A Slowdown in Social Gains  The current economic slowdown resulted in social gains in Latin America and the Caribbean that were weaker in 2014 than in previous years. In particular, the growth of the middle class – which was one of the key successes during the years of the commodity boom – came almost to a halt.  Despite the slowdown, the region was able to reduce poverty in 2014. Income growth was higher among poorer households, contributing to a slight decrease in inequality. However, the growth of the income of the bottom 40 percent of the population was lower than it had been in previous years.  Since over the last decade poverty reduction has been driven mainly by economic growth, the weakening of economic conditions in 2015 and 2016 will make further reductions of poverty more challenging.  As policy-makers face increasingly difficult trade-offs it is key to reignite growth and cushion the impact on the poor, ensuring that access to basic services and opportunities is not compromised. P overty reduction in the Latin America and the Caribbean region (LAC) continued in 2014 at a slower pace, in line with a worsening economic environment. Total poverty, decade, middle class growth has slowed in recent years (to 1.7 percent annualized growth since 2012, down from 5.3 percent between 2004 and 2012), reaching 35 percent of LAC’s population in 2014. That defined as life on less than $4 a day, fell by more is, even as more people have been able to escape than 16 percentage points between 2004 and 2014 poverty, mobility into the middle class has slowed, such to 23.3 percent (Figure 1).1 Much of this gain, that at current growth rates, the middle class would no however, occurred in the earlier years. Between longer be projected to become the largest group in 2004 and 2012, LAC reduced poverty at a rate of the region in the near future.3 5.4 percent per year; between 2012 and 2014, this rate was 3.9 percent per year. This lower rate of poverty reduction is unsurprising given the weaker economic environment that the region has faced since 2012. Economic growth is critical for poverty reduction, as illustrated by the fact that since 2003 45 around 75 percent of all poverty reduction was 39.5 Vulnerable 38.3 38.9 40 explained by economic growth, as opposed to redistribution. As economic conditions continued to 34.8 35.0 Middle class Percentage (%) 35 worsen in 2015 and 2016, further pressure on 36.3 slowing down social gains in the region can be 30 anticipated. 24.1 23.3 25 22.5 Poor The growth in the size of the middle class slowed in recent years. The vulnerable, those not in poverty 20 but not yet in the middle class, continue to be the largest group in the region at 38.9 percent in 2014.2 15 2004 05 06 07 08 09 10 11 12 13 2014 This is worrisome as they are the most likely to fall into poverty in any given year. Despite the continuous Source: LAC Equity Lab tabulations using SEDLAC data (CEDLAS and the World Bank). movement of people out of poverty during the last 1 APRIL 2016 The economic slowdown has also been average of 3.2 percent between 2004 and 2008 to accompanied by a lower income growth for the 1.5 percent in 2014, and an estimated -0.7 in 2015.4 bottom 40 percent of the population. Annual GDP These worsening macroeconomic conditions have per capita growth in the region declined from an translated into waning social gains, including Nicaragua and Guatemala do not collect poverty data as frequently as many of their neighbors in the LAC region, but both countries collected new surveys in 2014. After half a decade without poverty estimates, Nicaragua’s 2014 survey revealed a sizeable reduction in poverty at $4 per day from 52.5 percent in 2009 to 41.4 percent in 2014. The social gains were particularly strong in the rural areas. At the same time, the new poverty estimates for Guatemala show worsening conditions with a 7.2 percentage points increase (from 52.6 to 59.8 percent) in poverty between 2006 and 2014. The increase in poverty rates was higher in the urban areas, compared to the rural (11.3 and 4.2 percentage points, respectively). (a) Nicaragua (b) Guatemala 80 80 Poverty rate (%) Poverty rate (%) 60 60 40 40 20 20 0 0 2005 2009 2014 2000 2006 2014 National Rural Urban National Rural Urban Source: LAC Equity Lab tabulations using SEDLAC data (CEDLAS and the World Bank). Note: The figure reports the poverty headcount rates at $4 per day (2005 PPP). (a) Annualized growth rate of incomes for the bottom 40 percent and the overall population 2004-2009 MX SV CO PY CH NI PA CR EC DR PE BR UR HN AR BO 2004-2008 2004-2009 2004-2008 2004-2009 2003-2009 2005-2009 2004-2007 2004-2009 2004-2009 2004-2009 2004-2009 2004-2009 2004-2009 2004-2009 2004-2009 2005-2009 12 10 Annualized growth rate 8 6 4 2 0 -2 -4 -6 Income growth bottom 40 Average income growth 2 (b) Annualized growth rate of incomes for the bottom 40 percent and the overall population 2009-2014 HN MX CR AR