ReliefWeb

OVERVIEW

Latin America and the Caribbean (LAC) is in a development trap. Despite decades of progress, some of which could be wiped out by the COVID-19 pandemic, two characteristics of the region have remained largely undisturbed: high inequality and low growth. These two factors are closely related and interact with one another to create a trap from which the region has been unable to escape. This is not a new finding. This phenomenon is well documented in the region. A rich body of research has explored the different channels through which high inequality and low growth reinforce one another. However, many of our existing approaches in thinking about how to escape this trap inevitably leave us with a long list of “good policies” that work to address these channels separately. In LAC, this has often led to political incentives that foster fragmented policy responses with a short-term perspective—in some cases, deepening the existing distortions.

This report proposes a conversation beyond the individual links between inequality and growth to explore the complex interactions of some of the factors that underlie the mutual reproduction of inequality and slow growth. While there are other factors underlying the region’s high-inequality, low-growth trap, this report focuses on three that are critical: the concentration of power; violence in all its forms, political, criminal and social; and distortive elements in the design of social protection systems and labour market regulatory frameworks. Perceptions of inequality and fairness also play a fundamental role because they contribute to shaping people’s political attitudes towards different policies and may be crucial for building clout to support desirable policy reforms. In the end, of course, the ways in which the different factors interact are shaped by the (in)effectiveness of governance in each context. Figure O.1 provides a visual depiction of these interactions as considered in this report. Because the trap is the result of a complex interaction of factors, exiting it will require a more systemic policy approach that fundamentally considers these factors jointly and from a holistic perspective.