Since the 1990s, the distribution of income has recovered attention as an area of research and policy design (Atkinson, 1997). Indeed, at present poverty and inequality are a persisting matter of concern both in developing and developed countries due to their intrinsic relevance and to their potential links with economic growth and development.

After two decades of significant increases, in the last ten years the developing world exhibits, in average, a reduction in household income inequality, mainly due to the evolution observed in Latin America, Eastern Europe and Central Asia. However, levels are still high and the causes of this reduction are not clear. Many authors argue that in Latin America, the fall in personal income inequality obeys to i) employment and wage increases resulting from fast economic growth led by primary goods exports; ii) a new generation of redistributive policies; iii) sustained increases in human capital accumulation and iv) and declining returns to education.
Many questions can be posed in regard to the explanatory factors under the recent fall of inequality and poverty experienced by LAC, the sustainability of these trends, the future of redistributive polices, normative issues related to the domains in which to evaluate well being, as well as measurement and data availability. In what follows, we outline some areas of interest for further research, with particular focus in Latin America.

  • In the first place, more research efforts are needed in order to understand the causes of the recent fall in personal income inequality and its links to economic growth. As it was stated below, there are many competing explanations that need to be deepened and clarified. A related question refers to the ultimate causes explaining the recent fall in returns to education and to what extent this trend is expected to continue.
  • The links between factor income distribution and the personal income distribution have been scarcely addressed in the context of developing countries.  The same holds in regard to the distribution of productive assets and its impact on inequality.
  • The analysis of redistributive policies, including social assistance and income and wealth taxation. In regard to the former, the recent reforms in social protection systems in Latin America is of particular interest, as long as it has been argued that it is a successful model that other developing countries should emulate.  To which extent the expansion of the current package of redistributive policies applied in Latin America and other developing countries can yield to further decreases in inequality? Is the redistributive role of social transfers similar to the one observed in developed countries, particularly in the European Union?
    • There are many studies assessing the impact of cash transfer programs on income, education, health and labour outcomes, and evidence is not conclusive, although many rigorous impact evaluations show that they contribute to reduce extreme poverty and foster attendance to the educational system. This also poses questions on whether educational achievements are translated into better labour market outcomes in adult life. Recent studies on early childhood development clearly show that countries need to do a substantial effort in improving health and development outcomes at early stages of life.
    • The role of the tax system and particularly personal income taxation has been studied to a lesser extent in the context of developing countries. In general terms, it can be asserted that the redistributive effect of income taxation is lower in the developing world than in developed countries.
  • Measurement and data availability are another relevant issues of further research. In the developing world, most studies rely on household surveys, which are suitable instruments to capture the huge proportions of the population out of the formal social security and tax system. However, it is widely know that these data sources tend to fail in capturing the income of the richest sectors of the population. Efforts can be done in order to improve inequality measurement in terms of fostering the use of complementary data sources such as tax records when available and promoting studies in order to measure the distribution of wealth, which has been an almost intact research field.
  • Another promising research field refers to the multiple dimensions of well being, expanding inequality and poverty analysis beyond income. At present, there is widespread consensus on the fact that income is a relevant but not the only dimension in which to assess inequality; a research field to deepen in LAC.

A workshop on “Income inequality and redistributive policies in the developing world“ to be held in Montevideo, March 24-25 2014, to be organized in coordination with the LACEA Network on Inequality and Poverty (NIP).
Local Host Institution and Organizer
Instituto de Economía (UdelaR); Andrea Vigorito.
A course on Income and Wealth Inequality and Redistribution to be held in March 2015.