essentially punishing the “have-nots”. (Image above: La Villa, a small village in the country side of Peru)

This is what led to me to focus my thesis on discovering why Latin American countries have struggled economically and why income inequality is so prevalent. I hypothesized that it was largely due to many neo-liberalist policies that were either adopted willingly during the late 20th century or forced upon them by the International Monetary Fund. These policies then went on to influence major economic categories such as labor force participation, openness to trade, and spending on education. By running a regression analysis using these factors on the GINI coefficient of eight different nations in Latin America, I hoped to discover which policies had the most effect on income inequality and just how much of an impact they had.

Source: Leah Galamba

(Image left: A slum on the outskirts of Lima)

While much of this economic data can be found online, I found it essential to my understanding of the subject to travel to Latin America and see these inequalities first-hand. As an economist it’s easy to run regressions and look at numbers, but often that can lead to ignoring the actual people affected. My time in Peru this past summer was eye-opening to say the least. I spent time both in the capital city of Lima, as well as a farm in the country side. While in the country I was able to see the living conditions of the lower end of the economic ladder. The farm we stayed on had no running water and only ran a generator for electricity once a day for around two hours. The farm was run by one man, with the help of his children, who primarily grew oranges and raised guinea pigs. They didn’t have large farming equipment, so the labor was done almost entire by hand with the help of small tools. In the small village about two miles away the people seemed to have decent houses and enough food, but still lacked basic infrastructure like paved roads and reliable plumbing.  I was able to speak to some of the local inhabitants of the village and many of them had been born and raised there and showed no signs of wanting to get out. While the people are happy and making the best of their situation it was strange to see their acceptance this poor life. Many also mentioned that they would never want to move to the city because there was simply too much crime and pollution.  

Source: Leah GalambaEven in the city of Lima, where the more economically advance reside, inequality is prevalent. Crime is a major problem in the city and many areas are considered to be too dangerous to even walk through. The more prosperous neighborhoods were filled with nice homes and apartment buildings with well-maintained roads, sewer systems, and even tennis courts. However, the surrounding slums of the city were densely populated areas with small houses and limited infrastructure. Perhaps the most noticeable difference between the high and low income areas of the city was the prevalence of police. The richer areas and tourist zones had police on every corner while it was rare to see a single one in the slums. This kind of system seems to perpetuate the idea that those with more money are more entitled to protection from the city, while those in the slums were crime is higher are left to fend for themselves. 

(Image right: A busy city street in downtown Lima)

My time abroad in Peru has shown me just how unequal Latin America can be and how real people suffer because of it. However, there does seem to be hope as my economic research has revealed that for most countries in Latin America income inequality is improving. Only time will tell but hopefully new government policies can bring a lasting change for the better to this region and its people.

Leah Galamba is a senior majoring in economics and Spanish at Penn State. Her research focuses on examining income inequality in Latin America and how recent government policies have influenced changes to the rate.