Monday, January 27, 2014

The True Causes for Latin America's Social Inequality

By Carlos Sabino

Our region has the questionable distinction as the most unequal region in the world. Due to the complexity of this phenomenon, however, it cannot be reduced to one main cause. Many factors lead to this outcome, from historical precedents to more recent cultural, economic, and political developments.

Either way, inequality doesn't simply originate from an economic elite that takes possession overall revenues. The economy is not a zero-sum game, where some win what others lose; rather it's a complex social network that constantly creates wealth. My purpose in this brief article is to highlight, among multiple factors, two causes that, without a doubt, stimulate and strengthen income inequality.

The first of them is inflation. Inflation has been a characteristic consequence of economic policies that most governments in Latin America have applied. These policies have uncontrollably increased the money supply in circulation, generating a currency devaluation, and a consequent price rise. However, when there's inflation, not all prices increase evenly, and this asymmetry doesn't affect all people in the same manner.

Salaries, for example, rarely reach the price rise, and if they do, they do it late: employers or governments don't adjust salaries in a daily basis, they do it in gaps of a year or more. While they wait to adjust, salaries lose purchasing power, and they start to progressively impoverish employees.

Further, inflation causes a loss of value in monetary savings, since the same sum of money is worth less each day; and from experience, interest accrued is never enough to compensate for any such future or present wealth erosion. Retired citizens are then left behind, because they lose their life savings, which can disappear in cases of hyperinflation or very high rates of inflation that last for several years. Argentinians, Peruvians, Venezuelans, Nicaraguans, and many other Latin Americans know this very well, because they have experienced this sad reality several times.

However, not everybody is affected by this cruel scourge, of course: the wealthiest citizens, who have savings abroad in foreign currencies, or companies that can easily adapt their product's price, escape from the consequences of inflation, and can even obtain good rises in their annual income.

This is how different sectors of the population start to separate: there are a few who maintain or improve their standard of living, while the great majority of salaried employees, who have savings in local currency, grow poorer by the day.

The gap between "rich and poor" widens when governments put forward policies that use the dishonest excuse of benefiting the poor, and generate constant inflation. The case of Argentina and Venezuela are vivid examples of this unfortunate distortion.

The second factor is also government-made, and contributes to social inequality. High taxes, as well as multiple restrictions that regulate the creation and functioning of new entrepreneurial businesses, divide the formal and informal sectors of the economy.

The poorest citizens that try to overcome their situation through entrepreneurial initiatives are hindered in their efforts, because they can't afford to pay the high costs of entering and remaining in the formal sector. They don't have access to credit or other avenues to capital that could expand their small businesses, so the economy's mainstream marginalizes them. They don't have ways to invest in new technology, and consequently, they pay lower salaries than the formal sector.

These two factors we just pointed out are well known and several authors in the region have studied them thoroughly. Nonetheless, most governments persist on defending social policies that try to transfer wealth from the richest to the poorest, instead of attacking the causes for inequality, for which they are culpable.

The redistributive approach brings little progress or no progress at all, because it only delays economic growth, increases bureaucracy, and creates strong ties of dependency with politicians who offer this government aid. It would be better and more respectful of individual dignity to approach inequality by focusing on the root of the problem, starting with these two factors: inflation and absurd government regulations that hinder development of small businesses.

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This commentary first appeared on the PanAm Post (January 21, 2014), which along with its Canal blog is a new online media outlet and source for news and analysis throughout the American continent.  Carlos Sabino, a sociologist, writer and university professor, is director of the Masters and Doctoral programs in history at Universidad Francisco Marroquín, in Guatemala; translated by Marcela Estrada.