DR SV PA NI CH PE UR CO BR BO EC PY 2009-2014 2010-2014 2010-2014 2009-2014 2009-2013 2009-2014 2009-2014 2009-2014 2009-2013 2009-2014 2009-2014 2008-2014 2009-2014 2009-2014 2009-2014 2009-2014 12 Annualized growth rate 10 8 6 4 2 0 -2 -4 -6 Income growth bottom 40 Average income growth Source: LAC Equity Lab tabulations using SEDLAC data (CEDLAS and the World Bank). Note: The figure shows the annualized growth of incomes for the bottom 40 percent and the overall population between 2004-2009 and 2009-2014, or the nearest years in cases in which these surveys are not available for selected years. slowing income growth in most countries. The World percentage points. Despite these gains, income Bank’s measure of shared prosperity reports the inequality remains high in the region: as of 2014, the income growth of people in the bottom 40 percent poorest 40 percent of the population received only as an indicator to monitor whether growth is 11.6 percent of the region’s income. benefiting the less well-off in each country. From 2004 to 2009, real per capita income of the bottom 40 percent grew 6.1 percent on average across the region; since then, it has grown at 4.1 percent. 14 0.60 Income growth in recent years has been particularly 12 11.6 low in Central America and Mexico (Figure 2). Even 0.58 10.0 so, the income growth of the bottom 40 percent in 10 Income share of Gini coefficient most countries continued to be higher than the the bottom 40 Percentage (%) 0.56 average income growth rate, suggesting that 8 percent although growth slowed, it has continued to be 6 0.549 0.54 inclusive. 4 Gini Inequality did not decline strongly. Inequality 0.52 measured by the Gini coefficient experienced an 2 0.520 annualized decrease of 0.9 percent in LAC between 0.514 0 0.50 2004 and 2010 (Figure 3), a significant drop in inequality in one of the most unequal regions in the world.5 However, the rate of reduction of income Source: LAC Equity Lab tabulations using SEDLAC data (CEDLAS inequality has slowed since 2010, with the Gini and the World Bank). Note: Numbers are calculated using coefficient falling from 0.520 in 2010 to 0.514 by pooled data from LAC-17 (see annex 1 for details on the country coverage). 2014, equivalent to an annualized decrease of 0.3 3 In May 2014 the International Comparison Program (ICP) released new internationally comparable Power Purchasing Parity (PPP) values. The new ICP data allows for updated estimates of the cost of living across countries. As of October 2015, the basic World Bank indicator for measuring extreme poverty globally with these new PPP values is the percentage of people living on less than $1.90 a day. Using this updated measure, an estimated 4.4 percent of LAC’s population was living in extreme poverty in 2014. Seven of the 17 countries in the region with frequent poverty data have reduced extreme poverty to less than three percent; among these 17 countries, Honduras has the highest extreme poverty rate at 16 percent. At the extreme, a majority of the Haitian population (54 percent or 5.6 million people) lived in extreme poverty as of 2012. Together, these poverty rates imply over 30 million people living on less than $1.90 per day in LAC. 30 60 54.0 Global Extreme Poverty Rate $1.90 8 25 Number of people (millions) 7 20 6 16.0 5 (2011 PPP) 15 4 9.3 10 6.8 3 5.4 5.75.7 6.2 3.73.8 3.8 2 5 1.61.7 2.3 2.8 3.0 3.1 0.3 0.9 1 0 0 Uruguay Ecuador Colombia Argentina LAC Guatemala Paraguay Peru Chile Panama Honduras Costa Rica Brazil Mexico Bolivia Nicaragua Dominican Rep El Salvador Haiti Uruguay Paraguay Ecuador Colombia Panama Argentina Peru Guatemala Chile Honduras Costa Rica Dominican Republic Mexico Bolivia Brazil Haiti Nicaragua El Salvador Source: LAC Equity Lab tabulations using SEDLAC data (CEDLAS and the World Bank). Note: Poverty rates are for 2014 except for Chile and Dominican Republic (2013) and for Haiti (2012). LAC poverty rate includes Haiti and therefore it is not comparable with regional aggregates presented in the rest of this document. The economic downturn has slowed down income was about 4 percent per year, similar to the rates seen growth across the entire income distribution; even for the top 60 percent. Here too labor income growth so, the income growth of the poorest 10 percent was the primary driver, accounting for about two- remained relatively high, driven by the growth in thirds of income growth. labor incomes. Figure 4 shows the average annual growth rate of per capita income between 2010 and Households in poverty and in the bottom 40 percent 2014 for every decile of the income distribution.6 have lower labor force participation and higher During this period, the income of the poorest 10 unemployment rates, particularly for women. In percent grew 5.7 percent per year on average, with 2014, less than half of the women aged 18 to 65 in labor income contributing more than half of this poor households and in the bottom 