Inequality and the macro-economy in Latin America: How do they interact?

This paper examines the interaction between the macro-conomy and inequality in Latin America. It focuses on those macroeconomic policies LA countries have been adopting in a post-reform context of fairly liberalised economies. A main problem identified in the paper is that LA countries have been highly vulnerable to shocks. Whilst the larger economies have been vulnerable to financial shocks associated with volatile capital flows, the smaller economies have been vulnerable to shocks such as falling terms of trade. In both cases, the consequences have been high degree of volatility in key macroeconomic variables, such as output, employment, wages and real exchange rate. Both groups of countries have failed to deal adequately with these shocks, due mainly to lack of instruments to prevent them, and/or to mitigate their effects. The inability to respond appropriately to these shocks resulted in major setbacks in the region's fight against poverty and inequality. In many countries, advances in poverty and inequality reduction in the first half of the 1990s have been reversed since then with the increase in the frequency and intensity of shocks. At the same time, the high levels of inequality across the LA region may have worked as a constraint to macroeconomic policies, may have increased volatility effects of shocks, and contributed to aggravating inequality even further.