POOR PERFORMANCE: Even before the crisis, Latin America had the greatest inequality in social conditions in the world, experts say.        Font Size ..... Small Normal Big Very Big

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Although new signs of recovery are encouraging international investment to resume, there is no doubt that the global economic crisis has left a trail of negative side effects in Latin America. One of the most serious is increased poverty in the region. As the Economic Commission for Latin America and the Caribbean (ECLAC) -- one of five regional organizations run by the United Nations to promote economic development -- sees it, during the economic boom times between 2003 and 2008, poverty rates in the region fell 10 percentage points, from 44 to 34 percent of the population. That's changing, however. The Organización de Estados Iberoamericanos (OEI) expects the region's GDP to contract 1.7 percent this year, after growing 3 percent last year, while unemployment will also rise. According to ECLAC, all of this will have a negative impact on poverty levels across the region, where there are already more than 180 million poor people, and more than 70 million who qualify as “extremely poor” -- that is, people who cannot meet basic needs for survival, such as food, water, clothing, shelter and sanitation.

In July, Alicia Bárcena, executive secretary of ECLAC, told a gathering of politicians in Santiago, Chile, that the organization predicts some four million Latin Americans "will swell the unemployment lines this year, and it is likely that several million will return to poverty." She noted that the economic downturn abruptly ended six years of uninterrupted growth in the region, which enabled more than 35 million people to emerge from poverty. "That's why there is so much frustration," she said, adding: "It is clear that we will not return right away to the levels that we had before. Latin America's economic recovery will be slow, too slow."

Why is that the case? Karina Olivas, professor of economics at UPC, the Peruvian University of Applied Sciences, explains that given its history of economic dependence on the United States, Latin America has long been exposed to the cyclical ups and downs of its neighbor in the north. This time around, the downturn has had a big impact on the region's mineral-exporting nations, such as Chile, which had to deal with a spectacular drop in metal prices after a period of steady increases. The result has been a downward spiral, Olivas notes. "This has led to lower levels of governmental collections through taxes and mineral royalties, and has widened the effect of the crisis.”

But countries dependent on other types of exports have also been affected. Petroleum-producing countries like Venezuela, Mexico and Brazil have experienced a pronounced decline in their earnings from crude sales, which also suffered price declines on international markets, she says.

DIVIDING UP THE PIE

Beyond its commercial dependence on the United States, the region's unhealthy distribution of income is another factor that has led to sharply higher poverty, says Guillermo Paraje, professor at the business school of the Adolfo Ibañez University in Chile.

Paraje notes that Latin America has the greatest inequality in social conditions in the world, affecting general access to education and training. As a result, "there are no strategies for developing adequate human capital." Instead, he says, Latin America is focused on exploiting natural resources and "when prices rise, everything goes well. But when prices fall, the region's economies suffer a great deal. If the pie is poorly divided and it also doesn't grow much, many people stay hungry.”

Chile is a case in point. According to Victor Salas, professor of economics at the University of Santiago, Chile (USACH), since the downturn, unemployment in Chile has increased to double-digit levels for the first time in several years, reaching 10.8 percent in the second quarter of this year. The Organization for Economic Cooperation and Development (OECD) recently warned the country that it has one of the world's largest -- and most "abysmal," in the words of German Sanhueza, professor of management and economics at USACH -- salary gaps, with the wealthiest 10 percent of the population earning 29 times more than the poorest 10 percent. In countries such as Germany, Spain, Norway and Japan, the average difference in incomes is nine times.

Diego Andrés Guevara, professor of economics at the Autonomous University of Colombia, notes that "the situation is not exclusively Chilean. Salary differentials and, generally speaking, the unhealthy distribution of income in the region, have grown in recent years as a result of the long-lasting social inequalities in our countries. And this has been even more noticeable when considering gender and ethnic groupings.”

PASSING THE BUCK?

Is anyone responsible for eradicating the problem? José Carlos Saavedra, professor of economics at UPC, argues that government inactivity is to blame for the region's high poverty levels. "Our governments fail to provide what only they can offer: mechanisms for creating equal opportunity for people to develop, independent of their social conditions at birth," he says. "You can't ask the marketplace to reduce the great structural inequalities. That works well when it comes to allocating certain scarce resources in an efficient way but not when it comes to including the people who can't participate in supply and demand." One example, he says, is Peru, where “a person who is born in a poor region and has poor parents is practically condemned to poverty, and that fact is supported by research."

