Challenges Facing the People’s Republic of China
Edited by Juhzon Zhuang, Paul Vandenberg and Yiping Huang
Chapter 8: Crises, exchange rate management, and inequality: lessons from Latin America
Nora Lustig and Jaime Ros
Recurrent macroeconomic crises and sharp decelerations in productivity growth in Latin America over several decades have slowed broad economic growth and contributed to concerns that many countries in the region may be caught in a middle-income trap. Understanding the causes of these crises and the role of exchange rate regimes and financial and capital account liberalization provides valuable insight into how to avoid a crisis, not only for countries in Latin America, but also for those in Asia, including the People’s Republic of China (PRC). In addition to these challenges, Latin America is grappling with high income inequality. In the past, discontent over inequality resulted in violent conflict and social instability and led to the adoption of populist policies, which contributed to macroeconomic crises. Indeed, the region remains the world’s most unequal, although income inequality has declined in the majority of Latin American countries since 2000. In contrast, income inequality in the PRC has risen dramatically since the country first began implementing market reforms in 1978, and concerns have been rising since then that inequality may become an Achilles heel and trigger social unrest or the adoption of unsustainable policies. Understanding how public policy on education and government transfers contributed to the decline in inequality in Latin America could therefore prove useful for the PRC and other emerging economies.
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