Globalization and Income Inequality in Latin America  

Posted: December 22nd, 2022

Globalization and Income Inequality in Latin America  

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Globalization and Income Inequality in Latin America

Globalization is acclaimed for opening up the economies of countries and creating a global market where goods, people, and information flow freely (Samimi & Jenatabadi, 2014). Many countries have embraced globalization by undertaking neoliberal reforms so that they can access the promised benefits (Siddiqui, 2012). Although globalization is not a new phenomenon in Latin America, its latest wave in the 20^th century has been characterized by neoliberalism through deregulation, privatization, and increased integration with the global economy (Ruckert, Macdonald, & Proulx, 2017). As expected, globalization increased the exploitation of resources, enhanced international trade, and bolstered employment, which not only increased the income in households but the national wealth as well (Williamson, 2015, p. 332). However, these benefits have not been distributed equally across the population in the South American countries (Williamson, 2015, p. 339). Latin American remains the most unequal region in the world, with its GINI index of family income being 47% compared to 42% for Africa and 36% for Asia and the Pacific (OECD, 2019). Evidence of the high numbers of the urban poor is prevalent in most Latin American countries. Social tensions are high because people are critical about the uneven distribution of national wealth, loss of jobs, and misappropriation of public funds by a few individuals (Hernández et al., 2010). However, the nexus between globalization and inequality is complex because of extraneous factors. Despite being associated with economic growth, high living standards, and increased wealth due to enhanced international trade, economic globalization in Latin America has not only yielded socioeconomic inequalities but has also urbanized poverty and increased unemployment. An analysis of the linkage between globalization and income inequality in Latin America can reveal the challenges and obstacles that hinder the realization of positive globalization outcomes in this region.

Globalization and Economic Growth

Globalization has accelerated economic development in the world, courtesy of international trade and migration. Ortiz-Ospina (2017) observed that international trade exploded in the 19^th century from less than 10% of the global output in the 1800s to 60% currently. Although the world population has increased more than seven times, poverty has reduced dramatically, with fewer than 10% of the population living below poverty. However, globalization has led to a significant increase in income and wealth inequality globally. The National Research Council (2010) reported that the richest 500 individuals earned a combined income that exceeded that of the poorest 416 million people in the world.

Globalization in contemporary society is often associated with openness, which should translate to economic growth (Ortiz-Ospina, 2017). It enhances knowledge and information flow, increases labor mobility, and allows international trade to thrive freely. These effects have been evidenced widely in studies. According to Ritzer and Dean, globalization is a ‘transplanetary process involving increasing liquidity and growing multidirectional flows as well as the structures they encounter and create’ (2015, p. 22). As such, it is associated with great flows of places, decisions, information, objects, and people. Samimi and Jenatabadi (2014) qualified globalization by demonstrating that economic liberalization facilitated economic growth in countries with advanced financial development and high levels of human capital. Specifically, financial openness increased foreign direct investment (FDI) inflows, which came along with new knowledge and improved managerial skills. This helps upgrade the levels of human capital in a country, which can translate to higher labor productivity. Moreover, the flow of ideas and technology enhances creativity, innovation, and enterprise.

Although there is conflicting evidence on globalization causing inequalities, there is no doubt that globalization can help inequalities thrive. On one side, it contributes to global inequality capitalism, as evidenced by the north-south divide (Ritzer & Dean, 2015). However, according to Thomas Friedman, a distinguished political commentator, globalization was flattening the world and reducing inequalities by allowing more people to partake in and profit from the global economy (Ritzer & Dean, 2015). In developing and underdeveloped countries, globalization created beneficiaries and losers, thus perpetuating inequalities (Thorbecke, et al., 2008). Amarante, Galván, and Mancero (2016) demonstrated that the individual income inequality in Latin America had narrowed between 2003 and 2012, although the disparities between the countries had widened. Similarly, Cura et al. (2006) revealed that the wage gap had narrowed between men and women. However, this held for white women, who were the study focus, and therefore, cannot be extrapolated to the general population. These findings present two contradictory outcomes in growth and wealth. One argument is that in the early stages of economic development, income and wealth inequalities were necessary for the rapid accumulation of capital and economic growth. From another perspective, inequalities foster uncertainty, depress investments, and reduce growth. Yan (2019) argued that the negative effects included brain drain and environmental degradation, translating to the depletion to the intellectual and environmental wealth.

