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Argentina: Poor People in a Rich Country

 

Argentina 2000 PA
(Official Use Only)

Volume 1 (11Mb PDF)

Volume 2 (24Mb PDF)

Argentina is a relatively rich country. Yet despite this wealth, it is also a country with a relatively high level of poverty.

Since 1991, the country has gone through a period of adjustment that has led to a remarkably sharp drop in rate of inflation, the privatization of state-owned industries, and the opening of the economy to foreign commerce. All of these adjustments have affected the poor, particularly through their effects on labor demand. Added to these shocks have been the recurrence of economic crisis, particularly in 1995 and 1998, which have also slowed the growth process.

Progress on the economic front produced real gains in terms of reducing poverty and improving welfare. Poverty rates fell from 40% in 1990 to a low of 22% in 1994. However, since 1995 poverty has grown slightly as a percentage of the population, and income distribution has deteriorated. The deterioration of income distribution reflects the fact that while overall growth has been positive, and average per capita income has risen, the gains have gone largely to the more skilled and educated in the labor force, and not to the poor. In addition, unemployment has risen, and unemployment rates are higher among the poor and extreme poor, than for the general population. Many poor are underemployed or in temporary jobs ,or work in highly variable construction activities. Women, particularly poor women, have increasingly entered the labor force as a strategy to maintain household income. The lack of full time and secure employment is seen by the poor as one of their most critical needs.

In general, poor families have low levels of education, have a large number of dependents, and are younger than families that are not poor. Large family sizes are the result of much higher fertility rates among poorer women, a factor that tends to perpetuate poverty. They live in areas lacking often in water and sanitation services, roads, and other public amenities, live in areas affected by flooding, and live in overcrowded conditions. The often lack titles to the land they inhabit, and therefore lack the incentive and the collateral to invest in their housing. The distribution of urban services is uneven between urban areas; some seem to do a better job than others in meeting these basic needs.

The Government spends about 18% of GDP on social programs, however not all of these programs were designed to reduce poverty. The largest part of government spending is for social insurance, which provides pensions and some unemployment benefits to workers from the formal sector. However, workers in the informal sector, which are more often poor, do not receive these benefits. While workers in the formal sector enjoy benefits and relative job security, workers in the informal sector have neither. Most of the unemployment seems to come from the informal sector, and younger workers are more often unemployed. Workers in the informal sector are not necessarily poor; the poor can be found in both the formal and informal sectors, and there is movement in both directions between the these sectors. However, workers in the informal sector are both more prone to job loss and salary reductions, and are relatively unprotected against these events.

Generalized social programs, principally in education and health, benefit all groups, and generally the poor benefit more than most. The poor particularly benefit from primary education, in part because they have larger families. Higher education spending, however, is highly regressive. Most of the students in public universities are not poor, and receive essentially a free education.

Government programs that are specifically targeted to the poor generally work well, and are well targeted. The more general problem is one of coverage. Only about 25% of poor families receive any form of direct public assistance, in the form of cash, food, etc. However, it is estimated that public and private transfers together probably reduce overall poverty by 4 percentage points, and are particularly important for the elderly. Government programs tend to be procyclical, and are reduced during downturns in the economy just when they are most needed. And there are several government programs of limited value which could be reduced or redirected (housing, labor training).

Shifting demand for labor has put a high premium on education. While rates of return to primary education are extremely low (about 3%), returns to tertiary education is 29%. Despite these high returns, the poor often do not complete secondary school and are underrepresented in higher education. Repetition rates are high, as are dropouts. Only 24% of those aged 18-24 among the poor have a secondary education. The low quality of education, particularly in poorer areas, and the need to work all work against school completion.

Rural areas tend to be ignored in most surveys, in part because Argentina is heavily urban. However, limited information suggests that there is substantial poverty among the rural population, particularly in the Northwest and Northeast. Most of these poor are not farmers, but farm and non-farm workers who are often unemployed and lack skills and education. The indigenous people of the rural areas seem to be particularly poor, since they live in remote areas away from public services.

