Poverty: The Reality behind the Data

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Spanish

In 2014, for the fourth year in a row, the growth rate of Latin America and the Caribbean, although still positive, has been lower than the year before: a bare 1.2% compared to 2.8% in 2013. The price of non-energy commodities —soybeans, copper, iron, etc.— has fallen 7.5% on average and will do so by at least another 10% in 2015, while the price of oil will fall a total of 50%. Technological innovations and their impact on supply is to a large extent behind the end of the commodity super cycle, but weak demand also counts, and what is happening in China, an economy where for the first time in 24 years the IMF forecasts growth below 7% in 2015, is not helping much. But this is not all, the strengthening of the US recovery brings the time closer when the Fed will raise interest rates and the world will have to face unprecedented combinations of liquidity, return and risk.

Since historically Latin America usually only fares well when the world economy is growing, commodity prices are high, world interest rates are low and risk tolerance is high, almost inevitably many are thinking that it is a good idea to solemnly declare that the party is over.

And what better way to announce it than to anticipate the end of poverty reduction? To some extent, this is the central message of ECLAC’s recent Social Panorama of Latin America which reports that since 2012 the percentage of Latin American and Caribbean people living below the poverty line has remained constant at 28.1% of the population —about 167 million people—while those living in extreme poverty have increased by about 5 million, affecting 12% of the population.

The message is convincing, apparently very precise and probably correct, although it is based on provisional data for 2013 and projections for 2014. Even so this is not just a technical detail, but something more fundamental: poverty is not like the CPI or growth of GDP which are calculated almost instantaneously because what they measure is unambiguous data provided by governments, markets and the macroeconomic news in the press without which apparently they would not know what to do, what to share or talk about. This is not the case with poverty. Contrary to what Tolstoy wrote, not all poor families are poor in the same way.

Poverty is a multidimensional phenomenon which is difficult to measure accurately. In fact one of the most interesting contributions to the ECLAC publication is the chapter which presents its synthetic poverty index based on five dimensions of the problem: difficulty of access to housing, basic services, education, employment or social protection, and finally, an indicator of the level of monetary income supplemented by a measurement of ownership of certain consumer durables.

These results are consistent with the more traditional measures we mentioned earlier.

Also, using this indicator it is estimated that in 2012 the situation had improved since now “only” 28% of the population of the region —10 percentage points less than in 2005 – is living below the threshold of monetary poverty with deficiencies in at least two dimensions. Very enlightening is the fact that the non-monetary deficiencies, which are the biggest contributors to poverty, are low educational level in adults, lack of employment, social protection or sanitation and, to a lesser extent, overcrowding, limited access to energy and lack of durable goods.

Whoever has traveled in Latin America will not be surprised that the place where the poor live changes the prevalence and intensity of what it means to be poor: in Central America and Bolivia between 80% and 90% of the rural population suffers shortages in some of the dimensions, and only in two countries – Chile and Costa Rica – has the decline in rural poverty been greater than in the cities.

The problem is not only the existence of poverty, but the type of poverty that prevails and the place where the poor live, because the effectiveness and cost of the public and private policies designed to eradicate it depend on these and other characteristics —rather than on good intentions.

The complexity of the phenomenon is at odds with the broad brush analysis that announces that inevitably in view of the slowdown in economic growth, poverty will grow again. If nothing is done, this will be the likely result. But the relevant question is, if today it is socially, politically, economically, institutionally or morally possible not to do anything. My perception is that it is not. We now know so much about all the dimensions of the problem that doing nothing is too risky.

The IDB, World Bank, ECLAC, UNDP, and more recently even the very IMF itself, have produced rigorous evidence that, with the discrepancies usual in social science, suggests that about 60% of reduction poverty in the region is explained by economic growth —especially, rising wage income —and the remaining 40% by reducing levels of inequality which, in particular, have generated the public policies associated with the conditional transfer schemes and the contributory and non-contributory pensions systems. We always knew that growth would reduce poverty, but we now also know that the same result can be achieved by reducing inequality. It is not a minor detail because it can be the basis for two reasons for rejecting the pessimism of the conventional information.

First, the traditional: that there is no reason whatsoever to prevent the countries of the region from prioritizing growth of productivity in order to return, even in a hostile or less friendly international environment, to growth rates above 3.5%. Growing below a 2% trend is not an inevitable curse, but a reflection of the incapacity to build the political and conceptual consensuses needed to embark on pro-growth productivity reforms. At the IDB we have estimated that if the region’s productivity gap were eliminated in 10 years, the annual growth of the representative economy of the region would increase by 2.8 percentage points.

The second reason, more unconventional, is that it is not obvious that, if the democracies of the region have to adjust public spending, this time they are going to prioritize social spending cuts. The emerging middle classes have occupied a not insignificant electoral space and we know very little about their tolerance to adjustments such as those that took place in the 1980s and 1990s. We know even less about the responsiveness of the 30% of citizens who are in the vulnerable middle class, or the capacity of young people who are seeing how the premium of their better education is reduced and does not free them from the threat of unstable employment or wages. And even less —although the history of Europe and of Latin America itself in the 20th century is not at all reassuring—about how the strengthened middle class might respond to the “escalation” of demand for public goods by the new and empowered social agents.

Many questions are still unanswered. It is difficult … but as the song that played in Holsten while Tony Soprano was waiting for his family says: Don’t stop believin’.

With information from El Pais: “The Reality Behind the Data.

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The Author

José Juan Ruiz

José Juan Ruiz

Chief Economist and Manager of the Research Department. The Department is the sector of the Bank that generates new ideas to enrich the knowledge base that supports the policy agenda of the Bank and its member countries. Mr. Ruiz comes to the IDB from the Banco Santander, where he served as Director of Strategy and Chief Economist in the Latin America Division. For the past 12 years he has been a member of the Executive Committee of the America Division and has been a member of the Board of Directors of Banco Santiago in Chile, Banco Santander Colombia, Banco Santander Puerto Rico, Banco Santander Perú and Banco Venezuela. Mr. Ruiz has also held various governmental positions in the Ministries of the Economy, Finance and Commerce. He was Undersecretary of International Economy and Competition and Chairman of the Economic Policy Committee of the European Union from 1991 to 1993. He was responsible for Spain’s relations with the OECD, IMF and the World Bank, where he also served as a consultant. From 1993 to 1996, he was the Chief Economist for Banco Bilbao Vizcaya Argentaria. He is a regular contributor to El País and from 1996–2001 wrote a column “Butaca de Patio” for the Spanish economic newspaper, Expansión. Mr. Ruiz holds a BA in Economics from the Universidad Autónoma de Madrid and is a member of the Spanish civil service as Técnico Comercial and Economista del Estado.

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