San José, Costa Rica, since 1956

Report: Attack Poverty for Economic Growth

The World Bank is spreading the word in Latin America that to increase economic growth, countries need to attack one of the principal drags on growth: poverty.

A World Bank team was in Costa Rica last week to repeat that mantra in a forum that included Fernando Zumbado, Minister of Housing and the Fight against Poverty, Education Minister Leonardo Garnier and former Foreign Trade Minister Alberto Trejos.

The idea that economic growth can improve living standards and mitigate poverty is an accepted axiom. The inverse of the axiom, that poverty can be a drag on economic growth, creating a vicious circle in which slow growth and poverty feed off each other, is much less studied, bank officials said.

To turn the vicious cycle into a virtuous cycle, governments must invest more in health and education to give their populations the opportunity to better participate in the economy and contribute to economic growth, said Guillermo Perry, the World Bank s chief economist for Latin America and the Caribbean.

Perry and other World Bank economists drafted a report that describes the phenomena, entitled Reduction of Poverty and Growth: Virtuous Cycles and Vicious Cycles.

A healthier, better educated population is better able to make contributions to economies, because they can better gain access to financial markets and other means of private investment, the report states. Ill health has obvious affects on productivity and the ability to administer and generate knowledge.

Poor people attend schools of poorer quality, the reports continues, while education increases labor mobility and reduces the birth and mortality rates of children.

The poor are exposed to greater risks in the labor market, and poverty also inhibits the movement of labor away from agriculture to areas of higher productivity.

Poor regions and countries have fewer people capable of adopting and administrating new technologies that contribute to productivity, according to the report. Poor regions also lack infrastructure or human capital that make them attractive for extraregional investment or development resources that increase labor mobility.

Additionally, poor countries and poor regions find that ethnic or racial tensions are exacerbated by income disparity, which generates inter-regional tension.

The results are a poverty trap in which groups or families are stuck in a vicious circle of poverty.

What the report argues is that intelligent investment in the poor can lead to virtuous cycles and that the question of the reduction of poverty in favor of growth should perhaps be a political concern as important as the traditional concern with growth in favor of the poor , says the report s executive summary. In other words, investing in the poor is good business for society as a whole, not only for the poor.

It is also necessary to pay attention to problems of infancy to make sure children are given healthy environments in the first years of life to ensure the ability to learn once they get to school, said the report.

Perry said Costa Rica still faces a poverty problem that dates back to the financial crisis of 1981 and 1982, when Costa Rica fell in arrears with its international lenders and the bottom fell out of its currency.

As a consequence of that crisis, the government had to make cuts in secondary education funding and many Costa Ricans withdrew their children from school to be able to help make ends meet.

Costa Rica, once known throughout Latin America for its quality of primary and secondary education, began to slip, Perry said.

Though Costa Rica got a handle on the crisis after a couple of years with the help of aid from the United States and other countries, the effects on levels of real spending on education lasted approximately 15 years.

One result has been stagnation of the country s poverty index, in which Costa Rica s level of poverty has remained steady at around 20%.

The education stagnation may also have an effect on other indicators of social ills such as the rising crime rate, he said.

Among the measures prescribed by Perry to break the vicious cycle in Costa Rica are continuing to open the economy with freetrade policies that provide greater economic opportunity, and passage of the fiscal reform bills to provide a greater amount of government revenue to fund health and social programs.

Perry praised the policies of Costa Rican President Oscar Arias, which include providing money to poor families to allow children to stay in school (TT, Sept. 1) and attacking the problem of inadequate housing for the poor (see separate article).

The economist said countries must also maintain sound fiscal and monetary policies to avoid crises, such as the one Costa Rica experienced in the early 1980s caused largely by over-borrowing from international lenders.


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