338   CHAPTER ten

Chilean society. Part of this puzzle might be resolved by looking at the variables
used to construct the HOI. By focusing on basic inputs—including school enrollment
and completion of sixth grade—it misses the constrained opportunities in the richer
countries. As countries progress, it is easier to meet this basic threshold and complete
primary school or provide great coverage in water or electricity. Yet a Chilean from
a poor neighborhood west of Central Santiago Centro, such as Quinta Normal and
Independencia, might find that a sixth-grade education does little to improve her
competitiveness with kids completing high school in the exclusive neighborhoods of
Las Condes and Vitacura. Secondary education increases the chances that a person
will remain out of poverty for the rest of their lives. Measures of inequality of oppor-
tunity in education—separable from overall opportunity— suggest that 35 percent of
all disparities in educational achievement in Latin America are from circumstances
beyond the individual’s control. This rate, even in the best country cases, is much
higher than European counterparts. The sad lesson is that in Latin America the
wealthier your family, the better your test score results. A concept in economic jus-
tice called the compensation principle suggests that inequalities due to circumstances
should be eliminated.22 But this is even more complicated than in wealthier countries
as the needs are greater and the budgets more constrained. Let’s now turn to consider
policies to redress inequality and alleviate poverty in the region.

Addressing Poverty and Inequality in

Latin America
The progress in reducing poverty and redressing inequality in the region is encour-
aging—but much remains to be done. It is inspiring to appreciate that policy,
well formulated, can improve the well-being of the poor and open opportunities
for those less well-off in society. Despite the historic progress, we recall that 160
million people or approximately 27.5 percent of the regional population live in
circumstances that limit their ability to choose pathways to greater well-being. For
one in four Latin Americans, poverty is chronic, condemning people to lives with
little opportunity. That is a huge loss of human potential.
Why has progress in poverty reduction been so slow in countries that possess
Copyright © 2018. Rowman & Littlefield Publishers. All rights reserved.

significant wealth? Some such as Gabriel Palma suggest that elites in Latin America
have been uniquely capable of protecting their economic and social privilege.23
Political economists would point our attention to analyzing how politics shapes
social policy. The so-called three I’s of social protection—institutions, interests,
and ideas—give us clues as to the slow progress in reducing poverty and promoting
a fairer distribution.24 Political systems, while largely democratic in the region, may
not be responsive to constituent needs. Instead, a legacy of patron-client relations
impedes systemic change. The interests of key actors—the political elites, bureau-
crats, donors, or NGOs—may not align squarely with the needs of the poor. Ideas
held by elites about the causes and consequences of poverty and the obligations of
the state to provide a social safety net for the vulnerable may have prevented policy
innovation. Most poverty policies in the past have not systemically incorporated
gendered aspects of development, leading to distorted outcomes.

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 Poverty in Latin America   339

Another cause of unsatisfactory progress in reducing poverty and inequality is

a knowledge gap. Despite over 50 years of development as a field of study and its
application in practice, we know stunningly little in terms of what works. Countries
have adopted various poverty-fighting tools consistent with national ideologies
and institutions. For example, under import substitution industrialization, when
industry was receiving subsidies, it appeared quite logical (and politically palat-
able) to subsidize the consumption baskets of the poor. Much of this was done by
holding down the prices of basic foodstuffs such as tortillas or milk. But this turned
out to be a very inefficient policy if the goal is to support the poor. When a govern-
ment subsidizes an agricultural product, the difference is paid to the producer; it
is perhaps no great surprise that politicians liked these payouts in anticipation of
political payback from agro-producers. Consumers—both rich and poor—would
find lower prices at the checkout line. One couldn’t ask two different prices for the
same item—grocery store chaos would ensue. In this way the wealthy were also
benefitting from the low price of dairy or bread, a leakage from the stream of social
spending that should have been directed to the poor. In adjusting to the debt and
economic crises of the 1980s and 1990s, subsidies were slashed under the neolib-
eral model. But the global financial crisis delegitimized pure market approaches. A
new approximation of state and market is taking place in the region, allowing for
social innovation.

What Works in Reducing Poverty?

