Growth and Poverty Reduction: Latin American Experience with Economy-wide Policies Alberto Valdés Taking Action for the World’s Poor and Hungry People IFPRI and The State Council Leading Group, China Beijing, October 17-19, 2007

Why look at Latin America? Lesson for other developing countries. Economic reforms in Latin America beginning in the 1980s were deep and wide. Explicit goal: stability for growth. Initially poverty goal not explicit, in part due to lack of diagnosis. With macro stability attained, in mid-1990s poverty goal explicit. Introduced during major macroeconomic disequilibria, limiting government fiscal policy. Fiscal belt-tightening, central bank discipline for macroeconomic stability. Trade liberalization, deregulation, privatization for improving the investment environment and efficiency. Corrected inherent anti-export bias in previous approach of import-substitution/closed-economy. Prepared the region for now ongoing globalization.

Cost reduction: trade liberalization, deregulation, privatization. Lowered tariffs and non-tariff barriers. Removal of price controls. Reduction of state agencies, licenses and other obstacles to business and trade (both exports and imports). Lessening state control of ports, roads, telecommunications, energy. All aimed at lower costs of doing business.

Expectations for small open economies More trade, and more rapid growth in exports, including agriculture. Initially poverty reduction not the direct focus. Later, yes. However, important for poverty: More employment in exports for same amount of value added than import-competing activities. Higher growth, higher incomes. Outcomes Depth and impact of reforms uneven: some countries more than others. Exchange rate appreciation surprise. Modernization of government very slow. In general, greater global integration today. Social policy shift toward targeted subsidies to poor.

Growth is good for the poor. The case is strong that sustained growth remains a necessary condition for poverty reduction. Economic growth can be more pro-poor in some circumstance and less in others and that less inequality is better than more. But just by itself, growth is pro-poor. Patterns of growth matter, because some industries are more intensive in unskilled labor than others. Policies that are biased against higher-labor-intensive sectors work to the detriment of the poor.

Questions about growth and inequality Can the poor take advantage of growth? Initial inequality can influence how the poor benefit. Critical for reducing poverty: pro-employment growth, particularly unskilled labor. In the long run the main factor appears to be education. The record in Latin America is still overall disappointing for coverage and quality compared to East Asian experience. Poverty and inequality can feedback to slower growth. poor exposed to worst schools, poor regions unattractive to investment, disparities and political risk.

Effective public expenditures Tradeoffs and priorities: so many gaps, so few funds. Little analysis of the effectiveness of spending. So much of public spending end up being transfers as private subsidies. Waste of funds that might go to productive “public goods.” Estimate for Latin America rural areas: a shift from 40% to 50% on public goods increases agricultural GDP per person 2.3% – without spending a penny more.