European investments target Latin American inequalities.

October 05, 2023

European Union, through the Global Gateway, must crucially use its financial muscle and knowledge to help the region bridge its historical development gaps.

Dos mujeres del distrito de Brasilãndia en Sao Paulo en una imagen de archivo de 2020.
Dos mujeres del distrito de Brasilãndia en Sao Paulo en una imagen de archivo de 2020.
Fuente: Toni Pires / El País

Latin America and the Caribbean is the most unequal region on the planet. Its Gini income index stands 15% above that of the second most unequal region, i.e. Sub-Saharan Africa, and almost 50% above that of the most equal regions, like Europe and Central Asia. This is one of the reasons why the EU's investment mobilization plans in the region, which will total EUR 45 billion by 2027 (little under USD 50 billion at today's exchange rate), have targeted mainly inequality.

The recent meeting of Finance Ministers of the EU and Latin America and the Caribbean, held in Santiago de Compostela sponsored by the Government of Spain and CAF—development bank of Latin America and the Caribbean—, pinpointed three key areas of cooperation: green transition, digital transformation, and human development (with a special focus on inequalities). In fact, of the 70 initiatives in the new investment agenda devised by CAF, at least 15 focus on curbing inequalities.

Inequality has become a major hindrance to socio-economic development in the region, and it conceals a harrowing reality. It is sometimes expressed as low social mobility, which means that society offers the most needy few opportunities for progress. In turn, low social mobility is multifaceted. In terms of education, for instance, only one out of every ten children of parents with no college education manages to complete a higher education course by the age of 24–25. Conversely, one in two students with a college educated mother or father completes their education.

Furthermore, children of parents with low complexity jobs are also conditioned from birth: They have only an 11-percent chance of moving up to high complexity jobs, in contrast to 60 percent for children of parents with complex jobs. This 6-fold gap contrasts with figures from other regions, which ranges between 2 and 3 times.

Low social mobility is more prevalent among women, people of African descent, and residents of disadvantaged communities. Thus, for instance, women's labor force participation rate is 30% lower men's and their work-related income is 35% lower. Overall, high intergenerational persistence in educational and job performance and differences in formal employment careers lead to high persistence in earnings between generations. The upshot is that, in the region, the income earned by children is more closely pegged to the income earned by their parents. Income disparities in parents' income generation are 90% transferred to the children's generation, compared to 40% in Europe or North America.

The meeting in Santiago laid the foundations for future collaboration between the EU and the region. In terms of human development, two sets of policies are needed to help curb inequality and speed up growth, which is particularly relevant in Latin America and the Caribbean, as one of the slowest growing regions in the world. First, systemic policies targeting the entire population are needed. Also, the region requires policies focusing on disadvantaged groups.

Systemic policies should expand access to early childhood education and improve the quality of basic education. They should also bolster the content of secondary school curricula and vocational training programs: digital skills, languages, and with a focus on natural sciences, engineering, and mathematics. Based on experience, however, the region should not be expecting human capital policies alone to provide the solution. It is critical to address the incentives behind self-employment, and entrepreneurial sluggishness and informality. This requires a review of the special tax regimes for microenterprises, and ensuring that social protection spending schemes do not tax formal employment to subsidize informal jobs.

At the same time, the region requires policies to help disadvantaged groups. In the case of women, we need childcare and similar policies to expand their labor force participation rate in formal jobs and with better career prospects. In the case of dwellers of impoverished areas, we require transportation and housing policies in order to minimize the drawbacks experienced by workers in underserved areas in accessing good jobs. Lastly, reversing the intergenerational replication of the drawbacks suffered by people of African descent and indigenous people requires directing additional efforts on human capital policies and infrastructure investment, as well as accessibility to urban services in their areas of residence; and anti-discrimination policies, with a special emphasis on employment.

Addressing inequalities is critical for Latin America and the Caribbean to address the challenges set out in the 2030 Agenda. Hence the importance of the EU, through the Global Gateway, using its financial muscle and knowledge to help the region bridge its historical gaps in human development.

This column was also published in El País

Santiago Levy
Santiago Levy

Consultor. Político y economista mexicano que ha ocupado diversos cargos en la administración pública de México y organismos internacionales. Recientemente se desempeñó como vicepresidente de Sectores y Conocimiento del Banco Interamericano de Desarrollo.