Latin American inequality since 1491

Jeffrey G. Williamson 12 September 2009

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Latin America is much more unequal than Asia and the rich post-industrial nations, and modern observers have leapt to the conclusion that this must always have been the case. Indeed, Stanley Engerman and Kenneth Sokoloff (1997) have famously argued that high inequality appeared very early in the post-conquest Americas, and that this fact supported rent-seeking and anti-growth institutions, which help explain the disappointing growth performance we observe in Latin America even today.

Their thesis begins with the plausible assertion that high levels of income inequality favoured rich landlords and rent-seekers, and thus the development of “bad” institutions that were incompatible with economic growth. Their thesis argues further that high levels of Latin American inequality have their roots in the natural resource endowments present when Iberia conquered the region five centuries ago. Exploitation of the native population and imported African slaves, as well as their subsequent disenfranchisement, reinforced the development of institutions incompatible with growth.

Thus, most analysts of the modern Latin American economy carry a pessimistic belief in historical persistence; they believe that the region has always had very high levels of income and wealth inequality, suggesting it will be hard for modern social policy to create a more egalitarian society there. This conclusion is not supported by the evidence (Williamson 2009).

The evidence, such as it is

There is no evidence documenting inequality for the Inca, Aztec, or other indigenous civilisations prior to the arrival of the Iberian conquerors. But we can guess. Recently, co-authors and I collected what we call an ancient inequality database ranging over two millennia from the Roman Empire in A.D. 14 to British India in 1947 (Lindert, Milanovic, and Williamson 2007, 2008). The sample includes four Latin American observations: Nueva España 1790, Chile 1861, Brazil 1872, and Peru 1876, although we recently added a new Mexican 1844 observation. These pre-modern inequality observations are constructed from what are called social tables, sources which report average income and income recipients by social class. After identifying the determinants of inequality from this sample, we estimated a pre-Iberian 1491 distribution for the Americas. With this inequality guess anchored on 1491, other evidence can then be used to reconstruct trends in Latin American inequality up to the 1920s.

Was Latin America unequal on the eve of the industrial revolution?

Latin America was indeed unequal on the eve of its industrial revolution – led by Brazil and Mexico, but was it more unequal than Western Europe on the eve of its industrial revolution?

Table 1 presents inequality information for pre-industrial Western Europe (that is, prior to 1810) and for pre-industrial Latin America (prior to 1880). According to Table 1, the Engerman-Sokoloff thesis must be soundly rejected – the average Latin American Gini coefficient (47.5) was in fact considerably lower than that of western Europe (52.9). Thus, it is not true that pre-industrial Latin America was more unequal than pre-industrial northwest Europe. Since we know that high inequality was consistent with industrial revolutions occurring in Western Europe, it is unclear why it should be inconsistent with it in Latin America somewhat later.

Table 1. Inequality in pre-industrial Latin America and Western Europe

Country Year    Population
(millions)
Ratio peasant
to mean income
Inequality
Gini
         
Brazil 1872 10,167 0.67 43.3
Chile 1861 1,702 0.28 63.7
Nueva España 1790 4,500 0.24 63.5
Mexico 1844     51.3
Peru 1586 2,469   35.5
Latin America   18,838    
Unweighted average     0.40 50.0
Weighted average     0.51 47.5
         
England 1688 5,700 0.21 45.0
England 1759 6,463 0.37 45.9
England 1801 9,053 0.34 51.5
France 1788 27,970 0.27 55.9
Holland 1561 983   56.0
Holland 1732 2,023   61.1
Western Europe   52,192    
Unweighted average     0.30 52.6
Weighted averag     0.29 52.9

Inequality trends since 1491

Figure 1 plots income inequality trends in Latin America over 500 years. There are five distinct phases reported there.

Figure 1. Likely inequality trends in Latin America, 1491 - 1929

  • First: The initial Iberian impact

Given what we know about ancient pre-industrial economies across the globe and assuming that Iberian colonists were no better or worse at extracting surplus than were the other colonisers (like England, Holland, and the Ottoman Turks), the impact of the Iberian conquerors in the first decades can be guessed with some confidence. The Iberian Americas probably had Gini coefficients 12-13 percentage points higher than the indigenous empires; the Latin American Gini coefficient might have drifted up from 22.5 in 1491 to something like 35 in the post-1492 decades. Not only did the Iberian elite replace the indigenous elite, but the Iberians were able (or willing) to considerably raise the extraction rate in their favour.

  • Second: The impact of the 16th century demographic disaster.

European disease caused immense demographic damage to the indigenous population over the century following 1492. Most analysts think it shrank by more than 90% by the early 17th century. The Atlantic slave trade tried to substitute African slaves for decimated indigenous populations, but their addition was far smaller than the subtraction from the indigenous population (except for the Caribbean and Brazilian coast).

The demographic disaster raised the land-labour ratio and thus contributed to higher (but unknown) GDP per capita. It also raised the marginal product of labour, lowered the marginal product of land, suggesting that the wage-rental ratio went up and that inequality went down. The Iberians found their ability to exploit indigenous workers somewhat constrained by labour scarcity, and inequality levels remained relatively stable.

  • Third: The colonial inequality boom.

