Escaping the Poverty Trap

The elimination of poverty must remain at the top of the policy agenda in Latin America and the Caribbean, where inequality is higher than in any other region and one in five people survive on little more than two dollars per day (as measured by the 1993 purchasing power parity (PPP) exchange rate).

Poverty is an intrinsically dynamic phenomenon. Poor people are locked into a low-level asset (or capability) trap. Hence, poverty reduction efforts must seek to provide incentives that will encourage the poor to acquire assets and capabilities that will enable them to escape poverty in the future.

Of course, it is impossible to make serious inroads against poverty without generating persistent economic growth. But, based on the continent’s economic performance over the past last 15 years, growth alone is unlikely to reduce poverty by more than 25% in the next ten years. Even if policymakers were successful in creating an environment that better rewards investment and thus promotes faster growth, Latin America’s ills would not be solved. The high level of income inequality requires specific poverty reduction efforts.

Indeed, a striking feature of Latin America is that very little redistribution currently takes place. Taxes generally have little redistributive effect, because most countries rely heavily on indirect taxes. Even Chile’s tax system – the most effective in Latin America – is actually regressive. Personal income tax revenue is low in Latin America and the Caribbean, suggesting that there is scope for policy makers to increase the intake so they have more money to distribute to those in need.