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Poverty & SDGs

How to Close Latin America’s Rich-Poor Chasm

WASHINGTON, Jun 11 2013 (IPS) - Latin American governments have increasingly been working to lessen inequality in the region, but new data suggests their efforts vary widely in quality and impact.

Latin America has for decades been considered one of the world’s most unequal regions, with chasms between the richest and poorest in each country. At a World Bank discussion here on Monday, however, researchers suggested that these gaps have been closing over the past several years – surprising many analysts.

“There is no doubt that fiscal policy, the structure of taxes, can be a powerful mechanism to change the distribution of wealth in a society.” -- Jaime Saadera-Chanduvi of the World Bank

Still, major work remains to be done in spreading these reforms to all members of society.

“The main reasons for these high levels of inequality have had to do with corruption, lack of functioning justice systems and rule of law,” Jennifer Johnson, a senior associate of the Latin American Working Group, an advocacy group, told IPS. “As yet, the gains that have been made have not reached the marginalised populations.”

Increasingly, researchers have been looking into what Latin American governments have and haven’t been doing over the past decade to achieve lower levels of poverty and inequality.

“These questions don’t go away,” Stephen Younger, an economics professor at Ithaca College, said Monday at the World Bank. “People are always concerned about the equity implications of a policy, and that includes fiscal policy.”

Early results from a study released last week highlight a wide variety of public policy choices confronting Latin American governments regarding poverty reduction and income redistribution. The report looks at Brazil, Bolivia, Argentina, Peru, Mexico and Uruguay.

“The idea of the project is not only to measure the result of what’s going on with regard to inequality, poverty and social development in Latin America,” Nora Lustig, a professor of Latin American economics and co-author of the new study, said at a panel discussion last week.

“Rather, it is to look more deeply at how this process has been happening and, particularly, how much effort governments themselves are really making.”

That analysis has now identified Argentina as the most effective Latin American country at reducing inequality. Particularly useful in this regard have been measures such as direct cash transfers, when governments give money directly to poor citizens.

Lustig and her colleagues found that this approach has helped to reduce poverty levels in Argentina by more than 60 percent.

Yet in other countries, such an approach has not been nearly as effective. In Peru and Bolivia, for instance, cash transfers have only reduced poverty by around seven percent.

According to Lustig, this discrepancy can be explained by simple spending levels.

“Peru spends much less money in all these transfers,” she told IPS. “It also had to do with who the transfers are targeted at, but it mainly has to do with spending.”

Argentina comes out as a “shining star”, Louise Cord, a sector manager with the World Bank’s Latin America and Caribbean office, said at the unveiling of the results. “And yet we have to all wonder about the sustainability of this fiscal framework.”

According to the study, Argentina has funded the majority of its public spending since the early 2000s through “distortionary taxes” and “unsustainable revenue-raising mechanisms”.

In nearly all countries throughout the region, so-called indirect taxes, on goods and services as opposed to on people and organisations, are seen as problematic for the poor. Such practices have been shown to wipe out all the effects of direct taxes and direct cash transfers, especially in Brazil and Bolivia.

“There is no doubt that fiscal policy, the structure of taxes, can be a powerful mechanism to change the distribution of wealth in a society,” Jaime Saadera-Chanduvi, director of poverty reduction and equity at the World Bank, said Monday.

“It’s critical to understand how taxes and benefits can be shaped through the distribution of incomes and, through that, increase standards of living.”

Economic blossoming

By 2009, nearly a third of the Latin America population had moved into the middle class, with just an estimated 10 percent chance of falling back into poverty.

“Despite these important gains, there is still room to move forward and I think a study like this highlights that,” said Cord.

According to some advocates, Latin American governments need to focus particular attention on corruption, in order to ensure that social policies are not used for political gain or other manipulation.

“States must begin to analyse poverty reduction initiative through coordination with marginalised sectors that have traditionally been excluded from these policy discussions,” Kelsey Alford-Jones, the director of the Guatemala Human Rights Commission, a Washington-based advocacy group, told IPS.

“They need to focus on models that meet needs identified at the local level,” he said.

Alford-Jones notes that U.S. economic policy, “including the imposition of structural adjustment programmes and free trade agreements, has played a major role in the perpetuation of poverty and inequality.”

Meanwhile, the United States is currently looking for ways to more closely engage with the rising economies of Latin America. Over the past week, both Vice-President Joe Biden and Secretary of State John Kerry made highly visible trips to the region.

Biden noted during his five-day trip that he had seen an “economic blossoming” in the region.

“What the United States needs to do is be far more flexible and less inclined to favour the demands of transnational organisations,” Laura Carlsen, director of the Mexico City-based Americas Program for the Center for International Policy, a Washington think tank, told IPS.

“In particular, it also needs to look more carefully at what’s happening to the weakest countries.”

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