Bootstraps not Band-Aids: Poverty, Equity and Social Policy in Latin America - Working Paper 24

After a decade of economic reforms that dramatically altered the structure of economies in Latin America, making them more open and more competitive, and a decade of substantial increases in public spending on education, health and other social programs in virtually all countries, poverty and high inequality remain deeply entrenched. In this paper we ask the question whether some fundamentally different approach to what we call "social policy" in Latin America could make a difference — both in increasing growth and in directly reducing poverty. We define social policy broadly to include economy-wide ("macro" and employment and other structural) policies that affect poverty and social justice in foreseeable ways, as well as social investment programs such as health and education and social protection programs including cash and other transfers targeted to the poor and others vulnerable to economic and other shocks.Section 1 contains a brief review of what is known about the links among poverty, inequality and growth in the region and elsewhere. We emphasize the relevance of empirical work showing that income poverty combined with inequality in access to credit and to such assets as land and education contributes to low growth and directly to low income growth of the poor. In Section 2 we focus on the effects of the market reforms of the last 10-15 years on poverty and inequality in the region, based on empirical studies using household data. We emphasize the finding that the reforms have not contributed to reducing poverty and inequality. Though reforms have not particularly worsened the situation of the poor, they have not addressed the underlying structural causes of high poverty, i.e. the poor's lack of access to credit and to productivity-enhancing assets. In Section 3 we describe briefly four stages of social policy in the region over the last four decades. In Section 4 we propose a more explicitly "bootstraps"-style social policy, focused on enhancing productivity via better distribution of assets. We set out how this broader social policy could address the underlying causes and not just the symptoms of the region's unhappy combination of high poverty and inequality with low growth.