40 percent were in growth. While this is a significant growth rate, the the labor force compared to two-thirds of those in the bottom 10 percent lived on less than $2.50 per day top 60 percent (Annex 3). Unemployment rates were (Annex 2). For the rest of the bottom 40 percent, the also significantly higher for women in poor households news were not as good; for this group income growth (14.7 percent) than for men in poor households (9.7 4 percent) and women in the top 60 percent (5.3 percent). Given the importance of labor income to overall household income growth, these low rates of female participation and high rates of 10 Non-labor income unemployment represent significant challenges to Annual average growth per 8 Labor income exiting poverty. Total income capita income Labor market indicators suggest that urban 6 poverty may have increased in Brazil in 2015. The 2015 labor force surveys (LFS) in the region show 4 positive growth in per capita labor income in Peru, Mexico, Argentina and Ecuador, but not in Brazil, 2 where it fell by 9.9 percent between 2014 and 2015 (Figure 5). 7 This fall in labor income in Brazil 0 reflects the country’s GDP growth of -3.7 percent in 10 20 30 40 50 60 70 80 90 100 2015. Since labor is the primary income source for Income percentile most households in the region, changes in labor Source: LAC Equity Lab tabulations using SEDLAC data (World income are the primary driver of changes in poverty. Bank and CEDLAS). Note: The growth incidence curves are For 2015, the fall in average labor income suggest calculated using pooled harmonized data from LAC-17. Non- a more difficult environment for poverty reduction in labor income includes public monetary and in-kind transfers, contributory and non-contributory pensions, capital incomes (such Brazil. as profits and benefits, rents, and interest and benefits), and private transfers and remittances. Mexico Argentina Peru Ecuador Brazil 6 4.2 Change in average labor 2.5 2.7 3 1.4 1.7 1.3 0.5 incomes (%) 0 -0.6 -3 -3.8 -6 Average per capita labor earnings 2015 GDP growth -9 -9.9 -12 Source: LAC Equity Lab tabulations using LABLAC and SEDLAC data (World Bank and CEDLAS); 2015 GDP growth refers to preliminary estimates from the World Bank’s January 2015 Global Economic Prospects for Argentina, Ecuador, Mexico, and Peru. For Brazil, official growth rate is reported. One of the achievements of the region in the last typically uniform across all groups of society. To decade has been an improved access to basic explore how equitable access to these basic opportunities. While the region has achieved very opportunities is we can use the Human Opportunity high rates of coverage in electricity or primary school Index (HOI).8 The HOI is an indicator that measures enrolment, access to other basic opportunities such as how a child’s access to basic opportunities such as water and sanitation or the internet lags behind (see education, water, electricity, and sanitation, is coverage rates in Figure 6a). In addition, access is not affected by circumstances outside of his or her control 5 –for instance, place of residence or education of the water in the dwelling, and improved sanitation. While household head. The difference between the access to basic opportunities remains unequal, the coverage ratio and the HOI for a given opportunity region has made significant progress in increasing reflects how the set of circumstances affects the access to basic opportunities in the last 14 years. For chances of accessing this opportunity. The larger the example, the HOI for finishing primary school has gap between coverage and HOI the more unequal increased substantially in almost every country in the access is. As Figure 6(a) suggests, LAC shows gaps in region between 2000 and 2014 and in particular in access to basic opportunities that is more pronounced those countries with low initial levels – as shown in in the case of access to internet in the house, running Figure 6(b). (a) HOI and Coverage by opportunity, LAC 2014 (b) HOI for finishing primary education by country, circa 2000-circa 2014 Primary School 100 Internet Water Sanitation Complete Cellular Electricity Enrollment 100 Arg 80 Chl Ury 80 Pan Mex Ecu 60 Cri Bol Percentage (%) 60 Circa 2000 LAC Per Bra Pry Dom 40 40 Nic Hnd Slv 20 20 Gtm 0 0 HOI Coverage 60 800 100 20 40 Circa 2014 Source: LAC Equity Lab tabulations using LABLAC and SEDLAC data (World Bank and CEDLAS). Note: LAC numbers are calculated as unweighted average of country-specific numbers in 2000 and 2014, or the nearest year when data for those years are unavailable. What can be done to regain the pace of social gains group of the population. Combined the poor and in the region? First, taking into account the vulnerable account for around two-thirds of Latin prominence of growth in explaining poverty reduction Americans. Finally, as policy-makers face increasingly in the LAC region, reigniting