A recent World Bank report on poverty1 found that Paraguay appears to have a relatively lower incidence of extreme poverty and a more equitable income distribution than most other countries in Latin America, including many whose economies are more developed. The estimates, which unfortunately cover only the urban population, suggest that about 20 percent of the population is poor and 3 percent is very poor. Although poverty was found to be distributed more evenly than income in the different regions across the country, it was found to be relatively more prevalent in small cities, and presumably also in rural areas. About 34 percent of the population in small cities is poor, and almost 8 percent is very poor.
Poverty is associated with low education levels, female-headed households, language (monolingual Guarani speakers), and migration. It is reflected in overcrowding, low quality dwellings, and a lack of access to basic household services. The probability of being poor for primary school graduates is twice as high as for secondary school graduates, a monolingual Guarani speaker has almost a 50 percent greater chance of being poor than a monolingual Spanish speaker, and migrants have a 60 percent higher probability of being poor than non-migrants.
On gender issues, the report found clear-cut evidence of sex discrimination. Females make about 57 percent of male earnings, a differential observed almost uniformly at all levels of education. Work experience is much better rewarded for men. However, wage discrimination in terms of schooling is less obvious, in the sense that proportionally women receive a larger increase in payment than men for the same improvement in education (although this is still consistent with a widening gap in absolute terms).
Incentive and Regulatory Framework
According to the information available, the incidence of poverty in Paraguay is similar to that in countries with double its per capita income. This is likely to be so because the country has few distortions affecting goods and services markets; price controls have no significance, interest rates are set freely by the market, there is only one exchange rate with free access to buying or selling, the tax burden is low, and the economy is open with low tariffs. The pricing, interest rate, and exchange rate policies help to generate a more even income distribution by avoiding rents to privileged groups, thereby also helping to keep poverty down. The fact that taxes are low increases disposable income, making consumption prospects higher and poverty correspondingly lower. Also, an open economy with low tariffs means that consumers can buy imports at prices lower than in more protectionist environments, thus increasing the purchasing power of wages and also contributing to keeping poverty down.
The counterpart to the low taxes mentioned above is that public expenditure in the social sectors has been lower in Paraguay than in much of the rest of the region. The positive side of this outcome is that, in the absence of programs supported by the public sector, community participation has flourished. This suggests that, at least in the case of Paraguay, encouraging community participation and keeping income in the hands of those who earn it is more effective than giving it to the government for redistribution. In the last few years, however, social spending has been increasing drastically; unfortunately, there is little evidence that this has affected the quality or quantity of services delivered -- higher expenditures have been tied to higher wages, and have been unrelated to productivity improvements.
Although there is no effective official welfare system in Paraguay, private income transfers (mostly family help) have helped to cut extreme poverty in half. These transfers are a key source of income especially in households headed by women, and the household heads receiving them are normally older and, therefore, more in need of help. These transfers are a private mechanism that has been singularly effective in fighting poverty. Without them, poverty would affect 25 percent of the population instead of 20.5 percent, and 7.7 percent rather than 3.5 percent would be very poor. These transfers are significantly more important than social security pensions. Although not an official program, private transfers have worked well as an instrument to keep poverty under control.
Key challenges remain, and this is reflected in weak social indicators in some areas that mostly affect the poor. For example, maternal mortality appears to be high, the quality of primary education is poor, the quality and coverage of secondary education is low, and the coverage of water and sanitation services is also low. To solve these problems and to reduce poverty further, the report recommends maintaining a sound macroeconomic framework, and keeping the size of the public sector small (and the tax burden low). It also recommends developing targeted programs that benefit the poor rather than generalized subsidy programs, concentrating education investments on increasing primary education quality and secondary education quality and coverage, improving primary health care, and avoiding reductions in the relative price of public services, especially water and sewage.
The government has no explicit social strategy, and the report recommends targeting the delivery of social services to those most in need. However, this requires that substantial improvements be made in the existing information systems. Thus, the report highlights the need to prepare poverty maps that provide detailed information at the municipal or district level, to carry out periodic Living Standards Measurement surveys that incorporate the rural sector, and to study the characteristics of the "informal economy" in order to "formalize" it by changing the regulatory framework as needed to reflect what is actually happening (and, therefore, keeping the economy as free of distortions as possible).
1. Paraguay -- Poverty and the Social Sectors, A Poverty Assessment, Report 12293, June 29, 1994.
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