IFPRI Forum

September 2006

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While the 1980s are often described as a "lost decade" for Latin America, as illustrated by negative per capita economic growth during most of the decade, the 1990s were characterized by structural pro-market reforms and a resumption of economic growth to 3 percent a year. The region entered the 21st century with rather sound macroeconomic fundamentals and mostly democratic governments, even though problems of low citizen participation and weak governance remain. After lackluster growth during the first few years of the new millennium, gross domestic product (GDP) in the region grew at 6 and 4.5 percent in 2004 and 2005 respectively, the highest growth rates registered since 1980.

But the resumption of economic growth and return to democracy in Latin America do not mean that all is well in the region. Most Latin American countries are failing to translate economic growth into lower numbers of poor people. This problem is particularly serious in Central America, the poorest region of Latin America. Fifty-five percent of all inhabitants in the region live in poverty, which is heavily concentrated in rural areas. In Guatemala, Honduras, and Nicaragua, four of every five rural inhabitants are poor, and three of every four poor people are extremely poor.

Most rural poor in these three countries are concentrated in areas with relatively favorable socioeconomic and biophysical conditions, according to a recent study by IFPRI's Central America office (in collaboration with the World Bank and Virginia Polytechnic Institute). What they lack are the basic assets to take advantage of economic opportunities. These countries are experiencing very high and increasing levels of income inequality largely because of extreme differences in asset ownership and human capital. Even under appropriate policy regimes, the "asset-poor" are not able to share in the benefits of growth. IFPRI's research also showed that investments in a single asset (such as land or roads) have little impact on the welfare of the rural poor and may in fact contribute to increasing inequality. For example, since investments in infrastructure are more effective when directed toward areas with better land tenure security and access, an investment in a new road alone may benefit landowners disproportionately. The main policy lesson is that because assets are complementary, governments and donors need to invest in geographically appropriate bundles of assets that enable the rural poor to exploit an area's comparative advantage and transform economic opportunities into greater wellbeing.

The high inequality in most Latin American societies not only prevents significant progress in poverty reduction, but also leads to social unrest and insecurity, which in turn reduce productivity and discourage private investment flows. Latin America is thus increasingly caught in a vicious circle: economic growth is thwarted by high crime rates, and a lack of economic opportunity contributes in turn to a rise in crime. The Inter-American Development Bank estimates that Latin America's GDP would be 25 percent higher if the region's crime rates were equal to the world average. Crime and insecurity are particularly serious problems in Central America, where violent gangs in Honduras, Guatemala, and El Salvador wreak havoc in both urban and rural areas, with severe consequences for poor people.

Tackling corruption is also essential in making poverty history. Guatemala has long had the dubious reputation of being the most corrupt country in Latin America after Venezuela and Paraguay. According to the Global Competitiveness Network of the World Economic Forum, corruption and insecurity consistently top the list of the most problematic factors for doing business in El Salvador, Guatemala, and Honduras.

Poverty in Latin America is hurting the region's prospects for higher economic growth. A recent "flagship" study by the World Bank shows that the growth-poverty link is a two-way street: not only does a lack of growth lead to higher poverty, but high poverty also acts as a brake on economic growth. Whereas growth in Honduras and Nicaragua has picked up a bit during the past couple of years, the pronounced slowdown of economic growth since 2000 in El Salvador and Guatemala, two of the poorest and most unequal countries in Latin America, will put these countries farther away from achieving the Millennium Development Goal of halving poverty by 2015, while also compromising future economic growth.

In addition to the study on the drivers of economic growth in Central America, IFPRI is undertaking a number of studies in the Latin American region to promote pro-poor growth. Researchers are identifying the policies that will enable the rural poor in Honduras, Nicaragua, El Salvador, Guatemala, and Costa Rica to benefit from the Central America Free Trade Agreement (CAFTA). On another project, researchers are working with the Peruvian government and international donors to significantly reduce rural poverty in the Andes and Amazon rainforest regions. Finally, an upcoming study will examine efficient and equitable ways to improve the delivery of public services to the rural poor in Guatemala.

Hans G. P. Jansen is a research fellow in the Development Strategy and Governance Division of IFPRI.