So I want to add an ingredient to Jeff's list: the distribution
issue. Not income distribution per se, but something more
fundamental: the distribution of assets and opportunities,
especially as it affects the poor. I want you to consider for a few
minutes a possible lesson for Latin America from East Asia (where
income inequality has for decades been much lower than in Latin
America): that distribution of assets is relevant for ensuring that
growth occurs from below, and therefore brings about poverty
Why has growth been consistently higher and poverty reduction so
much greater in East Asia compared to Latin America? Why are the
Koreans worrying about a drop in growth to 5 percent, while, outside
Chile, 4 percent growth is considered a success in Latin America?
The so-called Miracle study of East Asia's success, done at the
World Bank, focused on broad-based, export-driven, shared growth. I
believe behind shared growth was, in fact, what could be called
growth from below; that is, growth fueled by increasing productivity
of the poor in societies where the distribution of opportunities was
relatively equal. To talk about distribution requires that I clarify
its relation to the reduction of absolute poverty. Tonight I am
fundamentally concerned with the reduction of absolute poverty.
Societies tend to care about distribution, in addition to absolute
poverty, if unequal distribution reflects destructive inequality,
i.e. a lack of opportunities or a lack of mobility--which is likely
to cause absolute poverty. There can also be constructive
inequality, which provides incentives for mobility and rewards high
productivity; this inequality usually reflects broad-based
opportunities and is not associated with high absolute poverty and
social immobility. Thus inequality in itself may or may not matter.
But if it reflects or generates policies, programs and historical
patterns in which the rich enjoy privileges and rents that
ultimately undermine efficiency, growth, and poverty reduction, it
certainly does matter.
World Bank Approach to Poverty Reduction:
At the IDB, my colleague Juan Luis Londoo and I recently prepared an
assessment of World Bank poverty reduction policies for a session of
the AEA conference held this past January on World Bank policies.
One of our conclusions is straightforward: World Bank and other
development economists have not focused enough on the fundamental
issue of the distribution of assets and opportunities.
The World Bank's historic and continuing emphasis on growth as key
to poverty reduction is absolutely correct. In 1968, the
then-President of the World Bank, Robert McNamara, introduced the
explicit goal of poverty reduction. But for all practical purposes
in the analytic work and lending of the Bank, poverty reduction is
seen as occurring through and because of growth. There has been some
emphasis on distribution of income, but as an outcome rather than a
determinant of growth or of poverty reduction. This lack of emphasis
on income distribution and underlying asset inequality is not that
surprising. Mainstream economic theory (in contrast to the Marxist
tradition, which was certainly without influence in the World Bank)
saw distribution as: (a) an outcome [Chenery et al., Redistribution
with Growth]; or (b) as problematic in that redistribution through
populist transfers has historically been a cause of destabilization
and has inhibited sustainable growth. Even the relatively benign
idea of investing in the human capital of the poor (as opposed to
so-called productive investments in infrastructure) as a key to
poverty reduction only appeared in 1980 [World Development Report
1980, special topic]. And in fact it was almost 10 years before Bank
lending actually reflected this view--it took a decade to bring
education and health lending up to a mere 10 percent of total
In the 1980s, the strategy of growth and human capital accumulation
as the means to reduce poverty was put on hold while analytical and
operational work focused on adjustment issues. Then in 1990 came a
second World Development Report with a special section on poverty.
The report presented a three-pillar strategy for poverty reduction
reflecting the history I have briefly outlined. The three pillars
were growth, human capital accumulation via social programs, and
safety net programs to protect the vulnerable and to alleviate
poverty during periods of adjustment.
The Three Pillars in Latin America:
In Latin America, the three-pillar approach seemed an appropriate
recipe, and it has in fact been implemented in the 1990s. Major
economy-wide reforms, enacted starting in the mid to late 1980s,
have brought a return to growth of 3-4 percent annually in the
1990s. Countries have also implemented major increases in their
spending on human capital; social spending per capita (excluding
pensions) has increased 22 percent in the 1990s, equivalent to an
additional percentage point of GDP spent on health and education.
Finally, most countries in Latin America have created some form of
safety net, generally emergency funds for social protection.
With economic reforms, the region achieved some positive growth in
the early 1990s, so that per capita income recovered to its 1980
levels. But average growth rates have been anemic, and some portion
of the growth achieved reflects catch up effects after a period of
no growth. Moreover, the overall results of the economy-wide reforms
and increased social spending have been less than satisfactory for
poverty reduction. With the possible exceptions of Chile and
Colombia, countries in the region have managed little or no
reductions in poverty in the 1990s.
