SANTIAGO — Sibele and Odair dos Santos live and work in Porto Seguro on Brazil’s Northern Atlantic coast, and together earn about $590 a month. A decade ago their quality of life was transformed thanks to hard work, an increased minimum wage and government aid programs.

At a certain point, 32-year-old Sibele stopped working in a bakery and became an assistant teacher while studying education at university. And she is no exception. “I see how, like us, many people have a better life today,” she says.

For sure in Brazil, households whose members had an average per capita income of less than $2.50 a day fell from 24.1 per cent in 1995 to 10.2 per cent in 2011.

The same is happening elsewhere, and the most recent studies have shown an “important decrease in inequality in almost all" Latin American countries in the past decade, says César Bouillon, a lead research economist at the Inter-American Development Bank (IDB).

Bouillon says Latin America has discarded the shameful reputation of being the world’s most unequal region, and is now behind Africa in that respect. It may not seem much he says, but “if in the 1980s, half of Latin Americans were poor, now only three out of 10 are poor. More than 100 million people have left the state of poverty.”

Real democracy

Eduardo Ortiz-Juárez, an economist working with the United Nations, says efforts to reduce inequality not only reduce poverty, but also help create “a new middle class.” This class he said grew in Latin America over the past decade, from 21.9% to 31.3% of the population.

Why is this shift happening now? Conventional wisdom might link this to the "automatic effect" of economic growth derived from booming commodity prices. But the spread of "real democracy" is cited as another reason. Though still with some holes, democracy has taken root in the region and allowed "parties committed to equality and solidarity to grow," says Evelyne Huber, political science professor at the University of North Carolina. She believes that once legitimate democracy is installed, two decades are needed on average for inequality to begin to fall. That was the time needed in Latin American states for parties defending the underprivileged to consolidate their positions in the face of residual resistance by "authoritarian enclaves."

Celia Lessa Kerstenetzky of Brazil's public Fluminense Federal University agrees that "economic inequality moves inside the political system." Money and influence "carry a lot of weight in politics, especially in unequal countries," she says of Brazil, though her comments also apply to Colombia, Paraguay and Central American states.

Virtuous circle

While transparent, democratic politics maintain the virtuous cycle Latin America has to set in motion, the cycle of declining inequality was given its initial push by vast aid programs to the poor and increases to the minimum wage.

It is a model that needs revision today, says Huber, given the differing population sizes of Latin American countries. She says direct state aid initiatives like Bolsa Familia in Brazil or Renta Dignidad in Bolivia, need scrutiny when they "focus" on a segment as big as 40% to 70% of the entire population. Eduardo Ortiz-Juárez says initiatives like Oportunidades in Mexico helped reduce inequality by one per cent a year. This, alongside increased hourly and minimum wages "explains 50% of the drop in inequality," he says.

After this initial phase, quality education becomes fundamental. Ortiz-Juárez says public educational services must meet the market's demands if inequality is to keep falling. He urges an extension of quality, cost-effective education across the population. In Porto Seguro where Sibele lives, only 47.3% of people have finished their primary and secondary schooling, and higher education offered in the region is minimal and expensive.

The absence of quality mass education — or educational segregation — is said to distort market patterns and productivity across the economy, helping to keep inequality entrenched. In Mexico, for example, inequality persists because of the inability to create quality jobs for the increasing number of job seekers, while in Chile the dearth of qualified workers impedes productivity gains in practically all areas of its economy.

Argentina, Brazil, Mexico and Peru have recently reduced inequality in part by narrowing wage differences between the highest and lowest-paid workers. But this followed earlier progress in making education universal. In Chile, says Evelyne Huber, children attending municipal schools have "dramatically lower" chances of ultimately entering one of the country's eight best universities. Differences in the quality of education let inequality fester for generations.

Tax Revolution

Massive investment in public education systems is needed to make them world class. For that, taxation must be reformed, and researchers agree more people must pay income tax and not just consumer levies like sales tax. César Bouillon says states must review their labor "black markets" in a region where those avoiding taxes can reach 60% of the working public.

"Until these people enter the system, raising income tax will merely increase the tax burden on those" already paying income and consumer taxes, he says.

But in the face of these challenges, the regional middle class face a dilemma: should they use the mediocre public services or pay for private ones? If they pay more taxes and want to buy private services, they must then choose between restricting consumption and tax evasion. The challenge is to bring the middle class back to public education and health services.

Middle-class participation says Huber, "not only reduces rejection of paying taxes to finance services they do not use, but also uses the energies and contribution to education of middle-class parents."

The last two components Huber proposes are innovation and smart finance. In an economy open to global commerce, per capita income levels can rise through industrial modernization and investments in technology. But this should be moderated with measures to control capital flows and manage exchange and interest rates.

The last thing anyone wants now are the boom-and-bust cycles that crippled the region in the 1970s and 80s.

*Camilo Olarte in Mexico City and Marlene Jaggi in Sao Paulo contributed reporting