From Vicious To Virtuous Circles:Growth And Poverty Reduction In LAC

PRESS BRIEFING

with

PAMELA COX

GUILLERMO PERRY

OMAR S. ARIAS

J. HUMBERTO LOPEZ

WILLIAM E. MALONEY

 

Tuesday, February 14, 2006

9:45 a.m.

 

P R O C E E D I N G S 

MS. SERRANO:   Good morning, everybody.  Thanks for coming, and we have invited you here today, as you well know, for this new report, and may I ask you please to take note of the materials that are out there.  There's a copy of the report in English.  There's a copy of the executive summary in Spanish.  There's a press release in English, Spanish, and Portuguese, a fact sheet in three languages, too.

 

So that should be available for all of you out there.  And let me introduce, though most of you know them well, our Vice President Pamela Cox to my right; Guillermo Perry, our Chief Economist, to my right; and the three authors of the report, Omar Arias, Humberto Lopez and William Maloney, who will be very happy to answer any questions that might come up.

           

So we'll start with Pamela, some opening remarks, and then Guillermo will present the main findings in the report.

           

MS. COX:   Thank you very much, Elena, and thank you to all of you for joining us today.  We're very happy that you came.  We feel it's very important to work with the press, especially because we acknowledge the very important role that you all play in getting key messages out to people in Latin America.

           

Every year, our Chief Economist Office, led by Guillermo Perry, does what we call a flagship report, and this is our flagship report for 2006, and many of you have seen some of our reports in the past.

           

And one of the reasons that we chose the topic today is because we at the Bank given the nature of what we do working on development have been quite concerned about how Latin America has had a combination of lagging growth on one side and persistent poverty and inequality on the other side.

           

And I think one of the questions that we asked ourselves is are these two things interrelated and why isn't Latin America taking off in the same way that, say, the East Asian countries have?   Latin America has been growing around 4.2 percent a year, and this growth, while better than in many past years, is still modest.

           

It's certainly modest in terms of what East Asian countries have been able to accomplish and frankly it's also modest in terms of what the region needs to accomplish, especially if it is going to reduce poverty, and just to remind people that although Latin America is primarily a middle income country region, approximately about a quarter of its citizens live under $2 a day, our definition of poverty, and it suffers from one of the highest rates of inequality in the world.

           

So in this report, the team looked at how growth and poverty are interlinked, and it's not just an analytical study that looks at how growth and poverty are interlinked.   In addition, it also makes recommendations about what can be done to both boost growth and reduce poverty and inequality at the same time.

           

One of the big questions we're asking, of course, is how can growth reduce poverty and how much emphasis you put on growth versus distribution?   But, in addition, how much can policy influence whether growth is what we call pro-poor?  In other words, when there's growth, does it trickle down to poor people and does it reduce poverty, and then what sorts of policies do you need to have to target the poor and particularly to target inequality?

           

Now, the central theme of the report is essentially that everyone knows that growth is key for poverty reduction.   I think that's not a big finding across the world.  That's something the Bank has been preaching for years, but what we find in this report is indeed that poverty itself is dragging down growth in the region.  So it's not just that growth is good for reducing poverty.  It's also, when you turn it around, that poverty is bad for increasing growth rates, and that's what we call these "vicious and virtuous circles," which is the title of the report.

           

Now, the vicious part of the circle relates to poverty.   When you have poverty, you have situations where the full ability of people in the country and full impact of its resources are not being realized.  For example, if you have poor students and they have substandard schools and low expectation of jobs, you're not using all the human capital that you have available in the country.

           

If you have poor entrepreneurs who can't get credit, they can't grow their businesses, they can't become the next Bill Gates of Peru or, you know, other famous business people.

           

In addition, they tend to underinvest in good projects.   So the capacity of the country is not being used either on the resource side or the human resource side.  But, in addition, when you have poor regions in a country, they tend not to have infrastructure; they tend not to attract jobs; they tend not to attract investment.  So, again, you have this vicious cycle that they stay in poverty, and then poor countries who have poor people, who have income disparities, tend to have higher crime and violence, may have higher political instability, particularly when poor people see that it's fairly hopeless for them to succeed in the country.

           

So this is a very vicious circle that it's very difficult for a country to break out of.   But the virtuous circle that we're talking about and that we hope countries in the region will launch is to look at how the poor not only can benefit from growth, but how the poor can contribute to growth as well.

           

For example, if you want to educate rural children and, of course, poverty is often concentrated in rural areas, it has more dividends if you also have improved infrastructure that attracts a poor improved investment, more businesses coming into the area.   You start getting virtuous circle where there's jobs created and where people want to invest themselves.

           

In addition, if you improve financing to universities, to higher education, where returns to education are very high, it's an incentive for students to finish secondary school, and in Latin America, one of the key issues is many students drop out either in secondary school or by eighth grade.

           

And policies that can build these interrelationships will add more to growth in Latin America and be good for the region.

           

There's many other findings and recommendations on this report, and Guillermo and his team have a more detailed presentation of both the main findings of the report, but I want to emphasize very importantly from the World Bank side, the type of policies and interventions that governments can take to actually improve growth and improve the reduction of poverty and reduce inequality.

