Speakers:

Guillermo Perry, Chief Economist, Latin America and the Caribbean Region, World Bank

Andrew Lawson, Research Fellow, ODI

At this meeting, Andrew Lawson interviewed Guillermo Perry on two recent World Bank reports Poverty Reduction and Growth: Virtuous and Vicious Cycles and Latin America and the Caribbean’s Response to the Growth of China and India and the discussion focused on key development issues in Latin America.

Andrew Lawson began by asking Perry what the key messages of 'Poverty Reduction and Growth: Virtuous and Vicious Cycles' are and which messages he wanted policy makers to pick up.

Perry replied that the report examines the relationship between growth and poverty in both directions. He dealt first with the traditional emphasis of growth on poverty reduction in which it is argued that without sustained growth it is difficult to achieve a reduction in poverty and that variations in the efficiency of growth in reducing poverty are often due to the initial pre-conditions. He argued that coupling growth with redistribution and having policies which interact is better for countries where pre-conditions are poor. He identified a role for the state to equalise opportunities.

He then moved on the more innovative aspect of the report which examines how poverty reduction improves growth. He said this approach draws more on sociology than on economics. He explained that poor people cannot invest because they do not have access to credit to invest in their own businesses; they cannot send their children to school or they take them out of school early so poverty is transmitted between generations; and when they get sick they cannot access healthcare and so they become less productive. The report found that poverty traps impede growth making countries unattractive to investment and indicated that the concept of poverty traps are useful in explaining the low growth, high poverty cycle.

He said a key finding of the report is that poverty retards growth but does not impede it and that cycles can be broken. A major policy implication is the shift from seeing poverty and inequality reduction as something to be done solely for moral / humanitarian reasons to an imperative for growth which affects society as a whole.

His message to developed countries was that it is not acceptable to forget about the large pockets of inequality in middle income countries. He directed this comment particularly at the UK where the focus is on the poorest countries.

Lawson moved on a question about education: in Latin America there has been a high level of spending on education but problems with quality. What kind of spending is needed?

Perry replied that education is the key to getting out of poverty yet many poor families cannot afford to allow children to complete secondary education. He pointed out that social mobility in Latin America is quite limited and that poverty is often transmitted to the next generation. He gave Brazil as an example where the richest 30% have 7 years more education than the poorest 30%. In urban Brazil and Argentina, there is a 5 year difference. This is a symptom of an unequal society. He compared the region to East Asia where education was not a problem as societies were more equal.

He said the key factor in escaping poverty is finishing secondary education but too many families have to take children out of school to work, especially if they suffer a shock. He argued this suggests the problem does not simply lie with number of schools and teachers. Access and quality are also factors. Poor families need to be given cash transfers to keep children in school. He emphasised quality of education and cited slow reading speeds as a problem.

The third question was on the ineffectiveness of social programmes in Latin America and concerns over the quality of programmes, targeting and allocation.

Perry disagreed, saying that cash transfer programmes have been quite efficient but that public spending needs to be focused on areas which have the greatest impact on the poor, for example, primary education and basic health. Spending which benefits the middle class such as subsidies on pensions, gasoline and tertiary education bypass the poor. Policymakers need to ask what the relative value of spending programmes is. Efficiency is another major problem; in education, for example, a high level of expenditure of salary increases for teachers is not the best use of funds.

Michael Reid, Americas Editor at the Economist asked whether the Bolsa Familiar in Brazil is being done well. He raised the concern that it has been increased very rapidly and is less targeted than Oportunidades in Mexico.

Perry replied with some background on Oportunidades: the idea of cash transfers was invented in Mexico and this programme grew out of a regional programme called Progresa. The aim was to design an efficient programme to help poor families. Funds for Oportunidades were taken from other programmes where it was less clear if these were efficient. There were good information systems and external evaluation (by the World Bank) found that it was very well targeted, low cost and made a noticeable impact on human capital. The Bank decided to support the programme.

In Brazil, Lula's original idea was distribution of food. The World Bank suggested instead that Brazil expand the Bolsa Escolar to a national programme (Bolsa Familiar). The Bank provided finance for the Brazilians to learn for the Mexicans.

Lawson's next question focused on the specifics of policies in low income and middle income countries and how these might differ. He asked Perry about the reports' suggestions that low income countries should change, abandon or improve various policies.

Perry responded that the econometric studies yielded obvious results. Very poor countries should prioritise growth over redistribution whereas middle income countries can make more of an impact on poverty reduction by focusing on redistribution. He cited the figure that a one point improvement in an unequal country's gini coefficient value is equal to a 2.5% permanent increase in growth. He argued policymakers should focus on policies to improve equality such as conditional cash transfers and better tax collection systems.

