extent, by the recent terms of trade gains) as well as public
spending for education, cash transfers and other forms of social
assistance. There is micro and macro evidence that higher public
and private spending reduced inequality in education and improved
the distribution of human capital among the workforce.
Redistribution was also pursued via macroeconomic policies
favoring the labor-intensive traded sector and changes in labor
market policies and institutions. Also in this case, the changes
introduced were far from radical, and yet helped improve labor
participation, increase the proportion of workers covered by formal
contracts, and reduce unemployment.
Of the changes that determined the decline in income inequality
between 2002 and 2007, the most important was the reduction of
educational inequality among workers, which explains one third of
the overall average decline in inequality (equal on average to 4 Gini
points). Other key factors were the choice of a competitive real
exchange rate (though such policy was not followed in all countries)
and the increase in minimum wages (each of them caused a drop in
inequality equal to around a fifth of the overall decline). The rise in
public social expenditure in LOC countries reduced inequality by
about one tenth of the total while the changes in direct relative to
indirect taxes has only a modest impact on inequality. As for the
changes in international conditions, the improvements in
international terms of trade reduced income inequality by about one
tenth of the total, while remittances and capital inflows had no
impact, and GDP growth affected inequality only modestly. Finally,
the LOC countries recorded an additional decline equal to about
fifth of the overall decline in inequality.
While interrupting a positive cycle of six years, the impact of the
crisis is, on average, considerably less intense than in the OECD
countries and the transitional economies of Eastern Europe. The
arguments and simulation results presented above tentatively
suggest that the inequality deterioration expected for 2008 and 2009
should be substantially lower than the gains recorded in most of the
region over 2002/3 and 2007.
Beyond the problems posed by the current financial crisis, Latin