Over the two centuries between 1600 and 1790, some fundamentals were at work that would have served to raise inequality. First, populations partially recovered their 16th century losses; they rose from about 8.6 million in 1600 to 12.5 million in 1790. Thus, population density rose and land-labour ratios fell, fostering inequality. Second, GDP per capita rose from 438 to 650 and urbanisation rose from 9% to 14.2%. These forces probably served to raise the Gini from 36.2 to 57.6, in which case inequality between 1491 and 1870 reached its peak in the 1790s just prior to independence.

  • Fourth: Revolution, independence and lost decades.

Figure 1 predicts that the Gini probably dropped from 57.6 in 1790 to 46.4 in 1870. The biggest force contributing to the fall was, of course, independence and de-colonisation since the five “lost decades” up to 1870 yielded very little GDP per capita growth or urbanisation.

  • Fifth: Creating modern inequality during the globalisation boom.

Latin America faced steeply rising terms of trade throughout the late 19th century. Since it was a primary product exporter, land and mineral rents were driven up relative to wages. This happened everywhere around the poor periphery (Williamson, 2009 ongoing), but it was especially dramatic in Latin America. Since land and mineral resources were held by those at the top, inequality rose as well. The magnitude of the rise is confirmed by surging rent-wage and GDP per worker to unskilled wage ratios, but the recent work of Luis Bértola et al. (2009) and Leandro Prados de la Escosura (2007) tells the same tale – inequality rose by as much as 37% over the belle époque.

Three revisionist findings

  • First: It is simply not true that Latin America has always been unequal.

Only by comparisons with other times and places can statements about inequality offer any useful meaning. When comparisons are made with the leaders in northwestern Europe, income inequality in pre-industrial Latin America is found to have been lower, not higher. If inequality encouraged rent-seeking, suppressed private property rights, retarded the development of “good” institutions, and thus discouraged growth in Latin America, it must have done even more so in northwest Europe where the industrial revolution first started! In addition, pre-conquest Latin America had one of the lowest levels of inequality anywhere in the world, and it remained so until the start of the 17th century. It cannot be said that initial endowments and Iberian colonisation made Latin America more unequal than other places.

  • Second: Latin American inequality over the past five centuries has exhibited immense variance.

Indeed, it exhibited much more inequality variance between 1491 and 1929 (Ginis ranging from 22.5 to 60.3) than one can find between Latin America, Europe, and East Asia today (Ginis of 51, 34, 38, respectively).

  • Third: Globalisation forces during the belle époque pushed Latin American inequality up to historic highs by the 1920s.

Other primary product exporters underwent similar inequality-enhancing booms over that half century too, but it appears that Latin America had one of the biggest and that the high inequality achieved persisted (and even increased) during the anti-global episode between the 1920s and the 1970s.

Bottom Line

The inequality history that makes Latin America distinctive stretches across the 20th century when Europe and its English-speaking offshoots underwent a secular decline in inequality correlated with the rise of the welfare state. Latin America did not share that decline. It is Latin American 20th century inequality history that’s unique, not the four centuries before.

References

Bértola, L., C. Castelnovo, J. Rodríguez, and H. Willebald (2009), “Between the Colonial Heritage and the First Globalization Boom: On Income Inequality in the Southern Cone,” paper presented to the 15th World Economic History Congress (Utrecht, August 3-7).
Branko Milanovic, Peter Lindert and Jeffrey G. Williamson (2007) “Measuring ancient inequality,” VoxEU.org, 5 December.
Branko Milanovic, Peter Lindert and Jeffrey G. Williamson (2008) “Measuring Ancient Inequality,” NBER Working Paper 13550, National Bureau of Economic Research, Cambridge, Mass. (October 2008).
Engerman, Stanley and Kenneth Sokoloff (1997) “Factor Endowments, Institutions, and Differential Paths of Growth Among New World Economies,” in How Latin America Fell Behind, ed. by S. Haber (Palo Alto, Cal.:Stanford, 1997): 260-304.
Prados de la Escosura, L. (2007), “Inequality and Poverty in Latin America: A Long-Run Exploration,” in T. J. Hatton, K. H. O’Rourke, and A. M. Taylor (eds.), The New Comparative Economic History (Cambridge, Mass.: MIT Press), pp. 291-315.
Williamson, Jeffrey G. (2009) “Five Centuries of Latin American Inequality,” NBER Working Paper 15305, National Bureau of Economic Research, Cambridge, Mass. (August).
Williamson, Jeffrey G. (2009 ongoing) Trade and Poverty: When the Third World Fell Behind.

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Topics:  Poverty and income inequality

Tags:  Latin America, inequalities

Comments

jcb

I'm not sure how JGW gets such a low Gini coefficient (43.3) and high peasant to mean income ratio (.67) for Brazil -- a society in which 10-14% of the population were slaves (1874). http://tinyurl.com/n7bq75

Similarly, the figure for Peru (1586) indicates no peasant to mean income ratio, but an even lower (35.5) Gini coefficient. This was a society almost entirely of Native American slaves. http://tinyurl.com/m8nmbp

Slaves had zero or very little property. How could one even calculate personal income, much less mean income, in either case?

My point is that the incomparability of the evidence vitiates the baldly stated conclusion that: "It is Latin American 20th century inequality history that’s unique, not the four centuries before." Political inequality -- slavery, encomiendas, various forms of serfdom -- cant be separated from abstract pecuniary measures of wealth inequality. And pre-industrial wealth inequality in finite units of land can't be measured in the same way as post-industrial wealth inequality in infinite units of pecuniary income.

Laird Bell Professor of Economics, Harvard University and CEPR Research Fellow