Effect of Economic Reform on Income Distribution in Latin America

Latin American economies had experienced high income disparities. One of the objectives of economic reforms in Latin America was to bring down the disparities in income distribution. The economic reforms introduced several measures like liberalization of trade, liberalization of capital account, privatization, reforms in tax structures and reforms in labor markets that had significant impact on income distribution in Latin America.
The Latin American economy has traditionally experienced high levels of income disparities. The major factor influencing income disparities has been the difference in wage levels of workers. The labor market of Latin America has undergone strategic changes due to implementation of economic reforms.

In the pre-reform era, income inequality in the economy was attributed to supply related factors in the labor market like scarce availability of skilled workers.

Labor market and income distribution during economic reforms in Latin America
Economic reforms were undertaken in the 1980s and 1990s by many Latin American economies. Among the many changes brought into force by the reforms, shifting the onus in the labor market to demand related aspects was an important one.
The economic reforms were implemented with the objective of ensuring growth for the Latin American economies by shifting towards an open market economy with liberalized trade, deregulation and increased impetus to investment.

The benefits expected to accrue to the labor market from the reforms are –
Generation of new jobs for on-skilled workers.
Reduction in the level of difference in wages.
Secure a relatively advantageous position for the labor markets of Latin America compared to that of North America.
Major reform measures influencing income distribution in Latin America
The economic reforms of the 1980s and 1990s in Latin America introduced measures that were considered to be important determinants of income distribution and wage differentials in the economy.

These include –
Liberalization of trade.
Liberalization of capital account.
Reforms in tax structures.
Reforms in labor markets.
Liberalization of trade

Trade liberalization played a positive role in bringing down the disparities in income distribution due to the following factors –
Under trade liberalization, the production in an economy is focused on the sectors where it has comparative advantages over other countries. This is expected to raise the demand for lesser skilled workers in an economy thus bringing down the level of wage differences between skilled workers and non skilled workers. This in turn reduces income disparities in the economy.
Liberalization of trade negates the effect of subsidized capital which lowers the wages of lesser-skilled workers.


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Last Updated on : 26th June 2013

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