If your income is low—say the equivalent of US$300 per month or less—you probably live in a rural village or an urban shantytown that lacks decent access to drinking water, sanitation, or electricity. The roads leading to your home are likely to be in terrible shape. Chances are that you don’t have legal title to the land you live on.

As a result, you have to spend more of your income on the basics than people who live in high-income areas with decent infrastructure and services. You spend much more buying water from roving vendors than you would if you had an in-home connection (in some Central American cities, up to 30 times more per liter). You miss work more often because of preventable illnesses caused by poor sanitation. You waste more hours commuting because of inadequate public transportation. And since you can’t put up your house for collateral, it’s almost impossible for you to obtain a loan. In an emergency, you have to resort to loan sharks that charge usurious interest rates.

This so-called “poverty penalty” is increasingly viewed as a central reason for the persistence of inequality in many parts of the developing world. The problem isn’t simply that the poor lack money. In fact, the purchasing power of the 360 million people in Latin America and the Caribbean who earn US$300 or less per month is estimated to total a staggering US$510 billion per year. Rather, the problem stems from the high proportion of their modest income that people at the base of the economic pyramid must devote to meeting basic needs, and from the difficulty they have in obtaining credit and growing their businesses.

Fortunately, there is growing evidence that the poverty penalty can be rapidly reduced, given the right conditions. In some developing countries, even the poorest of the poor are quickly gaining access to high-quality water services, public transportation and telecommunications—at prices they can afford. In others, low-income families are finally finding ways to use their homes and land as collateral for obtaining credit at competitive rates.

Why is this happening in some places but not in others? Why are private companies in some countries offering products and services tailored specifically to the needs of the poor? What kinds of government policies or programs are leading to a rapid reduction in the poverty penalty?

This month, IDB President Luis Alberto Moreno announced an initiative, “Building Opportunities for the Majority,” that aims to identify answers to these questions while providing innovative solutions to help low-income people develop their economic potential and accumulate assets.

“Latin America and the Caribbean have achieved macroeconomic stability, but this is not enough to solve the problems of people living near or below the poverty line,” Moreno said at a recent press conference announcing the initiative. “In fact, poverty and inequality levels have hardly changed over the past 45 years.”

“I think it’s time for a new approach: less macroeconomics and more microeconomics. We have to go directly at the obstacles that prevent low-income people in our region from improving their living standards,” he added.

To understand the economic potential of Latin America’s low-income majority, the IDB has produced “Mapping the Majority,” an Internet-based tool that graphically displays indicators on access to vital services by income for each of the region’s countries. The tool uses data from household surveys carried out in Latin America and the Caribbean as well as from public and private institutions (See link at right for more information).

The Bank also commissioned special studies by two leading independent think tanks, the World Resources Institute (WRI) of Washington, D.C. and the Instituto Libertad y Democracia (ILD) of Lima, Peru.

ILD, led by Hernando de Soto, took stock of the “dead capital”—unregistered and untitled assets such as businesses and real estate that cannot be used as collateral for loans because they are not legally recognized—in 12 countries in the region. According to the ILD study, these assets amount to US$1.2 trillion (See link at right “Dead Capital”).

WRI, which is known internationally for its work on environmental issues and the “new emerging markets” of low-income people, estimated that this population in Latin America and the Caribbean represents a US$510 billion market, measured by purchasing power parity. Their study offers a breakdown of this market by country (See link at right “The Market of the Majority”).

At a conference at IDB headquarters from June 12-14, heads of state and leading experts in development discussed specific strategies for lowering the poverty penalty in five specific sectors where the IDB believes it can make the biggest impact in the short term. These are low-income housing, microfinance services, social infrastructure (drinking water, sanitation, electricity, urban transport and rural roads), job training and support to small and medium-sized enterprises, access to information and communication technologies, and registering persons who lack identity documents.

“We don’t have all the answers,” Moreno said in announcing the initiative. “That is why I’m proposing that we work with governments, private sector companies and civil society organizations to leverage their experience, their resources and their comparative advantages.”

In order to catalyze such partnerships the IDB will create a network of Innovation and Opportunity Centers in several of the region’s countries and one at the Bank’s headquarters. The IDB will finance part of the operating costs of the centers, which will be selected based on their capacity to research, design, implement and evaluate pilot projects aimed at meeting the needs of the low-income majority.

Lessons learned through these pilot projects will shape a growing proportion of the IDB’s lending, which can amount to as much as US$8 billion per year, and will be used to scale up successful experiences.

Moreno also announced that the IDB will pour more resources into specific sectors. During the next five years it will double loans for basic infrastructure projects benefiting low-income communities, to US$1 billion per year by 2011. It will create a US$1 billion loan fund for small and medium-sized enterprises. And it will increase by 50 percent its financing for job training, to US$2 billion over a five-year period.

The IDB also plans measures to spur the volume of microfinance in the region from US$5 billion to US$15 billion by 2011. It will also work to help reduce the average fee charged for remittances to the region from the current 5.6 percent to 3 percent during the same period.

Moreno said that the IDB will continue to make significant loans to traditional sectors, since its mandate still requires it to devote at least half of its annual lending to programs in social sectors such as health and education, and to essential efforts involving modernization of the state and citizen security.

See upcoming editions of IDBAmérica for reports on the June conference and on examples of how Latin American governments, private enterprises and civil society organizations tackling this challenge.

Questions? Comments? Suggestions? Please write to editor@iadb.org