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By Ludwig Von Mises Institute (Reporter)
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Colonialism Isn't the Source of Latin America's High Inequality

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Income inequality in Latin America is appallingly high, with the richest 10 percent of the population controlling 54 percent of national income. According to the 2021 Regional Human Development Report’s “Trapped High Inequality and Low Growth in Latin America and the Caribbean,” published by the United Nations Development Program, Latin American countries record higher inequality and worse social indicators than countries in other regions with similar levels of development. However, the story of inequality in Latin America has not been a desolate narrative of doom since the mean Gini coefficient decreased from 0.534 in 2002 to 0.499 in 2010.

But some worry that these gains might be eroded due to external shocks and economic downturns springing from covid-19. Indeed, researchers point out that covid-19 has heightened the growth of inequality by worsening economic opportunities. The inequality-inducing effects of covid-19 have brought the persistence of inequality in Latin America to the forefront of academic discourse. Many attribute the blatant inequality of Latin America to the colonial era. Writing in this vein, Sergio Costa and Francesc Badia I Dalmalse posit that leftist administrations were elected “based on a premise of reverting inequalities accumulated since the colonial period.”

Although the vices of Latin America are usually ascribed to colonialism, the issue is more complicated. Popular knowledge is that the Spanish operated an extractive enterprise in the Americas aimed at deriving resources for the metropole. Spain’s enterprise in the Americas entailed a high level of regulation, so we cannot designate it as promarket. Yet the escapades of the Spanish Empire are largely an embellishment of history, according to Henry Kamen in his lucid text Spain’s Road to Empire. Administering multiple territories proved to be expensive and the cost of empire was compounded by interest payments. Spain relied on the assistance of creditors to fund imperial projects, hence administrative costs and external payments reduced the size of its coffers. The truth is that most of the wealth created in the New World did not reach Spain; instead, it serviced debt and paid for military expenditures.

Moreover, in a 2008 study, Regina Grafe and Alejandra Irigoin undercut the argument that the Spanish Empire was extractive by contending that Spain’s stakeholder model offered greater input to local elites in revenue management. Grafe and Irigoin explain:

The political economy of the Spanish Empire was not what the textbook still tells us. Studies of revenue collection have shown that there was very little centralizing tendency and extraction to the metropolis was limited…. Instead it looks perfectly rational if we assume that the Spanish Crown tried to maximise aggrandisement of the Empire and the retention of the imperial bond rather than simple income…. The price of this strategy was the need to co-opt colonial elites. The means of co-optation was to keep most of the revenues in the Americas and allow local merchants a significant stake in their collection and expenditure. Seen from the working of the fiscal system and more specifically the way in which the Spanish Empire spent its money there is very little evidence for coercion or for a predatory state. It was a cheap way of running an Empire and the rule was very efficient in the sense that there were nearly no direct challenges towards Spanish rule from within.”

Additionally, others have opined that despite imperfections, Iberian institutions cannot shoulder the blame for the plight of Latin America. According to a study by Leandro Prados de la Escosura, titled “Colonial Independence and Economic Backwardness in Latin America,” Spanish institutions lowered transaction costs, notwithstanding inefficiencies. He reveals the beneficial impacts of these institutions:

The colonial empire provided protection (security and justice) at a cost not too high. With independence, new providers of protection emerged but with lower capacity than the metropolis. Transaction costs increased as political and economic institutions went through a period of turmoil and redefinition, while continued violence between and within countries also contributed to less well-defined property rights. These costs were higher for the new republics because of fragmentation and the loss of economies of scale.

In a nutshell, the conclusion is that independence resulted in a panoply of divided states that lacked the capacity to legitimate institutional authority, thereby diminishing growth rates.

As an explanandum, colonialism fails to capture how institutional weaknesses have led to inequality and subpar economic performance in Latin America. Since, we have explored the institutional legacy of colonialism, we will discuss data measuring income inequality in the colonial era. Rafael Dobado González and Héctor García Montero in “Colonial Origins of Inequality in Hispanic America? Some reflections based on New Empirical Evidence,” refute the assertion that inequality has its genesis in colonialism. Using anthropometric data and wage estimates the researchers argue that the material welfare of commoners in Mexico and Venezuela during colonialism was comparable to that of contemporaneous Europeans.

Similarly, economic legend Jeffrey Williamson corroborates the results of González and Montero in his 2015 paper, casting doubts on the colonial origins of income inequality. Professor Williamson avers that acceleration in income inequality occurred due to antiglobalization forces: “The inequality history that made Latin America today’s most unequal region is not what happened during the three centuries of colonialism, or the half century of early Republican independence, or even the belle époque commodity boom. The history that mattered is the anti-globalization epoch from 1913 to 1970. Latin America did not share the ubiquitous Great Egalitarian Leveling, but rather continued the belle époque rise.”

Invariably, the evidence indicates that antimarket forces are a greater contributor to inequality than colonialism. Although colonialism has a negative reputation, and in some cases, deservingly so, uncritically assigning colonialism as the primary reason for predicaments in Latin America and elsewhere indicates superficial thinking. Colonialism is just one element in a multidimensional puzzle.


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