Income Distribution under Latin America's New Left Regimes

This paper reviews the decline in income inequality that has taken place over 2002-2007 in most Latin American countries against the background of its steady increase over 1980-2002. The paper then analyzes the factors that could explain this trend reversal. It focuses in particular on favorable external conditions, cyclical factors, improvements in the distribution of educational achievements and the subsequent drop in skill-premium, and changes in macro-economic and social policies introduced in several countries, particularly by a growing number of left-of-center governments that have come to power during the past decade. An econometric test for the years 1990-2007 using a sample of countries covering the majority of the population in the region indicates that, in addition to a favorable business cycle and external conditions, a decline in skill premium and the new policy model of fiscally prudent social-democracy that is emerging this decade in much of Latin America impacted favorably the distribution of income. If this approach will survive the current crisis, much of the recent inequality decline is likely to become permanent.