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Poverty Alleviation in Latin America

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1990
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With the aim of promoting growth with equity, the Bank works with countries to launch effective programs to protect the poor

With an average per capita income of $1,700, Latin America is the wealthiest region in the developing world, with the average per capita income of the region well above that of the “middle-income countries,” according to the Bank’s classification. Yet poverty persists either in some countries, or in particular regions within countries (see chart), posing a development challenge for national governments and the World Bank. Nine of the 26 countries of the Latin American and Caribbean (LAC) region have an average per capita income below $1,000. A few—Bolivia, Guyana, and Haiti—have income levels of the order of the poorest countries in Sub-Saharan Africa.

How widespread is poverty in the region, and whom does it affect? Given the well-known weaknesses of per capita income comparisons, a number of proxies can be used to measure poverty conditions in the region. Among them, the infant mortality rate is perhaps the most telling indicator of poverty. In Bolivia and Haiti, for example, more than 10 percent of infants die within a year of birth. The extent of poverty can also be gained from identifying the poorest groups and their conditions. In Ecuador, 65 percent of the rural population is considered to be below the poverty line. In Peru, the per capita income of the poorest 50 percent of the population was estimated to be only $116. The major pockets of poverty in Latin America are in rural areas and subregions with a high percentage of native Indian populations. Even in a relatively rich country such as Venezuela, one third of the population in the Andes region is estimated to be below the poverty line. Infant mortality in the Trujillo and Meriela States is two and one half times that in the Federal District of Caracas. In the Oaxaca and Chiapas States in Mexico, calorie consumption per capita is far below accepted standards (1,483 and 1,609, respectively). The difference in per capita incomes between states in Brazil is stunning: 211,000 cruzeiros in the Federal District of Brasilia versus 24,000 cruzeiros in Paraiba in 1980. Also, the Bank estimates that there is a 16-year difference in life expectancy between the northeastern Brazilian states and the rest of the country.

Approaches to poverty alleviation

Three main strategies to tackle poverty can be defined.

  • General economic growth is the most effective way to attack poverty in the long run, by increasing the opportunities for employment and the fiscal resources of the country, that in turn could be allocated to social programs. However, it may take a long time for income growth to trickle down to particular groups in the population.
  • Specific programs to increase the earnings opportunities of the poor. Beyond general economic growth, one could tackle the worst aspects of poverty (such as malnutrition) at a faster pace, by increasing the stock or productivity of the physical assets of the poor, through land reform, irrigation, or credit to small farmers, and by improving human capital, through education and training. The key issue here is to identify approaches to poverty alleviation that have an acceptable economic rate of return (i.e., they should not be inefficient or retard growth) and that primarily benefit the poor, rather than the better-off segment of the population.
  • Social programs targeted at the poor. These are interventions to directly improve the standard of living and life expectancy of the poor through provision of nutrition, primary health care, water, and sewerage. The key consideration here again is to maximize the flow of benefits to intended beneficiaries and to keep administrative costs under tight control. Such interventions are certainly the most immediate and effective instrument to combat poverty in the short run.

Of these three strategies, much attention has been focused in recent years on targeted programs to help the poor. This involves careful attention to three areas.

Targeting. Since resources are limited, some priorities have to be set in approaching poverty reduction. This can be done by defining a target group (i.e., a segment of the population that should be the main beneficiary of the government or other assistance).

Most of the needy are usually very young or very old. Establishing priorities again, one strategy could be to concentrate on infants and school-age children, as well as pregnant women and lactating mothers. The rationale for choosing children over adults is that interventions at the early ages will have a higher and more lasting impact, both on life expectancy and improvements in human capital. The two major sectors of intervention for poverty alleviation purposes are health, broadly defined, and education. Thus, specific programs could include nutrition, vaccination, water, sewerage, shelter, primary health care, access to primary education, and training.

Leakage of benefits. Any program addressed to the poor is bound to leak some benefits to unintended groups in the population. For example, if a general food subsidy is given for items consumed mainly by the poor, richer groups in the population are also likely to consume the same food, thus taking advantage of the subsidy. Replacement of such a generalized subsidy scheme with another one specifically aimed at a particular group of the population is bound to decrease the amount of leakage considerably.

