Latin America Advisor

A Daily Publication of The Dialogue

What More Can Latin America Do to Reduce Poverty?

Poverty is on the rise in countries facing economic recession such as Argentina, Brazil and Venezuela, Nora Lustig writes below. // File Photo: Argentine Government. Poverty is on the rise in countries facing economic recession such as Argentina, Brazil and Venezuela, Nora Lustig writes below. // File Photo: Argentine Government.

Due largely to Brazil’s historic recession, more than 10 percent of Latin Americans, or 62 million people, are living in extreme poverty, the highest percentage since 2008, according to a report recently released by the U.N. Economic Commission for Latin America and the Caribbean, or ECLAC. What factors are shaping extreme poverty rates in the region, and how should governments confront this challenge? Which countries have the best economic and social policies to fight extreme poverty, and can such measures be replicated elsewhere? What influence, if any, has extreme poverty had on politics in Latin America?

Jaana Remes, member of the Latin America Advisor’s board, economist and partner at McKinsey Global Institute: “Latin America’s success since the early 2000s in using conditional cash transfer and other targeted policies to reduce absolute poverty captured public attention around the world. Yet the gains have not proved durable: latest data show that the trend went into reverse in 2015. At the same time, a new ‘vulnerable’ class has emerged of people who are no longer technically poor, but who nonetheless struggle to meet basic household needs, and the middle class is being squeezed. Latin America’s dual challenge is that economic growth has been too weak, and the gains of that growth have been distributed unequally. Overall, people in the bottom 90 percent of the income distribution account for less than two-thirds of total consumption—the lowest share of any region in the world. The path forward requires restarting the ‘virtuous growth cycle,’ in which increased labor productivity gains translate into higher wages for the broad base of the population, which, in turn, lead to higher domestic demand and investment. Governments will need to put in place conditions that incentivize firms and entrepreneurs, reduce incentives for informality and reduce costs through more efficient public services and less regressive taxes. Business leaders, too, have a role to play. They must prepare for a more competitive environment, invest in the talent and capital to raise productivity, and share gains through worker wages. This holistic approach, which tackles both demand and supply issues, will be challenging. But if Latin American economies are to become more dynamic and more inclusive, it is essential.”

Nora Lustig, Samuel Z. Stone professor of Latin American Economics and director of Commitment to Equity Institute at Tulane University: “While poverty is still declining (albeit at a slower pace) in most countries in Latin America, poverty is on the rise in countries facing economic recession such as Argentina, Brazil and Venezuela. We are observing the consequences of the end of the commodity boom. Countries that followed prudent macroeconomic policies during the boom (such as Chile and Peru) have been able to cope with lower commodity prices without drama. In countries where the windfall led to large increases in government spending (such as Argentina under the Kirchners), adjusting to the new conditions took a more brutal turn. That economic crises cause poverty to increase should not come as a surprise. Poverty increases because employment dwindles, wages plummet, subsidies are cut and consumption taxes are raised. Under the circumstances, governments should introduce policies to restore growth and protect government spending on basic education and health care, infrastructure in poor areas and cash transfers targeted to the poor. They should also seek help from international financial institutions to make the adjustment process less draconian. Luckily, and in contrast with the punishing role they played during the 1980s and the 2001 crisis in Argentina, these institutions have become more cooperative. A salient example is the large IMF program for Argentina approved last year and its special provisions to protect social spending and the poor. Whether these provisions will have the intended effect, it is still too early to tell. Although political dynamics in the region are driven by multiple factors with security concerns and anti-corruption sentiment leading the way, falling living standards for the poor and the lower middle classes must surely be playing a role. To varying degrees, their anger and disappointment must underlie the resurgence of Cristina Fernández in Argentina, the loss of the Workers’ Party in Brazil and the weakening of Maduro’s base in Venezuela.”

Claudio Loser, former head of the Western Hemisphere Department at the IMF and founder and CEO of Centennial Latin America: “The information provided by ECLAC on poverty is concerning. The indicators of poverty and of extreme poverty increased starting in 2015, after having declined since early in the century. However, poverty levels, in percentage terms, have not reached the levels of earlier years. Progress was made during the high-growth commodity-boom years. The recent slowdown in economic activity was the main culprit in explaining the reversal. GDP growth declined from about 4.5 percent at the beginning of the decade to a negative 0.6 percent in 2016. As countries became poorer, poverty increased, even with antipoverty schemes in place. A ray of hope is on the horizon. In 2018, with higher growth, overall poverty declined, and extreme poverty remained unchanged in percentage terms. Even with a recession in Argentina, and not counting Venezuela, the numbers are likely to improve this year. Another interesting statistic—if it can be believed—is that inequality has continued to decline. A sobering note is that countries such as Brazil and Mexico have helped reduce extreme poverty. However, extreme poverty is mainly linked to average per-capita income. Chile and Uruguay lead in per-capita income and in terms of low extreme poverty, followed by Argentina and Costa Rica, in the range of less than five percent, followed by Brazil and Peru (two cases of success in combating poverty). The most likely conclusion is that the best policy to reduce poverty is to have pro-growth policies, supported by antipoverty programs. However, these fail when growth declines.”

Camilo Arriagada Luco, sociologist and associate professor in the architecture and urbanism department at Universidad de Chile: “ECLAC’s poverty profiles since the 1990s indicate that a series of factors affect the likelihood of being poor: rural location, youth, lack of education or race. However, such factors operate within a context of opportunities that we should consider when looking at extreme poverty in the region. The weakness of massive job creation means income alternatives for the poor are a combination of informal activities with very low productivity and state subsidies. Meanwhile, the increase in the prices of food and fixed costs (health education, housing, transportation), combined with low salaries, is a phenomenon that aggravates the exclusion of the poor and extends the demand for subsidies and state programs to sectors beyond the poverty line and the minimum wage. The Latin American public sector is facing a particularly complex moment right now. It must review its look toward globalization and private investment as the only engines for development—because they haven’t been—and it is obliged to build an alternative subregional or national development strategy to unbridled globalization and low-quality economic growth cycles. In particular, the implementation of social public spending through cash transfers has proved unsustainable, given its correlation with inflation and clientelism. In countries where cash transfers concur with social services, nutrition has improved, but decades have passed without evidence of improvement in or expansion of public health services and education. There is space for innovation and investment in the territorial areas where poverty prevails: rural areas affected by droughts, urban slums, immigrant housing projects and municipalities with prevalence of women-led households with no day care, among others. It is possible to identify the subset of marginal sectors that need public health services and education the most. There is an unprecedented potential for information, and data that can be used for targeted public policy. Big data is seen as an opportunity for global business, but less as an opportunity to organize the social programs that are most urgent.”

The Latin America Advisor features Q&A with leaders in politics, economics, and finance every business day. The publication is available to members of the Dialogue's Corporate Program and others by subscription.

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