For centuries, Latin Americans endured high levels of poverty and inequality. In recent years, however, growing independence from Washington’s economic dictates has helped to boost growth and create opportunities for redistributive policies. The result has been falling poverty rates and improvements in a host of other social indicators in much of the region, particularly in South America. Nevertheless, Latin America remains wracked by social conflicts deriving from deep inequality, poverty, environmental and land disputes, as well as the rising violence and organized crime in Mexico and Central America in relation to the so-called War on Drugs. Whether the region can continue to show progress in its social indicators remains to be seen, but one hopeful sign is that Latin America weathered the 2008–09 global recession relatively well in comparison to most of the Global North.
For roughly two decades during the 1960s and 1970s, Latin America averaged a respectable annual per capita GDP growth rate of 3.3%. However, the debt crisis of the 1980s hit the region hard. Economies stagnated, and Latin America was forced to accept economic policy intervention by the International Monetary Fund (IMF) and the World Bank, which brought along with it a series of reforms intended to restructure and open the region’s economies. These reforms included privatization, tighter monetary and fiscal policies, increased international trade and capital flows (often without regard to negative domestic consequences), and the abandonment of previously successful development policies guided by the state. Both inequality and poverty increased.
During the decade of the 1980s, poverty and extreme poverty both grew by about 20% throughout Latin America. Poverty rose from 40.5% to 48.4% of the population, and extreme poverty rose from 18.6% to 22.6%. The 1990s saw a partial reversal of this trend, with both poverty and extreme poverty falling slightly, but not enough to make up for the damage done during the prior decade.1 By the late 1990s, over 200 million Latin Americans were still living in poverty.
Social and political pressure, and the electoral victories of the left, coupled with the waning influence of the IMF, the World Bank, and the U.S. State Department in the region, opened the way for a more economically and politically independent Latin America. Countries began reducing their dependence on international financial institutions by amassing reserves and seeking financing directly from lender countries—often developing countries themselves—when necessary.2 This gave various countries more freedom to invest in education and health as well as cash-transfer programs that targeted poverty and extreme poverty; social spending in the region climbed by an average of about 30% between 2000 and 2008, measured as a percent of GDP.3 The region has also strengthened ties to other developing nations, as exports to countries outside of the G8 (made up of the world’s richest countries) rose from about 30% of total exports in 2000, to about half in 2010.
The turn toward increased social spending and pro-poor policies in parts of Latin America, particularly South America, shows that political pressure for economic independence and policies that address the needs of the poor can work. But how did these countries fare during the global recession, when effective policies to shield the economy and people were most needed?
*
An analysis of the vulnerabilities of Latin American and Caribbean economies to outside market forces, and their respective abilities to cope with the global recession, shows that Latin American countries that depend most on the Global North (often reflecting a continuation of historical patterns of dependency on imperial metropolises) suffered much worse recessions than their more economically independent neighbors did during the 2008–09 global downturn. While most of the more vulnerable countries also saw rising poverty during and after the recession, a few of these countries stand out as having bucked the trend, effectively protecting their most vulnerable citizens from the harmful effects of the global downturn.
Figure 1 (right) shows exports to G8 countries and remittances from abroad, both of them as a percentage of GDP, for 15 countries for which data was available. We classify countries as having “high exposure” to the Global North if either their exports to G8 countries or their remittances from abroad amounted to at least 15% of their GDP in 2006, the year before the global recession began in the United States. Countries in this category were more dependent on wealthy countries and more vulnerable to the spread of a worldwide downturn from the United States and Europe.
As expected, on the exports side Mexico was the most vulnerable, with exports to G8 countries making up nearly a quarter of GDP. Chile, Costa Rica, Ecuador, and Venezuela were also vulnerable, with G8 export markets contributing to over 15% of the economy in each of these countries. El Salvador, Honduras, and Jamaica were the most dependent on remittances, with these accounting for over a fifth of Honduras’s GDP and over 15% of GDP for both El Salvador and Jamaica.
Figure 2 (below) shows the loss in real, seasonally adjusted GDP for most of the same countries for 2008–09, separated into low-exposure and high-exposure groups. Not surprisingly, countries in the high-exposure group suffered much worse recessions than their counterparts in the low-exposure group. Only about half of these countries have risen back to their pre-crisis levels of GDP.
