AMÉRICA LATINA (3)
LIMA, Peru, March 9, 2015 – One out of every five Latin Americans or around 130 million people have never known anything but poverty, subsisting on less than US$4-a-day throughout their lives. These are the region´s chronically poor, who have remained so despite unprecedented inroads against poverty in Latin America and the Caribbean since the turn of the century.
Their situation is becoming more precarious as the economic boom that significantly contributed to reduce poverty dwindles. Regional GDP growth has slowed, from about six percent in 2010 to an estimated 0.8 percent in 2014. This contraction will likely take away one of the biggest drivers behind the strong reduction in poverty: an improved job market.
A new World Bank report, Left Behind, Chronic Poverty in Latin America and the Caribbean, takes a closer look at the region’s entrenched poor, who and where they are, and how policies and thinking will need to change in order to more effectively assist them.
“Poverty exists and persists due to constraints within and without the households, everything from lack of appropriate skills and motivation to the lack of basic services such as clean water,” said Jorge Familiar, World Bank Vice President for Latin America and the Caribbean. “In other words, supporting individuals is necessary but not sufficient. An enabling context that provides appropriate services is also crucial. Therefore, social policies and regional development need to go hand in hand.”
But who are the chronic poor? The answer to that question traditionally has been hard to come by due to the lack of data tracking the poor over time. The World Bank report, however, applies a new methodology to shed light on those who have remained poor in Latin America.
Among the report’s key findings:
· There are significant variations among countries. Uruguay, Argentina and Chile have the lowest rates of chronic poverty, with rates around 10 percent. On the other extreme, Nicaragua, Honduras, and Guatemala have rates of chronic poverty significantly higher than the regional average of 21 percent, ranging from 37 percent in Nicaragua to 50 percent in Guatemala.
· There are significant variations within countries. Within a single country, some regions show incidence rates up to eight times higher than the lowest. In Brazil, for instance, Santa Catarina has a chronic poverty rate of about five percent, while Ceará is nearly 40 percent.
· The issue is rural and urban. Despite the much higher percentage rates of chronic poverty in rural areas, such poverty is as much an urban as a rural issue. In fact, considering absolute numbers, urban areas in many countries, including Chile, Brazil, Mexico, Colombia and the Dominican Republic, had more chronic poor between 2004 and 2012 than rural areas.
“In addition to focusing on access to basic services and good jobs, policies must also take into account the very real social and aspirational barriers facing the chronically poor in Latin America,” said Ana Revenga, Senior Director for Poverty at the World Bank Group. “If this remains unaddressed, it will be far too easy for the most vulnerable to fall through the cracks of social safety nets, no matter how well-targeted these programs are.”
In Peru, for instance, patients with tuberculosis, who live largely in Lima’s slums, were 43 percent more likely to abandon treatment before being cured if they were depressed at the time of diagnosis.
To better assist these patients, a program that provides free treatment also offered clinical psychologists to help treat depression and special support to help identify income-generating opportunities for patients. Other social intermediation programs, such as Chile Solidario, or Red Unidos in Colombia, employ social workers to actively match beneficiaries with social programs that address family-specific needs.
Moving forward, policymakers in Latin America would be justified to rethink the approach of poverty reduction programs, using this new analysis to better understand who the chronically poor are and where they reside. It will be crucial to improve coordination between different social and economic programs, and to tackle the mental and emotional toll that poverty takes on the poor and their ability to improve their lives. Only then will it be possible to forge a clearer path out of poverty for the 130 million chronically poor in Latin America.
Inequality has left a distinctive mark in the Latin America and Caribbean history. The gap between the rich and the poor has – for years – fueled political and social instability in a region characterized by huge reserves of natural resources and an abundant labor force.
But a little more than a decade ago, this gap began to narrow, mostly due to an unprecedented economic prosperity that lifted many families from poverty.
A World Bank study analyzes some of the concrete causes which led to a decrease in inequality, referring to a decline in the Gini index – coefficient that measures economic inequalities in a particular society – from an average of 0.530 in the late 1990’s to a 0.497 in 2010.
Out of the 17 countries for which comparable data is available, 13 registered a drop, in comparison to a Gini increase in other regions of the world.
The report focuses on three Latin American middle income countries:
Argentina, which was the most unequal country in the region between 1970s and 1990s;
Brazil, where significant economic progress translated into better welfare services;
Mexico, which despite a lower economic expansion had a better performance in the international markets after joining the North America Free Trade Area (NAFTA).
More and better-paid jobs
After increasing in the 1970s and 1980s, Brazil’s Gini index reached a near historical and worldwide record: in the late 1980s, at around 0.630. Following a decade of almost no change in the 1990s, the inequality coefficient started declining steadily in 1998.
