How to Generate and Sustain the Highest Income Inequality in Latin America – the Case of Colombia 2000-2010

The main purpose of this paper was to identify the economic factors keeping income inequality high in Colombia, with a focus on the decade between 2000 and 2010. To this end, three determinants were analysed; two of them contributing primarily to income inequality (land concentration and functional income distribution) and one contributing secondarily (the fiscal system). Since income inequality is a measure of the degree of disparity or the gap between high and low income households in a country, the previous factors were evaluated from the perspective of how they affected the highest and lowest quintiles in the income distribution. The results of the analysis revealed that current income inequality is strongly rooted in land inequality, as it has perpetuated poverty, affected human capital accumulation and has led to an increased proportion of people in poverty and extreme poverty conditions. The functional income distribution shows a very unbalanced distribution among profit and wage shares in favour of profits, thus impacting the highest income quintile. The analysis also shows that fiscal policies led to a slight reduction of the Gini coefficient in the last decade with public expenditure benefiting the highest income quintile in Colombia. Together, the three elements discussed in this paper are determining factors when explaining the pattern of income inequality in Colombia in the last decade.