More of the same? Policy lessons from a decade of poverty reduction

1. LASA, Columbia University, September 27, 2013, “The Future of Latin America: Positioning the Region in the Global Scene” More of the same? Policy lessons from a decade of poverty reduction George Gray Molina

2. Motivation For the first time, growth, poverty red and inequality red moved in the same direction. How much is structural and how much is spurious? Can we expect more of the same?

3. 5 bullets • Inequality reduction was mostly based on improvements in labor income, social transfers and demographic change. How much of this is one-off? • Labor income improvements happened mostly in urban service sectors –how much of this is sustainable after the boom? • Social transfer improvements were progressive –but somewhat eclipsed by regressive taxation. How can fiscal policy work in tandem? • How much can be done in the short run? Income improvements move at a much faster speed than asset improvements. • Future achievements will be more difficult –declining returns have set in for many dimensions of well-being. Is this the real middle income trap?

4. Inequality reduction was mostly based on improvements in labor income, social transfers and demographic change. How much of this is one-off? Argentina: 33% Brasil: 41% Chile: 29% Colombia: 45% Rep. Dom.: 24% Ecuador: 66% El Salvador: 41% México: 64% Panamá: 22% Perú: 37% Fuente: CEDLAS 2013

5. 2. Labor income improvements happened mostly in urban service sectors –how much of this is sustainable after the boom? Improvements in wages (formal sector) and remunerations (informal sector) are happening in the non-tradeable sectors, with the few improvements in producivity. When the consumption boom winds down, services will be first to contract. Need to increase value added in manufacturing and services.

6. 3. Social transfer improvements were progressive –but somewhat eclipsed by regressive taxation. How can fiscal policy work in tandem? …que se anula en el medio Alto impacto social… Poco impacto social con cierta progresividad Fuente: Lustig et al. (2012).

7. 3. (continued) Sometimes fiscal policy has the net effect of moving people into poverty ….

8. 4. How much can be done in the short run? Income improvements move at a much faster speed than asset improvements. • Existe un MPI informativo como base comparativa, equivalente a $1.25 • Con un índice específico del contexto, ¿qué bienes se asocian a $2.5, $4, o $10? e.g. Dimensiones “más altas” vs. MPI tradicional - Tener movilidad, celular - Niños de 7-15 en escuela - Al menos 5 años de educación - Agua potable - Sanitario con agua - Vivienda con materiales firmes • Criterios más demandante. • Más revelador en ALC para fines de política pública. Fuente: PNUD-DRALC con base en HDRO y encuestas de hogares

9. 5. Future achievements will be more difficult –declining returns have set in for many dimensions of well-being. Is this the real middle income trap? Each additional unit or economic progress is more costly (fiscally, politically, institutionally)–as countries move into middle income status.

10. Final thoughts • Metrics runs ahead of policy sophistication –it is easier to identify the poor in multiple dimensions than to act in multiple dimensions. • Policymaking can be institutionally-intensive or not. The hardest thing is to change behavior, norms and power relations • More of the same is not likely in the future. As the LAC boom winds down, we will see how fragile our achievements are. • Need strong safety nets over the life cycle. Need to close territorial gaps in assets. Need to strengthen regional markets and create value added productive sectors. Price-led growth will not do.