Later, from 2002 to 2009, the income of the bottom 10% grew at 7% per year – nearly three times the national average –, while that of the richest 10% grew only at 1.1% a year. During this period, Brazil’s population benefited from better-paid jobs, from cash conditional transfer programs, and from higher spending in basic education.
The study authors stress that in Brazil labor income contribution accounted (from 2006 on) for the largest share of inequality decline. Still, they also acknowledge the expansion of initiatives such as Benefício de Prestação Continuada (a transfer to the elderly and disabled) and Bolsa Família (a program in which poor families receive a monthly stipend per child attending school, up to a maximum of three children).
The latter, which currently reaches 13.8 million families, compensates poor households for schooling costs, thus curbing dropout and child labor.
Education is the answer
Brazil, Argentina, and Mexico’s successes may be hard to sustain, however. According to the study, the global crisis threatens the economic growth and foreign trade in these countries.
Investing in high quality education for all can be key to protecting local labor markets, as well as social and economic achievements, say the authors. “The decline in inequality cannot be taken for granted. It requires ‘hard work’ both from policymakers and the polity.”
After years of the gap narrowing, better economic equality is no longer a reliable trend in many countries. What can be done?
Photograph: FRANCK FIFE/AFP/Getty Images
This might be a “man-bites-dog” moment for Latin America. For about a decade, researchers and policymakers have been saying that the key lesson from the world’s most unequal region is that inequality can – and in fact did – decline. This is supported by a rigorous set of data showing that from 2000 up until around 2010, income inequality unambiguously declined in 16 of 17 countries.
But new data shows the trend has stagnated across Latin America – and in some cases, there has even been an increase in the concentration of income. This analysis is based on the latest revision of household data coming from the Socioeconomic Database for Latin America and the Caribbean (Sedlac) and published by the World Bank.
Let’s start with the inequality data. The news here is not that there is a reversal in the inequality trend, but that the rate of decline is slowing down – and, in some countries, stagnating. The results show “stagnation” in the inequality trend between 2010 and 2012. Between 2000 and 2010, the regional Gini index (how the world bank measures inequality) declined on average by 0.94% per year, while in 2011 it fell by just 0.33%, and in 2012 it fell a paltry 0.02%.
The trend can also be assessed through country-to-country comparisons. Here, our own UN Development Programme (UNDP) estimates using the Sedlac data, is that Mexico and Panama, and to a lesser degree, Brazil, saw a slow in their narrowing of inequality when comparing 2002-2007 to 2007-2012. However, if we move the comparison period to 2007-2011, we can add Dominican Republic, Chile and Paraguay to the list of countries where inequality is plateauing.
Why is decline of inequality slowing?
The key question is, of course, why inequality is stagnating in some countries. Given what we know about changes in income distribution, the critical factors are the following: lower growth in labour income at the bottom of the income pyramid; less effective social assistance (either through fiscal constraints or changes in targeting) and a diminished impact of pensions, for either of the previous reasons.
Again, assuming not much has moved either on social assistance or pensions in the period 2010-2012, the culprit would seem to be the labour market – particularly the low-skilled segment of the labour market in the service sector which created most of the new jobs during the boom. As “growth in labour income” is both a benefit for society (through poverty reduction) and a cost to business (through higher unit labour costs) another policy debate ensues:
- One way to tackle stagnating inequality is to embark on structural reforms that improve the business environment – a relatively direct way of lowering unit labour costs is liberalising labour markets and de-regulating labour benefits. A number of fiscally-constrained countries, following Mexico’s recent reforms, will follow this path over the next few months and years. From a human development perspective, we fear this might be a “race to the bottom” strategy. While pro-growth strategies can and have reduced inequality in the past – Peru is a good example of this – low wages should not be a measure of development success.
- A second way to tackle stagnating inequality is to strengthen social protection networks, focusing specifically on how to bolster returns to education for different segments of the labour market. This is a “race between education and technology,” rather than a race to lower labour costs. It engages with the question of why some countries are able to sustain growth with increases in productivity, rather than through booming external prices. Some countries, following Brazil or Chile’s example, are likely to follow this route.
- A third way to deal with stagnating inequality is to do nothing. This is, in fact, the most likely scenario, as reforms that address inequality are intensive in political and institutional capital. In these cases, countries will attempt to sustain declines in poverty through higher economic growth. They are likely to find, by the year 2020, that “more of the same” does not often yield the same.
In any event, we will see a renewed appetite for structural reforms in the region. As Yogi Berra, the Yankees baseball manager, once said: “when you come to a fork in the road, take it”.