Stephany Griffith-Jones, IDS, asked how countries can create sustainable programmes using the current windfall from high commodity prices.

Perry responded citing evidence from the World Bank and the Economic Commission for Latin America (ECLAC) which shows that fiscal policies tend to be highly pro-cyclical and, in lean times, public investment is first to be cut. He argued governments need to break these pro-cyclical patterns. For example, they should resist giving general wage increases when revenues are high as these are politically difficult to cut when revenues fall and the result is governments end up cutting good infrastructure investment and social policies instead.

He gave the example of Chile where revenue which results from high commodity prices must be declared and this share is not included in the budget at all. Chile manages changes in the economic cycle relatively well.

Lauren Phillips, ODI, asked about the market implications of overtly focusing on redistribution. Perry responded that he thought banks and ratings agencies would see it as sensible for a country to be spending on primary education as this would increase political and social stability and therefore reduce this type of risk.

Jonathan Glennie, Christian Aid, agreed with Perry that a lot of the content of reports is obvious and has been known for a long time. He asked if the reports represented a significant change of heart at the World Bank and a signal that it would consider social analysis not just economics. He asked if the World Bank, when it comes to specific policy recommendations, will be more open to countries saying they will not repay debts because the money would be better spent on education. He gave the example of Ecuador where 70% of recent oil revenues has been going on debt repayments.

Perry responded that the World Bank is not claiming to be the first to draw the conclusions in the reports. It's aim is to strengthen the case with groups less willing to accept the arguments on poverty and inequality by proving that redistribution can increase growth.

On the issue of debt he argued that debts do need to be repaid in order to be able to access credit in the future. He said official debt reduction such as the HIPC initiative work when coupled with an increase in availability of concessional credit.

Robert Laver, independent consultant, said cutting back on infrastructure spending and being unable to maintain infrastructure already built constituted a double loss and Perry agreed. Laver asked if Latin American governments were making improvements on corruption, to which Perry responded that it depends on the country and the crucial factors are good institutions and strong civil society. Laver's final question was on debt: would the lending system improve if loans were made directly to organisations rather than governments. Perry responded that by-passing the government is problematic and that non-government organisations and churches cannot establish a good education system, only individual instances of good schools.

Lawson then turned to questions about trade. He said trade has not been of great benefit to the poor and even in some cases not of great benefit to growth. He asked Perry to comment on the fact that this is the first time a World Bank report has stated this.

Perry responded that in general trade is good for growth. However, the reports also found that in Latin America, although trade and trade agreements have increased growth opportunities, the benefits are distributed unequally. He said that Latin America is opening up relatively late and at the same time as India and China which have lower wages are more skilled workers. So Latin America is left with a comparative advantage in the primary sector. The wage gap between Latin America and India and China is widening as wages for skilled labour grow faster than those for unskilled.

He went on to say that despite the difficulties with distribution the answer is not to reject trade. Rather, Latin America should continue to open its markets but also focus on improving education, infrastructure and access to finance for small and medium enterprises. In this way opening up to trade would have a greater impact on growth.

Lawson asked if there is a role for aid for trade provisions in Latin America to which Perry replied yes, especially in the poorest countries. This would facilitate trade and also support the weakest regions, countries and firms. He highlighted a problem in the way countries are defined as low-income, pointing out that Bolivia is not classed as poor despite its 50-60% poverty rate.

Further questioning from the audience led to comparison with the Asian Tigers' development and the question of whether Latin America should maintain some tariffs or adopt completely open liberalisation. Perry commented that the effects of trade liberalisation are not the same in every country and that Latin America was still protecting its economy and not investing in education at a time when East Asia was taking advantage of the benefits of liberalisation.

Stephany Griffith-Jones asked specifically how Perry thought the UK (through DfID) and other OECD countries could be more helpful to Latin America. Perry responded that the World Bank agrees that Africa is the priority but that countries just beyond the definition of low-income also need help. He said arbitrary definitions of poverty will always be problematic. He pointed out that innovations in development (such as cash transfers) often occur in middle income countries so it is important to keep an open dialogue.

Andrew Lawson wrapped up the discussion by asking Perry to comment on what he thought the future held for Latin America. Perry answered that the region has made progress on macroeconomic management and countries are now integrated into the global economy. The challenge now is to convince Europe, the US and Japan to live up to their commitments on access to agriculture markets and a fairer trade regime. He said that trade opportunities must be made to benefit more people and to achieve this, improvements must be made to education. He pointed out that some countries are progressing faster than others. Infrastructure is also crucial to market integration and financial systems, although better, need to reach smaller producers. He concluded that inequality is a major problem and said that although Latin American governments are ultimately responsible they need international support and international pressure to really tackle the problem. Developed countries must stay engaged to help the poor of Latin America.