           

So let me turn it over to Guillermo.   He's going to make a PowerPoint presentation and then we're going to open it up for any questions that you may have.

           

Guillermo.

           

MR. PERRY:   Thank you, Pamela.  Well, first, as in other years, you have there the names of the five main authors, and Luis Serven is not here because he left the office for heading the Macro Group at DEC now.  There was a large group of people that participated with background papers to this, many of them researchers from the region themselves, so we want to acknowledge that.

           

Should I do it in English or in Spanish?

           

MS. SERRANO:   English because we have the transcript.

           

MR. PERRY:   Okay.  Fine.  Fine.  This will be a very short presentation, but it's basically covering the main topics of the report, first facts, then the link, the traditional link from growth to poverty reduction, then the exploration of the other link, the feedback link from poverty reduction to growth and some policy and operational implications.

           

And as Pamela said, the motivation is what we call the twin disappointments of LAC, which is relatively low unstable growth and high inequality, and these figures just show that the problem of modest growth is a problem that is not new.

           

In a way, we have there income per capita of Latin America as a percentage of income per capita of the core OECD countries, and although economic theory would suggest that the poor countries should converge, to catch up with the rich, you see that Latin America has not caught up for 100 years.

           

In some periods, it more or less stayed at about 50 percent of the income of OECD, and then it fell during some times, and the other problem has been that as long as we have been able to measure inequality, inequality has been very high.

           

So those two reasons explain why our region that is a rich region in terms of natural resources and people still has very high levels of poverty, 25 percent below $2 a day.

           

In this report, and you will see that in chapter two of the report, we try to say let's measure in a more comprehensive way the problem of poverty and inequality, and we look at non-income dimensions, and some non-income dimensions, the story looks better than with income.   For example, on health, I'm not going to show this here, but the progress in health is very significant, and there is more convergence with the rich countries.

           

And also in income terms, when you use the right price deflator, things don't look as bad.   For example, the figures for the '90s is that inequality did not change more, increased in some countries, reduced in some others, and poverty reduced only slightly.

           

But when you take into account what happened with the cost of the borrowers of consumption [?] for different groups, it was reduced more for the poor--I mean the increase of the cost was more for the rich than for the poor.   In relative terms, it was reduced for the poor. and that looks a little better then.

           

But when you look at dynamic aspects, it looks worse.   For example, we looked at mobility and we found that mobility is very low in Latin America while risk is very high.  These two figures show problems of mobility, of how the likely education of the kids compared to the education of the mothers, and you see that you tend to--low levels of education in a family tend to persist over generations, and education is the main determinant of income.

           

If you transfer this to income, you would see a similar figure, and this is quite problematic because you are not having enough progress through generations.

           

So if you try to measure this better, still the story is that we have serious problems of poverty and inequality and that we need to do something.

           

In the flagship on inequality two years ago, we looked at the historical roots of that, and saw that these roots come from the colonial times so they are not easy to break.   But looking at more detail to what happened in the 20th century, we also see that part of the problem is a problem, a more recent problem of the 20th century.

           

Look at the left, the income relative to OECD again, and as I mentioned, up to 1950, Latin America, the blue line, more or less was constant with respect to the OECD.  I mean it did not catch up, but it was not left further behind.

           

From more or less the '50s onwards, it began to diverge.   Even if in the '60s and '70s, there was high growth, the world was growing much faster than Latin America, and the worst period was obviously the debt crisis of the '80s when this income per capita with respect to the rest of the world fell a lot.

           

And as a comparison, we have here the East Asian countries which is the green line, the East Asian tigers basically, and Spain as one of the European periphery countries.

           

And you see that from 1870 to 1950, both the East Asian tigers and Spain were doing worse than Latin America, but then they took advantage of this period of global growth much more than Latin America and really surpassed it.  So this shows that it is possible to change things.  These regions that were doing the worst did things, especially took more advantage of the global growth with strategies more linked to the global economy and more investments in education and other things, and surpassed Latin America.

           

And also on the right hand side, you see that many of the European countries that today have much lower inequality than there is in Latin America were not always more equal.   At the beginning of the century, sometimes their inequality levels were similar to Latin America and it was in the 20th century that many of them reduced significantly the levels of inequality, so it can be done.

           

So in that sense, the message maybe will turn a little bit positive.   We lost some time in the 20th century, but we can do it.  Others have done it.

           

Now, the second part, growth to poverty reduction.   The first part is, okay, we know that growth reduces poverty, but there are great variations in elasticities of poverty reduction to growth, and on what does that depend?  There are new estimates for the region here that indicate that for the region and for the world in general, for the poor in the more equal countries, growth delivers much more poverty reduction that further reductions in inequality.  And that is more or less obvious.

           

A very poor country doesn't have too much to redistribute and a very equal country doesn't have too much to redistribute.   On the contrary, countries that are a little more richer like the middle income countries in Latin America and more unequal like most of the Latin American countries, big changes in inequality can be very effective also in reducing growth.

