Distributive impact of public policy

The chronic inequality that characterized Latin America and the Caribbean has its roots not only in the region’s history but also in a pattern of development and modernization that perpetuated the socio-economic gaps. Very recently, however, the region experienced a period of sustained growth between 2003 and 2008, in which the indicators of poverty, indigence and even concentration of income improved, breaking, although for a short period, the so-called “empty box” of Fernando Fajnzylber. It is well known that the state can promote greater social equity through more effective public policies. However, as noted in this work, some distinctive features of inequality in our region as the large fraction of total income captured by the highest stratum, the level of geographical disparities and the high levels of poverty, reflect the difficulty in improving equity and cohesion and the complexity of achieving that aim by means of decentralized policies. Most of the times, the poorest areas are exactly those that have the lowest tax bases for funding the priorities of local public spending. To improve distributive impacts and promote equality and social cohesion in Latin America and the Caribbean, it is important to realize that citizens’ social needs are impossible to meet without financial resources. On the revenue size, the region’s fiscal systems share two important limitations: low tax pressure and regressive taxation, which, together with large-scale evasion and tax avoidance, all have major effects on equity. On the expenditure size, it is hoped that the structure of the spending financed with the resources available can help to construct more cohesive societies, increasing the legitimacy of public policy and therefore of paying the taxes intended to finance them. Decentralization is an important issue that affects the role of the state in improving the distributive equity, and the expected benefits of decentralization need to be evaluated in the context of the peculiarities of each country. In order to analyze in detail some aspects of the impact of public policies on equality as discussed in the ECLAC document “Time for equality: closing gaps, opening trails”, the Economic Development Division together with GIZ organized a seminar in which the main findings of the thematic chapter of the Economic Survey 2010 were discussed. The purpose of this activity and this publication is to contribute to the discussion on the impact that public policy can have in strengthening the link between economic growth and distributive equality, a link which has been quite elusive in the region’s economic history. The document address important issues as the consequences for income distribution of macroeconomic volatility; the way in which the latter affects the labour market, and the policy options dealing with it; the analysis of the distributive impacts of tax policy and the characteristics and possible impacts of social spending. The conclusion states that public policies must secure the financing needed to improve citizen access to social provisions in a way that combines efficiency with solidarity, relevance and universality, all at the most appropriate level of government. Inequality remains one of the biggest economic and social challenges in the region and public policy reforms needed to close the social gap require a constant effort to learn and rethink the kinds of intervention needed to overcome poverty and inequality and to increase people’s sense of belonging to a growing economy.