The growth of Latin American countries over the past twenty years has been deceiving. While China experienced an average annual per capita growth of 8.6 percent between 1981 and 2000, the Gross Domestic Product per capita of Latin America declined by 0.7 percent per year in the 1980s and increased by only 1.5% in the 1990s. Moreover, the region continues to be one of the most uneven in the world. It should therefore not be surprising that while China was able to cut poverty by 42% in these twenty years, in Latin America there have been few significant changes in poverty levels.

 

Though growth is key for poverty reduction, poverty itself is hampering the achievement of high and sustained growth rates. This is shown by the new study of the World Bank Poverty reduction and growth: Virtuous and vicious circles. The report estimates that, all things being equal, a 10% drop in the poverty level can increase economic growth by 1 percent and investment by up to 5 percent of the GDP. In other words, reducing poverty is good business for the entire society.

 

This is due to various factors. As poor people lack access to credit and insurance, a large part of the population cannot make investments that are potentially profitable for the national economy. Moreover, it is difficult to attract investments in regions with insufficient infrastructure and low levels of education. Poor homes, with substandard schools and limited resources, are unable to sufficiently invest in the education of their children and society is thus deprived of the potential contribution of a large pool of skills. Individuals who are malnourished and unhealthy learn and produce less than those with access to quality healthcare services. In short, society as a whole in countries with a high poverty level is deprived of the productive contribution of many of its members.

 

Accordingly, the most efficient strategy to grow and reduce poverty in most Latin American countries would apparently consist of a combination of policies seeking to accelerate economic growth with programs directly focused on reducing poverty and inequality. In particular, there are four goals:

 

1)       Achieve full coverage of pre-school, primary and secondary education and basic healthcare for the entire population, and at the same time improve the quality of public schools and hospitals. Latin America is loosing opportunities to acquire skills and increase growth due to the substandard education that most of its children and young people receive.

2)       Expand access to public services to the poorest sectors and regions (drinking water and sewer; roads, electricity and telecommunications to rural areas).

3)       Develop access of micro companies and the poorest sectors to the financial system.

4)       Facilitate the creation, growth and generation of jobs by the most dynamic companies (large and small).  

 

The first two goals require that public spending be made more efficient in these areas with more resources being dedicated to them. Poor families should be motivated to keep their children in school by means of focused and conditional cash transfers. Any increase in resources targeted to these areas must be offset by reducing the overly high and inequitable public subsidies allowed by most countries in the region (e.g., to energy consumption, retirement funds and university-level education. With regard to the latter, considering the high profitability of private university education, large public subsidies are no longer required, but rather educational credit).

 

In contrast, in some countries with very low taxation levels, the effective collection of taxes must be increased, by reducing exemptions and opportunities for evading taxes. If this is not done, there will be tax imbalances, the consequences of which (with regard to inflation or macroeconomic crisis) would end up by hindering economic growth even more, particularly for the poor.

 

The two last strategies in turn primarily require legal and regulatory improvements that would facilitate access to financial services and reduce unnecessary costs for companies.

 

Only in this manner, by promoting growth and at the same time attacking poverty in a decisive manner and on various fronts, can we go from a vicious circle to a virtuous circle in which greater economic growth will benefit us all.