Plateauing on Poverty Reduction?

Economic growth
Poverty - Inequality - Aid Effectiveness

Can we expect further poverty reduction from a longer growth-spell in Latin America and the Caribbean? At first glance, it would seem like more could be achieved from additional labor income growth and the expansion of existing social transfers. On the other hand, much of remaining poverty –the 177 million people under the poverty line last year-- is concentrated in harder-to-reach pockets, sectors, and geographic areas, either excluded from dynamic labor markets or as yet unreached by social safety nets. Given this particular set of challenges, more of the same might not work as well in the future. Is poverty reduction plateauing in the region?

In a paper co-authored with Susana Martinez-Restrepo we describe two trends that support the “plateauing” hypothesis.2 First, labor participation and wages have increased since 1995, but have increased unevenly, mostly benefiting working-age adult males. Second, the share of labor participation has also expanded unevenly. The service sectors in Latin America now account for more than 60 percent of total employment and, with the exception of Peru, have increased since 1995. The extreme concentration of new jobs in the service sectors, for economies based mostly on commodity exports, rings some alarm bells. 

Income gains for skilled adult men, ages 25 to 64, in the service sectors, were attained relatively easily in recent years –they comprise the low-hanging fruit of a regional economic boom. The high-hanging fruit, on the other hand, includes unskilled individuals working in low-productivity sectors, particularly women and youth, individuals who have dropped out of the labor market, and many who have never been economically active. One particularly large group is comprised of low-income women with little education and/or few labor skills. Another large group includes individuals working in low-productivity service sector jobs. 

Creating more jobs or changing the share of employment in a given sector (from primary to services, for example) will not necessarily improve labor incomes in the future. The ongoing economic transformation in the region can be described as one in which workers are leaving low-skilled, low-productivity and poorly paid jobs in agriculture, or higher-paid and higher-productivity jobs in the manufacturing sector, and moving to low-skilled services such as retail trade and personal services, mostly in the informal sector (domestic service, street vendors and beauty parlor owners). 

Thinking About the High-Hanging Fruit

As social progress continues in the region, each additional unit of progress becomes more expensive by dollar yardstick, institutional effort or collective action. Eventually, decreasing returns or natural limits kick in, slowing down the overall rate of progress –think literacy or life expectancy at the higher end of the development spectrum. However, as a rule of thumb, the pursuit of low-hanging fruit continues to inform the way many policymakers make decisions in the real world. Why aim for costly, institution-intensive, power-rattling, gender-balancing or environmentally sound choices, when the path of least resistance can also deliver (some of) the goods? Closing the remaining gap between rich and poor will require moving beyond the easy path of achievement. 

In an ideal world, we would be able to pin down the exact “shape of the curve” for social progress –we would know, for example, whether a conditional cash transfer program is just starting to have a marginal impact on a target group or whether it is plateauing or declining. We would then, either reallocate scarce resources, or take steps to tackle obstacles head on in order to ensure further benefits. Unfortunately, in the absence of good data, the place where low-hanging fruit becomes high-hanging fruit remains largely unknown. Often, the closest we get to hitting a structural constraint is when the money runs out.

One way to address this problem is to think about the binding constraints to social achievements, in a similar way to which the literature thinks about binding constraints to economic growth,3 except that the object of achievement moves “beyond GDP” to include other dimensions of well-being –such as quality of jobs, personal security, social empowerment, among other of the “missing dimensions” reported by well-being surveys in the region.4 In a policy environment where many things are missing, and where results are unknown, understanding the point at which low- and high-hanging fruit intersect becomes all the more relevant.

1George Gray Molina is Chief Economist at UNDP’s Regional Bureau for Latin American and the Caribbean (RBLAC). The opinions expressed in this article are personal.

2Martinez-Restrepo, Susana and George Gray Molina, 2012, “The High-Hanging Fruit of Latin American Progress”, Human Development Research Brief, Regional Bureau for Latin America and the Caribbean, New York: UNDP. 

3See Ricardo Hausmann, Dani Rodrik and Andres Velasco, Growth Diagnostics, Working Paper, John F Kennedy School of Government, Harvard University, Cambridge: Harvard, 2005. 

4See Joseph Stiglitz, Amartya Sen and Jean Paul Fitoussi, Mis-Measuring Our Lives: Why GDP Doesn’t Add Up, New York: The New Press 2010. In addition, see CEPAL/Latinobarometro/AECID, Latin America in the Mirror: Objective and Subjective Dimensions of Social Inequity and Well-Being in the Region, Santiago: CEPAL (ECLAC), 2010. 

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