Poverty, Inequality, in Latin America

1
Poverty, Inequality,in Latin America

• Policy and Microfinance

2
What is poverty?

• Inadequate satisfaction of needs
• Mostly related with low levels of income
• Poverty is multidimensional
• There are many needs
• Shelter, knowledge, food, social interaction
• There is not a unique definition for poverty
• There is not a unique poverty measurement
• People love to argue about poverty

3
Development Economicsin the past

• More growth ? less poverty
• ? Focus on making GDP grow faster
• Already an urban bias
• Fragmented economies, Import Substitution
  Industrialization
• Also focus on urban poverty
• But majority of LA poor live in RURAL areas (60)
  and their poverty is deeper

4
Rural vs. Urban Poverty

• In 5 out of 12 countries rural population is
  more than 40 total population
• In 10 countries rural povertygturban
• In all LA countries, the majority of extremely
  poor are rural
• Nicaragua, Honduras, Guatemala, Ecuador, El
  Salvador, Paraguay, Colombia, Peru, Venezuela,
  Mexico, Brazil and Chile.

5
Poverty Evolution El SalvadorPercentage of
Households
Fuente Encuesta de Hogares de Propósitos
Múltiples, Ministerio de Economía
6
BoliviaPoverty Evolution 1976 - 2001
98.6
100
95.3
90.9
(0.21)
(0.48)
85.5
80
70.9
(0.93)
58.6
of Households
66.3
(1.33)
60
(0.84)
53.1
(1.52)
40
Rural
39.0
Total
Urban
20
1976
1992
2001
7
Now

• Focus on rural poverty
• Factors influencing the capacity of the rural
  households as a small entrepreneur and as a
  production unit
• Accelerated economic growth is still regarded as
  the prime mechanism to diminish poverty

8
LA Background

• Abundant in land
• CR smaller than WV, ES half of CR, Bolivia 20x CR
• But large proportion of landless or near landless
  rural workers
• High concentration of land
• Economies of scale
• El Salvador too small and there is not enough
  land for reducing poverty of rural poor (5 mill.
  Tot. pop.)
• Small share of rural workers in labor market
  (30-45, depending on country size)
• Small share of agriculture in economy (15-25)
• ? Low added value of the sector

9
High degree of heterogeneityin LA rural poor

• Education
• Per capita income
• Access to services
• Security of land tenure
• Labor and rural financial markets
• Weather
• Culture

10
Estimates of indigenous pop.
11
More selected indicators
12
Poverty measurement

• Basic needs fulfillment Indexes
• Income/consumption
• ?welfare/utility proxies
• poverty lines?
• Comparisons
• Cross-country
• Within-country?

13
La Paz - Income
14
Cochabamba - Income
15
Chuquisaca - Income
16
Gini Coefficients
1995
1997
1999
of income
of households
17
Two kinds of poverty

• Transitory phenomenon ? Vulnerability
• Exogenous shocks
• Severe droughts (El Niño), macroeconomic crisis
  (Argentina), political upheavals (wars, drug war
  in Colombia, heavy rain in La Paz-Bolivia or San
  Jose-CR, Hugo Chavez in Venezuela, earthquakes in
  El Salvador), etc
• Structural conditions
• Little or no productive assets
• Low assets productivity
• Demographic, ethic
• Concentrations of political and social power

18
Household Income - 1995
Colones
Households ranking according 1995 income
Nota Incluye solamente las familias del panel
Fuente FUSADES/BASIS, Encuestas de Pobreza Rural
19
Household Income - 1997
Colones
Households ranking according 1995 income
Nota Incluye solamente las familias del panel
Fuente FUSADES/BASIS, Encuestas de Pobreza Rural
20
Inadequate satisfaction of needs

• Low household income
• Low productivity of the country in general
• Individual household characteristics
• Education, dependency rates, assets.
• Lack of supply of many goods and services
• Health and Medical Services
• Schools
• Lack of knowledge about the right think to do
• (solid vs. liquid food)
• Electricity
• Roads ? access to markets of inputs and outputs

