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Latin America's Vicious Circle

2/26/2006 - 6:00 AM PST

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Report Highlights Need to Fight Poverty With Growth

WASHINGTON, D.C., FEB. 26, 2006 (Zenit) - Latin America's continued poor economic record was the subject of a report published Feb. 14 by the World Bank. The study, "Poverty Reduction and Growth: Virtuous and Vicious Circles," was notable for admitting the need for greater government involvement in the economy, compared to the normal insistence on privatization and the private sector.

"Latin American countries need to fight poverty more aggressively if they want to grow more and compete with China and other dynamic Asian economies," commented the press release accompanying the report.

Between 1981 and 2000 China achieved annual per capita growth of about 8.5%. By comparison, Latin America's per capita gross domestic product (GDP) declined by 0.7% during the 1980s and increased by only about 1.5% per year in the 1990s. Poverty levels didn't change significantly, except in Chile.

Poverty is not only a consequence of the lack of growth, argued the World Bank. The continued high levels of poverty in turn hamper the achievement of high and sustained growth rates in the continent.

According to the study, a 10% drop in poverty levels, other things being equal, can increase economic growth by 1%. In turn, a 10% increase in poverty levels lowers the growth rate by 1% and reduces investment by up to 8% of GDP, especially in countries with underdeveloped financial systems.

Poverty hampers growth because people lack access to credit and insurance, and are, therefore, in no position to undertake activities that fuel investment and growth. And a combination of poor families and bad schools leads to a substandard education of children.

At the regional level, a lack of infrastructure to promote growth discourages investment. At a national level, poor countries, unable to moderate income disparities, frequently fall victim to social tensions. These, in turn, make it difficult for a healthy business climate to flourish. What results is a vicious circle in which low growth results in high poverty, and vice versa.

An associated problem is the high level of income inequality. Little improvement has occurred in this area in recent years. As well, there is little intergenerational mobility, with the children of poor families generally remaining trapped in poverty themselves.

Changing strategy

"In order to move from a vicious to a virtuous circle, we need to launch a broad-based attack on poverty that feeds back into higher growth that in turn reduces poverty," said Guillermo Perry, World Bank chief economist for Latin America and the Caribbean, in presenting the report.

Among its policy recommendations, the study urges:

-- improving the quality of education, and expanding its coverage at secondary and tertiary levels;

-- boosting investment in infrastructure to benefit laggard regions and increasing the access of the poor to public services;

-- extending access to credit and financial services, and implementing effective social policies, such as conditional cash-transfer programs that provide cash to poor families as long as they keep their children in school and take them to the doctor;

-- expanding access to public services such as clean water and electricity.

Strategies that help reduce poverty are needed to complement pro-growth policies, such as trade liberalization, the World Bank observed. Even though policies of economic liberalization are essential for long-term growth and poverty reduction, they can also have short-term negative effects on poverty and inequality, the report said. "Smart investments in the poor can lead to virtuous circles."

The study also recommends that countries improve the equity of their public expenditure programs. Specifically, countries should target expenditures to those who really need them, rather than spending resources to subsidize programs for the well-to-do. In addition, countries need to improve the efficiency of their social policies and, in most cases, to increase revenue collections through tax systems that minimize adverse effects on investment.

Potent weapon

Such advice represents a break from previous thinking by the World Bank and other international financial institutions. In fact, the report explained that economic policy has often been debated about in terms of whether it should follow emphasize pro-growth or pro-poor policies.

The evidence now shows that this dichotomy is no longer so relevant. Clearly, it is necessary to have policies that promote economic growth. "Strategies that do not focus on growth," the report explained, "forswear perhaps the most potent weapon for improving human well-being at our disposal."

At the same time, if policy-makers fail to take into account the ...

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