Colombia is the seventh most unequal country in the world. Inequality here is very similar to countries such as Haiti, Angola and South Africa. The administration of President Juan Manuel Santos is uncomfortable about this and has taken a number of steps to reduce inequality, including a recent tax reform proposal.
Gini coefficient of income, country ranking
Why is the Administration right to be concerned about high income inequality? The first reason is democratic. Ordinary Colombians express concern about the high inequality they see every day and believe that it is the Government’s job to deal with it. Close to 85 percent of the population finds the income distribution unfair. More than 70 percent of Colombians believe that the Government should implement firm policies to reduce inequality, according to the 2010 LAPOP survey carried out by the University of Vanderbilt.
The second reason is poverty. While it is on the decline in Colombia, progress could have been much faster with a less unequal income distribution. Income poverty fell from 47.7 percent in 2003 to 34.1 percent in 2011. Poverty fell exclusively as a result of income growth as income inequality remained largely unchanged: the Gini coefficient was 0.55 in 2011 – the same as in 2003.Our calculations show that if Colombia had the same income distribution as Peru, poverty would have been ten percentage points lower than it is today, i.e. around 25 percent.
The third reason is stability. High inequality can be a source of distributive conflict and social tension. This tends to undermine the legitimacy of policies and institutions as well as their stability, and in particular weaken property rights, thus discouraging investment and thereby growth. While the decade long conflict in Colombia has many roots, most observers agree that the perception of inequality is an important factor.
Why is income inequality so high in Colombia? Since labor income is the largest component of household income, the performance of the labor market is critical in understanding income inequality. Colombia has the highest level of unemployment in Latin America (still above ten percent despite a healthy economy) and this contributes to inequality as the unemployed have lower incomes than the employed. Moreover, the labor market is segmented between formal and informal workers generating further income discrepancies.