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Education and productivity, keys to reducing inequality during low-growth periods

October 9, 2014


  • The World Bank’s Chief Economist for Latin America, Augusto de la Torre, reports that the region has more room to maneuver and that the current setback is not accompanied by crisis, as it was in the past

Enormous, impressive buildings next to neighborhoods of poorly constructed housing. Modern urban roads alongside rough unpaved roads in rural areas. Luxurious shopping centers that contrast with the hundreds of vendors on the city streets.

Signs of economic inequality abound in Latin America. According to the experts, it is the most unequal region in the world.

During the past decade, the boom in raw materials drove the record growth of the middle class. The gap between rich and poor has not declined at the same pace, however. Today, as the region faces an economic slowdown, the question is, “what will happen with the social advances achieved in recent years?”

This is the key issue of the report Inequality in a slower-growing Latin America (i) presented by the Chief Economist for Latin America, Augusto de la Torre, at the World Bank headquarters and available on a webcast (hashtags #Perspectivas2014 and #LaDesigualdades), with the active participation of Twitter and Facebook users.

According to De la Torre, inequality declined in Latin America over the past decade, but less so than generally thought. This is because despite the record increase in employment, wage dispersion was a factor given the low level of education.

In other words, although the poor had increased access to education, it was not of sufficient quality. As a result, when these individuals entered the labor force, their skills were less recognized, affecting their earnings. This explains the low employment income recorded in the region, according to De La Torre.

 “Employment and the changes in employment affect inequality in Latin America more than economic growth does,” said De la Torre. Having a well-paid job requires skills that can only be obtained through a quality education, a key area where the region is lagging behind.

Some internauts, including Gregorio Delgado, agreed. On Facebook, he wrote, “slow but steady development will occur only by providing significant training to people. There is no other formula, even when the country has abundant riches provided by the land.”

Less growth, more inequality?

The latest economic forecasts point to lower growth than expected – 1.2%- due to the slowdown in emerging economies such as India and China. Even Brazil is expected to grow just 0.5% in 2014, in a diverse scenario where Panama, Bolivia and Colombia will experience estimated growth of more than 5%.

De la Torre said it is unlikely that Latin America will again reach the average annual growth rates of 5% reported in the past decade. Rather, it will average around 3% - in 2015, growth is expected to be 2.2%. But the good news is that the “current setback is not accompanied by crisis, as it was in the past,” he said.

The expert added that tensions are likely between efforts to stimulate growth and maintain employment to ensure social advances. He believes some countries will be tempted to take the path of least resistance in the short term, that is, by maintaining consumption, increasing public spending and taking on increased debt, which will threaten growth in the long term.

However, many countries have a countercyclical monetary policy with flexible exchange rates and significant room for debt. This will enable them to maintain jobs without compromising productivity in the long term, thus allowing them to stimulate growth.

In the case of Brazil, De la Torre stated that the South American giant – which recorded one of the largest expansions of its middle class over the past 10 years – should change its structure focused on domestic consumption to one centered on attracting increased investment.

This is why the reforms countries implement to return to a growth that benefits the poor should focus on quality in education at all levels and should promote productivity through innovation.

 “If the region is successful in its reforms to improve productivity but does not improve education, we will face more unequal times, with the wages of higher-skilled workers moving further away from those of lower-skilled workers. If not accompanied by an overall increase in quality education, success in productivity reforms may lead to setbacks in the gains we have experienced,” said De la Torre.