Globalization and Income Inequality in Latin America: A Review of Theoretical Developments and Recent Evidence

Although Latin American countries (LACs) experienced an increase in income inequality after their integration into global economy in the1980s and 1990s, they experienced a decrease in income inequality in the 2000s. This study attempts to identify the channels through which globalization has affected the increase and decrease in income inequality in LACs, based on a review of theoretical developments and empirical evidence. This study finds that the Stolper–Samuelson effects, within-industry skill-biased technological change, offshoring from developed countries, and technology or quality upgrading of high-productivity firms are the major channels for the increasing income inequality. This study also finds that the reduction in inequality in the 2000s can be mainly explained by an increase in the relative supply of skilled workers in Mexico, while it can be explained by the Stolper–Samuelson effect in South American countries such as Brazil and Chile.