The Altamiras are rich. they live in a luxurious eight-room apartment in an exclusive section of a large Latin American city.
The Bajareses are poor. They live in a one-room shack on a hillside with no electricity, no potable water and no paved roads.
Anyone raised in a Latin American or Caribbean country is familiar with these two fictional families. Everyone knows that the gap in their incomes--and in their overall prospects--is huge. After decades of studies on the topic, people are no longer surprised to hear that the region has the world's worst income disparities.
Inequality is so ubiquitous that it can be tempting to dismiss it as an obvious problem with obvious solutions. Many people assume that inequality is a reflection of underdevelopment, and that the only way to reduce the gap between rich and poor is to improve a country's social and economic conditions.
But is the problem that simple? Do we really understand the origins of inequality and how it is perpetuated? The 1998-99 edition of the IDB's report on social and economic progress in the region, Facing Up to Inequality in Latin America, summarizes an unprecedented effort to answer those questions. IDB researchers analyzed responses to questions about income, education, age, occupation and other factors that were gathered in thousands of households between 1994 and 1996. The surveys cover 14 countries that account for more than 80 percent of the region's population.
By processing data from the surveys, researchers were able to paint an unusually detailed portrait of typical families at each level of the wealth spectrum. The picture that emerges of the Altamiras and the Bajareses, who are used as composites to represent characteristics of the wealthiest 10 percent and the poorest 30 percent of the region's families, defies many popular stereotypes. Indeed, it shows that understanding inequality requires a much closer look at the confluence of economic and institutional factors, personal decisions, cultural influences and gender roles.
Out of proportion. According to the IDB report, Latin American and Caribbean countries are much more unequal than countries in other regions of the world. Some 150 million Latin Americans, or 33 percent of the region's population, live on less than $2 a day, an amount which is assumed to be sufficient for minimum subsistence. But if income distribution in the region were the same as the international average, thus reducing inequality, poverty in Latin America and the Caribbean would be half of what it is today. If income in the region were distributed as it is in Southeast Asia, Latin America would have one-fifth as many people living on less than $2 per day.
In effect, Latin America has what economists call "excess" inequality: disparities that are far worse than they should be, considering the region's overall level of development. The chasm between the Altamiras and the Bajareses makes that clear. According to the IDB report, the Altamiras and their peers among the wealthiest 10 percent take in a stunning 40 percent of all the region's income, while the Bajareses and their neighbors in the lowest 30 percent earn just 7.5 percent of the total. Looked at another way, the Altamiras' per capita household income is 20 times that of the Bajareses. Moreover, IDB researchers warn that the disparity is almost certainly larger because household surveys measure only income from labor, not capital (such as rental properties, investments, etc.), and the latter is an important source of money for the top 10 percent.
Why are these gaps so large and so out of proportion? The authors of the IDB report argue that the explanation resides in the confluence of macroeconomic, demographic, educational and geographic factors. But they also show that significant parts of the answer can be found in four key variables in the lives of families like the Altamiras and the Bajareses: their fertility, place of residence, education and employment.
Who are the rich? One popular stereotype of wealth in Latin America holds that each country is dominated by an elite group of large, fabulously rich clans that control vast tracts of land and key industries. In the clichéd view of these families, the men are in charge of generating income and managing assets while women devote themselves to family and social functions.
Although such families undoubtedly exist, the Altamiras and their peers are not like them. In contrast to the large wealthy families of the past, the Altamiras and other families in the top 10 percent have an average of just 1.4 children. In Honduras, where wealthy families are the largest of all, they average less than two children under age 18. In Uruguay and Argentina, one out of every two families in the top 10 percent does not have a minor child at all. In other words, in societies that are still predominantly Catholic, the families that can most afford to have numerous children are choosing to have the least.
The Bajareses, on the other hand, have three children, about average for families in the lower 30 percent. This is a marked improvement on the early 1960s, when the average Latin American woman had six children, but it shows that higher fertility is still concentrated among the poor. Households in the lower 30 percent are also likely to be larger because they include more adult dependents (such as grandparents or uncles). Overall, families in the top 10 percent have an average of less than four members, while those in the bottom 30 percent average 6.3 members. Hence, per capita income is higher in the Altamira home not only because its members earn more, but also because they have fewer mouths to feed.