Conclusions

Future anti poverty efforts need to focus on three broad areas:
  • First, reforms and policies that will lead to a pattern of growth that will be more rapid overall, and feature a higher level of employment per unit of output.
  • Second, improving the access of the poor to basic services, that will both raise their overall welfare and, by improving their human capital, improve the productivity and their ability to compete in an increasingly globalized economy;
  • Thirdly, reduce the vulnerability of the poor to shocks and losses in income , chiefly by improvements in safety nets to both protect the poor during economic downturns, and keep them from making short term adjustments that will have negative impacts on their long term ability to reduce their poverty.

Generating Labor Intensive Growth. Macro-economic policies that permit rapid and stable economic growth without inflation are an essential first step to a significant decline in poverty. A sustained growth of per capita income of 1.8% could reduce poverty by 35% in ten years, provided the benefits go to all parts of the economy. This is more likely to happen if Argentina's labor markets operate efficiently. However, Argentina's labor market is one of the most rigid and regulated in the developing world, preventing wage adjustments from taking place easily. Some of key short term reforms that would facilitate a more orderly operation of the labor market include:
  • elimination of centralized or sectoral collective bargaining agreements which are automatically extended to all workers in a sector, even if not signed and even when expired;
  • reduce the high cost of labor by reducing labor taxes, severance payments and moving to a fully-funded unemployment insurance system based on individual accounts;
  • allow temporary employment that is not subject to payroll taxes, as under the former modalidades promovidas, and
  • extending programs, such as PYMES, which permit exceptions for small scale enterprises.

In the longer term, the critical problem remains that a large part of the labor force in the informal sector lacks any form of pension or unemployment insurance coverage. A major reform of the labor laws that would reduce their present high level of protectiveness should be followed by an extension of at least minimum coverage to small firms.

Increasing Access to Services. A major effort should be undertaken to raise the level and quality of education available to the poor, and increase their access to secondary and higher education. One of the key problems is that children of poor families are more likely to drop out of school for various reasons. The impact of the recent recessions in 1995 and 1999 seems to have actually worsened the situation with enrollment rates for the poor declining. A viable strategy in education would include:
  • greater investments in secondary schools in poor neighborhoods, such as by extending the present Plan Social Educativo;
  • cash grants to poor families conditional on keeping children in school particularly at the secondary level, in order to offset the economic incentives from school leaving and the effects of unemployment;
  • the establishment of a system of partial cost recovery from students at public universities, who generally tend to be from non-poor families, and the establishment of a nation-wide system of scholarships for students from poor families.
  • expanding the capacity of the current public university system, both by improvements in operating efficiency and through further investments.

While the situation in health is less critical, greater efficiency in the health sector could improve the quality of service available to the poor. Particularly, the Government should focus public health care expenditures on those without health insurance, by improving cost recovery from those with insurance and the ability to pay, and by improving the operating efficiency of the public hospital system. While granting more autonomy to public hospitals can improve their efficiency, care needs to be taken to avoid building in incentives that will reduce services to the poor. Eventually, health insurance coverage should be extended to those in the informal sector not presently covered. Existing programs of maternal and child health (PROMIN) need to be expanded, and linked with family planning and reproductive health services for the poor, in order to reduce their currently high rate of fertility among the poor.

Deficiencies in infrastructure both reduce the productivity of the poor, and limit human resource development. The urban poor live in areas usually devoid of adequate sanitation and safe water, and often without paved roads. Provision of such public services in poor neighborhoods can improve health outcomes. But attention also needs to be focused on building up communities, especially in urban areas, that lack roads, lights, and other services, and do not have legal titles to their land. Existing large public sector subsidies for housing (FONAVI) which are not well targeted would be better reallocated to improvements in basic urban infrastructure. The urban poor are particularly vulnerable to problems of crime and violence, and attention needs to be paid to alcohol and drug abuse, and improvements in police protection and access to justice.

Reducing Vulnerability. Recent economic "shocks" clearly demonstrate the need for a strong system of safety nets. The Government needs to:
  • identify high priority programs that will be protected from budget cuts during a crisis;
  • undertake a thorough evaluation of existing programs, eliminate weak programs, combine or streamline programs, and put more resources into programs which have proven effective;
  • identify programs that can be expanded during a crisis to provide emergency employment and income opportunities for the poor; and
  • take additional steps to improve targeting, so as to reduce leakage to the non-poor.

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