Market Inequality and Redistribution in Latin America and the Caribbean

Abstract

This article analyzes how politics influences Latin American and Caribbean income inequality. Most studies view the distributional process in two phases with inequality shaped first by markets and then by state redistribution. Typically, cross-national analyses of inequality limit the influence of politics to the redistributive phase. But we argue that a full understanding of how government affects inequality must also consider how politics shapes the market. While redistribution is undoubtedly an important mechanism employed by government to influence distributional outcomes, we find that inequality produced by the market is more responsive to politics than is redistribution. Left partisan power and public investment in human capital significantly reduce inequality in the market phase. In addition, social spending on human capital conditions the effect of economic growth. As human capital investment increases, growth becomes more equality enhancing, providing further evidence of the market conditioning effect of policy.