Poverty and inequality in Central America

• Pages: 377-378

Page 377

Although poverty in Central America declined slightly and growth picked up in the 1990s, inequality increased. In a recent study, IMF Economists Ana Corbacho and Hamid Davoodi outlined the problems faced by seven countries-Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and Panama-and the reforms they need to undertake.

During the 1980s, the Dominican Republic was the only one of the seven countries in the study to register a positive average annual growth rate of output- a meager 0.9 percent. In the 1990s, however, all of the countries enjoyed positive rates of growth, ranging from 0.1 percent in Nicaragua to 3 percent in El Salvador.

Of the five countries for which poverty head count indexes and data on income distribution are available, poverty declined in three-Costa Rica,Honduras, and Panama-and increased in two-El Salvador and Nicaragua. In Honduras, poverty declined, even though inequality increased. Inequality also increased in El Salvador and Nicaragua, while Costa Rica and Panama saw no change.

The average Gini coefficient (a commonly used measure of income inequality, with 0 representing perfect equality and 100 perfect inequality) for the seven countries increased to 54.4 at the end of the decade, from 53.4 in the early 1990s. Inequality was greatest in Honduras and Nicaragua, the two poorest countries.

Noting the high correlation between poverty and inequality, Corbacho and Davoodi discussed the complex relationship between poverty, inequality, and growth and argued that growth could have less impact on poverty in countries with large income disparities.

Nonetheless, sustained growth is a prerequisite for poverty reduction, and Central America's growth performance in the 1990s was not strong enough or steady enough to make a dent in the region's high poverty rates. One reason, the authors suggested, was that, even though the countries cut spending in the 1990s and narrowed their deficits, the composition, efficiency, and equity of spending hardly changed.

Social spending

Investment in education is an important contributor to longer-term economic growth, and education is crucial to helping people get out of poverty.However, the progress the region has made in educating its people over the past four decades masks a continuing polarization.

Although the average number of years of schooling doubled from 2.5 in the 1960s to 5 in 2000, and the...