Pro-poor growth in latin america

CHAPTER 5

Pro-Poor Growth in Latin America

There is no doubt that growth must be at the center of any successful poverty reduction strategy. However, are all progrowth policies equally pro-poor? Is it possible that some policies lead to higher growth but leave poverty unchanged or, even worse, lead to higher poverty? Similarly, does the composition of growth matter, or can all sectors beconsidered equally propoor? Finally, what is the role of taxes and transfers in this context? Should policy makers focus only on improving the distribution of market incomes along with the growth process, or do they have to complement these actions with tax and transfer interventions that directly target disposable income?

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HAPTER 4 ARGUED THAT FAST POVERTY

reduction in the region wouldrequire the implementation of development strategies that aim at simultaneously achieving fast sustained growth rates and more equal societies. This general advice, however, leaves unanswered several questions of critical interest for policy makers: are all pro-growth policies equally pro-poor? Is it possible that some policies lead to higher growth but leave poverty unchanged or, even worse, leadto higher poverty? Will policy makers face a trade-off between faster growth and higher inequality? Similarly, does the composition of growth matter, or can all sectors be considered equally propoor? If the composition of growth does matter, should policy makers aim at biasing growth toward some particular sectors? Finally, what role do taxes and transfers play in this context? This chapterexplores these issues in three complementary ways. It addresses them first from a policy perspective and reviews what is known about the effect on inequality of a number of growth-enhancing policies. In many circumstances the positive impact that a policy has on growth will be reinforced by its positive impact on the distribution of income. But it is also plausible that some pro-growth

policies areassociated with higher income inequality. This potential trade-off may in turn result in development strategies that may lead, on the one hand, to faster growth but, on the other hand, to no change in poverty or perhaps to even higher levels of poverty. Thus, if the objective is to reduce poverty, policies will have to be considered according to their potential impact on both growth and inequality.The chapter then adopts a sectoral perspective and focuses on whether growth in different sectors of economic activity influences poverty in different ways. As discussed in Beyond the City: The Rural Contribution to Development (de Ferranti and others 2005), differences in labor intensities in the location of economic activities or in sector-related spillovers can result in growth in differentsectors having different effects on poverty. To anticipate some of the empirical findings of this chapter, we find that, indeed, the sectoral composition of growth matters for poverty reduction. Finally, we also review the extent to which policies aimed at improving the distribution of market incomes (defined as the distribution of income among households determined by market rewards to the private assetsand efforts of individuals before government intervention) need to be complemented with tax and transfer interventions that directly target disposable incomes (defined as the distribution of

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P O V E RT Y R E D U C T I O N A N D G R O W T H : V I RT U O U S A N D V I C I O U S C I R C L E S

income after taxes have been levied and transfers have been paid). Disposable incomes, after allis said and done, are the relevant distribution to consider in poverty reduction strategies. The need to resort to taxes and transfers as a poverty reduction tool will depend largely on whether the distribution of disposable income is mainly driven by changes in the distribution of market incomes or alternatively by government interventions using the tax-and-transfer instrument.

Are all...