Separating countries by their level of dependency on the Global North has a similarly dramatic effect on comparing trends in poverty. Figure 3 (below) shows poverty rates for low-exposure and high-exposure countries from 2006–10. None of the countries with low exposure saw even one year of rising poverty rates, which is commendable, but not surprising given the relative mildness of their recession.
In direct contrast to the steady trend of poverty reduction for the low-exposure group, every country in the high-exposure group, with the exception of Venezuela, saw poverty rates rise for at least one year during the global recession. All of the countries in the high-exposure group also had higher poverty rates after the crisis, in 2010, than before the crisis in 2006, with three exceptions: Honduras, Ecuador, and again, Venezuela. It is not surprising to see poverty rates rise when GDP falls, especially when it falls as dramatically as it did during the global recession; however, the three countries that bucked the trend tell us that rising poverty, even during a recession, is not inevitable and that various countries in Latin America have found a way to counteract the harmful effects of a weakening economy on human development. The three countries that successfully protected their poor from the imported recession have an important commonality: They have all prioritized shifting the political economy of their countries away from the Washington Consensus and toward redistributive policies that prioritize the needs of their own populations.
Midway through the global recession, several of the countries in the low-exposure group had already increased social spending, enacting programs that targeted social exclusion, poverty, and inequality. Within the high-exposure group, some countries implemented fiscal stimulus and expansionary monetary policies specifically in order to counteract the recession, most notably Ecuador and Venezuela. In Ecuador, this included dramatically expanding access to credit, on concessional terms, for first-time homeowners. Venezuela launched a massive effort to build public affordable housing, although its expansionary policies came too late to avoid a recession that lasted a year and a half. The resulting construction booms have boosted the recovery in both countries. With well-timed expansionary fiscal policies and other measures, Ecuador was able to keep its recession short and relatively mild. Both countries—including Venezuela, despite its economic downturn—were able to maintain progress in poverty reduction through the expansion of social spending. Ecuador’s main anti-poverty program, the Bono de Desarrollo Humano, or Human Development Benefit, has swelled in both enrollment and generosity while Venezuela’s famous network of misiones has brought education and health care to millions of people.
Honduras’s trajectory has been more complicated, with poverty rates maintaining a downward trend though much of the recession, until mid-2009 (the annual surveys are taken in May) before rising again. Beginning January 1, 2009, the government of Manuel Zelaya increased the minimum wage over 50% and budgeted an additional $20 billion lempiras for enforcing the new rate. Before these reforms, Honduras held the dubious distinction of having the lowest minimum wage in the hemisphere. Zelaya’s reform also limited evasion by streamlining a previously complicated set of 15 different categories of minimum wages, varying widely from 54 to 134 lempiras per day; the 2009 reforms contained only two categories for minimum wage workers—urban and rural—instead of the many categories that were in effect before.4 Honduras also reacted to the global recession with expansionary macroeconomic policy by sharply cutting interest rates, from 9% in 2008 to just 3.5% in June 2009. A few weeks later, these advances were brought to a screeching halt when a coup d’état deposed the democratically elected Zelaya government. The policies that had contributed to a downward trend in poverty were subsequently reversed. By 2010, as a consequence of the coup, the world recession, and the ensuing dramatic political changes, poverty in Honduras was again on the rise.
By late 2011, poverty levels in Latin America had dropped to their lowest in 20 years, with poverty falling from 48.4% in 1990 to 31.4% in 2011, and extreme poverty falling from 22.6% to 12.3%.5 This 20-year record for Latin America is being driven by the countries with high decreases in poverty, such as Argentina, Brazil, Peru, and Venezuela. Their prima facie improvements undoubtedly mask the reality of those countries where poverty has instead increased, such as Honduras, Jamaica, and Mexico.
*
Poverty rates are not universal figures. Each country sets its poverty level independently, so rates are not strictly comparable across countries. That said, a common definition for poverty is twice the cost of a basic food basket. Thus, while it is very good news when families rise above the poverty line, it does not mean that all of their needs are met and that broader development goals have been achieved. Poverty lines, by definition are low, and relying on these low levels can give an overoptimistic impression that huge strides in poverty reduction are being made, leading other important issues to be left unaddressed, including the underlying roots and causes of that poverty.