Income distribution in selected Latin American and Caribbean countries: share of lowest 20 percent

Source: World Bank.

Administrative costs. These costs also have to be taken into account, because there is a trade-off between operating a targeted program with the hope that it will benefit the poor and fine tuning of delivery and supervision mechanisms, at great expense, to ensure that result. For example, a social worker should ideally visit households periodically in order to determine who should get how much assistance, and the visit should be repeated every few months. For practical reasons, however, a school feeding program covering all children in a poor district might offer a good substitute with minimum leakage.

How the Bank helps

There are essentially three actors involved in poverty alleviation within any given country in the region: the government, local nongovernmental organizations (NGOs), and bilateral or multilateral international organizations such as the Bank. The main instrument at the government’s disposal is revenue and expenditure policy, exercised through the budget. The government can alleviate the worst aspects of poverty by directing public expenditure to the most vulnerable groups in the population. NGOs can help in two main ways: by mobilizing resources beyond the state budget and by helping the government’s programs along with their own. They have the additional advantage of being close to the target populations and are able to respond flexibly to needs as they arise.

The Bank has several instruments at its disposal to act as a catalyst in poverty alleviation in the Latin American and Caribbean region. First, and irrespective of any lending activity, economic and sector work routinely includes public expenditure reviews to facilitate policy analysis and advice on social programs and the reallocation of subsidies.

Second, a project can be specifically focused on poverty alleviation. Third, adjustment lending operations, an increasingly important element of Bank assistance in the region, now include agreements on critical fiscal measures in support of poverty alleviation.

Analytical work. Despite 40 years of economic growth, urbanization, and industrialization, many countries in the Latin American and Caribbean region face child malnutrition, although its precise extent is unknown. A1989 Bank study, “Feeding Latin America’s Children,” reviewed targeted nutrition programs in selected countries in the region to answer three questions: How many children and mothers suffer from malnutrition? What are governments doing about it? What gaps in the policies and programs need immediate attention to lessen this suffering?

Briefly, the answers indicated that malnutrition affects about one third of children and mothers, with the highest incidence among the rural poor. There is a wide range of governmental efforts to address this problem, and effectiveness varies considerably. General food subsidies, offered in many countries, are not effective in reducing malnutrition; maternal and child health services offer an effective vehicle for providing food to pregnant and breastfeeding women and to clinic visitors under school age. School breakfasts and lunches offer a good means of inducing poor children to stay in school, while assuring that their learning capacity is not diminished by the pain of hunger.

The nutrition situation varies substantially, with Chile, Costa Rica, and Uruguay having eradicated most of the worst cases of malnutrition, while Guatemala, Haiti, and Honduras still have a serious problem. But the nature of malnutrition policy differs substantially. Some countries, such as Guatemala and Haiti, are addressing it by increasing the amount of resources assigned to existing programs. Others (e.g., Brazil and Venezuela) are reformulating program objectives so that currently available resources can be redirected to the needs of the poor and vulnerable. Some countries (such as Peru) are starting programs where none now exist to feed poor children who may otherwise lead unproductive lives.

In designing operations to enlist the poor, one needs data on the location of the poor, their nutritional status, and standard of living. Another major arm of the Bank’s analytical work is the Living Standards Survey, conducted at the household level to collect information on basic nutrition and socioeconomic conditions beyond that available in an ordinary census. As such, it can document and update poverty conditions in a country as a guide to Bank operations. The first such study in Latin America took place in Peru in 1985. These surveys have been crucial in formulating programs aimed at the poor in Bolivia and Jamaica. Studies are now being planned for several other Latin American countries.

Poverty-focused operations. Bolivia’s “Emergency Social Fund” is a good example of this type of operation. The project addresses the severe unemployment and loss of income following the shrinking of the Bolivian economy since 1980 and the collapse of tin prices in late 1985. The Emergency Social Fund was established in the context of the 1985 adjustment program and is intended to build public acceptance for the economic adjustment measures and to act as a bridge until economic growth gains momentum. It also aims to restructure the health and education sectors, by decentralizing responsibilities to local government and nongovernmental organizations and shifting priorities toward basic health care and primary schools. The program consists of small-scale employment and income-generating projects and social assistance activities, for those suffering most from the effects of the economic crisis and the adjustment process. The target population includes the unemployed, particularly those affected by the collapse of the mining industry, and the rural poor, especially pregnant women, lactating mothers, and preschool children.

