Latin America Advisor

A Daily Publication of The Dialogue

Will Poverty Reduction Remain Stalled?

Yosef Hadar / World Bank / CC BY-NC-ND 2.0

Q: Poverty reduction has stalled across most of Latin America since 2012 as economic growth has slowed, and 28 percent of the region’s population, or 167 million people, were in poverty in 2014, the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) said recently in its annual report. With regional growth expected to be relatively low this year, will efforts at poverty reduction remain stalled? Can poverty be reduced in a low-growth environment? What policies or steps should governments take to address the issue?

A: Alfredo González-Reyes, program specialist at the Regional Bureau for Latin America and the Caribbean at the United Nations Development Programme: “Average income growth and a more equal distribution of income in Latin America and the Caribbean (still the most unequal region in the world) have been the main drivers of poverty reduction in many countries of the region during recent years–even more than demographic changes and labor market dynamics. That is why in a low-growth environment, efforts at poverty reduction may be expected to remain stalled. In this environment, the priority should be not only to identify alternative policy options to keep reducing poverty, but also to prevent those already out of poverty from falling back into it. Better redistribution through social spending and taxes may be one of the alternatives. Today, poor people in countries like Bolivia or Peru find their income to be only very slightly better after receiving all their benefits and paying all their taxes. Also, more could be done through direct taxation, which although relatively progressive across the region, still represents a rather low percentage of GDP. This is, of course, a difficult way to go, particularly in those countries where, as in the case of Mexico, the government has openly decided to tie its own hands regarding any significant fiscal changes in the foreseeable future. It will be very important to keep in mind that in the long run, increased investment in individual capabilities and asset accumulation among the poorest will be crucial to improve well-being. Although very important, income should not be what matters to us the most, and in the current context, our eyes should look far beyond it.”

A: 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: “During the 2000s, the proportion of people living in extreme poverty in Latin America was halved, and 50 million people no longer had to survive on less than $2.50 a day (the international extreme poverty line used for the region). On average, 60 percent of this decline in poverty can be attributed to economic growth and 40 percent to the exceptional (for the region and globally) decline in inequality. With lower growth in the region, it is unsurprising that the pace of poverty reduction has stalled. The evolution of poverty is closely tied to growth. To the extent that the region will continue to face significant economic headwinds, we should expect poverty reduction figures to be much less auspicious than in the past decade. In countries hit the hardest by lower commodity prices and/or poor domestic policies, slower or negative growth will translate into higher unemployment and lower wages: poverty will rise. The new global economic environment entails that many governments have had to increase taxes (or will have to soon) and/or introduce spending cuts, as the recent announcements by Brazil and Mexico’s ministries of finance illustrate so well. Both measures can exacerbate the negative effects on the poor induced by lower economic growth. However, clever and socially responsible governments can take measures to protect the poor from becoming further impoverished by not cutting the budgets-and, even expanding them when necessary-of programs targeted to the poor, such as Bolsa Família in Brazil, Prospera in Mexico, and Juntos in Peru and targeted employment programs. Governments can also refrain from raising taxes on goods primarily consumed by the poor, such as basic foodstuffs.”

A: Paula Lucci, research fellow in the Growth, Poverty and Inequality program at the Overseas Development Institute: “The recent report by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) shows that poverty reduction has stalled over the last two years, coinciding with a context of slower growth. Last year, the region recorded the lowest growth since the financial crisis, at 1.3 percent. With economic forecasts remaining low for this year, it is imperative that countries act to protect the progress made in reducing poverty and inequality. As public resources are likely to be more constrained, social spending on basic services and safety nets should be protected, as those most in need of state support are likely to be the most vulnerable to the negative impacts of weaker growth. But more fundamentally, Latin American countries need to rethink their growth models and steer efforts to diversify and increase the productivity of their economies. On the whole, many countries in the region remain dependent on commodities, which are subject to the volatility of international prices and are capital-intensive. Too many people are excluded from formal employment and trapped in low-productivity, low-paying jobs. To tackle these challenges, there needs to be far greater focus on improving the quality of education for all and tackling low levels of innovation–and doing so in a way that leads to growing in a ‘climate-compatible’ way. Only by addressing the fundamentals of the economy, creating more good-quality jobs and having the fiscal resources to keep investing on social spending will poverty and inequality reduction remain sustainable over the years to come.”