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Meeting Summary
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.
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