Splitting the Bill: Taxing and Spending to Close Ethnic and Racial Gaps in Latin America by Nora Lustig, Judith Morrison, and Adam Ratzlaff published by IDB (2019).
“The first decade of the 21st century was particularly good to Latin America. In addition to extremely high growth rates (Munyo and Talvi, 2013), the region saw impressive reductions in poverty and inequality (Cord et al., 2013). These gains were due to a mix of factors including income growth, government transfers and increasing returns and access to education (Cord et al., 2013; Lustig and Lopez-Calva, 2010). In spite of these gains, indigenous peoples and African descendants remain marginalized, face higher rates of poverty, lower access to health and education, lower human capital and lower incomes (de Ferranti et al., 2004; Gandelman et al., 2011; Hall and Patrinos, 2006; Ñopo, 2012). These ethno-racial gaps pose a number of problems for society as a whole; however perhaps most troubling is that the inequality between ethno-racial groups may hinder growth (Alesina et al., 2012).
One tool that can be used to address ethno-racial inequality is fiscal policy, a tool that Latin American governments have under-utilized in reducing inequality relative to other countries. Although there have long been concerns on the potential impacts on economic growth of reducing inequality through fiscal policy, recent studies have dispelled many of these concerns (Dollar et al., 2014; Ostry et al., 2014). While the impact of fiscal policy on inequality is relatively small in Latin America, is it being used to help close some of the ethno-racial gaps?
Between 0.96% (Uruguay) to 9.1% (Brazil) of overall market income inequality can be explained by race or ethnicity in the four countries studied here. However, the correlation between ethno-racial status and other factors associated with overall inequality, such as educational attainment, suggests that ethno-racial inequalities are actually higher. Furthermore, market income poverty rates among indigenous peoples and African descendants are over double those of the white population.
Direct taxes and transfers manage to reduce poverty and inequality in all five countries — Bolivia, Brazil, Guatemala Mexico, and Uruguay — and substantially in all countries except Guatemala. Furthermore, almost all direct cash transfers were ethno-racially progressive and in many cases absolutely progressive, meaning that the share of the benefits going to indigenous peoples and African descendants was greater than their share of national income (relatively progressive) and/or of the national population (absolutely progressive). This is particularly true among the conditional cash transfer programs…”