           

You see in this table, for example, for Latin American countries, what growth rates you need to compensate a one percent increase in inequality.

           

And Honduras needs a little bit, less than one percent growth to compensate that, which means that, again, growth is more effective than reduction in inequality in the case of Honduras, but if you go to the other extreme, Argentina, Chile, Brazil or Mexico, you do need--I mean you do need 2.5, 2.4 additional growth if your inequality increases one percent or the other, if you reduce one percentage point inequality, that is the same effect as a 2.4 percent growth.

           

So clearly countries like Argentina, Chile, Brazil, Mexico and Costa Rica should follow a strategy both promoting growth and reducing inequality because that joint strategy is much more efficient than just one or the other in reducing growth.  So we are putting some numbers on these that we have always known.

           

We also look at sectorial growth.   I'm not going to show this here, but in the report you will see that we find like in other studies that obviously if the growth pattern is more concentrated, for example, in the rural area where most of the poor are, then growth is more pro-poor--but we don't go into policy implication so much because we did a whole flagship last year about this--indicates that if you overcome the underinvestment in public goods, and you open more to trade, then the rural area will grow faster in most of Latin America, open more to trade in Latin America and in the rich countries as well.

           

So in this report, we concentrate more on another thing, which is the combinations of policies that help more growth and reducing inequality.   And first it's important to know that going back to all the policies that in the past we have found that can help in growth, in the long term, all those policies help in reducing poverty, but in the short-term, some reduce inequality and some increase inequality.  So in the short-term, the effect is different.

           

For example, we find again that increased access to education and infrastructure increases growth and reduces inequality in the short-term, so their effect in reducing poverty is very powerful, and in the inequality, we have found something similar, but here we do that more econometrically, in a more rigorous fashion.

           

But, on the contrary, for example, trade opening in general increases growth but in the short-term tends to reduce inequality and in some cases may even reduce poverty.   So what is the conclusion in that case?  Should we don't do trade opening?  No.  Because it does increase growth in the long term poverty.  But you should accompany that policy with other things.

           

You should accompany that policy with complementary policies that are pro-poor like access to education and infrastructure that they don't only help more the poor, but actually we have proven that these policies increase the growth response of the economy.   When you open to trade, and you do at the same time better education infrastructure, you get more growth and more equitable benefits.

           

And if there are some groups that can lose like some small farmers in non-competitive sectors, you should have compensatory mechanisms.   So the conclusion is that in some cases, you do need policy packages or you should have policy packages that are much better than the sum of its parts.  These kinds of policy packages really gives much more than if you do only one or the other thing.

           

Also, if you only do infrastructure or education, you don't get as much as if you do it together with opening to trade.   Now, the other thing that we look at is are we trying to get more pro-poor growth through more equity of opportunities, which is a topic of our WDR, or do we also need some policies that are much more focused on the poor end on redistribution?

           

And this diagram that is a little bit difficult without a PowerPoint, but let me explain, the red line going up is the average Gini in Latin America and the green one is the average in Europe, in the OECD countries, core OECD countries.

           

So the difference which is between these two green lines is the total differences in Ginis.   In the left, we look at the difference in Ginis before taxes and transfers, what is the production of incomes in the market, and you see that the difference between the two is more or less half of the total difference.

           

So what this means is that if Latin America wants to have eventually the same kind of income distribution of an average OECD country, it has to have more equality of opportunities, but it also has to use the system of taxes and transfers moire as the OECD countries do.

           

And then we go a little bit more in detail on that.   What is it precisely that you have to do?  Well, first, the problem is that although public expenditures are very progressive in OECD countries, they are not in Latin America, because although some parts of the public expenditures like basic education or health are progressive or the cash transfers, conditional cash transfers.  Others like subsidies to pensions, subsidies to tertiary education, subsidies to energy consumption, are very regressive.  So the average you don't redistribute through the expenditures.  So you need to change that.

           

This is critical and once you do that, you probably also would have to increase tax collections because most countries with the exception of Brazil and Nicaragua in the region collect taxes much below what other regions or other countries of the same level of income per capita, but you probably should do that once that your expenditures are more equitable and more efficient.

           

Then we go to the last part, which is the link from poverty to growth.   As we look at a basic fact of convergence clubs among countries, that is that countries are converging to three different groups.  Again, economic theory would suggest that all countries should converge in the long term, but this is not happening.

           

Poor countries are converging to one side.   Middle income countries to another side, and rich countries to another side, and the three are not getting together.  And we go further than that.  That has been shown by other people.  We go further to try to estimate econometrically.  Other things being equal in two countries, if one country has more poverty, what happens to the growth prospects.

           

And we find that on average, other things being equal, ten percentage points more of poverty lower growth by about one percentage point, and if you have a shallow financial system, lower investment about five percentage points.   This graph shows that countries with high poverty levels, the pink line, tend to have lower investment rates and ten to be poorer.

           

So you have these kind of almost a poverty trap for very poor countries there.   It's not that they can find impossible to growth, but poverty becomes a very strong drag on growth.

           

And we find other channels through which poverty reduces growth because it reduces educational attainment of the average population and innovation; risk and health dimensions also reduce growth.

