Latin America Advisor

A Daily Publication of The Dialogue

How Well Are Latin American Nations Fighting Poverty?

The World Bank on Oct. 4 updated the international poverty line to those living on $1.90 per day or less, up from $1.25 per day or less. The World Bank also projected that Latin America and the Caribbean’s poverty level would fall to 5.6 percent of the population in 2015, as compared to 6.2 percent in 2012. How will these figures change the way the region fights poverty? Which countries in Latin America are doing the best job of helping lift individuals and families out of poverty? Will raising the poverty line affect the way international development agencies address poverty reduction efforts for the region?

George Gray Molina, chief economist at the Regional Bureau for Latin America and the Caribbean at the United Nations Development Programme: “The World Bank adjustment reflects changes in prices between and within countries. The basket of goods and services that cost $1.25 (2005 PPP) a few years ago, now costs $1.90 (2011 PPP). The net effect in Latin America and the Caribbean is relatively small. Still, the most successful countries at reducing extreme poverty—as captured by the harmonized SEDLAC data—are Bolivia, Peru and Ecuador (each, a very different ‘development model’). The larger issue is that more and more countries face ‘last mile’ challenges with respect to extreme poverty—they are only getting started with the ‘resilience marathon’, both raising and keeping people above a $10/day vulnerability line. Our own work at UNDP shows that the determinants of ‘sliding-back-into poverty’ are not the same as the determinants of ‘leaving poverty.’ The resilience challenge requires assets, labor skills and social protection to keep all boats afloat. This upgrading is a generational challenge that will not be achieved by any single government, nor for any single political mandate. At a moment when the region as a whole is at zero GDP growth, it is important to regain broad-based growth while also strengthening resilience and addressing the hardest exclusions of the decade. This is a tall order. It will require using short-run politics to create precious policy space, and using policy space to achieve long run impact.”

Nora Lustig, Samuel Z. Stone professor of Latin American economics at Tulane University and nonresident fellow at the Center for Global Development and the Inter-American Dialogue: “There are four important factors to note. First, the new World Bank international line of $1.90 per day is measured in purchasing parity dollars of 2011 (PPP). The PPP exchange rate is the exchange rate from dollars into local currency that would give the same purchasing power in both the United States and the country in which poverty is being measured. Since prices for many goods and services in Latin America are cheaper than in the United States, the PPP exchange rate will yield more pesos or reais per PPP dollar. In Latin American countries, $1.90 in PPP dollars is worth more than one would presume. Second, the $1.90 per day in PPP does not imply a higher international poverty line. The previous international poverty line was $1.25 in PPP dollars per day. However, it was measured using 2005 PPP exchange rates, which were constructed using prices for similar goods around the world collected that year. The current line of $1.90 uses PPP generated from prices collected in 2011. Thus, the new line is not really higher in the sense that $1.90 in PPP 2011 is supposed to buy the same goods and services as the $1.25 in PPP 2005. Third, this new international poverty line is not really relevant for middle-income Latin America (no Latin American country is among the benchmark countries). The lowest poverty lines in most countries in the region are closer to twice as much or $4 per day in PPP 2011. Fourth, extreme poverty in the region is still going to be excessive in the sense that, given the countries’ average incomes, poverty should have been much lower than what it actually is. Excessive poverty is the consequence of excessive inequality. In spite of its decline in the past decade, inequality in Latin America is still the highest in the world. Reducing inequality should remain a priority.”

Sergei Soares, visiting fellow at the Center for Global Development: “What changes in poverty measurement with the new poverty line? The answer is: in theory, nothing; in practice, very little. Conceptually, the World Bank’s extreme poverty line has not changed since 1990, when Martin Ravallion defined it as the average of the national poverty lines of the poorest countries on the planet, made comparable using purchasing power parity (PPP) currency conversion rates. Updated PPPs have led to updated poverty lines in 2001 (1993 PPPs), 2008 (2005 PPPs) and this year (2011 PPPs). It is important to remember that new lines never come alone; they always come hand-in-hand with new PPPs. In practice, relative prices change among countries from one PPP exercise to the next. This means that although worldwide the $1.90/day + 2011 PPPs combination counts about 28 million fewer very poor people for 2011 than the previous methodology ($1.25/day+2005 PPPs), in Latin America it counts almost eight million more people. This is due to changes in relative prices between Latin America and the rest of the world. However, none of this changes the fact that Latin America has done very well in reducing extreme poverty. Chile, Costa Rica and Uruguay have extreme poverty rates that are negligible, and Brazil, Colombia, Peru and Mexico have slashed their extreme poverty rates by a factor of two or three over the last 10 years. Impressive achievements, whatever the line.”

Jacqueline Pitanguy, sociologist and executive director of Citizenship, Study, Research, Information, and Action (CEPIA) in Brazil: “In view of the historically high levels of social inequality prevailing in Brazil in spite of periods of strong economic growth, the challenge of promoting social justice and recognizing the interrelation between human rights, social welfare and social development could not be postponed much longer after the democratization of the country and the promulgation in 1988 of a new Constitution. Even if some conservative sectors still defended the theory that economic growth and GDP increase would lead to the reduction of social inequality, the prevailing perspective was that it was necessary, and urgent, to have a state intervention in order to face extreme poverty and its perverse effects on the wellbeing of the population. Starting with Fernando Henrique Cardoso’s government and in a broader, deeper and faster pace with Lula da Silva’s and Dilma Rousseff’s governments, two main programs aimed at decreasing poverty and social inequality have been successfully implemented: Bolsa Familia and Brasil sem Miséria. The recent World Bank report shows that in Brazil, the number of people in extreme poverty fell, between 2001 and 2013, from 13.6 percent to 4.9 percent of the population. The report also recognizes that the decline in extreme poverty in Brazil was more significant than in any other Latin American country. This good news will not be highlighted in the media, which will focus on the negative effects of the crisis on these gains. Brazil is undergoing a political, moral and economic crisis and a collective feeling of discredit in the country. Certainly poverty reduction might be compromised by the crisis but will not collapse. Safety networks, investment in education, public health and housing play a key role in protecting the most vulnerable population. No government will be sustainable if it does not include the reduction of social inequality as priority on their agenda.”

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