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Economic growth and social equity

For many years, the Mexican government held down the prices of staple foods, such as tortillas, largely through subsidies that benefited rich and poor alike. These subsidies were both expensive to maintain and failed to benefit the people who needed help most.

So during the 1990s, the government started to phase out the generalized food subsidies. In 1997, they were replaced altogether with a program targeted at poor families who committed themselves to provide adequate levels of education, health and nutrition to their children. At present, 96 percent of food subsidies benefit the poor, contrasted to only 39 percent in 1994.

This experience, according to José Angel Gurría, Mexican finance secretary, shows that economic efficiency and social efficiency can be achieved simultaneously.

“This is not an option,” said Gurría at the seminar Socially Responsive Macroeconomics, which was held in conjunction with the IDB’s annual meeting earlier this year in New Orleans. “It is an obligation, it is the ultimate mandate of democracies,” he said. “A macroeconomic strategy that does not take social issues into account will not be successful.”

In the last two decades Latin America has been hit by a record number of economic crises and natural disasters. The poor are particularly vulnerable to the income downturns resulting from these shocks. The reason is that they live so close to subsistence that any variability in their income affects their consumption of basic necessities, and because they have the least access to self-protection mechanisms such as savings, credit and insurance that could help them cope during bad times.

Just as economic crises cause poverty and inequity, inequality may in turn amplify the impact of crises, generating a vicious cycle of increasing instability and inequality.

At the seminar, IDB President Enrique V. Iglesias said that Latin American countries must ensure that economic growth benefits a large portion of the population, and that economic policy takes into consideration the plight of the poor. In particular, he called for developing social protection mechanisms to shield the poor from bearing the cost of economic crises.

“We must strive for an economic policy with social responsibility and, at the same time, for a social policy with economic responsibility,” Iglesias said.

Former International Monetary Fund director Michel Camdessus, said that the region is beginning to realize that growth alone may not enable societies to meet equity objectives. He called for a greater convergence of ethical values with existing demands for greater efficiency in market-based and globalized economies.

“Stability alone is not enough,” said Camdessus. “Modest growth and stability are not enough. What everybody is looking for is high-quality growth and capacity for social response in the framework of sustainable growth.” He cited the efforts of Colombia and Mexico to improve their social programs, including social security, social investment funds, and price stabilization funds.

In a related event, participants in the first meeting of the Social Equity Forum, a new IDB initiative, discussed how to include considerations of equity in macroeconomic policymaking. The panel acknowledged that macroeconomic stability and growth are prerequisites for reducing poverty and improving income distribution. Governments should take advantage of periods of prosperity to reform their social systems and build reserves (as this may be the best time to act). A social system should both attack the structural causes of poverty and help mitigate the impact of crises.

Emphasis was placed on ensuring continuity in social services and hence the importance of building and strengthening the institutional framework. Limited fiscal resources require countries to clearly identify social spending priorities. Nora Lustig, chief of the IDB’s Poverty and Inequality Advisory Unit, emphasized the need to make public spending more countercyclical in order to avoid exacerbating economic fluctuations.

Eduardo Aninat, imf deputy managing director and forum chairman, stressed the need to further study the social impact of economic reforms in recent decades to gain a better understanding and draw lessons for future reform initiatives.

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