           

Now, we look at this problem not only among countries, but among regions in the same country, and this graph, I only put it there because it's very beautiful, and it's very Brazilian, and it looks like the Paviosucre [ph], but imagine that the Paviosucre, the two mountains that are there, are not getting together but are getting apart.

           

And this is what is happening with the states in Brazil.  The richer states are getting together, are converging in incomes.  The poorer states are converging in incomes, but the two groups are getting farther apart.  And why is it?  Partly, it is because agglomeration externalities.  Sometimes richer areas get high returns because they have higher levels of education of their people, higher infrastructure, and new activities are more productive there.

           

There is spillover from some states to others, but only to neighboring states.   It doesn't get from the south of Brazil to the north of Brazil, and migration helps a little bit in equalizing incomes, but not completely.  It is limited for many reasons that we look at the report.  So if you want some more equality, you do need to support lagging regions during reform.

           

We get a lot into the policy issues because there may be some dilemmas between growth and regional equality, and I don't have time to go into that, but we go into some depth what you can do to try to solve this problem.

           

And we then look at potential education/income poverty traps among households, and in one chapter we look at families that continue to be poor are either because they are located in very poor regions where they don't have enough opportunities or/and because they have low educational levels which are transmitted from generation to generation.

           

Other things like discrimination in the labor markets and that are not as important in Latin America as these two things.  And you can see the problem in education here with Argentina, but it's worse in other countries, in which the kids of the poor tend to converge to seven years of education; the kids of the rich tend to converge to 13 years of education.  It's a major difference.

           

In other countries, it's even worse, and the problem is that in most countries, the kids of the poor tend to converge to less than finishing secondary education, and only when people complete secondary education, the probability of getting out of poverty increases significantly.

           

And actually the problem of the low education trap has to do, as I said before, here you see other reports have done this, but we repeated this here--Omar did this in the report--that if you educate more, yes, there are returns to education.   You see them growing, but when they really begin to grow a lot is after you complete secondary and have some tertiary and then the problem of the poor is that they cannot wait as much because there is more opportunity costs for their children and whatever, or they cannot get there because they are going through lower quality of schools and you see there that the kids of the poor, even if they get to the same level of education get less returns out from that education.

           

It's the difference between the two lines, and this is due to the fact that they don't have access to the same quality of schools.   They have less access to complementary assets, less connections to use their education afterwards, and critically if you really need to try to--educational policy has to try to get people, all the people out of secondary.  Just increasing by one year doesn't make a big difference in the country.

           

You really need, as the Asians have done, to try to get everybody out of secondary with relative good quality and credit so that the people that want to go to university and the more talented can go.

           

And this thing of reducing liquidity constraints and risks through the role of conditional cash transfers, vouchers, and educational credit is very key.

           

So, just to finalize, what are the main policy implications, and we have in the handout that we will give you some other specific sectorial policy implications which, if you want to, we can discuss in the questions and answers.

           

But the main policy implications is, first, that this debate of people that have said, no, let's growth and we afterwards we will be concerned with the problem of poverty inequality of pro-poor growth is really a false debate.

           

It is true that poverty reduction needs growth.   Without growth, it's very difficult to reduce poverty, but the reverse is also true, where you keep poverty packages, it's more difficult to grow.

           

So you have to attack the two things simultaneously and policies need to take account of their direct short-term effects in both things.   When you have a policy like trade opening that is good for growth, but in some regions, at least like in Latin America, seem to increase in the short-term inequality, then you need to complement it with other policies like access to education and infrastructure and compensation measures that actually increase not only make more equitable the benefit of these policies, but increase the growth of it as well.

           

Second, the conclusion, is it pro-poor growth or pro-poor policies?   Really we need equality of opportunities like the WDR says that is the key, is key, but if we want eventually to be with the same levels of equality in the OECD countries, that will not be enough.  We also will need to use the capacity of redistribution of the state that Latin America does not use, through sensible taxes.  I mean taxes that are efficient.  And through taxes and transfers that are more focused and especially that are more focused on the poor.

           

And finally, if poverty reduction can enhance growth, then we should look at every time that we do our poverty, a direct poverty reduction intervention, how we can enhance more the growth aspect, and this is precisely what conditional cash transfers do because they not only give income to poor families lifting up their liquidity constraints, but because they require that kids go to schools and to health services, then they are increasing human capital for the future.

           

Also, you can design well safety nets that encourage efficient risk taking by population and so on.   So let me stop there and we open for questions.

           

MS. SERRANO:   Pablo.

           

MR. BACHELET:   Pablo Bachelet of the Miami Herald.  I'm going to ask a Venezuela question.  Venezuela has been growing at nine percent, maybe plus, growth rates, but at least there are some statistics that I've seen that would indicate that poverty has been or inequality has been increasing in Venezuela.  And some of the development indicators in that country are not that good.

           

I would just like your comment on that.   I mean here you have a country that is growing, presumably growth reduces poverty, but that may not be the case in Venezuela.  Comments on that?

