Global Policy Forum

By Marcela Sanchez

The World Bank announced this week that Latin America needs to cut poverty to boost growth -- a conclusion that may be "descubriendo el agua tibia," or, stating the obvious. But this is a big deal for the international lending institution.

Since its inception, the Bank has talked about reducing poverty. But for more than 15 years it has focused on market reform policies, offering loans to countries that promised to lift trade barriers, deregulate and privatize industry and adopt austerity plans to stop deficit spending and reduce inflation. These reforms, which became known as the Washington Consensus, were supposed to unleash the economic potential of developing countries and spur growth. Growth, in turn, was to create opportunity for the destitute and lift them out of poverty.

Many Latin American countries took the loans and adopted the reforms. But the reforms themselves did not bring about the intended consequences. Latin America's performance has been disappointing, particularly in comparison to the dynamic economic growth and poverty reduction in Asian countries. The region now has "the highest measures of inequality in the world," with one-quarter of the population living on less than $2 a day, according to the World Bank.

The authors of the World Bank report, "Poverty Reduction and Growth: Virtuous and Vicious Circle," recognize that a country can't necessarily grow its way out of poverty, and that poverty can be a huge drag on economies and on growth. Poor regions lacking in infrastructure fail to attract investment. Poor families, faced with substandard schools and high costs, are less likely to invest in the education of their children. And, as has been particularly clear in recent years, countries unable to moderate income disparities face social tensions that jeopardize business. As the authors quantify it, when poverty levels increase by 10 percent, growth decreases by 1 percent and investment is reduced by up to 8 percent of a country's GDP.

Two of their main conclusions are a breakthrough for the Bank: that private sector growth is not a panacea for the poor and that inequality must be targeted directly. A third conclusion is almost heretical for the Bank: that the state needs to take on more economic responsibility than less. "Converting the state into an agent that promotes equality of opportunities and practices efficient redistribution is, perhaps, the most critical challenge Latin America faces in implementing better policies that simultaneously stimulate growth and reduce inequality and poverty," the report says.

The Bank is recognizing political as well as economic reality. By advocating greater state responsibility, particularly for redistribution of wealth, the World Bank seems to be aligning with other multilateral institutions and governments in the region. Jose Antonio Ocampo, U.N. undersecretary-general for economic and social affairs, said in an interview after a U.N.-sponsored event on Latin America early this month that "today the majority (of leaders in Latin America) recognizes that the state has a function more important than ever in confronting the issue of inequality."

The great surge to the left in recent Latin American elections reflects popular dissatisfaction with the Washington Consensus. Even in Chile, the big economic success in the region, center-left President-elect Michelle Bachelet stressed the need to put an end to the "trade-off" between growth and equality. (To be fair, her conservative rival did not disagree; in fact he promised to make the reduction of economic inequality through government subsidies his top objective.)

The authors of the World Bank report point out that there are specific "intervention" programs already in place in Brazil, Colombia and Mexico that manage to be "both pro-poor and pro-growth." These programs provide cash to very poor families under the condition that their children stay in school and that they take steps to improve their health. Rather than creating dependency or increasing birth rates, as some critics feared, the programs have "successfully increased human capital" in high-poverty regions.

Whether the World Bank will back up its new thinking with a change in process remains to be seen. After all, the report is not a repudiation of the Washington Consensus, but an admission that it has been insufficient. In an analysis published last fall, the London-based World Development Movement found that of the 450 conditions the World Bank and the IMF imposed on agreements with 50 countries, only 11 were not based on the orthodox Washington Consensus formula.

If the World Bank were to make poverty reductions measures a condition for assistance, it would be a big change in the way it helps Latin America. It would be shifting from an approach that helped weaken governments to one that seeks to strengthen them.

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