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Latin America's Vicious Circle

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 constraints on growth due to the constraints imposed by continued poverty, their pro-growth strategies will be undermined. "Redressing these constraints gives rise to an under-examined dimension of policy analysis that might be called pro-growth poverty reduction," the report noted.

Therefore, the World Bank recommended that, when pro-growth policies can have adverse effects on income distribution and poverty, they be accompanied by policies such as improved access to education, improvements in infrastructure, support to small farmers and financial aid for poor households.

"Converting the state into an agent that promotes equality of opportunities and practices efficient redistribution is, perhaps, the most critical challenge Latin America faces in implementing better policies that simultaneously stimulates growth and reduce inequality and poverty," said the report.

Growth in solidarity

Such an approach has long been advocated by the Catholic Church. The Compendium of the Social Doctrine of the Church expresses concern over evidence of increasing inequalities between advanced and developing countries. It explains that we need a "globalization in solidarity" (No. 363) to ensure that economic progress reaches all sectors of society.

The Compendium also points out that the state has a vital role to play in ensuring greater solidarity, respecting, however, the principle of subsidiarity, so that authorities do not unduly extend their powers. "It is necessary for the market and the state to act in concert, one with the other, and to compliment each other mutually," notes No. 353.

Poverty poses a dramatic problem of justice, the Compendium observes and calls us to a greater awareness of the duties imposed by solidarity, justice and charity. No. 449 of the Compendium cites the words of Pope John Paul II in his message for World Day of Peace 2000: "At the beginning of the New Millennium, the poverty of billions of men and women is the one issue that most challenges our human and Christian consciences." A challenge that will not be easy to resolve, as the World Bank report points out.


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