Investment in education, one of the key factors in inequality decline in Mexico

Inequality has been a distinctive feature in Latin America and the Caribbean in its history. The gap between rich and poor has nourished years of political and social instability in a region characterized by enormous natural resource reservoirs and a great workforce potential.

But for more than a decade this gap has started to decrease, supported by an economic boom without precedent that has driven tens of thousands families out of poverty.

A World Bank study analyzed some of the concrete causes for the decline in inequality, translated in a decrease of the Gini index – the income coefficient per capita per household – from an average of 0.530 at the end of the 1990s to 0.497 in 2010.  From the 17 countries for which there exists comparable data, 13 registered a decrease, compared to an increase of the Gini in other parts of the world.

The report focuses on what happened in three middle income countries in the region as a representative sample: Mexico, with less economic growth but a better performance in the international markets thanks to the North American Free Trade Agreement (NAFTA); Argentina, that registered impressing growth rates during the analysis period and that between the 70s and 90s presented the highest inequality rate in the region; and Brazil, that boasted an important economic progress that has been translated in social well-being under center-left governments.

According to the study, during the first decade of the 2000s, income increased in the three countries, the average schooling years rose, and inequality between labor income and non-labor income decreased – that means income from cash transfers or interests, among other things.

Mexico: less economic growth but more income

Mexico has a “before” and “after” 1994: that was the year of the North American Free Trade Agreement (NAFTA). But it wasn't until after 1996, when the country reached its maximum in inequality (a Gini of 0.547), that the gap started to decrease, according to a study titled “Declining inequality in Latin America in the 2000s : the cases of Argentina, Brazil, and Mexico.” 

 “Nearly 60 percent of the decline in poverty can be attributed to the reduction in inequality. Notably, the faster growth of incomes at the bottom of the distribution happened during a period of lackluster aggregate economic growth," the authors point out. Unlike Argentina and Brazil, who registered impressing growth rates during the last decade, the Mexican economy only expanded at an annual rate of 1%.

The decrease in inequality coincided mainly with a change in the patterns of public expenditure, they add. For two decades, the Mexican government increased progressively public investment in health, education and alimentation. In the strategy, its flagship conditional cash transfer program Oportunidades stands out, that, since 1997, first with the name of Progresa and since 2002 renamed Oportunidades, covers 5,8 million poor families, about 19% of the households, according to 2012 numbers.

This is a plan of conditional transfers where the mothers receive economic support on the condition that the children receive a good alimentation, go to school and to regular medical visits.

The study highlights that  Progresa/Oportunidades is an example of redistributive “efficiency”, because with a budget size of as little as 0.36% of GDP, “accounts for 18 percent of the change in the pre/post-transfers difference in the Gini coefficient.” In 2010, the Gini Index in Mexico was at 0.475 from 0.547 in 1996.

The billions of dollars that enter the country every year in remittances from the outside have also been key to the increase of the non-labor income, helping to reduce the gap between rich and poor.

On the other hand, the labor incomes have done little or have had a negative effect on Mexico, according to the study. Although the increase in public expenditure in education generated a greater quantity of qualified work, this didn’t necessarily mean a salary improvement, which maintains the country in what the experts call “the paradox of progress”.

The World Bank in Mexico

The World Bank is collaborating with Mexico in the social protection sector, offering an integral package of financial products, including lending for projects. Moreover, it gives technical assistance and analytical support, bringing together the main stakeholders in the topic, and facilitates the exchange of experiences and knowledge generated in Mexico and the world.