Globalization in Latin America

Latin American undertook reforms that opened up their economies to the world in accordance with neoliberal principles. However, these reforms were instigated by the debt crisis that hit the region in the 1980s (Murakami, 2018). In the 1960s and ‘70s, many Latin American countries enjoyed an economic boom as their wealth-generating export created a large balance of payments. However, exports were based on agricultural products and petroleum (Gwynne, 2017). In turn, the governments engaged in massive industrialization through import substitution programs using their newly-accumulated wealth (Gwynne, 2017). They also engaged in social programs that improved the standard of living of their citizens (Williamson, 2015). This reduced the inequalities in society. However, the debt crisis of the ‘80s, which was occasioned by the accumulation of large international debts against a collapse of the oil prices globally, ensued (Wiarda, 2019). Countries were forced to spend their wealth to repay debts, thus, ceasing the social and developmental programs (Wiarda, 2019). The International Monetary Fund (IMF) and the World Bank intervened to resolve the debt crisis and advised the countries to open up their economies through neoliberal reforms (Ortiz-Ospina, 2017). Notably, Latin American countries abandoned their protectionist policies and reduced trading tariffs, joined trading blocs, and integrated their financial systems with the global market. However, they chose the import restriction model instead of export promotion (Carbonnier, Campodónico & Vázquez, 2017). Therefore, Latin American countries generated wealth before they globalized their economies. While the wealth was generated through exports, which implicated the globalization of trade, the economies of the countries were not fully integrated into the global economy. As such, prior to the crisis, Latin America had not fully succumbed to the forces of globalization. The question that arises is whether this wave of globalization widened or closed the inequality gaps in these countries.      

Latin America is unique because it lies in the continuum between wealthy and poor nations. As such, many argue that the effects of globalization not only differ between the South American countries but also yield both income inequality increases and decreases, consistent with the Kuznets Curve (Williamson, 2015). According to the Kuznets hypothesis, inequality tended to follow a bell-shaped trajectory as incomes increase, as would be the case in pre-industrial Latin America (Williamson, 2015). Moreover, the inequalities are not distributed equally across genders and ethnicities (Thorin, 2001). This indicates the presence of extraneous variables that cannot be accounted for by globalization. Ñopo, Atal, and Winder (2010) revealed that while Latin American countries sustained economic growth before 2000, inequalities and low social wellbeing persist to date. The women still had lower incomes and wealth than men and indigenous people and those of African descent had lower incomes and fared poorly compared to those of European descent, indicating gendered and ethnicity-based income inequalities (Thorin, 2001). However, Williamson (2015) argues that there are two contrasting views on inequality in Latin America. There is a belief that inequality in this region can be traced back to colonialism, attributing the high levels of inequality to Iberian colonialists. Inequality has not changed because the region missed the great egalitarian leveling of the 20^th century (Williamson, 2015). Contrastingly, the poor implementation and management of the neoliberal reforms eroded the leveling of incomes in Latin America, which occurred during the economic boom of the 1970s (Williamson, 2015). In these cases, although globalization had facilitated economic growth in Latin America, it has not eradicated the income and wealth inequalities that exist in society. Besides, while income inequalities have a historical origin, a combination of colonial and neocolonial tendencies has prevented the progress towards a more egalitarian society.