Two other trends are worrisome. First is evidence of worsening
income distribution over time, and its link to the minimal progress
against poverty. If the economies of Latin America had maintained
the same income distribution throughout the 1980s and 1990s as in
1970, the increase in poverty would have been smaller by almost half
in the years 1983 to 1995. In other words, at least half of the rise
in poverty since the 1970s is associated with a deterioration in the
distribution of income. Second is evidence that the distribution of
education itself is worsening. Using data on the education of adults
(years of school completed) over the last three decades, we estimate
that average education, though it has increased from about 3 years
in 1970 to more than 5 years today, is becoming more and more
unequally distributed (in that the standard deviation of average
adult education has increased). Thus the pattern of inequality is
being repeated over time. In sum, the three-pillar recipe in Latin
America is not delivering the desired results, at least not yet.
Moreover, the worsening trends in income distribution and
distribution of education suggest that the recipe of growth, human
capital accumulation and safety nets may not alone address Latin
America's underlying problems of poverty and high inequality.
Growth and Inequality Across Countries:
In our work at the IDB, we have examined the relationship between
economic growth, the income of the poor and inequality across a
group of 43 countries over the past three decades. Using the
high-quality income distribution data compiled by Klaus Deininger
and Lyn Squire, we selected countries with Lorenz curves available
for two periods of time separated by at least five years. For the
resulting sample of 43 countries, we also use income estimates per
capita in international purchasing power prices, and information on
physical capital investment, the education of the labor force, land
distribution, and trade indicators. Our regressions confirm the now
standard results of growth analysis: economic growth reduces
poverty, and income inequality reduces economic growth. So less
income inequality would reduce poverty by increasing growth.
But there is more to the story. To the standard regressions we added
variables measuring the initial distributions of land and human
capital. We find that a more equal distribution of assets matters.
It reduces poverty not only indirectly by accelerating economic
growth, but directly by enhancing income growth of the poorest
groups. In fact, the positive effect of lower asset inequality on
income growth is almost twice as great for the poor as for the
population as a whole.
Thus we have two virtuous circles: a more equal distribution of
assets reduces poverty (1)indirectly by enhancing aggregate growth
which in turn reduces poverty, and (2) directly. But the mirror
image of these is a vicious circle where high initial asset
inequality inhibits asset accumulation which traps the poor in
poverty and, by limiting aggregate growth, reduces society's
capacity to help the poor.
These findings are obviously relevant for Latin America. Growth has
been anemic in the region and poverty reduction has been minimal.
Income inequality is high and procyclical. These outcomes are
related to weak asset accumulation (particularly of human capital)
and high inequality of assets (land and human capital).
Compared to the East Asian economies, Latin America has had much
lower physical capital accumulation. The region also had a lower
level of initial human capital and higher initial asset inequality
in human capital and land. Consider this. With East Asia's
distribution of assets--land and education--in 1960, Latin America
would have half the number of people living in poverty today. The
number of poor would likely be even lower for two reasons. First,
the number of poor would be lower if we were to take into account
the effects of greater asset equality on growth, and of growth on
poverty reduction. Second, the number would be lower still if, in
fact, physical and human capital accumulation were a function of
initial inequality (as could be tested in a structural model).
Lessons for the Multilateral Development Banks (MDBs):
Several lessons emerge for the multilateral development banks.
First, the emphasis on growth and human capital accumulation as key
to poverty reduction makes sense. Second, and less positive, more
attention should be focused on a second key determinant of poverty
reduction and aggregate growth: the distribution of assets, both
physical and human capital. The long-standing inattention of all the
MDBs to inequality in the distribution of assets, especially
education, has been costly. More concern earlier with the causes and
the consequences of income inequality would have called greater
attention to a fundamental constraint on poverty reduction: the
poor's lack of access to the assets necessary for increased
productivity and income.
In the context of Latin America, the multilateral development banks
have long decried populist transfers. There is an alternative: to
focus on programs that put productive assets in the hands of the
poor. This means focusing not only on expanding education, but on
its distribution as well. It means seeking other mechanisms beyond
education to increase the access of the poor to productive assets:
land reform, reform of legal systems, credit, and fair competition.
All of these can create opportunities in previously unequal
societies, eliminating the hidden privileges in asset markets
historically enjoyed by the rich. The growing support of the MDBs
for microenterprise programs acknowledges the relevance of access to
assets and opportunities for income growth among the poor.
Similarly, new emphasis in the banks on political and economic
decentralization and on participation of the poor in the design and
implementation of social and economic programs, with real voice and
the power of choice, can be effective in poverty reduction. In
democratic societies only political access and economic freedom can
help ensure greater access to the assets that will raise incomes.