Inequality, Freedom and Development
It is in our nature to derive satisfaction not only from our own well-being, but from the way we see ourselves with respect to others: Messages saying that we are behind our neighbors in paying the electric bill encourage us to pay earlier, and information about where we stand in income distribution may sway our opinion on redistributive taxes. Just as an object of a child’s desire is whatever their little sibling is holding at the moment, our instinct drives us to perceive our well-being not only based on our own sensations, but also in comparison with a reference group, whether it is socially close or distant. It is only natural that the width of social gaps has consequences on the way people perceive their own well-being, and therefore on their decisions on labor supply or political participation.
From the early 1990s to the early 2000s, inequality in Latin America was exacerbated, then improved around 2013, and has remained relatively stable ever since (Lustig, 2020a). Despite these fluctuations, the region continues to lead global inequality. When we consider that household surveys—the usual source for inequality studies—do not traditionally include people with very high incomes or people with sizeable non-work incomes (Lustig, 2020b), and attempts are made to correct the calculation to include them, the resulting levels of inequality are even higher: The richest 1% earn about 25% of the total domestic income in our region.
Just as in the case of perceptions of insecurity—where change in crime rates is more important than crime rate alone (one murder in an otherwise safe community will cause much more of a stir than two murders in another community where such crime is a common occurrence)—, the visible discontent with gaps between rich and poor, which has triggered recent social protests in countries such as Colombia and Chile, may be linked to the constant inequality, after a period of improvement, and not to inequality itself. High and persistent inequality is almost synonymous with inequality of opportunity, and stagnation of inequality reduction observed since 2013 may have led to frustration among people who had seen their chances of progress improve during the 2000s. This underscores the importance of the inclusion agenda, not only for the stability of the region but for its long-term development possibilities.
The development of reliable institutions that facilitate collective decision-making and conflict resolution, while leaving room for creativity and individual initiative requires a delicate balance between the power of the state and the power of society: On the one hand, the state must be strong enough to enforce the rules, define reliable and stable decision-making mechanisms that affect society as a whole, and on the other hand, the state should not oppress citizens to the point of suffocating inventiveness and entrepreneurship. If we were to graph the power of the state against the power of citizens, a 45-degree line would describe the equality of power between the two. Thus, it has been suggested (Acemoglu and Robinson, 2020) that the path of prosperity and freedom is the narrow space around that equality line, where a more complex and powerful state is counterbalanced by a better organized and empowered society. Extreme imbalances lead to autocracy on one side or total chaos on the other.
The power of the state is in many cases a euphemism for the power of an elite, in such a way that the quality of institutions resulting from the tension between the state and citizens is closely related to the income distribution mechanisms and wealth between the elites and the rest. Citizens excluded and frustrated by the impossibility of progress cannot contribute their full inventive capacity to the creative process of society, and broadly speaking, do not really enjoy a free life (Sen, 1999). At the same time, elites are needed to make collective decision-making feasible.
In recent months we have seen a major effort by the U.S. government to push a public policy and investment agenda aimed at reducing inequality. Tax raises and greater social security increase the size of the state, but in a way that seeks to empower citizens further, giving them greater capacities to develop and participate to their full potential. Thus, the idea is for the increase in the “power” of the state to more than compensate with greater power of citizens.
But the devil is in the details. The tax reform proposed and rejected in Colombia a few months ago had an inclusive approach, with generally gradual tax increases aimed at maintaining higher social spending. However, violent protests continued long after the bill was withdrawn. The government’s intention was met with a political minefield of impossibility. In Peru, the wounds of historical inequality and segregation were seen once again in the last elections and, as we are now aware of the risks of radicalization, we hope that the new government will shift the balance towards a path of inclusion, sustainability and freedom.
