Factors of Income Inequality Over the Last Half Century: The Case of South America

This paper makes an empirical contribution to the analysis of the growth-inequality nexus by using a cross-sectional augmented distributed lag (CS-ARDL) model that allows uncovering the factors behind income inequality in a dynamic heterogeneous panel data model. It also allows estimating short- and long-term effects. We analyze the growth-inequality relationship in South America using data on a sample of ten countries over the 1960-2011 period. The region has long had the world’s most unequally distributed income, due to highly unequal distribution of farmland, government development, access to public services -- education -- and demography. We find significant negative long-term effects of human and physical capital on inequality. On the other hand, macroeconomic volatility and political institutions increases income inequality in the short-term. Finally, our results indicate the key role of sectorial production in diminishing the Gini coefficient.