As in much of the world, these two families' prospects are also determined by where they live. Despite the much-publicized growth of Latin America's cities, most of the region's poorest people still live in the countryside. Only in Brazil, Chile and Venezuela do more than half of all households in the lower 30 percent live in urban areas. And in nearly every country, nine out of 10 families in the two highest income deciles (that is, the two top 10 percent segments) live in cities. Because income-generating work tends to be scarcer in the poor rural regions than it is in cities, people like the Bajareses are much less likely to emerge from poverty if they live in the countryside.
The Altamiras and the Bajareses also differ starkly when it comes to education. Mr. Altamira has completed 12 years of school, just under the average for his peers, while Mr. Bajares has only five years of schooling. Perhaps more significantly, Mrs. Altamira and her peers have completed an average of 11.6 years of schooling, compared to only 4.7 for Mrs. Bajares and other women in the lower 30 percent. Education sets the Altamiras apart even from people in the second highest decile of the income spectrum: on average, people in the top 10 percent have 2.7 years more schooling than people in the next decile. In Mexico, Brazil and Costa Rica, this gap is more than three years. Thus, even though the Altamiras have not even gone to college, they tower above the rest of society when it comes to education, simply because most people in the region have so much less.
Mr. Altamira and Mr. Bajares have a similar likelihood of participating in the formal labor force (85.8 and 82.5 percent, respectively). But while a quarter of the heads of household in the top 10 percent work as professionals, technical personnel, or senior corporate executives, only a tiny fraction of workers in the lower 30 percent reach leadership positions or have technical responsibilities on the job. As a result, Mr. Altamira earns 3.5 times more than Mr. Bajares.
Given her husband´s sizeable income, Mrs. Altamira can afford to stay out of the work force. But one of the most unexpected discoveries of the IDB household surveys showed that, in fact, a majority of women (60 percent) in the top income decile participate in the work force (meaning they are either employed or seeking employment). By contrast, only 36.7 percent of the women in Mrs. Bajares' income segment do so, and most of them work in the informal sector, where the pay is much lower.
Women's work. According to the IDB report, this sharp difference in the labor participation and income-earning potential of women turns out to be one of the most significant contributors to inequality in the region.
Why are poor women so much less likely to be in the work force? There are a number of factors, but education is perhaps the most evident one. While men with very little education are still very likely to be in the work force, the opposite is true for women: only 40 percent of women with four years or less of schooling is in the labor market, compared to 78 percent of those with higher education. A woman's choice of whether or not to work is also determined by the wages her husband earns, the number of children she must care for, and, in traditional societies, by the productivity of housework. The Bajareses have no electricity, gas or running water in their home, and they live far from public transport. Mrs. Bajares consequently spends many more hours a day at basic household tasks than Mrs. Altamira, whose home is equipped with all the latest appliances (Mrs. Altamira also can afford to hire household help.) Even if she could find someone to watch her children and help with the housework, it would hardly be worth it for Mrs. Bajares to travel to a job in the nearest city, because wages for people with her education are very low. As a result, only 7.5 percent of all women in Mrs. Bajares' income group have formal sector jobs, compared to 33.5 percent of women in the top 10 percent.
The real tragedy in this pernicious cycle of missed opportunities is that it perpetuates inequality. Consider a different scenario. If Mrs. Bajares had completed more years in school when she was a girl, she would have had a greater incentive to participate in the work force because of the prospect of getting reasonable pay. Once she was employed, Mrs. Bajares would probably have endeavored to have fewer children, in order to improve her chances of keeping the job. The Bajareses' combined income might have enabled them to move to a village with electricity, water and sewer service, and to buy a stove, a refrigerator, and a clothes washer and other appliances. These conveniences would have made housework more productive, ensuring that Mrs. Bajares would have enough time to hold down a job while her children are at school.