Another good example of a poverty-focused project is Jamaica’s “Social Sectors Development Project,” launched in 1989. This project was in tune with the Government’s Social Well-Being Program—a major effort to continue the structural adjustment effort required to diversify the economic base and to ensure sustainable economic growth of at least 3-4 percent per year over the long run. The project’s objectives are to reverse the recent deterioration in human resource development, through renewed investment and policy changes in education and health services, and to alleviate the conditions of the poorest groups of the population, through targeted nutrition and employment programs.

Policy and institutional changes to improve the overall efficiency of social services in Jamaica include the establishment of an information system to monitor the project’s effects on key social indicators; redirection of investment in favor of health and education to reach the poor; reform of basic education; introduction of a more equitable system of secondary education; rationalization of services and increased cost recovery, including privatization programs, in health activities; improvement of expenditure controls; and targeting and monitoring of nutrition and other relief programs.

Issues

Some common issues that dominate poverty alleviation efforts in the LAC region have arisen in the Bank’s poverty-related operations in individual countries. These require urgent attention if the current momentum is to be maintained.

Insufficient public funding. The limited availability of resources have obliged many governments to cut down their expenditure in the social sectors. In the many countries in the region, the health and education share of public spending or of the GNP fell in the 1980s.

Misdirection of public expenditure. Public expenditure on poverty alleviation has been increasingly directed to the older segments of the population (e.g., through social security payments) rather than to the very young—the most vulnerable group. Many countries subsidize both curative medicine in urban hospitals and expensive university education, even though most of the beneficiaries of these services come from middle- and upper-income groups. General food subsidies in some countries also benefit these groups. Reducing these subsidies would free public resources, allowing governments to concentrate on primary health care, basic education, and nutrition assistance for those truly in need.

Reallocating public expenditure from higher to primary education, from curative to preventive medicine, or from social security to child nutrition is not politically easy. Similarly, it has been difficult to replace expensive general subsidies with food subsidies for only the poorest groups.

Lack of priorities. Often governments set overly ambitious goals to combat poverty. In some countries, for example, the poorest 40 percent are the target for the government’s anti-poverty program. Obviously, this is a very large and heterogeneous group. Much more differentiation and narrowing of targets is needed.

Decentralization of poverty action. The poorest are widely dispersed in the country, especially in rural areas. This creates a problem in trying to reach them by action at the central government level. For example, although most education and health programs are actually administered at the state and municipal level, the Bank has until recently dealt almost exclusively with government staff working at the central government level. Local governments and NGOs need to be more intensively involved in Bank-supported programs.

The task ahead

The examples of Bank assistance in the region for poverty alleviation quoted in this article represent a small fraction of the needs of the poorest. The countries’ needs are immense. For example, in some countries, less than 10 percent of the most vulnerable groups (children and women) are being reached by assistance programs. Often, these programs are inadequate to supply the minimal calorie and protein intake for the poorest.

On the other hand, covering all those eligible is not beyond the realm of possibility. The Bank has estimated that those groups could be reached by increasing the current expenditure for mother-and-child programs from one quarter of 1 percent of GDP to more than 1 percent. This objective could be achieved with a concerted donor effort and a willingness of national governments to reallocate public expenditure from generalized subsidies to targeted programs.

If macroeconomic conditions remain difficult in the LAC region for the next few years, this will mean stagnating fiscal revenue and overall public expenditure. Independent of the economic crisis of the 1980s, Latin American economies are characterized by distorted allocation of resources. Fewer resources have been invested, for instance, in sectors with high social profitability (e.g., primary education) than higher education. From the equity viewpoint, too many subsidies have benefited the highest income groups. The recent economic crisis must have made such distortions worse.

The relatively high involvement of government in the economy—public expenditure accounts for about one third of GDP in the typical Latin American country—means that there is plenty of opportunity for government intervention to assist the poor. For example, shifting resources by a few percentage points of government expenditure to supplement the incomes of the poorest 10 percent of the population could have a dramatic effect on poverty alleviation.

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