Peripherality, income inequality, and economic development in Latin American countries

Abstract

ABSTRACT Following a neo-structuralist perspective, this study presents a development puzzle for Latin American countries (LACs): a triangular relation amongst peripherality (increased terms-of-trade volatility and technological backwardness), income inequality, and per-capita income. We employ a simultaneous equation model using three-stage least squares (3SLS) to analyse this triangular relation. We find that a decrease in income inequality and an increase in per-capita income were mutually reinforcing in 14 LACs between 1995 and 2014. Although technological progress increases per-capita income, it partly mitigates this increase by increasing income inequality. Additionally, the increasing effects of foreign sources of technology, including foreign direct investment (FDI), on income inequality are mitigated in countries with higher technological capabilities. While an improvement in commodity terms-of-trade expectedly increases per-capita income and decreases income inequality in South American countries, their volatility is mostly insignificant.