Moreover, Saavedra asserts that Peru lacks appropriate systems and a social net. "We don't have unemployment insurance or health insurance that protects people who are more likely to lose their jobs during a crisis. In addition, social programs in Peru are inefficient and have serious problems when it comes to coordination.”

Olivas of UPC agrees, arguing that governments, in Peru and elsewhere, have not used the benefits of economic growth to set up social programs for people who are the most vulnerable to falling through the cracks. "This leads to discontent that gradually increases, and becomes a breeding ground for an explosion of political and social conflict," she contends. "The discontent can also have an impact on achieving a more rapid economic recovery."

In that regard, Guevara of the Autonomous University of Colombia echoes other professors, arguing that "when it comes to social policies, the model that characterizes our governments, which is the sort of capitalism that assists the population, has only contributed to the institutionalization of poverty."

Not everyone agrees, however. For his part, Salas asserts that "the responsibility for poverty and the poor distribution of wealth is essentially a private-sector one. But through social spending, the government can contribute with solutions that enable people to overcome poverty."

Paraje of the Adolfo Ibañez University wants to see an end to the debate. "You can't talk about the responsibility of the government versus the responsibility of the private sector," he says. "Structural and long-term poverty is the result of institutional agreements chosen by the same society that includes both the government and the private sector.”

Meanwhile, USACH's Salas stresses that the causes of poverty are associated "with the level of economic growth, although not exclusively. You have to remember that poverty in Latin America declined in recent years thanks to the expansion in production experienced between 2002 and 2007, which meant average annual GDP growth of 3 percent. This reduced poverty by 9.9 percent during that period."

FIND THE FORMULA

As with where responsibility lies, what needs to happen is no less contentious. On the one hand, there's a school of thought that believes "to defeat poverty, you have to address the fundamental subject of income distribution," asserts Guevara. "If this is indeed an activity in which the government competes, so do private enterprises … specifically, multinationals and holding companies that operate in Latin America.”

In a similar vein, Olivas notes, "it is not the job of the government to create jobs, but to create favorable conditions for the private sector to develop itself in such a way that it is transformed into the principal promoter of economic development and, therefore, of the entire population. The emphasis has to be on achieving the wellbeing of every citizen."

Saavedra proposes that the government "protect institutions charged with designing, implementing and applying social policies in every nation, choosing qualified personnel and providing incentives for fulfilling the quantifiable social objectives of the time." This also means that "government representatives must establish goals for academic performance in public schools in accordance with international standards, as well as address social inequality from the first stages of life through programs on nutrition, health and education, and with scholarships."

Going one step further, Sanhueza supports setting up a system for training workers, in both public and private institutions, to "promote a culture of activity, as well as scientific and technological innovation that enables the creation of more and better labor markets that provide jobs with higher added value.”

MACROECONOMIC LESSONS

Macroeconomic measures also have a role to play, and have in fact helped some Latin American countries survive the recession, according to Salas. "Despite how hard it has been to survive the crisis, the impact on Latin American countries hasn't been as great as in other nations which are developed. A big part of the reason comes down to the economic-recovery policies that governments have applied in Latin America, and their efficient management of the available resources," he says. "Without a doubt, authorities must continue along the same path.”

What's more, he notes, the largest economies of the region, such as Brazil, Mexico and Argentina, are showing institutional and political stability, "and their internal conflicts can be managed and overcome without having a greater impact on the economy and society, [in their countries] and in their neighbors." As for the smaller economies, such as Venezuela, Bolivia, Ecuador and Paraguay, as long as they remain integrated into the global market, "the entire scenario favors economic growth in Latin America."

Wenceslao Unanue, a professor at the Adolfo Ibañez University, adds that it goes without saying that economic growth and human development are the keys to dealing with these problems. Two other essential elements: promoting sexual equality and environmental protection. "If we manage to work on all of these fronts, we will promote growth and development of the region's countries while helping to eradicate poverty." Easier said than done? Certainly, he says, but "poverty is a condition that is economic, social and psychological, so you have to consider all of those aspects to address poverty correctly, and this is the responsibility of all of society."

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.