Escaping the Poverty Trap

Project Syndicate, 2007. Published in several international newspapers including: Reforma (Mexico), Mural (Mexico), Jordan Times (Jordan) Escaping the Poverty Trap

By Bjørn Lomborg and Sebastian Galiani The elimination of poverty must remain at the top of the policy agenda in Latin America and the Caribbean, where inequality is higher than in any other region and one in five people survive on little more than two dollars per day (as measured by the 1993 purchasing power parity (PPP) exchange rate).

Poverty is an intrinsically dynamic phenomenon. Poor people are locked into a low-level asset (or capability) trap. Hence, poverty reduction efforts must seek to provide incentives that will encourage the poor to acquire assets and capabilities that will enable them to escape poverty in the future.

Of course, it is impossible to make serious inroads against poverty without generating persistent economic growth. But, based on the continent’s economic performance over the past last 15 years, growth alone is unlikely to reduce poverty by more than 25% in the next ten years. Even if policymakers were successful in creating an environment that better rewards investment and thus promotes faster growth, Latin America’s ills would not be solved. The high level of income inequality requires specific poverty reduction efforts.

Indeed, a striking feature of Latin America is that very little redistribution currently takes place. Taxes generally have little redistributive effect, because most countries rely heavily on indirect taxes. Even Chile’s tax system – the most effective in Latin America – is actually regressive. Personal income tax revenue is low in Latin America and the Caribbean, suggesting that there is scope for policy makers to increase the intake so they have more money to distribute to those in need.

There is a compelling economic case for increased public investment early in a child’s life. Severe malnutrition in early childhood harms cognitive development. Growth lost in early years is never recovered. Measures to reduce the prevalence of iron deficiency, anemia, and vitamin A, iodine, and zinc deficiencies – which remain significant in some countries of the region – would have a positive impact. Improving the nutrition of infants and young children by promoting both breastfeeding and better knowledge of weaning foods would be a cost-effective opportunity, with benefits between five and seven times higher than the costs.

Conditional cash transfers are another option for Latin American policy makers to consider. These programs are designed to reduce poverty by making welfare programs conditional upon the recipients’ actions. The criteria for receiving aid may be sending children to school regularly or taking them to a doctor.

A comprehensive Mexican program, PROGRESA, delivers targeted education grants for children, health- care services and nutritional supplements for pregnant women, nursing mothers, and children under five, and annual health check-ups for other household members. In 2002, it covered a fifth of the Mexican population, delivering payouts that added up to 20% of beneficiaries’ total expenditure.

Evidence from this and smaller-scale programs show significant increases in household consumption, reducing poverty in the short run, and that such programs improve school enrollment and attendance

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rates, although they do less for achievement levels. Research also shows that these programs improve the health of children and adults.

Moreover, there is no evidence that these programs generate major negative incentives, such as lower employment among adults or higher fertility rates. On the contrary, there is some evidence that beneficiary households increased their participation in microenterprise activities and made larger investments in agricultural production activities.

These sorts of benefits are, in economic terms, worth at least twice as much as the cost of the program – the main expense is the cash that is transferred to households.

Early childhood development projects – designed to improve children’s physical, intellectual, and social development – form a third effective set of redistributive policies. A wide range of interventions belong to this category. Some, such as growth monitoring, day care services, preschool activities, or improved hygiene or health services, work directly with children. They may also include training services for teachers and caregivers, and the strengthening of institutional and community resources and capacity.

Researchers who looked at early childhood development programs in Latin America have concluded that program participation is associated with improved school readiness, a higher probability of on-time primary school enrollment, lower rates of grade repetition and dropout, and improved academic performance overall. The economic benefits, estimated to be between five and nineteen times higher than the costs, are dramatic.

A plan to reduce poverty in Latin America and the Caribbean should go far beyond conditional cash transfers and early childhood interventions in nutrition and education. Although there is not yet enough evidence to assess the cost-benefit ratios of specific policies, the evidence available suggests that policymakers should also prioritize improving the provision of education, creating more secure property rights through land reform, promoting microfinance, and improving rural infrastructure.

Poverty rates in the region have fallen slightly in the last two decades, but to reduce the drastic levels of inequality, there needs to be a serious commitment to policies that encourage the poor to acquire the means to escape poverty in the future. Above all, policymakers should ensure that fighting poverty remains one of their highest priorities.

Bjorn Lomborg is the organizer of Copenhagen Consensus, adjunct professor at Copenhagen Business School and editor of the new book How to spend $ 50 billion to make the world a better place. Sebastian Galiani is an associate professor at Washington University in St. Louis. Read more about Consulta de San Jose at: http://www.iadb.org/res/consultaSanJose/index.cfm.