In addition to the trend of declining poverty throughout the region, inequality in Latin America has also been on a steady downward trend for several years.6 Better distribution of labor income and an active redistributive role on the part of the state, through increased social spending and cash-transfer programs, mentioned earlier, have begun to help reduce inequality. Income inequality data can be misleading during financial crises (as investment losses among the wealthy can overstate improvements) and income inequality data based solely on income from work is sparse. However, available data for labor-only Gini coefficients does show evidence that supports the story of overall regional improvement in poverty and inequality rates found in the poverty data above.7 All of the countries in the low-exposure group saw steadily decreasing levels of labor inequality, as they did with poverty. Among the high-exposure countries, the second half of the last decade saw slight increases in inequality in Mexico (from .507 to .513) and Costa Rica (from .486 to .500), and increases in inequality followed by dramatic improvements in Ecuador (rising from .51 to .55 before falling back to .50) and Honduras (where it rose from .532 to .605 before falling back to .530), resulting in overall improvements from 2006 to 2009.
Although poverty and inequality statistics in Latin America are improving, the region continues to rely heavily on the extraction and export of raw materials. While these activities have helped spur growth, they have also generated social, political, and environmental conflicts—signs that despite poverty reductions, these countries’ policies are not flawless. Rooted in unresolved issues of land ownership and rights, concern for the environment, and a struggle against the over-representation of corporate interests over citizens, discontent with the repercussions of extractive activities is visible throughout much of the region, regardless of a country’s success in reducing poverty and inequality, and regardless of its government’s political leanings. The marches in Bolivia in defense of the Isiboro-Sécure Indigenous Territory and National Park (TIPNIS) and resistance to the Famatina mine in Argentina, the Belo Monte dam in Brazil, and the Minas Conga mine in Peru, are just a very few examples. But sustained mobilizations against the proposed roads, mines, and hydroelectric dams are also a sign that spaces for socially, economically, and environmentally harmful projects are being contested, and that as the region becomes more equal, it continues to work on democratization.
A generation ago, under the imposition of IMF and World Bank prescriptions, the policies that helped shield much of Latin America from the potentially devastating effects of the global downturn would not have been possible. Some countries avoided large GDP losses because of an already reduced dependence on the Global North. Others implemented expansionary economic policies and strengthened their safety nets to stimulate growth and keep the recession from translating into rising poverty and inequality. It is evident that when appropriate social and economic policies are used together, they can effectively raise millions out of poverty and maintain that progress through periods of global economic crisis. As the region continues to struggle through various social and political conflicts, there is hope that Latin America could, perhaps, one day lose the distinction that it bears of having the most unequal distribution of income in the world.
Sara Kozameh and Rebecca Ray are researchers at the Center for Economic and Policy Research in Washington, D.C.
1. Economic Commission for Latin America and the Caribbean (ECLAC), Social Panorama of Latin America (2011).
2. Mark Weisbrot, “Latin America: The End of an Era,” International Journal of Health Services 3, no. 37 (2007): 477–500.
3. Economic Commission for Latin America and the Caribbean (ECLAC), “Measuring Social Spending is More than an Exercise in Accounting,” Notes, no. 65 (August 2010).
4. Jose Cordero, Honduras: Recent Economic Performance, Center for Economic and Policy Research, 2009.
5. United Nations News Center, “Latin American Poverty Levels Fall to Lowest in Two Decades, UN Report Finds,” November 30, 2011.
6. Economic Commission for Latin America and the Caribbean (ECLAC), Social Panorama of Latin America (2011) 14.
7. CEDLAS and the World Bank, Socio-Economic Database for Latin America and the Caribbean, available at sedlac.econo.unlp.edu.ar.
*Figure 1 Source: United Nations Economic Commission for Latin America and the Caribbean, “the Base de Datos Estadísticos de Comercio Exterior”; World Bank, “World Development Indicators”; and authors’ calculations.
Figure 2 Source: IMF, “International Financial Statistics” and authors’ calculations.
Figure 3 Source: World Bank, “World Development Indicators”; Facultad de Ciencias Económicas Universidad Nacional de La Plata, Argentina, and the World Bank, “Socio-Economic- Database for Latin America and the Caribbean”; and authors’ calculations.
Read the rest of NACLA’s Summer 2012 issue: “Latin America and the Global Economy.”
