Poverty in Latin America
The Quest for Social Justice

Published Jun 2012

Poverty in Latin America: the challenge of cheap labor

The biggest characteristic of poverty in Latin America is inequality. Mostly huge income inequalities, and also inequality of access to basic services (water, electricity, education, etc…). Absolute poverty is also very present in many countries with a great share of the population plagued by hunger, while it’s almost inexistent in other countries. Typically the size of the family matters in issues of malnutrition.

But first let’s first look at the obstacles that have blocked governments' efforts to tackle poverty in Latin America. On one hand poverty has a negative effect on economic growth. It does so by typically bringing down levels of human capital (education, professional experience & training, health) and by increasing crime. Sky high levels of crime in Mexico and Brazil for example have always been a barrier to economic development and poverty reduction.

That’s the perfect vicious cycle as poverty fuels health issues (through lack of sanitation and access to basic services), crime, low levels of education, which all in turn affect the economy. This makes it impossible to solve poverty in Latin America. Whatever a government does, there aren’t opportunities to find jobs or resources to create or invest in new companies. Just how much poverty affects a country's economy depends directly on how widespread poverty is in the population.

On the other hand, there’s the argument that economic growth helps the poor, and that market liberalization is the best way to get that growth going. That’s the founding principle of the Washington Consensus and other IMF, World Bank and co. (i.e. the neoliberal team). Market liberalization refers to opening borders, removing trade barriers, diminishing the role of the state and letting the market itself regulate and provide for everyone. It also implies reaching a certain degree of fiscal discipline and macroeconomic stability to avoid inflation and other bad stuff.

Impact of globalization on poverty in Latin America

Impact of globalization in Latin America

In fact growth does help, but only to some degree. The famous (or infamous) “trickle-down effect” that says that as the rich get richer they invest in their companies and create more jobs is seriously compromised in this new world economy of ours.

Here’s why:

  1. They can easily re-invest elsewhere, that’s why corporations pushed for globalization 30-40 years ago, they gained access to cheap labor and capital could then move anywhere;
  2. The service and innovation economy doesn’t always employ that many people and the focus on R&D means more money for the engineers only;
  3. The other main focus on squeezing as much profit as possible for stakeholders means… well yeah you got it, less money for low workers.

This is the most common effect of globalization worldwide: salaries for high skilled jobs went up and those for low-ish skilled jobs went down. As living conditions get better in poor countries low workers do see their wages increase to survive the changes, but overall the effect has been a major deepening of inequalities. An income gap, Great Canyon-style. So the heart of the problem today is the distribution of income. You can be a fairly rich country like Mexico and still have a amazingly low GDP per capita, simply because the rich keep the money to themselves. Yet, the argument of providing companies with favorable conditions to expand the national market and create employment remains true no matter what, all the more in Latin American countries where there’s still much development to do.

Now of course another way to fight poverty is to make it easier for entrepreneurs to prosper and undertake new businesses, which has become incredibly easier nowadays with the booming service industry and the Internet. But too often poverty in Latin America thrives on badly, shabbily designed administrative procedures to register a business. It can take months and months of hardly understandable paperwork and bribes to set up a business. This creates a huge informal sector on which corruption and local mobs thrive. Not to mention the impact of the absence of taxpayers, and the fact that people can’t get grants or work-related social security they’re entitled to (pension, health care, cash transfers for their kids etc).

Successful transitions

So the idea is that growth successfully reduces malnutrition and poverty in Latin America when used jointly with steps to redistribute the riches more equally. At least a little bit more equally. It makes no economic or even capitalist sense for a CEO (or a few shareholders) to absorb all of the revenues of the company for themselves rather than reinvesting it and/or redistributing part of it to its workers. Everyone might as well be rewarded for their hard work. If those few absorb all of the created wealth then it’s not capitalism anymore, it’s sort of a hybrid feudal system.

As for welfare, it’s proven pretty effective to target those suffering from malnutrition and groups plagued by chronic poverty. But targeting only the very poor is in fact quite limited too because it doesn’t prevent people from falling into poverty, working-poor included. Often times, lack of education or access to water also points out at a major flaw in the basic urban infrastructure which then needs massive investment. All this means that growth and redistribution are needed altogether, but also jointly with a complete revamp of the labor market to address the issue of low wages. When wages of full-time low workers still leave them living below the poverty line, you know for sure that there’s a problem somewhere.

The limits of growth and neoliberalism

Neoliberalism & inequalities in Latin America

In fact, even while the globalization-liberalization duo did bring some economic growth to the continent and did reduce some of the poverty, more poverty rose from the huge inequalities that resulted from the whole process. What caused this inequalities was partly how fast the finance sector liberalized in Latin America. It not only boosted specific revenues (traders) but also made capital more mobile, taking advantage of impoverished workers who accepted any work conditions. This goes hand in hand with the R&D focused economy mentioned before that reserves high wages to specific jobs.

