Did the commodities boom reduce poverty in Latin America?

This article was originally published on The World Bank’s Open Data blog.

“Did poverty drop in Latin America because of good policies or good luck?” I am often asked this question after I tell people that poverty in the region fell from 40 to 25 percent between 2003 and 2013. The answer is a bit of both.

As the chart below demonstrates, there is no question that the poor living in countries that were favored by high commodity prices benefited more than those in other countries. More to the point, as the chart also highlights, the tremendous rise in revenues coming from the boom in commodity prices led to an increase in labor income that helps explain much of the poverty reduction seen in commodity exporting countries.

Note: We group countries as having experienced a ‘commodity boom’ if their terms of trade increased by an average of 2 percent or more per year over 2003-2013.

To me, however, an interesting story hides behind the line of the non-commodity exporting countries. Even without the benefit of the commodity boom wave, those countries also managed to reduce poverty by a respectable 7 percentage points.

How did they manage such gains? When looking at the factors behind poverty reduction in non-commodity exporters, we observe that labor income among the poorest 40 percent of the population played an important role (1.9 percent) but not as important as in the commodity exporters. More important was the role played by non-labor income (4.1 percent) which suggests, to some extent, an important role for public policies to protect the poor from less favorable external conditions.

This finding becomes particularly timely today, with the commodity boom fading and economic growth slowing down. In fact, we are beginning to witness a slowdown in poverty reduction in commodity boom countries in recent years.

But natural resources are not destiny. And, while the story across the region has varied significantly, it is worth noting that there was poverty reduction across the board, even in countries that did not benefit from the commodity boom. Among these countries, the drop in poverty ranged widely from 5 to 15 percentage points. In fact in some cases the drop in poverty was higher in some non-boom countries than in those that experienced a commodity boom. This reminds us that other mechanisms were also at play in helping people exit poverty. Even if poverty gains may slow because of sluggish growth, we have reasons to remain optimistic that those mechanisms may be used to keep poverty reduction going.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Oscar Calvo-Gonzalez is Practice Manager in the Poverty and Equity Global Practice of the World Bank.

Image: A farmer holds organic coffee beans at a coffee field in the mountains of Peru’s central jungle city of Chanchamayo. REUTERS/Enrique Castro-Mendivil.