Even with this new political economy, we don’t always know why certain interven-
tions in the social sector work. We have, for example, an intuitive sense that educa-
tion and health are good investments. But education takes place in various social
and economic environments. A subset of development economics has advanced
work in identifying what works in what environments by applying techniques
most broadly used in the medical sciences. For example, one argument has been
that putting computers in classrooms will improve educational outcomes. But do
they? How? A randomized controlled trial (RCT) of the One Laptop per Child
program in Peru found little improvement in conventional math and language
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skills (as assessed by standard testing) but measurable improvements in verbal

fluency and general cognitive skills.25 Another popular development measure
has been to extend credit to the poor. An RCT study by Dean Karlan of Yale and
Innovations for Poverty Action found that lowering the interest rate for clients in
Mexico’s Compartamos by 10 percent increased bank revenue because borrowers
were very responsive and the demand for loans increased. Furthermore, Karlan
pushed deeper to ask which groups of people were made better off—and which
were made worse off—through increased borrowing.26 Half receive a high rate,
and half received a low rate, although everyone’s rate was reduced a little bit. New
clients were brought in, overcompensating for the loss of revenue from lowering
rates. By creating a control group that did not receive the lowest rates, Karlan and
his coauthors found that people who accessed micro credit were marginally better
off—and certainly no worse off—than those who stayed out of the market. RCTs

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 340   CHAPTER ten

can help us understand why people behave in certain ways when basic conditions
can be controlled. It is less useful, however, in cases of infrastructure investment
or in assessing the distributional impacts of a policy.27 The large scale and one-off
nature make it difficult to set up control groups for study.
In addition to RCTs, other policy innovations are being experimented with to
address poverty. One new idea gaining traction is yes, another acronym—or really
two (or more)—RBF or COD. Results-based financing (RBF) and cash on delivery
(COD) share a common aspect in that they look at the outcomes rather than focus
on the programs. If the goal, for example, is to improve child and maternal health,
RBF will pay for a decrease in maternal and child morbidity, or an increase in
newborn weight. Care providers can be compensated at two stages—increasing the
number of pregnant and lactating moms enrolled and then later for results. Such
methods of pay for performance do of course have drawbacks. It is important to
verify results such that care deliverers do not have incentives for misreporting.
Counting quality outcomes can be problematic. Nonetheless, such schemes create
incentives for caregivers to work with communities to improve outcomes.28

What Should Poverty Reduction Accomplish?

Several principles can guide our poverty reduction policy menu. It is important
to design institutions that are fair and transparent to deliver quality goods and
services. Shining the light of transparency is the best antidote to corruption that
acts as a negative tax on public services. Institutional quality is critical. Providing
bad services can sometimes be worse that providing no services as all as they can
undermine trust in government. If people believe the government is inept they are
reluctant to pay taxes that might be squandered—and public services further dete-
riorate without a sound fiscal base.
Policymakers need to be wary of unintended effects. For example, tightening
regulations to draw more workers into the formal sector might actually drive firms
into informal status—an undesired goal as informality is associated with low pro-
ductivity. Providing too comfortable a safety net for the poor might depress sav-
ings and work effort.29 The goal of social protection is to provide help to the most
Copyright © 2018. Rowman & Littlefield Publishers. All rights reserved.

vulnerable while creating incentives to work and save. Programs ideally will be
geared to smooth consumption during crises, prevent poverty, and promote invest-
ment in human capital.30 Some programs should be designed to prevent social risks
through investment in human capital and other interventions intended to cope with
events that have already occurred. Attention should be paid to increasing risks from
climate change, food price spikes, and gendered social vulnerabilities.31

Entitlements and Social Spending

It is important to remember that as in many countries, the bulk of social spending

is not tied to the very poor but rather as protection against economic shocks and
aging. Social spending in Latin America broadly breaks down into two categories.