Urban Poverty

Urbanization is the shift of people from rural to urban areas and the gradual increase of urban population (Shen et al., 2016). As such, urbanization is a sign of globalization because it is associated with the free movement of people, and in turn, human capital. Shen et al. (2016) add that urbanization is known to deliver many benefits such as higher incomes, better infrastructure services, improved health facilities, and increased job opportunities. According to the advocates of neoliberalism, urbanization advances prosperity because large cities are a magnet of human capital and provide opportunities for wealth generation (Turok & McGranahan, 2013). For these reasons, low and middle-income nations have been encouraged to embrace urbanization to elevate the living standards and decrease poverty, replicating the positive experiences in advanced economies. Development agencies, such as the United Nations, IMF and WB and Overseas Development Institute (ODI), insist that economic development and urbanization are inseparable. The rationale in this perspective is that urban centers and cities attract people who can engage in economic activities to generate wealth and eradicate poverty. Besides, cities are globalized centers that connect people all over and improve access to jobs, products, and services that lack in rural areas. As such, cities are seen as a haven and savior of a country’s poor. China is often used as an example, with its urban population having increased from 20% to over 50% between 1980 and 2011, which was accompanied by rapid industrialization and transformation of living standards (Turok & McGranahan, 2013).

However, while globalization has winners that benefit from the concentrated and networked economic development in cities, it can also generate losers who are unable to share in these benefits, commonly known as the urban poor. Urban poverty is ‘a dynamic condition that extends beyond monetary benchmarks to a wide range of vulnerabilities and risks’ afflicting urban dwellers (Muggah, 2012, p. 23). Notably, globalization advances urban poverty when the poor in cities do not benefit from international trade, with the unskilled labor being most disadvantaged (Martinez‐Fernandez et al., 2012). Besides, globalization can aggravate inequalities in cities that lack proper development policies, which leads to the mushrooming and rapid proliferation of informal settlements. Martinez‐Fernandez et al. (2012) explained that although urban poverty was prevalent in the metropolitan areas in the global south, it was present in cities in the global north that were experiencing deindustrialization. In this case, deindustrialization emanated from global competitive forces that the outsourcing and relocation of jobs in certain sectors, alongside the neglect of infrastructure. Therefore, the dwellers of such cities were trapped in a vicious cycle of poverty because they are economically disempowered, while being ravaged by lack of education, violence, drug abuse and criminality (Martinez‐Fernandez et al., 2012; Smolka and & Larangeira, 2012). Moreover, they are unable to acquire employable skills or upscale their existing skills, which would enable them to partake in trade and thus take advantage of the globalized environment in cities and the opportunities presented by globalization (Smolka & Larangeira, 2012).

Latin America has global cities in which the prosperity of globalization existed alongside a large number of urban poor. The urban poor in Latin America have increased significantly since the 1980s, although the income inequalities dropped from a GINI coefficient of 0.51 to 0.46 between 2002 and 2014 before rising thereafter (OECD, 2019). Interestingly, urbanization is an indicator of economic growth and development but this broad statement does not account for other factors resident in leadership, governance, structures, and policies. Moreover, it reflects an ideal situation where the urbanization process is well managed. This is not the case in many Latin American cities, where extreme poverty thrives in slums despite the global connection. Smolka & Larangeira (2012, p. 99) observed that slum dwellers increased from 111 to 127 million between 1990 and 2001. Giraldo (2019) reported that 2017 recorded the highest poverty level in over a decade rising from 9.9 % to 10.2 % between 2016 and 2017. Likewise, Deneulin and Sánchez-Ancochea (2018) indicated that about 56.8 % of the working population were in the informal sector, while a third of young people (15-24 years old) lived in poverty. Large cities have large informal sectors and slums. Brazil is a testament, with favelas characterizing large cities such as Sao Paulo and Rio de Janeiro (Smolka & Larangeira, 2012). As such, the dire situation in many Latin American cities presents the urban dilemma in which unparalleled development and opulence thrive alongside extreme poverty and insecurity (Muggah, 2012).