           

MR. PERRY:   Humberto, would you like to try first and then Pamela and I will complement?

           

MR. LOPEZ:   I'm going to be honest.  I don't know specifically Venezuela as I do what we're referring to.  In a general context, what Guillermo was stressing is that in general, poverty reduction will be associated with growth.  That doesn't mean that every particular episode where you observe high growth you would also observe a decrease in poverty.  If inequality is increasing, it would be perfectly possible that what you referring, that poverty is increasing.

           

Now, whether this is due to the fact that some prices have been fixed artificially, and what has happened is that when you go to the markets, there are no products.   And eventually you start to have access to some particular products.  I'm not sure of whether that--

           

MR. PERRY:   May I complement this in the following way?  This report tries to show some general trends in the region, but they don't go in detail in each country.  We then go to the countries and we'll do  that is really to discuss the issue with, in every country with the authorities and civil society and the independent analyst and try to see what these generally mean specifically for that country.  Because only in the country specific context you can.

           

And perhaps also what happened in Venezuela is Venezuela is recovering from a major crisis in the past.  So one has to be very careful about the periods in which one is looking at that because this very deep crisis had a major effect on poverty.  So now that it's recovering, there may be some lag in the recovery of reduction of poverty.

           

But again we are not looking into detail in this moment in what has been the recent trends in each country.

           

MR. BACHELET:   May I do a follow-up?

 

MS. SERRANO:   Uh-huh.   Yes.  Yes.

           

MR. BACHELET:   Just a quick follow-up.  Venezuela and actually Argentina also have been implementing a policy of price caps and some freezes.  How does that come into the equation of this poverty growth issue that you discussed in the report?  I mean can you somehow boost by raising prices and keeping inflation under control?

           

MR. PERRY:   We really are not looking at this issue in the report, so I don't think we--it would get us in--we may if you want try to go over bilaterally with you later on in more detail on this.

           

MS. COX:   I think your point on inflation, whether or not the policy that they're using is the right policy, but inflation control is important because inflation does tend to hurt the poor more than other people in any economy.  They tend to be the most vulnerable to inflation, the least protected.  If you look at the generalized economic debate, the generalized economic debate is that price controls usually are not a very good idea, that they introduce distortions in the economy, but I think when you look at the Argentine case, they do need to deal with inflation.

           

MR. PERRY:   The problem is how sustainable it is to control inflation in that way.  When money supply is growing very fast, when in the case of Argentina, for example, the exchange rate is quite depreciated and you are getting to a capacity constraint, so it is very difficult.  I mean there are macroeconomic pressures to increase inflation.

           

And then you are trying to hold it down by this intervention, and this can work for some time.   But if the macro aspects that are fueling the inflation are not corrected, it may not be sustainable in the medium term.  That can be the problem of that.

           

MS. SERRANO:   Paulo.

           

MR. SOTERO:   I'm Paulo Sotero from O Estado De S. Paulo in Brazil.   I have a question.  What you describe there is how we got into this problem of high poverty/high inequality and low growth that we have in Brazil, and if you go to Brazil, you can see the problem you have just described.

           

I wanted to know in order to get out of this, maybe do you have a theory on why we got into this?   Because you always talk about "in the period of that crisis," which tends to convey the idea that something happened outside Brazil that led Brazil to this situation.  But do you know why a country chooses to get into the trap the way, particularly a country like Brazil?

           

MR. PERRY:   You want to--Humberto?  Well, the hypothesis that we have is the following: if you see the period in which Latin America falls more behind than the rest of the world, it's after the '50s, precisely when the world economy is booming.  So Latin America grew during the '60s and '70s, and some people say, oh, we were growing better at that time than now.  Yes, but we were growing less than the average of the world, and we did not do what other countries like the East Asian or the European periphery did, that they took advantage of that period to really catch up.

           

And why?   We were pursuing at that time very closed policies, very protectionist policies.  We were not taking enough advantage of this major global boom and the other thing that I think is different from that period of the last 50 years is that although we improved our educational levels, they did not improve as fast as in East Asian and the European periphery.

           

Up to the '60s, the educational levels in Latin America were similar to the European periphery and a little bit higher than East Asia.  And they went up much faster.  They really put a lot, much more effort on those.

           

So mainly these two things.   There may have been others.  And the other thing was macro-discipline.  We thought that because we had a closed economy, one could be a little more easy on the macro, on the fiscal and the monetary policy.

           

And for awhile, you could control it in other ways, but then it exploded with the debt crisis.   The debt crisis was a consequence of poor macro, as you know, I mean excessive indebtedness, which means excessive deficits.

           

And that, as you saw there, that the major setback with respect to the rest of the world was in the '80s, and we haven't been able to recover that setback fully yet.   So these were the key problems in the past.

           

But you were also asking what to do forward, no?

           

MR. SOTERO:   No.  Just on this.  What explains the fact that from a certain point on, for instance, we know in Brazil that we--our social budget benefits mostly the people that don't need help.  That's clear--the pensions, the universities, and all of that.  Was the crisis, the debt crisis that led the people that control poverty, oh, let's take care of ourselves here and do this?  Or do you have an explanation how this mechanism of helping the rich with social policies exacerbates?

