How can Latin America maintain inclusive growth?

The Latin America and Caribbean (LAC) region has been the most inclusive region in the world over the last decade: not only did it cut extreme poverty in half, it also realized the highest income growth rate among the bottom 40 percent of income earners in absolute terms, as well as relative to the total population. Between 2006 and 2011, the average growth rate per year in the mean income of LAC’s bottom 40 was approximately 5.2%. Moreover, when compared with the rest of the world, the region’s bottom 40 enjoyed the most rapid income growth relative to the total population (Figure 1).

Figure 1. Shared Prosperity: Annualized Income Growth,
Developing Regions, around 2006-11
Source: GDSP (Global Database of Shared Prosperity), World Bank, Washington, DC

These gains have been nothing short of transformational. In 2012, more than one-third of the bottom 40 in the region was comprised of vulnerable households (those living on $4 to $10 a day). This is an improvement compared to 2003, when the bottom 40 was composed entirely of households living in moderate poverty (those living with less than $4 a day). Moreover, in 2012, more Latin Americans were living in the middle class than in moderate poverty, 34.4 versus 25.1%. The inclusive nature of LAC growth is also evident in the decline in notoriously high levels of inequality, as measured by the GINI coefficient, which dropped from 0.56 in 2003 to 0.52 in 2012.

So what’s driving inclusive growth in LAC?

While doing research for our recent book, we learned that dynamic human capital accumulation for the whole population, higher growth of wages for those in the bottom 40 and price stability, under conditions of a slight decline in labor force participation for those in the two bottom quintiles, have driven many of these social gains.

We also found that the countries that did best at inclusive growth adopted policies that enabled equitable, efficient, and sustainable fiscal policy and macroeconomic stability; fair and transparent institutions capable of delivering universal, good-quality basic services;  well-functioning markets; and  adequate risk management at the macro and household levels.

However, things vary significantly at the country level.

While Bolivia, Brazil, and Peru took advantage of high growth rates to reduce poverty and boost shared prosperity, Guatemala, Honduras and Mexico grappled with lackluster growth. There was also significant variation across countries in the relative importance of growth and redistribution for poverty reduction. In Colombia, moderate poverty reduction was driven mostly by economic growth, while in the Dominican Republic, El Salvador, and Nicaragua, redistribution was almost exclusively responsible for reducing extreme poverty. The sustainability of LAC’s social gains may be jeopardized by less positive prospects for economic growth and by stagnation in the pace of the reduction in income inequality (Cord et al. 2014; de la Torre et al. 2014).There are more variations. Labor markets in Brazilexcelled at generating well-paying formal jobs that have done a lot to reduce poverty. On the other hand, in Colombia, fiscal policy has had a limited impact on inequality, partly because CCTs distribute 37.8% of funds to non-poor individuals and key components of social spending is regressive. In Argentina, there are significant regional disparities in equitable access to services, especially to sanitation. Finally, in Mexico, despite significant progress in addressing the fiscal risks of natural disasters, the ability of households to cope with natural disasters remains limited.

If growth wanes and progress in reducing the region’s high levels of inequality, as measured by the GINI coefficient, slows, it will be more important than ever for governments to focus policies on inclusive growth (de la Torre et al. 2015). For example, understanding the drivers behind falling labor force participation rates among the bottom 40 will be critical to ensuring the inclusiveness of growth, especially in a lower growth context that limits labor market returns. In addition, LAC should also pay close attention to its limited fiscal space to increase tax collection, work to improve the access and quality of basic services and develop policies to protect vulnerable populations from shocks.

References:

Cord, Louise, Oscar Barriga Cabanillas, Leonardo Lucchetti, Carlos Rodríguez-Castelán, Liliana D. Sousa, and Daniel Valderrama. 2014. “Inequality Stagnation in Latin America in the Aftermath of the Global Financial Crisis.” Policy Research Working Papers 7146, World Bank, Washington, DC.

de la Torre, Augusto, Eduardo Levy Yeyati, Guillermo Beylis, Tatiana Didier, Carlos Rodríguez-Castelán, and Sergio Schmukler. 2014. “Inequality in a Lower Growth Latin America.” Semiannual Report (October), Latin America and Caribbean Region, World Bank, Washington, DC.

de la Torre, Augusto; Ize, Alain; Pienknagura, Samuel. 2015. “Latin America Treads a Narrow Path to Growth”
Semiannual Report (April), Latin America and Caribbean Region, World Bank, Washington, DC.

This article is published in collaboration with The World Bank’s Let’s Talk Development Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Carlos Rodríguez-Castelán is Senior Economist in the Poverty Global Practice at the World Bank. Louise Cord is practice manager in the Poverty Global Practice for the World Bank’s Latin America and the Caribbean Region.

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