Poverty Reduction

• Author: Nora Lustig and Omar Arias
• Position: Senior Advisor on Poverty and Inequality at the Inter-American Development Bank/Poverty and Inequality Advisory Unit of the Inter-American Development Bank

Although Latin America and the Caribbean reduced the incidence of poverty during the 1990s, population increases and the greater income inequalities that had developed during the 1980s stymied the region's efforts to reduce the number of poor people. How can its policymakers fight poverty most effectively and better protect the poor during economic crises?

The incidence of poverty in Latin America was approximately 3 percent higher, and roughly 70 million more of its people were living in poverty, in 1997 than in 1980 (see table). The limited progress made to date in combating poverty is partly due to the impact of the 1980s debt crisis. Although economic growth resumed during the 1990s (averaging 3.3 percent a year for the region during 1990-98), it was not enough to produce notable progress in poverty reduction. This was partly due to the increasing inequality of income during the 1980s (see table), which was not reversed during the 1990s: with greater inequality, a given growth rate brought about a slower rate of poverty reduction.

All in all, the lack of substantial progress in reducing poverty can be linked to recurrent economic downturns and the increase in earnings inequality.

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

Crises, inequality, and poverty

Macroeconomic crises, which have been a recurrent phenomenon in Latin America and the Caribbean during the past twenty years, are perhaps the most important cause of large increases in poverty in the region. Because of the pervasiveness of such crises, the 1980s came to be known as the region's "lost decade." Although the region's experience during the 1990s was somewhat better, 24 countries experienced at least one year of decrease in per capita income. Altogether, between 1980 and 1998, there were more than forty episodes in which annual per capita GDP fell by 4 percent or more. These numbers will increase once results for 1999 are included.

In all crises for which data are available, the incidence of poverty increased at the onset of the crisis, and in all cases it reached levels-after between one and five years, depending on the country, had passed-that were higher than before the resulting recession had begun. Crises have frequently been accompanied by increasing income inequality as well. Inequality rose at the onset of the crisis in 5 out of 8 episodes for which data are available; and in 15 out of 20 episodes, inequality was greater after the onset of the crisis than before.

Fields (1991) has estimated that, on average, for every percentage point decline in growth, poverty rises by 2 percent. Others have found that had Latin America reached the levels of macroeconomic stability achieved by industrial economies, roughly 25 percent of its poor people would have been lifted out of poverty. Because crises in Latin America and the Caribbean tend to be accompanied by increasing inequality, economic contraction leads to greater-than-proportional reversals of previous gains in poverty reduction: each 1 percent decrease in per capita income during a recession in the 1980s wiped out the reductions in poverty that had been brought about by increases in per capita income of 3.7 percent in urban areas, and 2 percent in rural areas, during the 1970s. Also, crises ratchet up inequality: subsequent recoveries tend not to eliminate the greater inequality generated during a severe economic downturn.

That crises result in relatively high levels of transient poverty is uncontroversial, but they can also be a cause of persistent or chronic poverty, because of the irreversible impact that income...