           

MR. PERRY:   This really comes in--this was more looked at in the inequality flagship.  Actually this comes from a long history of let's say capture of the state for the benefit of some groups, which is beginning to change.  Frankly speaking, in the case of Brazil in particular, in our view, in the last two governments, the government of Cardoso and the government of Lula, is beginning to change because you are beginning to see, for example, since the Cardoso government, a major drive in basic education and health which was not the case before in Brazil.

           

And these expenditures are very progressive.   We have seen things like Bolsa Familia, which is very progressive, and we didn't see these things before.  And we are seeing some attempts to reduce the subsidies to the rich like pension funds, that have been difficult, you know, that, the political economy of that has been difficult.

           

I don't know if Omar would like to add something to this?

           

MR. ARIAS:   Yes.  I mean essentially related to what Guillermo was mentioning before, the problem of elite capture, and besides in the past, the region wasn't as smart in terms of these educational policies.  In the case of Brazil, we see now that there is a combination of interventions on the supply side to make sure that schools are in place and quality teachers go to the lagging regions, but also to make sure that we address also that the main constraints are faced by the poor.

           

So now that we're seeing policies that are exploiting the complementarity, it's much better.

           

MS. SERRANO:   Tatiana, Ana and Teresa.

           

MS. BAUTZER:    I have a follow-up on Brazil.  So, okay, so we have this history of state being captured by the elites.  But nowadays, the main factors there are, I mean in the last five years, there has been a reduction but not expressive reduction in the Gini coefficient or other measures of inequality.  So it's mainly the regressive spending, the regressive tax system?  What is the main driver today of this continuation of inequality in the country and also I have a doubt about a table that is on page 92, about the impact of public transfers on income inequality.

           

You see there in Argentina--

           

MR. PERRY:   Which page?

           

MS. BAUTZER:   92.  In Argentina, the Gini index falls almost four percent with the cash transfers, and this is very small in Brazil.  What does that reflect?  Just the size of the cash transfer?  Or inefficiency?  Does reflect efficiency of the programs to reduce?

           

MR. PERRY:   Humberto, would you like to mention something about this table first and then maybe Bill, would you like to comment on the more general question?

           

MR. LOPEZ:   Just very quick.   One of the problems that is in Brazil is that the pension system is very regressive and it accounts for a big chunk of the transfers.  When you have a large part of your cash transfer system is in a very retrogressive component, you cannot expect that it's going to have a very, very--

           

MS. BAUTZER:   So Bolsa Familia is more or less compensated by the regressiveness of the pension?

           

MR. LOPEZ:   Bolsa Familia is very progressive, on the other hand, but the unit amount that is sustained in Bolsa Familia is much smaller than what is spent on pensions.

           

MR. PERRY:   This is total public transfers, so that's why some part is progressive and another is regressive so basically cancel out.

           

MR. BAUTZER:   So you could say in Argentina, the way they do the cash transfers is much more efficient to reduce poverty than in Brazil?

           

MR. PERRY:   Perhaps because of the subsidies to pensions are not as large as in Brazil.

           

MS. COX:   Yeah, I think in Argentina, the case is they don't have a Bolsa Familia type program yet.  And they're moving towards that direction, but we're adding up the pension and the Bolsa Familia conditional cash transfers and any other sorts of support that's going, and I think in Brazil, the story is really on the pension side.

           

It's just so big compared to Bolsa Familia, and in Argentina, you don't have something as big as Bolsa Familia, but on the other hand, you don't have pensions that are as regressive as Brazil.

           

MR. PERRY:   And probably also here, although the program of Jefes is not as focused as Bolsa Familia and is not conditional, so in terms of quality, it's not as good.   However, it's very large.  It's very large.  So it does have an effect.

           

MS. COX:   But it's had a very--the research that's been done on the Jefas y Jefes program in Argentina has shown that it has had a positive impact.

           

MR. PERRY:   Yeah.

           

MS. COX:   It is not a conditional cash transfer system.   It's a short-term system, but it has had a very positive impact.

           

MS. BARON:   I wanted to ask on the Jefas y Jefes because I know that there has been some problems and that some financing has been kind of stopped or even looked at a little bit because of problems of irregularities, as they say.   So I wanted to know by what we see here, it kind of functioned well, but there was irregularity.  So how does that--

           

MS. COX:   Well, I think you need to look at the impact of these programs in doing what they are intended to do.   And in the Jefas y Jefes program, the intention was to deal with a social crisis.

           

MS. BARON:   Exactly.

           

MS. COX:   In 2002 and 2003.   When Argentina really had no safety net for poor people.  So it was a program that was put in place fairly rapidly.  Our research, which has been published I think at the World Bank Research Observer, has shown that the program did reduce poverty and was effective in that short-term impact.

           

MS. BARON:   In spite of the irregularities?

           

MS. COX:   What we find in nearly every type of program throughout the world is that there are problems in implementing these sorts of programs.   There's problems in the U.S., there's problems in Canada, there's problems in Europe.  And these can be problems related to abuse of the program.  They can be problems related to poor targeting of the program.  They can be problems related to administration.

