Tuesday, April 16, 2013

Little gained in Latin America’s free-market experiment

By Dr. Ronn Pineo
The Council on Hemispheric Affairs
Poverty in Latin America has been reduced substantially in the last three decades. In the late 1980s, nearly half of Latin America’s population lived in poverty. Today the fraction is about a third. 
This marks important progress, and it has continued in some area nations. However, it is worth noting that between 2002 and 2008, poverty contracted most in Venezuela, Bolivia, Nicaragua, and Argentina, countries which had largely abandoned neoliberalism; in Brazil, which had at least partially rejected neoliberalism; and in only two other states, Honduras and Perú, which still remained, at least partially, committed to free market polices. 
It was mostly factors beyond economic policy that helps to account for recent declines in the rate of Latin American poverty.  One factor was increasing remittances from Latin Americans laboring in the developed world, especially in the United States.  Total remittances from Latin American workers rose from $12 billion USD in 1995, to $45 billion in 2004, and $68 billion in 2006. 
However, “by far the main contributor to the reduction in the poverty rate,” as Jaime Ros has noted, was “the fall in the dependency ratio.” The indicator measures the number of non-working age people—children and the elderly—who are supported by the working age population. The higher the dependency number, the greater the economic burden.
Latin America’s past demographic history underlies this shift in the dependency ratio.  The late 1940s in Latin America witnessed lower overall death rates (the number of people who died a year divided by the total population), especially due to lower infant and childhood mortality rates.  Initially, birth rates stayed high even as death rates fell, but after a generation passed Latin America’s birth rates began to drift downward to match the lower death rates.  
The time gap between the fall in death rates beginning in the late 1940s and the eventual fall in birth rates by the late 1970s resulted in an unprecedented population explosion. Latin America’s population rose from 167 million in 1950 to 285 million by 1970. 
As this population cohort has aged, Latin America’s dependency ratio fell too, dropping from a very high rate of 87.3 in the years 1965-1970, to 55.0 for 2005-2010, an all-time low for the region.  The people born during the population explosion are of working age now, bringing the region a historic but one-time economic advantage, the “demographic bonus” or “demographic dividend.”  
As a result, Latin America temporarily enjoys a situation of a very large number of workers providing for a greatly reduced number of dependent people.  The region’s demographic bonus means that there is, for the moment, less poverty due, in large part, to the increased number of working age people per household.
A drop in the dependency ratio carries with it greater female participation in the workforce, for lower fertility means there are fewer children to care for, freeing women to enter the paid workforce. Lower fertility also means better overall lifetime health for women, resulting in more years spent in the paid workforce for adult females.  The fertility rate (the number of children born per woman per year) fell in Latin America from 5.6 for the years from 1965 to1970, to 2.4 for the years 2005 to 2010.  
The resulting demographic bonus has provided a significant, but fleeting, economic asset.  By 2025, as the current population ages, Latin America will need to support a very large elderly dependent population. 
It is fair to conclude that the reduction of poverty in Latin America in recent years was produced mainly by some short-term victories in the commodity lottery, as well as a spike in remittances, and most of all, a one-time reduction in the dependency ratio.
Income inequality data for Latin America is less positive. In the 1980s and 1990s, inequality increased significantly in Latin America. For example, from 1984 to 1994, the income of the top 10 percent of the Mexico’s population rose by 21 percent, while the income of the country’s bottom 10 percent fell by 23 percent. 
Nevertheless, there have been improvements, albeit modest ones, in lowering the Gini coefficient (a measure of economic inequality with 0 being the least inequality—everyone has the same income, and 1.0 being the most inequality—one person has all the income).
From 2002 to 2008, the Gini coefficient improved in seven Latin American states; five of these seven countries—Venezuela, Argentina, Bolivia, Nicaragua, and Paraguay—have traveled the farthest in rejecting neoliberalism. Outside of these nations inequality stayed the same or even increased, including in the largely neoliberal states of Colombia, the Dominican Republic, and Guatemala.
In 1970, the richest 1 percent of Latin Americans earned 363 times more than the poorest 1 percent. By 1995, it was 417 times more. Latin America continues to show, by far, the greatest income inequality of any region in the world. Of the 15 most unequal economies in the world today, 10 are in the area. If Latin America’s income were only as unevenly distributed as that of Eastern Europe or South Asia, its recent economic growth, though sometimes anemic, would have reduced the percentage of those living in poverty to 3 percent of the population.
The Economist, in its 2010 review of the Latin American economic situation, concluded that the region was “well on the way to building middle-class societies.” 
The evidence, however, contradicts this assertion. The informal sector—where people arrange irregular employment in itinerant retail sales, as day workers, or other loosely arranged jobs—today accounts for more than half of all workers in Latin America. More than eight of ten new jobs in Latin America are in the informal sector. 
Informal sector workers enjoy no protective regulation or benefits. They live by their wits, striving to scratch out a living, day by day. Meanwhile, union membership among active workers in Latin America fell from around one-fourth in the 1980s to under one-sixth in the 1990s.
Moreover, significant areas of severe poverty remain in Latin America, expressed along class, racial, gender, and regional divides   Poverty underlies poor health, contributing to elevated rates of infant, childhood, and maternal mortality. Of those living in poverty in Latin America, nearly half are children.  
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