Growth, Poverty, and Inequality in Latin America: A Causal Analysis, 1970 - 94

Uses data for the 1970-94 period for 12 Latin American countries to analyze the role of aggregate income growth on changes in urban and rural poverty and inequality. Shows that income growth is only effective in reducing poverty and inequality if the initial levels of inequality and poverty are not too high and if educational levels are sufficiently high. If these conditions do not hold, the beneficial effects of growth for poverty and inequality reduction are wasted. Also shows that there is an asymmetry in the effect of income change on poverty and inequality: the beneficial effects of a 1% growth in aggregate income are more than erased by a 1% decline in aggregate income, evidencing the high social costs of economic shocks. Finally, we show that income growth following structural adjustment reforms is more effective in reducing poverty than income growth under import substitution industrialization policies, but that it remains ineffective in reducing inequality. While we see no evidence that growth per se has increased inequality, results indicate that current concerns with high levels of inequality in Latin America cannot be met by simple reliance on aggregate income growth.[author]

Paper prepared for the IDB Conference on Social Protection and Poverty, on February 4 and 5, 1999