Stuck in a Rut

• Author: Jaime Saavedra and Omar S. Arias
• Position: Manager of the Poverty and Gender Unit in the Latin America and the Caribbean Region of the World Bank/Senior Economist in the same unit

Avenues for combating persistent poverty and inequality in Latin America

After going through bouts of crisis or economic slowdown in the late 1990s and early 2000s, Latin America now enjoys brighter economic prospects and an ongoing recovery. But poverty and income inequality remain stubbornly high and deep-rooted. While the region overall is on track to meet the Millennium Development Goals (MDGs) relating to human development-being ahead of other regions in terms of child mortality, access to safe water, and gender equity in education-it lags behind on achieving the poverty goal (together with sub-Saharan Africa). Indeed, the World Bank estimates that Latin America is at risk of falling short (by 1 percentage point) of meeting the MDG of halving the 1990 level of poverty by 2015.

Exactly how big is the poverty problem? How come more progress has not been made? And what can be done to turn the situation around? This article explores these questions, suggesting that the key to reducing poverty in Latin America, a region of half a billion people, is to create a level playing field-providing the poor with the opportunities to improve their living standards through access to education, health, infrastructure, and financial services. Improving the access of the poor to assets and services will help them share in, and contribute to, economic growth.

A snapshot of the problem

Poverty measurement is a challenge for analysts and policymakers. International organizations use purchasing power parity (or PPP) figures, as these facilitate international comparisons. Using a level of $1 PPP a day, the World Bank estimates that extreme poverty in the region declined from 11.3 percent in 1990 to 9.5 percent in 2001-although, because of population growth, the number of people living on $1 a day stayed at 50 million during that period (see table). For more recent years, preliminary estimates show a slight increase in the poverty rate. But based on a benchmark of $2 PPP a day, the region has not made much of a dent in poverty. The World Bank estimates that poverty has held at around 25 percent of the population since the mid-1990s. And because of population growth, the number of poor actually increased to around 128 million in the early 2000s.

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Yet analysts and regional organizations frequently quote poverty levels in Latin America and the Caribbean that are much higher. That is because countries adopt their own national poverty lines to take account of both domestic economic and social conditions and their own standard of well-being. These national lines are not strictly comparable across countries, but they do enable governments to track progress and determine the number of people who could potentially benefit from poverty alleviation policies according to country-specific living standards.

Using national poverty lines (based on data from the Socio-Economic Database for Latin America and the Caribbean), poverty affects 39 percent of Latin Americans, meaning that more than 200 million lack incomes sufficient to cover basic food and nonfood expenditures. As for extreme poverty-which attempts to measure the inability to pay for a food basket of minimum caloric intake-the rate dropped slightly from 22.5 percent in the early 1990s to 18.6 percent in the early 2000s, with the actual number of people living in extreme poverty now standing at around 96 million.

Moreover, the regional averages hide considerable differences in the levels and trends among countries. For example, according to national poverty data, the poverty rate ranges from above 60 percent in Bolivia and Honduras to below 30 percent in Chile and Uruguay. Moreover, even within countries, these rates vary significantly, especially along ethnic lines (see "Latin America's Indigenous Peoples" on page 23). In Mexico, recent data show that 90 percent of the indigenous population live below the national poverty line compared to 47 percent for the non-indigenous population. In Guatemala, these figures are 74 percent and 38 percent, respectively. And in Brazil, poverty among the Afro-descendants is 41 percent compared to 17 percent among the whites.

Accounting for the high poverty rate

Why has poverty remained so high? First, economic growth has been insufficient. It is well documented that sustained poverty reduction is closely...