The Inter-American Development Bank and Poverty Reduction: An Overview (Revised Version)
By Ruthanne Deutsch, Nora Lustig (03/98, POV-101r, En, Es)
During the 1980s the incidence of poverty (moderate and extreme) increased in the majority of the countries in the region. In the 1990s poverty has decreased, but not markedly. The experience of the past twenty years demonstrates that the incidence of poverty is very closely linked to economic cycles, but that poverty is sticky downwards -- it increases more during crises than it falls during economic upswings.
Economic growth is a key element for poverty reduction. However, poverty reduction may go slower than desired if current levels of inequality persist. Latin America and the Caribbean continue to suffer from one of the most unequal income distributions in the world, a distinction which has remained unchanged for several decades. It would take some countries roughly 60 years, and other more than two centuries in order to eradicate extreme poverty with an annual growth rate of 3% per capita. In contrast, the value of the transfers needed to eradicate extreme poverty immediately is not that great: in the majority of the countries, given perfect targeting, it would take between 0.5% and 1% of GDP to directly provide the poor with transfers sufficient to raise them out of poverty. The issue, thus, is not necessarily the availability of resources, at least for all but the poorest countries in the region. What is needed is the political will, supported by technically sound policies and programs, to aggressively confront poverty.
For the majority of countries in the region, today's economic perspectives are incomparably better than they were in the past. This is, without doubt, good news for poverty reduction. However, this does not preclude the possibility of future unpredictable crises such as the exchange rate crises in Mexico and Argentina in 1995, or natural disasters such as El Niño which result in declining growth rates, and concommittantly, increases in poverty.
While trends in economic growth have been for the most part positive there have been troubling patterns in inequality. In many countries the wage gap between skilled and unskilled workers has increased. Contrary to expectations, there has not been an increased demand, in relative terms, for unskilled labor. Various explanations have been given for this phenomenon, including: regulations which restrict labor mobility; technological change which increases the relative demand for skilled labor; and trade liberalization in the context of economic globalization, in which the countries of the region have to compete with countries such as China, where labor costs are even lower.
Whatever its cause, what is certain is that if the tendency for increased economic inequality continues, Latin America and the Caribbean will continue to be one of the most unequal regions of the world. This means that the same rate of economic growth will generate a smaller decline in poverty.
What do these trends in economic growth, poverty, and inequality imply for public policy? If economic growth today creates jobs which require higher skills, one basic ingredient for the reduction of poverty is to raise the skills of low-income groups. This entails not only increasing the quantity, but more importantly, the quality, of education in the region, and also, promoting increased demand for educational services by programs which encourage school-readiness and school attendance, and which encourage the use of health and nutrition services. Support for child health and nutrition programs, as well as reproductive health programs which increase access to information and contraceptive services are also essential elements of a strategy which invests in building human capital.
Poverty is fundamentally linked to lack of access -- by control or ownership-- to productive and financial assets. Policies that can promote the poor's access to assets include initiatives such as land reform, inheritance taxes, privatizations which distribute shares among the population, and housing and credit programs, to name some of the most important.
Actions which increase the poor's access to market opportunities also comprise an important element of the poverty reduction arsenal. It is essential to correct failures in the credit market, eliminate discriminatory practices in the labor market and the judicial system, reduce restrictions to labor mobility, and guarantee title of property for the poor. Also important are actions to improve the quality of life of low-income groups such as providing access to clean water and adequate sanitation.
Another element of fundamental importance to any poverty reduction strategy is the inclusion of mechanisms to help the poor withstand adverse shocks such as economic crises or natural disasters. Despite the fact that these events occur frequently --and that each time the number of poor increase and the poor are disproportionately affected-- government responses are more often than not improvised and ad-hoc.
Finally, a poverty reduction strategy should include a social protection component for those who are unable to participate in the labor market, such as the aged poor or those with extreme disabilities. Currently, social security and social assistance programs in the region are not adequate to address the needs of these groups.
The Inter-American Development Bank's contribution to poverty reduction can be seen first of all in its portfolio of projects and technical assistance which cover many of the policy areas cited above. This document's review of the lending program identified some areas which need increased emphasis in the future. For example, the Bank could increase its support to projects which promote school attendance through the provision of demand-subsidies to low-income families. Another area in which the Bank can take the lead role is in the development of mechanisms for more systematic responses to protect the poor from the adverse effects of economic crises, natural disasters, and more idiosyncratic shocks such as unemployment, old age, and sickness. And, of pressing importance to further our understanding of the effectiveness of anti-poverty programs and policies, would be the promotion of the inclusion of impact evaluation components within projects.
The IDB also contributes directly or indirectly to poverty reduction in the region through its non-lending activities, such as research, improving the quality of information, and training programs. These activities are also reviewed in this document.
Last updated: 01/16/07