21
Poverty alleviation strategy

• For each country depend on
• individual stage of development
• and rate of growth

22
Why are the poor poor?

• Few assets, no capital accumulation (both human
  and physical)
• Inegalitarian development
• El Salvador, Costa Rica
• Bolivia, Argentina
• Productivity of their assets is low
• Government failures
• Imperfect or incomplete markets

23
Why are the poor poor?(part II)

• Geographically concentration of economic
  activities and increases in efficiency
• Reduce nonfarm employment opportunities for the
  rural population
• Rural population immobile because of low skills,
  age distributions, and ethnic characteristics
  (language barriers)
• Or, when they migrate? urban poor

24
Three elements for promoting people out of poverty

• Building the assets for the poor
• Countering the effects of missing or failing
  markets (markets imperfections) and fragmented
  markets
• Remedying the failures of government
• Last two? key factors to increase the
  productivity of assets owned by the rural poor

25
Human Capital

• Educational levels are low
• The returns to education in the rural areas are
  low too
• Return to education in farm activities are
  smaller than in nonfarm activities
• Perhaps, the main impact of education among rural
  people is to facilitate their migration to urban
  areas, but
• Educate people to develop in rural areas, not to
  move to urban areas (Stiglitz)

26
Remedying the failures of government

• Land redistribution
• May increase farm output buy may have only a
  limited impact on household income
• Give redistributed land those who will work it,
  not to former militia/guerrilla
• Access to credit
• Technical assistance
• Education
• Defragmentation of markets

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Microfinance and Poverty alleviation
28
Background

• 500 million economically active poor people in
  the world operating microenterprises and small
  businesses
• Most of them do not have access to adequate
  financial services
• Credit. Where to they get them from?
• Savings. Do they save? How?
• Insurance
• Payment services
• Do they need them?
• First best, second best,
• Cost Benefit Analysis and alternative policies

29
Microfinance

• Has evolved as an economic development approach
  intended to benefit low-income women and men.
• Provision of financial services to low
  income-clients (usually self employed)
• Traders, street vendors, small farmers, service
  providers (hairdressers), artisans, small
  producers
• Group formation
• Self-confidence
• Women/poor empowerment! (_at__at_)

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Microfinance

• Small loans, for working capital
• Non traditional lending technologies
• Collateral substitutes
• Group guarantees (solidarity group)
• Compulsory savings
• TV, bed, VCR!
• Access to repeated and larger loans based on
  repayment performance
• Training, education, health programs
• ..

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Subsidized Credit (80s)

• ???
• Problem
• Most programs accumulated large loan losses and
  required frequent recapitalization
• ? Market based solutions

32
Subsidized Credit

• Undermines development (no infinitely rich donor!
• Poor pay can pay interest rates and cover
  transactions costs
• Sustainability ? institutional permanence
• ?efficiency

33
Services demanded by the poor

• Productive Credits
• Secure Savings
• Not only pigs and cows
• Or money under the mattress
• Consumption loans
• Consumption smoothing
• Transitory poverty alleviation

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Strengths of Microfinance

• Potentially capable of reaching the poor
• Financial sustainability, self-sufficient,
  subsidy free, LOCALLY MANAGED
• Potential to build on traditional system
• The availability of better financial products as
  a result of experimentation and innovation

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Risks

• Productive credit is not for all the poor
• Neither consumption credit
• Minimum scale for sustainability
• Lack of local qualified managers

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The Powerless and empowerment

• Norms of expected behavior
• Within the household
• Gender differences
• Age differences (people in Bolivia)
• Within the community
• Between socioeconomic groups
• Caste, ethnicity, wealth

37
The 90s in LA (17)Székely

• 70s both reduce
• 80s both increase
• 90s?
• Persistent inequality
• Lower poverty
• LA most unequal region in the world
• Inequality is inhibiting poverty reduction

38
Increases in inequality

• Argentina (rich got richer middle class poorer)
• Bolivia (something wrong with data?
• El Salvador (shocks natural disasters economic
  events)
• Nicaragua
• The better-off people are able to improve their
  income faster than others.