# **1. INTRODUCTION**

Latin America is known for its historically high levels of consumption and income inequality, and within the region, many of the Central American countries stand out for their high levels of inequality<sup>3</sup> . The Gini index for income for these countries, around 2009, was between 0.47 and 0.52 (World Bank, 2011) in comparison to an average of 0.31 for OECD countries.<sup>4</sup> Between 2002 and 2008, income inequality went down significantly in almost all Latin American economies (Gasparini and Lustig, 2010). Central America, however, presents a mixed picture: while El Salvador and Panama showed a slight decrease in the income Gini between circa 2005 and circa 2009, Honduras stayed at the same level and Costa Rica showed an increase in inequality (World Bank, 2011).<sup>5</sup> Fiscal transfers can be used as a way of offsetting consumption inequality, but eliminating income inequality requires interventions targeting the “deep roots of inequality”, in particular skills and knowledge, as the lack of education limits the access to good quality jobs and shapes life-time opportunities and income structure. The decline in inequality in Latin America in recent years has been attributed to both factors: a more progressive allocation of government spending through monetary transfers, together with improved access to education and fall in skill premia in the labor market (López-Calva and Lustig, 2010; Gasparini and Lustig, 2011; World Bank, 2011).

Access to and completion of tertiary education is particularly important for addressing income inequality through two channels. First, enabling individuals of lower socio-economic background to access higher earnings through tertiary education can contribute directly to reducing inequality. Extra years of education translate in general into higher salaries and therefore, inequality in education attainment can contribute to inequality in income. Second, a high quality tertiary education system can build the strong human capital basis for economies to compete globally and increase growth, laying the ground for both higher productivity and earnings, and more fiscal space that can create room for redistribution. With respect to the first issue, the possible “equalizing” role of education depends to a great extent on whether students from poor backgrounds are able to reach tertiary education. Moreover, even if they do reach this level, they may not benefit from higher earnings if the labor market does not value their knowledge, skills and competencies to the same extent as of richer students. This could happen either due to the poor quality of education institutions attended by the poor or the better access of the rich to quality jobs through family and social connections (or a combination of both). These factors can significantly attenuate the potentially “equalizing” role of education and even generate negative incentives for investing in higher levels of education among the poor.

In this paper, we analyze the inequality in access to and completion of tertiary education in Central America, as it is an important means to reduce income inequality in the long run. Because access to tertiary education is contingent on successfully completing lower levels of education, the paper also examines the inequality in progression through the education system.

> 3 The Central American countries analyzed in this paper includes Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. 4 OECD.StatExtracts. Income distribution- Inequality- GINI coefficient after taxes and transfers for latest year.  Available online: <u>http://stats.oecd.org/Index.aspx?QueryId=26068.  Date accessed: June 14, 2012.</u> 5 These three countries are the only available in World Bank, 2011.

2