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 Poverty in Latin America   341

Formal-sector workers—those working in registered firms—are largely covered by

social security and unemployment insurance. As people age and are not working or
workers are hit by a shock, these safety nets keep people out of poverty. Workers
in the public and private formal sectors enjoy access to good health care, social
insurance, and pensions to cover family needs as workers progress from the work-
place to retirement. But these often super generous programs do not extend to half
the workforce in Latin America; the poor and vulnerable are broadly excluded.32
­Countries in the region finance pensions through payroll taxes and contributions to
social security; contributions from general revenues supplement the pot. Old-age
income security programs draw about 3 percent of gross domestic product (GDP) in
countries with smaller programs (such as Colombia, Peru, and the Central American
countries) but up to 10 to 12 percent in countries with large systems (such as Brazil
and Uruguay).33 Retirement ages remain relatively early in the sixties, and some
special pensions, such as those for the military, can also be drawn by adult daugh-
ters. As the demography shifts in the region, burdens of caring for the so-called
“third generation” will further drag on future GDP growth.34 Job protection policies
in the region have often been categorized as overly rigid, making it difficult to hire
and fire formal-sector workers without resort to large severance packages or legal
claims. In exchange for loosening these restrictions (which adversely encourage
firms to remain in the informal sector), countries are attempting to expand income
protection programs such as unemployment insurance.35 Nonetheless, these pro-
grams have limited coverage for formal-sector workers.
Beyond social spending to prevent the nonpoor from falling into poverty,
governments directly invest resources in poverty reduction. The region has been a
center for innovations in income support for poor families, dramatically lowering
poverty rates. Programs called conditional cash transfers (CCTs) were pioneered
by Brazil and Mexico in the late 1990s. They have now spread to eighteen coun-
tries in the region, benefitting 135 million people.36 In Mexico, Colombia, and
Brazil CCTs cover about 55 percent of those who would otherwise exist on less
than US$2.50 a day. It is estimated that poverty would have been approximately
13 percent higher had these programs—that cost less than 1 percent of GDP—not
existed. CCTs combine dual objectives of alleviating poverty in the short run
through a cash transfer with encouraging long-run human capital development by
Copyright © 2018. Rowman & Littlefield Publishers. All rights reserved.

imposing conditions of school attendance and health checkups.37 The conditionali-

ties vary across programs, but often require that students be present for 85 percent
of school days and complete regular health checkups. In exchange, families receive
a deposit of about US$15 per child in primary school—perhaps ranging to US$30
for secondary attendance—deposited to an electronic bank account, most often in
the mother’s name.38
Evidence on the success of these programs varies, but most studies suggest
that CCTs are more effective in reducing poverty than in improving human capital.
Success in poverty alleviation varies by whether the transfers are well targeted and
transparently delivered. Targeting can be tricky; in informal settlements it may be
difficult to accurately identify the poor as opposed to the vulnerable populations.
Mexico’s Prospera (formerly Progresa and then Opportunidades) CCT is one of
the best targeted; it has added between eight and ten months of schooling and led

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 342   CHAPTER ten

to a decline of 11.8 percentage points in the incidence of anemia among children

under age two.39 Questions of progressive graduation from the program also arise.
If someone has picked up an informal-sector job, how is that information trans-
mitted to the social services agency to graduate the person off the transfer list?
Corrupt practices risk that CCTs become political entitlements rather than safety
nets. Transparency through electronic publication of those receiving transfers can
help decrease abuses in the system. When CCTs are aptly targeted, governments
get far bigger bang for the poverty reducing buck as compared to the broadly acces-
sible food subsidies we discussed earlier. Some suggest the CCT payouts are too
small—Latin American cities have become painfully expensive—but for those near
the poverty line CCTs have succeeded in providing a supplement to exit the worst
of deprivation.
A critical problem with CCTs has been unintended effects in the long-term
development of human capital. CCTs may increase the incentive to remain in the
informal sector to avoid the loss of the payment if one’s reported income rises. The
short-term collection of a CCT transfer means that the worker isn’t investing in a
formal-sector pension program. A second unintended effect has been that as CCTs
have increased, so has the demand for education and health, and this has further
overwhelmed weak quality in supply. As more students enroll in schools, outcomes
in the already stressed education section are further enfeebled. CCTs are but one
component in a suite of policies to promote human development. Supply-side cov-
erage of health, nutrition, and education services needs to be enhanced.40 Programs
should be further tailored for the complexities of the urban setting and informal
markets to promote genuine long-term change. When the Mexico Opportunidades
was relaunched as Prospera in 2014, the program expanded beyond income to
measures to promote social and productive inclusion of beneficiaries such as voca-
tional training and micro finance.41 One might conclude that the problem isn’t with
CCTs per se but rather the weak institutional mechanisms that complement their
implementation; more needs to be done to give the poor a chance to achieve their
potential.

