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Poverty and inequality in Central America

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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During the 1980s, the Dominican Republic was the only one of the seven countries in the study to register a positive average annual growth rate of output—a meager 0.9 percent. In the 1990s, however, all of the countries enjoyed positive rates of growth, ranging from 0.1 percent in Nicaragua to 3 percent in El Salvador.

Of the five countries for which poverty head count indexes and data on income distribution are available, poverty declined in three—Costa Rica, Honduras, and Panama—and increased in two—El Salvador and Nicaragua. In Honduras, poverty declined, even though inequality increased. Inequality also increased in El Salvador and Nicaragua, while Costa Rica and Panama saw no change.

The average Gini coefficient (a commonly used measure of income inequality, with 0 representing perfect equality and 100 perfect inequality) for the seven countries increased to 54.4 at the end of the decade, from 53.4 in the early 1990s. Inequality was greatest in Honduras and Nicaragua, the two poorest countries.

Noting the high correlation between poverty and inequality, Corbacho and Davoodi discussed the complex relationship between poverty, inequality, and growth and argued that growth could have less impact on poverty in countries with large income disparities. Nonetheless, sustained growth is a prerequisite for poverty reduction, and Central America’s growth performance in the 1990s was not strong enough or steady enough to make a dent in the region’s high poverty rates. One reason, the authors suggested, was that, even though the countries cut spending in the 1990s and narrowed their deficits, the composition, efficiency, and equity of spending hardly changed.

Social spending

Investment in education is an important contributor to longer-term economic growth, and education is crucial to helping people get out of poverty. However, the progress the region has made in educating its people over the past four decades masks a continuing polarization. Although the average number of years of schooling doubled from 2.5 in the 1960s to 5 in 2000, and the proportion of the population with no formal schooling decreased from nearly 50 percent in the 1960s to about 27 percent in 2000, the proportion of the population that has completed a primary education has remained constant. At the same time, the percentage with a higher education has increased eightfold.

Educational attainment in Central America is still low, and illiteracy rates are still high, for several reasons. First, as a share of GDP, government spending on education has increased only modestly. Second, spending on public education is less efficient in Central America than in other developing regions. Third, the distribution of education spending has not been equitable. Studies show that in two of the five countries for which data are available, the rich capture more of the benefits than the poor. Teachers’ salaries are high, by regional standards, but higher wages do not necessarily guarantee teacher quality, a key input in student learning.

The progress Central America has made in educating its people over the past four decades masks a continuing polarization.

The level of training for teachers varies throughout the region. Teachers in Costa Rica, El Salvador, and Panama all receive a tertiary education, while those in Guatemala, Honduras, and Nicaragua are trained in “normal” schools, which are similar to secondary schools. Nearly one-third of Nicaragua’s teachers are uncertified. Student-teacher ratios are high, except in Costa Rica and Panama, while the number of hours of schooling is low.

The picture is somewhat rosier for health care, another important factor in economic productivity as well as poverty reduction and human welfare. Central America invests relatively heavily in health care—in 1998, total expenditures on health averaged 6.5 percent of GDP, of which 3.6 percent came from public funds (only the Dominican Republic and Guatemala allocated less than 3.2 percent of GDP to public health). As a result, life expectancy increased from 54 years in the 1960s to nearly 70 years in the 1990s.

Infant and child mortality rates have dropped, while immunization rates have soared. According to the study, health spending is well targeted in three of the four countries for which data are available.

Corbacho and Davoodi reported that, despite these impressive results, there were striking disparities between countries and between the poor and the nonpoor within countries. While Costa Rica and Panama have good health indicators (Costa Rica’s are comparable to those in industrial countries), health care development is lagging in Guatemala, Honduras, and Nicaragua.

Other problems, the authors said, stemmed from the fragmentation and rigidity of health systems in all of the countries but Costa Rica. Resource allocation tends to be inefficient, so that some health care needs go unaddressed while others receive a disproportionate share of resources. Curative health care tends to be emphasized over preventive health care. Public facilities are generally of poor quality, and there is no accountability for performance or effective management. Moreover, the relationship between public health spending and health indicators is weak, indicating a need for greater efficiency in resource allocation.

The study also found that most of the countries do not have adequate social safety nets to protect the poor during economic downturns or natural disasters. Most safety nets fall into one of three categories: food and cash transfers, targeted human development programs, and employment and infrastructure programs. Although Costa Rica, El Salvador, Honduras, Nicaragua, and Panama have at least one program in each category, social safety nets in the Dominican Republic focus exclusively on food and cash transfers, and Guatemala has a school lunch program and several infrastructure programs but no targeted human development programs. Corbacho and Davoodi asserted that better targeting of social safety net programs, preventing abuse of them by the nonpoor, and periodic evaluation were crucial for fighting poverty and inequality.

Infant and child mortality rates have dropped, while immunization rates have soared.

Governance

Finally, the authors said, the countries should concentrate on improving governance and reducing corruption, which are critical for increasing the effectiveness of propoor public spending as well as of safety nets. To this end, governments must reduce the power of monopolies, make procurement procedures transparent, and increase the financial accountability of public spending. In addition, budget formulation and execution should be strengthened, with a larger share of resources allocated to providing the poor with a primary education and basic health care and reducing their out-of-pocket expenses.

Based on the World Bank’s six indicators of good governance—voice and accountability, political stability and lack of violence, government effectiveness, rule of law, regulatory quality, and control of corruption—Costa Rica is the most advanced of the seven countries in this area, with a score close to the average for the OECD countries. All seven made great strides between 1997 and 2001 with respect to political stability and control of corruption.

Adherence to international standards and codes—such as the IMF’s Code of Fiscal Transparency—is another way to reduce public sector corruption and improve governance. Honduras and Nicaragua have drafted, in collaboration with the IMF, a Report on the Observance of Standards and Codes for public administration, and other countries in the region have begun to work on similar reports.

Copies of IMF Working Paper 02/187, Expenditure Issues and Governance in Central America, by Ana Corbacho and Hamid Davoodi, are available for $10.00 each from IMF Publication Services. See page 374 for ordering information. The full text is also available on the IMF’s website (www.imf.org).

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