           

So the Jefas y Jefes program was put in place fairly rapidly.   It was an emergency program.   And the Bank was involved in the first phase of the program precisely because we felt our value added was helping the government deal with how to manage this program better, how to target these programs better.

           

For example, we helped introduce debit cards instead of cash which is a way to control more where the money goes.   And we're continuing to work with the government on the implementation of this program.

           

Now, the next step that the government has to do is make this program go into more a conditional cash transfer program.   Why?   Because a conditional cash transfer program, as Guillermo has pointed out, really has a double impact on growth.  It's a safety net in the short term, but in the longer-term it makes people invest in education, job skills and so on, and we're working with the government to do the transition.

           

MS. BARON:   How does it work, the condition cash?

           

MR. PERRY:   The poor families receive the transfer, but they have to prove--

           

MS. BARON:   That they use it in the--

           

MR. PERRY:   No, that the children are being, are attending school and are attending the health services.

           

MS. BARON:   Okay.

           

MS. COX:   There are programs such as this in Mexico, the Oportunidades.

           

MS. BARON:   It's like the Bolsa in Brazil--

           

MR. PERRY:   Yeah.

           

MS. COX:   In Bolsa Familia, the Families in Action in Colombia, and many people have put in place these sorts of programs, and they both provide the safety net which in many cases is non-existing and they encourage children to stay in school, particularly, for example, in Oportunidades in Mexico, the family receives an extra benefit when the child graduates from secondary school, particularly if it's a girl.

           

So there is various things you can do to make sure you're investing in human capital.   And Argentina wants to put in place now that sort of program.

           

MS. BARON:   Yeah, Plan Familia.   It's the one.

           

MS. SERRANO:   Teresa.

           

MS. BOUZA:   Yes.   My question is about this report that the World Bank has been preaching for many years the need of growth to reduce poverty and I wonder if this report is on how a shift of focus and that you're not planning to stress more the need of pro-poor policies?

           

MR. PERRY:   My personal view is that what we found here reinforces pretty much what has been the shift that the Bank has been taking in the past.   That is not only supporting policies in favor of growth, but supporting a lot of programs that attack poverty directly.  And it has been a big debate if this is the right way of going, and I think what this report suggests is that this is the right way of going, and that even more, every kind of policy should look at the impact that it has not only on growth but on inequality and in poverty in the short term because a policy can be very good for growth and for poverty reduction in the long term, but if in the short term it increases inequality and increases poverty, then it's not only, the results are not only inequitable, but the efficiency in terms of growth is diminished, and that's why we are saying you cannot separate policies anymore, these things are for growth and these things are for-no.

           

You have to look at the impact that every policy has on both sides of the equation and try to have packages of policies that are good for growth and help reducing poverty and guarantee that you reduce poverty in the short-term.   That's pretty much--so it reinforces that shift.

           

MS. COX:   And I think, Teresa, that the key difference that this report is adding to the literature is not only that we need to have pro-poor growth, but also that poverty is negatively affecting growth.

           

I think that has not been a message that we've been as clear about.   So we need to deal with poverty, not only because poverty is a bad thing, but also because poverty is actually dragging down growth.

           

MR. PERRY:   See, reducing poverty not only good for the poor; it's good for everybody.   It's good business for everybody.

           

MS. COX:   And that's a very different message because most people go in and say, well, let's just take care of poverty because we have to be nice to poor people, and I think what this report is showing in a very structured and economically, you know, based on economic fact, is everybody needs to be concerned about poverty because we would grow so much faster if we unlocked the potential of poor people and poor regions.   And I think this has been part of the East Asia miracle, in fact, that if you look at what East Asia did.

           

If you look at countries such as China, who remember have lots and lots of poor people when they started, was precisely they figured out how to unlock the ability of poor people.  How did they do that?  Well, they invested in education, they invested in industries and infrastructure that they created jobs for poor people and they started, you know, exporting and the rest I think everybody knows.

           

But here's a clear case of what a region did and for those of you who probably don't remember, back in the '60s, everybody thought that Asia was never going to develop.  What are we going to do with all these poor people in China?  And suddenly, you know, Asia took off and they took off because they had policies that very much played to what they had, their resources, and unlocked the ability of those people.

           

MS. BOUZA:   A related question related to Venezuela. The Venezuelan government is investing a lot in health and education.  I wonder if, you know, if you're familiar with, you know, the investments that they're doing and what's your opinion on that?

           

MS. COX:   We haven't yet had a chance to look at those investments, and I think we'd be more than happy to if the government wants us to do it.   I think the important thing that we saw on the table that Guillermo showed is Venezuela is a country with high inequality and one of the things that Venezuela needs to do to grow, aside from its oil revenues, is precisely to deal with investments in education and health.

           

So I think that we think it's important that Venezuela wants to do that.  Whether these investments are, will get the biggest bang for the buck, so to speak, we haven't looked at that particular issue yet?

