Poverty Reduction and Growth: Virtuous and Vicious Circles

Poverty Reduction and Growth: Virtuous and Vicious Circles

Poverty Reduction and Growth: Virtuous and Vicious Circles

Poverty Reduction and Growth: Virtuous and Vicious Circles


That raising income levels alleviates poverty, and that economic growth can be more or less effective in doing so, is well known and has received renewed attention in the search for pro-poor growth. What is less well explored is the reverse channel: that poverty may, in fact, be part of the reason for a country's poor growth performance. This more elaborated view of the development process opens the door to the existence of vicious circles in which low growth results in high poverty and high poverty in turn results in low growth.'Poverty Reduction and Growth' is about the existence of these vicious circles in Latin America and the Caribbean about the ways and means to convert them into virtuous circles in which poverty reduction and high growth reinforce each other. Through its analysis of fresh data and the attention it pays to issues such as the persistent inequality in the region, the role played by various microdeterminants of income, and the potential existence of human capital underinvestment traps, this title should be a valuable contribution to the current regional debate on poverty and growth, a debate that is critical to the design of policies conducive to enhancing welfare in all is dimensions among the poor of Latin America and the Caribbean.


This chapter reviews recent trends in poverty and inequality in Latin America and the Caribbean, along with the well
known concerns about the implications of static measures of poverty and inequality. The review shows that such concerns
are not merely conceptual curiositiesincorporating them in the analysis can and does lead to very different conclusions
about the evolution of welfare in the region and complicates inferences about the effect of growth on the welfare of the poor.
As important, however, these more complete measures of welfare open several additional channels through which poverty or
inequality can affect growth.

THE PERSISTENCE OF HIGH LEVELS OF poverty remains the central disappointment of the last 20 years in Latin America. This chapter begins by presenting the standard indicators of income poverty and inequality for the region—the share of the population living below $2 a day and Gini coefficients—their recent evolution, and some caveats surrounding the conclusions we draw from them.

However, it has long been acknowledged that such indicators are very imperfect measures of well-being, both of the poor and of the society as a whole. Many of the points made in this chapter were foreshadowed in Kuznets’s seminal “Economic Growth and Income Inequality,” published in 1955; others were made by Sen (1985). Yet in the context of understanding the reinforcing relationship between growth and poverty reduction, these points gain renewed importance. First, to understand how growth may affect the poor, we need to understand the channels through which different characteristics of growth affect the quality of life of individuals across dimensions of well-being, across their lives, and across generations.

Second, excessive narrowness in understanding poverty can lead to overlooking important channels through which the reverse causality may occur and thus prevents the fullest understanding possible of the virtuous circles between poverty reduction and growth. As is generally the case with these reports, we aim not to provide the final word, but rather to contribute some new ideas or, in this case, some new evidence on old ideas, to the debate.

Income poverty

Table 2.1 suggests that the rate of income poverty in Latin America is 24.6 percent, based on a poverty line of $2 a day in purchasing power parity (PPP) weighted by population and using the latest available surveys. It is somewhat higher in Central America and Mexico (30 percent) and the Andean Community (31 percent) and lower in the countries of the Southern Cone (around 19 percent), which nonetheless have a larger number of the poor by virtue of their larger populations. The sample does not have comparable measures for the Caribbean as a whole, but the two most populous countries (excluding Cuba) have poverty rates of 16.4 percent (Dominican Republic) and 44.1 percent (Jamaica). Very similar patterns emerge when working with unweighted averages, which are more relevant when the analysis requires taking the country as the unit of analysis rather than the individual.

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