counts, equity has become a central concern for development policy across the region, echoing the views of Latin American citizens, who overwhelmingly perceive the distribution of income as ‘unfair’ or ‘very unfair’ and believe that the state should take responsibility for reducing the gap between rich and poor.<sup>6</sup> High income inequality usually reflects an unequal distribution of assets, such as land and human capital, which prevents important segments of the population from participating in the growth process. Across countries, asset inequality and income inequality are closely associated – e.g., the cross-country correlation between the Gini coefficients of the distribution of income and the distribution of years of schooling is above .75, while the correlation between the Gini indices of the distribution of income and the distribution of land is around .50 (de Ferranti et al., 2004). And asset distribution is highly unequal in Latin America. For example, the Gini coefficient of the distribution of operational holdings of agricultural land is about .81 for Latin America (Deininger and Olinto, 2000), while in other world regions it hovers around .60; similarly, for the distribution of years of schooling, the Gini coefficient is .42 in Latin America, against .27 in industrial countries.<sup>7</sup> But high inequality can also reflect the failure of fiscal policy to perform its redistributive function – one of Musgrave’s (1959) three classic fiscal functions<sup>8</sup> – through appropriate use of taxes and transfers to correct socially-undesirable distributive outcomes arising from market forces, given the prevailing distribution of assets. The evidence shows that industrial-country governments are highly effective at this redistributive function, but developing-country governments are not, and in fact they are often part of the problem rather than the solution.<sup>9</sup> If inequality is above socially tolerable levels, as the survey evidence cited above suggests, in general policy action has to take a dual approach. On the one hand, it should target the deep roots of inequality, through interventions aiming to broaden asset ownership and equality of opportunity – e.g., by expanding access to education and health. But this is likely to be a long-term process with much of the payoff accruing in the distant future. On the other hand, policy should ensure, through the necessary fiscal reforms, that the fiscal system performs its redistributive function effectively. Of course, the relative emphasis on each of these courses of action should depend on countryspecific circumstances.

> 6 According to the regional opinion poll Latinobarometro, 89 percent of those surveyed in 2001 regarded the distribution of income in their countries as unfair or very unfair. In an earlier 1996 poll, three-quarters of all respondents agreed strongly with the view that the state should take charge of reducing inequality, and a further 17 percent supported that view, but not “strongly”.

> 7 Asset inequality has deep roots in Latin America, which some authors (Engerman and Sokoloff, 2000 and Acemoglu, Johnson and Robinson, 2001) trace to the pattern of specialization during colonial times, heavily reliant on natural resources – especially mining and sugar production – and on the use of subordinate labor. In this view, the colonists developed institutions (related, for example, to land use and political control) that helped perpetuate their political dominance and their wealth, resulting in a highly unequal distribution of assets that has persisted until today.  .

> 8 The other two are efficiency and stabilization; see Musgrave (1959).

9 For a discussion of the anti-poverty effect of taxes and transfers in industrial countries see Smeeding (2006). For a comparison of industrial and developing countries see Chu et al. (2000).

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