Latin America: Only a market economy can sustain robust growth

Mar-02-06 - by Marifeli Perez-Stable*

Nothing helps the poor like robust economic growth. Still, growth must be made to benefit the poor for poverty to be reduced. Weak rates of growth and scant dents on poverty -Latin America's record over the past two decades except for Chile- are not good news. Worse still are the entrenched inequities that continue to fray the social fabric in all countries.

In the just-issued Poverty Reduction and Growth, the World Bank offers a comprehensive analysis of the region with a twist. Poverty itself is part of the reason for Latin America's disappointing growth performance. Reducing poverty, in other words, benefits all citizens. Pro-poor growth and pro-growth poverty reduction need to go hand in hand. To redress inequality, add a state that promotes equal opportunity and undertakes efficient redistribution.

From colonial times until the late 19th century, Latin America developed to the beat of exclusion. Mineral wealth and plantation economies created societies skewed by and for the few on the backs of the darker-skinned masses. Latin America still bears the burden of this legacy, which partly explains its laggardness. History, nonetheless, is not destiny. In the 1960s, other regions began to take advantage of the expanding global economy while Latin America chose to remain inward-looking and protectionist. Then macroeconomic intemperance led to the 1980s implosion.

Neither is inequality immutable. A century ago, France, Spain and Great Britain, for instance, had high levels of income inequality that redistributive welfare states later mitigated. The World Bank points out that Latin America can still make the right choices.

Poverty is not just about income. Health and education are among the dimensions that should be considered in gauging the quality of life of the poor. Government transfers from the rich to the poor are, thus, of the essence. About 50 percent of the Latin American lag with respect to the countries of the Organization for Economic Cooperation and Development stems from its inefficient system of transfers.

Public expenditures in health and education generally favor the poor. Spending on pensions, higher education and energy largely benefits the wealthy and middle classes and tends to offset redistribution. Mexico, Colombia and Brazil are running effective and successful programs that create incentives for poor families to tend to the health and education of their children. The World Bank nods approvingly for it is precisely these types of programs that create virtuous circles of growth and poverty reduction.

The vicious circles of poverty traps are everywhere. Poor people often lack access to financial markets, infrastructure and property rights. The poor are more likely to be in poor health than their better-off compatriots. Just as their parents did, poor children generally attend low-quality schools. Poor adults tend to live precariously on the edge of formal labor markets. Poor people are the principal victims of crime.

Poverty traps suppress growth. Poor neighborhoods and regions do not attract private investment nor do their inhabitants accumulate human capital. Given low intergenerational mobility, birth becomes destiny for most poor people. Where insecurity reigns -whether due to unemployment, poor nutrition or crime- there is no tomorrow. According to World Bank calculations, close to 30 percent of the region's population lives on $2 a day or less. Latin America will never break out of the economic doldrums without harnessing the energies of the poor.

As I read Poverty Reduction and Growth, I thought of Hugo Chávez, Evo Morales, Néstor Kirchner, Michele Bachelet, Andrés Manuel López Obrador and Luiz Inácio Lula da Silva. Of course, Venezuela, Bolivia, Argentina, Chile, Mexico and Brazil are not on the same page. Yet, each of these leaders professes to care about the poor and, thus, the World Bank's analysis should be of interest.

Bachelet and Lula, no doubt, get it. Kirchner and López Obrador could but don't even want to try. Evo might still surprise us but, then again, that might be a fool's hope. Chávez definitely doesn't get it.

Only a market economy can sustain robust growth. That's what we all have to get for the sake of the poor and, indeed, all of us. Everything else is simply fool's gold.

*Marifeli Pérez-Stable is vice president for democratic governance at the Inter-American Dialogue in Washington, D.C.