           

MS. BAUTZER:   Just one follow up on this question of China.  Wasn't that easy because they were coming from a communist government that had, you know, all those ideas of everyone equal, you know, mandatory schools, equal for everyone?

           

MS. COX:   They also had the Cultural Revolution where nobody went to school for a couple of years.   I think that maybe China is, you know, a sui generis, but if we look at the rest--if we look at a country like Indonesia, which is approximately as large as Brazil, what Indonesia did very much in the 1960s was invest, and Thailand did this as well, is they invested in basic education to begin with.

           

And remember, these countries were much more equal so people had much more access to education.

           

MS. SERRANO:   Pablo.

           

MR. BACHELET:   Just a quick clarification. You said you're going to do a road show with this report, but you also say you'd like to discuss the programs that the Venezuelan government has in place.   Is Venezuela part of your road show?  Does the Bank have contacts with the Venezuelan government?

           

MS. COX:   We have an office in Venezuela.

           

MR. BACHELET:   You have an office so you do plan to present this report to them and discuss the programs that you have?

           

MS. COX:   I don't know the exact road show.

           

MR. ARIAS:   Well, actually what we have now is we have an ongoing poverty report that is being done in collaboration with the government of Venezuela.  And one of the aspects that is being analyzed is precisely the investments that are being done in the social sectors and that has just started and we should have that later this year.

           

MR. BACHELET:   Is that going to be public?

           

MS. COX:   All our information is public.

           

MS. SERRANO:   Last question.

           

MR. RODRIGUEZ:   This question is about Cuba.  Do you have an office there?  And are you suggesting that the Latin American countries should follow the example of Cuba and invest a lot of money in school and health?

           

MS. COX:   We do not--Cuba is not a member of the Bank at the moment, so we do not have any formal relationship with Cuba.  Certainly I think one of the success stories of Cuba has been exactly its investments in health and education.  I think there are other issues as to whether Cuba is growing or not, which since we don't have any knowledge of Cuba's economy, we can't comment on.

           

But certainly in terms of reducing inequality, Cuba with its investments in health and education.

           

MR. PERRY:   But we did look at these issues in the report that we did a few years back, "Closing the Gap in Education and Technology."   What we showed is that for growth to really be very strong, you need both things.  You need to improve human capital, but you need opportunities for the human capital to do productive things, and these things come out when you are open to trade and you have efficient markets and you have the right incentives.

           

So precisely in that kind of report we showed that this is again the complementarities that we talked here about trade opening and infrastructure and education that I was mentioning. Trade opening gives more if you do infrastructure and education, and your investments in infrastructure and education do much more if you have trade openings and other opportunities.

           

So if you keep a very closed economy which for reasons, for different reasons, and you have very good education, but the human capital cannot use it, which was what was happening in China also until they began to integrate more with the world economy.  Exactly the same.  China had been doing a lot of investments in education, but they were not showing in terms of growth.

           

MS. SERRANO:   Hugo.

           

MR. ALCONADA:   Yes, just a minor question.   In Argentina, our discussion now, the government is discussing to I think it's exempt or reduce the [Spanish] like the income tax for people who are earning up to 5,000 pesos.  As you all know, it's a very high income in Argentina in general.  Is that a way of dealing with, as you said here, you mentioned before progressive taxes?

           

MR. PERRY:   Maybe, Bill, you have been too silent.   Do you want to get in at some moment?

           

MR. MALONEY:   You want to talk about taxes?

           

MR. ARIAS:   Well, I mean in general we haven't frankly looked into that.   In fact, we are doing also a poverty report for Argentina right now and we should have that ready later this year.  We haven't looked into that issue, but in general one thing that differentiates OECD countries with Latin America is the existence and heavy, heavier reliance on progressive taxes.

           

Now, that not only means higher income taxes for the rich.   For instance, one instrument that is rarely used is property taxes.   So one would have to see whether the rationale for lowering the tax rate is because there is a feeling that there are problems of incentives, and that people feel that their effort is being taxed, so that now they're going to reduce their investment in their effort because much of it goes to the government.

           

In general, if you have a tax base that is broad and you have a good effort of collecting taxes, then that deals better outcomes than if you try to tax a very small group of people and then you have a hard time doing that.

           

MR. PERRY:   But I would like to insist that if you have very regressive expenditures and not very efficient, that's the first thing you want to solve, is to make more equitable and efficient your expenditures, and then after you do that, you want to increase your collection of taxes.

           

Now how to increase it in that case, the best way to increase taxes is relatively simple taxes and no exemptions and privileges.   Because many times what we find in Latin America is that, for example, in my own country, you have a tax on corporate income that is high, but you have a lot of exemptions.  So the system doesn't produce anything but problems, but noise for some investors.

           

So it's better to have many times lower tariffs, but really collect and not have all these loopholes and things.   I am not so familiar with the proposal of Argentina so I'm not giving you a direct answer on this proposal, but on the general trend that we see.

           

MS. SERRANO:   Okay, guys.   Thank you very much.  The authors are available if you want anything additional.  So just let us talk to them.  Thank you very much.

           

[Whereupon, at 10:45 a.m., the press briefing was concluded.]