Policy choices and weak implementation of neoliberal reforms have been implicated in the high levels of poverty and income inequalities in Latin America. To recover from the debt crisis of the 1980s, many Latin American governments abandoned the import restriction model and opted for export promotion (Murakami, 2018). The outward-looking strategy required the embracing of neoliberal policies, such as opening up of the financial and labor markets, to facilitate the integration with the global economy. However, the opportunities presented by such openness are not enjoyed equitably across Latin America. Therefore, population segments that have endured discrimination historically continue to be marginalized and disenfranchised (De Haan & Thorat, 2012). Historical inequalities based on gender, race, rurality, and ethnicity have prevented Latin Americans in low socioeconomic status from benefiting from the neoliberal policies (Murakami, 2018; Ñopo, Atal, & Winder, 2010). The Casta system prevails in Latin America, where those of Spanish descent enjoy supremacy over people with indigenous and African descent (De Haan & Thorat, 2012). Therefore, while those with European descent benefit from long-held and inherited prosperity, the rest are entangled in a vicious circle of poverty because they often lack the resources, education, and opportunities to better their lives. Moreover, this exclusionary culture has been institutionalized, preventing the development of pro-poor policies. For instance, these countries had impressive social programs during the economic boom (Smolka & Larangeira, 2012). However, after the debt crisis, social welfare deteriorated because these programs were stopped to facilitate the repaying of debts. The population grew accustomed to government assistance, an attitude that continues to date (Smolka & Larangeira, 2012). This has caused much political tension across many South American countries (Hernández et al., 2010). From another perspective, globalization enhances the transfer of labor and cost-saving technologies, causing massive layoffs of unskilled labor (Aguilera & Ramos Barrera, 2016). Companies sack people to improve their operational efficiencies and cut costs due to increased competition from foreign firms and products. Unemployment occurs when firms offshore their non-core and manufacturing operations to East Asian countries with cheap labor and advanced technology. In Latin America, the urban poor are unable to re-skill after losing their jobs, worsening the effects of the liberalization reforms (Aguilera & Ramos Barrera, 2016).

The political leadership in many South American countries has not fully embraced the neoliberal policies (Lopes, 2017). Their slow implementation of these policies hindered people from equally benefiting the globalization. While the large private firms and affluent individuals are reaping massive economic benefits, the poorly-endowed individuals are wallowing in poverty in the presence of the wealthy in urban centers. This may explain why illicit economic activities, such as crime and drugs, prevail in the cities, with the urban poor targeting the affluent population. Many leaders in the region proclaim to have prosocial and pro-poor policies for populist political support, while in reality, they implement policies that benefit the influential and affluent few (Deneulin & Sánchez-Ancochea, 2018). Prosocial policies encourage prosocial behavior and are intended to benefit other people and society, while pro-poor policies target the poor, with poverty reduction being the intent (Deneulin & Sánchez-Ancochea, 2018). Indeed, corruption is rampant in Latin American politics and political tension is always high (Hernández et al., 2010). Besides, the large corporations are either in the hands of a few affluent individuals, or if public, benefit only the political elite. As such, the fruits of globalization do not trickle across the population equally, thus sustaining the large inequality gaps.

Conclusion

Although the globalization-income inequality nexus is complex, the Latin American case presents a negative relationship. The high inequality in Latin American countries persists despite the rapid globalization. While globalization does not cause inequalities in itself, it can create conditions that allow inequalities to thrive. Poor management of the economy and globalization forces can aggravate inequalities and obscure the benefits of globalization. Latin America experienced poor management of policies, thus preventing the benefits of globalization from reaching the majority. This mismanagement affects the poor more than the wealthy, and as a result, prevents the narrowing of the income and wealth gaps in Latin America. The poor drop more into poverty, while the wealthy become richer, widening the income and wealth gap. The globalization’s promise to alleviate poverty has not been realized in Latin America, particularly for the urban poor. As such, Latin Americans from low socioeconomic backgrounds suffer from sparse incomes and poverty because they lack jobs and are left to odd chores and criminal activities. Globalization can reduce inequalities in Latin America when pro-social policies that improve the distribution channels of globalization enable income and wealth distribution as well. Well-implemented neoliberal policies alongside democratic processes could help attain this goal.

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