Physical Government Investment in Poverty Alleviation

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In addition to transfers to individuals, governments might choose to invest in infra-

structure and services to promote human development. If in addition to enhancing
infrastructure such as development of a clean water system or a new road, a com-
munity can build its capacity for governance and decision making, the project
will have accomplished improving both the physical and the social infrastructure.
Programs that promote community involvement, with local input from design to
implementation, are important in encouraging ownership and voice for the poor.
Venezuela has pursued capacity building approaches over monetary transfers
in its missions programs. Despite the wealth brought to Venezuela through oil,
nearly half of the population lived in extreme poverty in 1999.42 President Chavez
mobilized financing through contributions from the nation’s oil company, PDVSA,
into a separate fund, controlled by the president, for social investment or missions.43

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 Poverty in Latin America   343

A portfolio of nearly forty programs attacked the ecology of poverty, including

Mision Ribas for adult education, Mision Barrio Adentro to improve community
health, and Mision Mercal to provide subsidized food markets.44 In addition to the
goal of delivering services, the missions were seen as a new form of community
organization to build social capital as an alternative to market-driven neoliberal
policies. By 2012, Venezuela had achieved the second strongest record of poverty
alleviation in the region, to just over a quarter of the population, with extreme
poverty reduced to 6.8 percent.45 In the wake of the death of Hugo Chavez in early
2013, the sustainability of these achievements is in jeopardy. Weak oil prices and
an antibusiness regulatory environment have stripped the country of its ability to
deliver basic necessities. Many Venezuelans cannot get access to food and medi-
cine tragically suffering from malnutrition and curable disease. Nonetheless, the
direct government interventions stand as an example of the kind of work the state
can do to complement market failures leading to poverty.

Labor Market Strategies

As one considers poverty in Latin America, it is distinguished from inadequate

incomes in North America and Europe by the dominant presence of the informal
market. As we discussed in Chapter 8, we do know that poverty is correlated with
low productivity and low-productivity growth rates. Informality is not necessarily
poverty; the sector is complex with continuous movement of people in and out.46 If
people are paid the value of what their work is creating (economists will recall that
this is called the value of the marginal product or the marginal revenue product),
remuneration will remain pitiful as long as productivity is low. If an employer
pays above a worker’s contribution to production, the firm would quickly go out
of business. Improving productivity of workers is central to addressing long-run,
structural causes of poverty.
Policies such as CCTs to address short-term income shortfalls are critical, but
raising incomes above a poverty line may not fundamentally improve the quality of
life if the multidimensional aspects of poverty and deprivation are not addressed.
Having an extra US$50 a month helps; if, however, you are still in the same neigh-
Copyright © 2018. Rowman & Littlefield Publishers. All rights reserved.

borhood with the same lousy-quality schools, undrinkable tap water, and insuf-
ficient sanitation services, you continue to be relatively deprived. You are poorly
prepared to compete in the global economic market, and are probably prone to
intestinal disease that compromises your performance. Productivity sags.
The central policy challenge of poverty reduction is improving the capacity of
people to invest in their own skills and raise productivity. Youth born into neigh-
borhoods defined by chronic poverty may benefit from active labor market
policies (ALMPs) where governments intervene to help those unemployed find
work. These might include training programs, apprenticeships, vocational schools
and incentives to firms to hire riskier workers. By addressing market failures,
ALMPS can improve job prospects for skilled workers and young people.47 Think,
for a moment, about a job search where your record of work, probably a long one
since you were young, was not recorded. Imagine not having contacts through a

Franko, P. (2018). The puzzle of latin american economic development. Rowman & Littlefield Publishers.
Created from vand on 2023-03-21 03:59:58.