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Ecuador: Poverty Report


Ecuador FY96 PA

Volume 1 (4.34Mb PDF)

Volume 2 (21.7Mb PDF)

Poverty Profile

The Ecuador Poverty Report states that, although the oil boom of the 1970s led to unprecedented growth, poverty remains pervasive in this Andean country. The distribution of wealth is highly skewed, and close to four million Ecuadorians, about thirty-five percent of the population, live in poverty. Another seventeen percent are vulnerable to poverty. One and a half million Ecuadorians live in extreme poverty and cannot meet their nutritional requirements even if they spend everything they have on food. Poverty is higher in rural areas, where two out of three poor people live.

The report, which draws on the results of two qualitative studies and a recently completed LSMS (1994), stresses that the characteristics of rural and urban poverty are quite different. Rural poverty is associated with lack of education, little access to land, a low degree of market integration, and lack of employment in the vibrant off-farm rural sector. Furthermore, poverty among the many indigenous people, who live predominantly in the rural highlands (Sierra) and the Amazon region, is much higher than for the nonindigenous population. This population group also shows alarming levels of malnutrition and child mortality and has much less education than the nonindigenous population. Urban poverty, which affects one and a half million people, is linked to a somewhat different set of variables that vary by region. For example, while basic service provision has reached the poor in the urban Sierra, many poor in the urban Costa are without a functioning water supply or sewage system. But the poor in various urban areas also have some characteristics in common. These are, again, low educational achievement, informal sector employment, rented -- instead of owned -- housing, and low rates of labor force participation by the spouse of the household head.

Poverty Strategy

The report argues that a successful poverty reduction strategy can be based on the following components: basic nutrition and health programs for the poor; programs that strengthen the assets of the poor, which are labor, land, and housing; and support for a strong and stable demand for labor. The first two components, in particular, will require public resources. Hence, resource mobilization for the financing of social programs and targeted interventions is an essential part of Ecuador's poverty reduction strategy.

Financing of Social Programs and Targeted Interventions

Ecuador could raise substantial resources to finance anti-poverty programs by eliminating or reducing several subsidies, tax evasion, tax exemptions, improving education finance, and employing targeting tools as a means to reduce the costs of social programs. For example, the large subsidies for electricity and cooking gas, which together account for about 2 percent of GDP, are inefficient and unjust as they do not reach the poor (only 17 percent of the electricity subsidy and only 23 percent of the cooking gas subsidy go to the poor). Similarly, achieving a cost recovery rate of one half for higher education could finance a 40 percent increase in expenditures on primary education, which would benefit the poor disproportionately — currently, education finance is dramatically imbalanced, discriminating against the poor with unit costs for higher education about six times higher than for primary education. Finally, although targeting of social programs is a cost-effective means of reducing leakage, it is not widely used in Ecuador today. Among twenty-five major social programs, only about a third operate with an explicit targeting mechanism.

Basic Nutrition and Health Program

The report holds that a coordinated effort to expand nutrition programs to reach the most vulnerable groups, young children, and pregnant mothers, would bring high returns in the long run for Ecuador. But, while chronic malnutrition of children under five years of age is with 45 percent at alarming levels, the many modest nutrition programs only reached 5.5 percent of the 600,000 poor young children below the age of five in 1994. A close examination of several of these programs reveals that they do attempt to target, and that targeting costs are well invested (i.e., leakage to the non-poor is relatively small). However, the real problem, within financing and implementation constraints, is to reduce the degree of undercoverage. With respect to health programs, reductions in real per capita expenditure over the last years for the Ministry of Health, the main provider of health services in Ecuador, have plunged the basic health system into a crisis. Many public health posts can no longer provide fundamental services, and the poor have increasingly come to rely on the private sector for health care, which then absorbs 12 to 17 percent of the household budget. But not all the poor can turn to the private sector. About half a million of them cannot afford such expenses and are left without help even when they critically need curative care. The report asserts that appropriate funding for basic health care is a necessary condition for helping many of the poor survive.

Strengthening the Assets of the Poor

The main assets of the poor in Ecuador are labor, land, and housing. The report outlines that, with respect to increasing the productivity of labor, it is necessary to improve the quality of primary education and expand access of poor children to secondary education: attendance of secondary schools is clearly much lower for the poor than for the nonpoor children. Many poor parents do not send their children to secondary school because of the direct private costs of public education (amounting to four percent of the household budget of a poor family per child) and the opportunity costs of the children in school who are not able to contribute to family income. However, secondary education can be a way out of poverty, since the report estimates returns to secondary education at about ten percent. Financial assistance to the poor, either by reducing the direct costs or by introducing school vouchers, are options for increasing the poor's access to secondary education. Furthermore, helping poor women to enter the labor force can also constitute a route out of poverty for many families. In urban areas, the participation of poor women is constrained by their household duties, especially childcare, and by the limited mobility due to increasing violence.

Land is a determining factor for rural poverty. In rural areas, the smaller farmers are very often the poorer farmers. But the report shows that these farmers tend to have higher yields for many products than larger farmers. Supporting the existing but informal land market to help increase poor farmers' access to land can, therefore, increase equity without reducing efficiency. Titling of the many unregistered farms would be an important step toward formal land transactions. Innovative financial schemes such as land grant schemes or Agricultural Banking for the Poor could then be explored to help poor farmers overcome the lack of access to credit. These efforts could be complemented by increasing poor farmers' access to rural markets through infrastructure and extension investments that would bring them closer to the rural market -- the report shows empirically that the more farmers are integrated into the rural market, the less likely they are to be poor.

Finally, the report outlines that housing could be strengthened as a productive asset by creating an enabling environment, i.e., through legalization of invasions, to help the poor to upgrade their homes so they can be used for small business and other income-generating activities. Examining the traditional Ecuadorian housing credit schemes, the report holds that they have benefited the middle and upper-middle income classes only so that a redirection of the housing policy is necessary.

Supporting a Strong and Stable Demand for Labor

Increasing the demand for labor is related to the elimination of labor market entry barriers and to macroeconomic growth, particularly if growth finances investments in education to prepare workers for the modern workplace. Ecuador has cumbersome labor legislation as the government interferes with wagesetting in the private sector through a variety of mechanisms, including different minimum wages by sector and region, side benefits, and mandatory wage adjustments to compensate for increases in the cost of living. These regulations act as an entry barrier to employment in the modern sectors because they tax labor. The report estimates that these interventions are responsible for an eight percent wage differential between the regulated and the unregulated sectors. A General Equilibrium Model is used to show that a fifty percent reduction in the segmentation across sectors and regions would move about 100,000 workers to the modern -- and highest paying -- sector of the economy, significantly improving their living conditions.

The report illustrates the importance of labor-intensive economic growth with a model simulating the relationship between investment levels and education, moderately increasing growth rates, and investing part of the additional public funds in education, which would move more than a quarter of a million workers into the higher paying modern sector of the Ecuadorian economy. Continuing macroeconomic stability, increasing the savings rate, and stimulating the development of nontraditional exports would help restore growth to levels that would make possible a serious attack on poverty.

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