But the huge barriers to access education and the generally low educational levels also mean that people could less take advantage of technology to reduce poverty or apply to better jobs. In many of these countries there are still ads on TV trying to push people to continue their studies to college so that they can help the country develop. They lack talent but they also lack the proper structure and infrastructure to nurture it. More grants, professional training, “poor-friendly” loans (microfinance is a different thing), and higher wages are necessary for parents and/or students to support themselves throughout college.

Unlike what the IMF and the World Bank long claimed, there isn’t one best way to develop a country. There are stark differences between each and every one of them. These need to be at the core of any design of anti-poverty policy. But whereas education is one proven, solid element in the fight against poverty, the neoliberal policies promoted by the IMF and the World Bank have made higher education more and more inaccessible by privatizing it in many countries. This has hampered local needs to train professionals, develop universities, and adopt new technologies.

To be fair though, external trade liberalization did create lots of jobs in Latin America but the conditions of the trade agreements signed are strangely systematically in favor of the US and rich countries. Likewise neoliberal principles brought macroeconomic stability, mostly by bringing inflation under control. But they also left many burgeoning industries facing global corporations and unfair trade rules. Simply put, advanced nations have excelled at protecting their industries (aka market distortion) right in the midst of trade liberalization - supposed to end trade barriers – while the others didn’t have the right to protect themselves.

What does it have to do with poverty in Latin America? Everything. It’s about a country’s capability and right to develop its economy in all fairness, rather than being taken advantage of by other nations that do not have in mind the improvement of local living conditions (or send international aid as a way to apologize). Because if they did then poverty in Latin America would have been wiped out for decades. There is virtually not one advanced economy that did not protect its industries at some point of their economic development. Recently state interventionism and mild protectionism has also been the model of South Korea, China, India and a few successful more.

Cash transfers for poverty in Latin America

Welfare & poverty in Latin America

In the last ten years conditional cash transfers (CCT) have blossomed here and there, bringing new victories in the fight against poverty in Latin America. These programs offer social safety nets and poverty reduction effects at the same time. In other words the prevent people from falling into poverty all while reducing poverty itself. They have the advantage of - sometimes - being fairly cheap (good thing for a poor country, or even a heavily indebted one like the US) and very flexible and adaptable to different countries’ needs.

CCTs have been used to improve school attendance, thus reducing child poverty and child labor. The conditions for receiving these cash transfers is what makes the success: rather than simply verifying that kids go to school once per year, attendance is checked regularly but most of all the transfer happens only if the kids are successful at school (completing the year, having good grades). That’s after all the idea behind attending schools. Not having good grades but proving that you’ve learned something so you can grow your “human capital”. But CCTs can really be used for anything: having parents check at the hospital or receive medical advice regularly helped reduce newborn and child mortality; it’s helped raise the income of poor households when they found a job, invested in professional training or in their kids’ education. The advantage for poverty in Latin America is that often the authorities don’t need to offer that much money to raise entire households out of poorness.

One problem though is that CCTs require a certain level of institutional maturity and coordination (which even the US lacks) but when well-designed these programs prove great tools to fight poverty in Latin America in its many forms. They have been used to help with child poverty, malnutrition, education, health, single mothers and the elderly. Today CCTs not only represent an effective means against poverty, it’s also a great social protection system that counterbalances the effects of globalization and market liberalization.

What's left to do: ending poverty in Latin America

CCT programs are still at an early stage of their development and many can be improved. In education they should assist and drive students to continue their studies and graduate. More extensive coverage is needed in health care programs, targeting new groups usually excluded by poverty. More coordination between the different programs would also increase their efficiency – in their results as well as with the public resources – and could be used along with microfinance programs. Thus the poor could make use of their improved human capital (be it health, training or education), engage in new business ventures and take control of their lives.

The flexibility that CCT programs offer also makes them an amazing tool for absorbing economic shocks and crises (natural or manmade). The fact that records exist, that households are pre-targeted and have a file makes them invaluable in hard times. It diminishes the risk of running around and blindly distributing aid, sometimes aggravating disparities (e.g. when local bosses or mobs take everything). It’s also a great way to protect populations in not so competitive countries, when they can afford it. When well-thought out CCT programs can completely change the face of welfare, often plagued by huge wasting of public resources, not only in terms of money but also in terms of mitigated results (most of the time because of poorly designed plans). In the end we're still learning to efficiently manage public resources and it's a long process.

Now CCTs should also be focused on spurring citizens’ capabilities (so-called “empowerment”) by encouraging training, life skills, civic spirit, entrepreneurship, etc. But to end poverty in Latin America CCTs should also be put to use to spur the accumulation of physical capital, from livestock to small-scale manufacturing capabilities. That way the continent would have its own industries and be less sensitive to external shocks.


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