September 27, 2013

Poverty and development in LAC

J. Humberto LopezColumbia University

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i) The evolution of poverty in LAC over the past 15 years A positive story

ii) What is behind this good news? Good policies (and well, also some good luck!)

ii) Looking forward: receding tailwinds? Need to stress the policy side of the equation

Structure & messages of the presentation

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LAC achieved impressive gains in shared prosperity in the last 15 years, exceeding its

past performance…

For the first time, in 2010 the middle class (those between $10 and $50 a day) exceeded the poor ($4 a day)…

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

10

20

30

40

)%( Headcount

Vulnerable

Poor

Middle class

26.6

43.2

32.3

38.6

33.7

21.1

4

The decomposit ion of poverty changes into growth and changes in inequali ty suggests that growth accounts for 2/3 of the reduction in poverty and changes in inequali ty for 1/3.

LAC achieved impressive gains in shared prosperity in the last 15 years, exceeding its

past performance…

2000 2002 2004 2006 2008 2010

0.50

0.52

0.54

0.56

0.58

0.60

Gini Coefficient

$8,000

$9,000

$10,000

$11,000

GDP per capita, PPP )constant 2005 international $(

Gini

GDP per capita

5

Evolution of key commodity prices (in 2005 US$)

…helped by the evolution of commodity prices…

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

50

100

150

200

250

300

350

400

Soybean Maize Wheat Copper Oil

…by a much improved macro-financial immune system…

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Currency/Monetary Policy

Banking/Prudential Policy

Debt process/Fiscal Policy

Before Now

Weak/non credible/pro-cyclical

Fragile/unsound

Fragile/unviable/pro-cyclical

Credible/countercyclical

Sounder

More viable/less pro-cyclical

Latin America’s New Macro-Financial Immune System

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…and by public policies that have contributed to lower inequality.

Decomposition of changes in inequality by income component

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Recent evolution of key commodity prices

But commodity prices tailwinds are receding

2011M

01

2011M

02

2011M

03

2011M

04

2011M

05

2011M

06

2011M

07

2011M

08

2011M

09

2011M

10

2011M

11

2011M

12

2012M

01

2012M

02

2012M

03

2012M

04

2012M

05

2012M

06

2012M

07

2012M

08

2012M

09

2012M

10

2012M

11

2012M

12

2013M

01

2013M

02

2013M

03

2013M

04

2013M

05

2013M

06

2013M

07

2013M

0860

70

80

90

100

110

120

130

140

150

160

Soybeans Maize Wheat Copper Oil

And economic activity in the region is clearly loosing steam

9

0

2

4

6

8

10

12

14

December 2012 forecastSeptember 2013 forecast

For

ecas

ted

real

GD

P g

row

th in

201

3

Economic growth is decelerating in LAC and prospects are being revised

down

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And despite the progress on the inequality front, inequality is still extremely high

The most equal country in LAC (Uruguay) is less equal than the most unequal non-LAC country in the OECD (Turkey). The region remains the most unequal in the world.

0.0 0.1 0.2 0.3 0.4 0.5 0.6

Gini Coefficient

SloveniaDenmark

NorwayCzech RepublicSlovak RepublicUnited Kingdom

PortugalIsrael

United StatesTurkey

UruguayArgentina

PeruEl SalvadorNicaragua

BrazilGuatemalaParaguayColombiaHonduras

Source: SEDLAC for LAC countries and OECD library for OECD countries.Note: Circa 2011 for LAC countries and Late 2000's for OECD. Gini includes zero income.

The region’s external competitiveness lags that of the South East Asian MICs…

12Notes: LAC-IT: Brazil, Chile, Colombia, Mexico, and Peru. East Asian MICs: Indonesia, Malaysia, Philippines, South Korea, and Thailand. The lines represent simple averages. Total Reserves Excluding Gold are measured as a share of 2006-2007 average GDP in Current US Dollars. Sources: IMF and Bank for International Settlements

Real Exchange Rates and Reserves In

dex

2005

=10

0

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…and some key doing business indicators need to get better

Days required to enforce a contract Disclosure index

Days required to start a businessProcedures to start a business

0

1

2

3

4

5

6

7

EAP ECA LAC MNA SA SSA OCDE

0

1

2

3

4

5

6

7

8

9

10

EAP ECA LAC MNA SA SSA OCDE

0

200

400

600

800

1000

1200

EAP ECA LAC MNA SA SSA OCDE

0

10

20

30

40

50

60

EAP ECA LAC MNA SA SSA OCDE

Source: WDI. Note: Data refer to 2012. Disclosure Index ranges from 0 to 7 and higher values indicate more disclosure.

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Public policies have still a limited impact on inequality

Notes: The charts report the Gini coefficient for market income (before taxes and cash transfers) and disposable income (after taxes and cash transfers). Source: Lopez and Serven, World Development (2011)

EU LACRedistributive impact of Fiscal Policy: EU vs. LAC

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

ARG BRA CHL COL MEX PER LAC

Market Disposable

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

AUS BEL DEN FIN FRA GERGRE IRE ITA LUX NET POR SPASWE UK EU

Market Disposable

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Important challenges remain in terms of the social contract

Citizen trust in the state remains low with less than 50% of the citizens reporting trust in the state. Overall, trust has stagnated in LAC, fall ing in almost half of all countries.

The level of satisfaction with local services has also been stagnant since 2004 at around 50%.

Colo

mbi

a

Chile

Hond

uras

Guat

emal

a

Arge

ntin

a

Braz

il

Mexi

co

Boliv

ia

Peru

0102030405060708090

100

Satisfaction with Local Government Services (2010)

Source: AmericasBarometer by LAPOP in Seligson and Smith, The Political Cul-ture of Democracy, 2010: Democratic Consolidation in the Americas in Hard Times, LAPOP, December 2010

Very good

Very bad

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Thank you very much!