Finally, all these changes might have given the Bajares family more confidence in what economists call the "rate of return on education." In other words, the Bajareses might have concluded that working to keep their children in school is worth the near-term loss of labor because their greater long-term earning potential will benefit the entire family. The IDB household surveys, echoing numerous other studies, found that the children of working mothers tend to attain higher education levels than those of mothers who do not work, and that parents with more education and income-earning opportunities tend to have fewer children and channel more resources toward their education.
The policy challenge. Can governments hope to encourage this virtuous cycle of education, labor force participation and smaller families with a view to reducing inequality? Though the factors that influence a family's choices and options are numerous and complex, the authors of the IDB report believe appropriate policies can help.
First, any policy that increases women's education will increase their potential earnings in the labor market and lead more women to seek paid work, since the advantages of doing so will increase relative to the advantage of working primarily at home. At a practical level, that means opening more schools in locations that are accessible to low-income families. It also means improving the quality of education: too often, instruction is so poor that people correctly perceive that staying in school won't make a difference in their children's job prospects down the road. There are long-standing debates on how to reform the region's school systems in order to improve quality, but a growing number of experts agrees that a good first step is to decentralize school systems so that local schools have more liberty to innovate and are more accountable to the families that use them. Another promising approach involves creating incentives for both teachers and students. Teachers' pay increases can be linked to performance assessments that include input from parents, and families can be motivated to keep their children in school through lunch programs, free books and other services.
Second, before poor women will consider joining the work force, they must be able to increase the productivity of their household tasks. Policies that extend the availability of running water, electricity and community services can have an immediate impact in this regard. For women with children, the availability of low-cost child care during working hours is central to the decision to seek work or stay at home. According to the IDB report, studies in Brazil and other countries have shown that increasing the supply of affordable child day care leads to greater female participation in the work force.
Governments can also reform laws that indirectly discourage women's employment. In many Latin American and Caribbean countries, labor laws force employers--instead of the government--to pay for maternity leave. In order to avoid this considerable expense, many companies simply prefer not to hire women for important and better-paying positions. This tends to encourage labor segregation that relegates women to comparatively low-skilled clerical and service jobs. In some countries, labor laws also restrict the use of short-term contracts or part-time jobs--two categories that can be attractive to women with children. Even laws that keep the minimum wage too high can work against women's employment, by forcing too many companies to rely on informal work arrangements that offer very low pay and no job protection.
Window of opportunity. Changing these policies can be both politically difficult and costly, of course. But if current fertility trends continue, many of the region's governments will be able to take advantage of a so-called "demographic window of opportunity" that will improve their ability to finance such efforts (see "Demographic surprises," THE IDB, April 1997). In the next two decades, people born in the higher-fertility years of the 1960s and 1970s will swell the region's working-age population, even as the number of children shrinks and the number of retirees remains stable. In simplified terms, that means that more women will be in a position to enter the work force¯so long as economic and trade policies favor job creation. It also means that some governments will have more money to spend on improving education and other social services--because the social costs of caring for children and retirees will be temporarily lower and because there will be many more workers paying taxes. When the large working-age population of this period begins to retire in around 20 years, the social costs of caring for people 60 years and older will increase to a more typical level, and the "window" will close.
Moreover, there are compelling economic reasons for governments to prioritize spending on services that can diminish inequality. Classical economists have traditionally argued that inequality is something of a necessary evil. They maintained that the capital accumulation needed for economic growth could only come from the savings of a society's richest members because workers would always tend to consume everything they earned. They also argued that any efforts to redistribute wealth through social policy would backfire by lowering productivity and economic efficiency.
But over the last decade, economists and policymakers have begun to question these assumptions in light of new evidence indicating that inequality can slow a society's human and physical capital accumulates. Countries with a chronic shortage of skilled, well-educated workers cannot increase productivity as consistently as their more egalitarian competitors. Severely unequal societies are also susceptible to social and political conflicts that undermine stability and ultimately hold back economic growth.
The shifting currents of economic theory mean very little to the Bajareses, however. They would welcome any effort to narrow the gulf between their prospects for a better life and those of the Altamiras.