growth is critical for difficult trade-offs it is key to preserve the gains in resuming the pace at which social gains were being access to basic opportunities that have characterized achieved in the region before the economic the region in the last decade. Much needed efforts of slowdown. The growth agenda is thus critical to fiscal consolidation will benefit from better preserve and boost social gains. Second, it will be understanding what public programs help those who important to cushion the impact on the poor and need it the most and where there may be efficiency vulnerable and to ensure that investment on their gains. These types of analyses will help to inform human capital are not compromised or halted. As we policy choices to build on the very significant social saw in Figure 1, the vulnerable remains the largest gains achieved in the region in the last decade. 6 This brief was produced by the Latin America and Caribbean Team for Statistical Development (LAC TSD) in the Poverty and Equity Global Practice of the World Bank. The core team consisted of Leonardo Lucchetti, Eduardo Malasquez, Germán Reyes, and Liliana D. Sousa. The team worked under the guidance of Oscar Calvo- Gonzalez and received valuable contributions from Andrés Castañeda, Giselle Del Carmen, Karem Edwards, Emma Monsalve, Laura Moreno, Thiago Scot, Daniel Valderrama, and Martha Viveros. The numbers presented in this brief are based on two regional data harmonization efforts known as SEDLAC and LABLAC, joint efforts of the World Bank and CEDLAS at the National University of La Plata in Argentina. They increase cross-country comparability of selected findings from official household and labor surveys. For that reason, the numbers discussed here may be different from official statistics reported by governments and national offices of statistics. Such differences should not be interpreted in any way as a claim of methodological superiority, as both sets of numbers serve the same important objectives: regional comparability and the best possible representation of the facts of individual countries Unless otherwise noted indicators for LAC are calculated using data from Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, and Uruguay (LAC-17). In order to analyze the same set of countries every year, interpolation was applied when country data were not available for a given year. The welfare indicator used in this report is the total household per capita income. Since October 2015, the basic World Bank indicator for measuring extreme poverty globally is the percentage of people living on less than $1.90 a day in 2011 purchasing parity power (PPP). But the level of economic development in the LAC region has led analysts to use poverty lines that are higher: a $2.50 a day extreme and a $4 a day overall poverty lines. Unless otherwise noted, poverty lines and welfare measures in this brief are in 2005 US$ (PPP) per day. The Gini coefficient measures income inequality, using values between zero for perfect equality and one for perfect inequality. Since the coefficient does not satisfy group decomposability, the regional Gini coefficient is computed based on pooled country-specific data previously collapsed into 8,000 quantiles. As a result, this measure captures the income inequality between the region’s population, and thus differs from measures based on country-specific indicators. In order to analyze the same set of countries every year, interpolation was applied when country data were not available for a given year. Inequality measures include households with zero incomes. Results are similar with the exclusion of these households. 6 Extreme poverty ($2.50 a day) Total poverty ($4 a day) Gini coefficient 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 LAC 15.5 14.1 13.0 12.1 11.2 10.8 30.1 28.0 26.7 25.3 24.1 23.3 52.7 52.0 51.8 51.8 51.6 51.4 Brazil 13.9 11.7 9.6 7.8 26.9 23.8 20.8 18.1 53.9 53.1 52.7 51.5 Mexico 12.6 11.4 11.7 28.2 27.6 27.5 47.5 49.4 49.1 Andean region 19.4 17.0 14.7 14.8 12.8 12.0 35.7 32.4 29.3 28.5 26.8 25.1 52.1 51.3 49.8 49.5 49.5 49.2 Bolivia 20.6 16.1 17.1 14.4 14.0 35.1 29.0 29.2 27.2 25.9 49.7 46.3 46.7 48.1 48.4 Colombia 21.9 19.6 16.8 17.5 15.2 14.5 39.6 36.5 32.8 32.9 30.8 28.9 55.9 55.5 54.2 53.5 53.5 53.5 Ecuador 18.9 15.9 13.5 12.9 10.5 9.3 37.1 33.4 29.5 27.8 26.1 23.6 49.3 49.3 46.2 46.6 47.3 45.4 Peru 15.6 13.2 11.8 10.9 9.8 9.2 29.6 26.1 24.3 22.1 21.3 20.1 48.0 46.2 45.5 45.1 44.7 44.1 Central America 24.5 24.7 24.4 24.9 24.0 23.1 43.2 43.4 43.2 43.5 42.9 41.8 52.6 52.3 53.0 53.0 53.0 52.1 Costa Rica 4.6 5.1 4.7 4.6 4.6 12.7 13.0 12.2 12.2 12.0 48.1 48.6 48.6 49.2 48.5 Dominican Republic 16.4 16.1 14.0 14.6 13.9 34.7 35.1 33.3 33.3 33.1 48.9 47.2 47.4 45.7 47.1 El Salvador 18.7 19.8 16.6 14.7 12.7 12.3 38.9 39.3 37.9 34.8 31.8 31.4 45.9 44.5 42.4 41.8 43.5 41.8 Guatemala 36.9 59.8 48.7 Honduras 31.3 34.0 37.4 42.4 39.6 36.2 50.0 53.3 56.4 61.3 59.4 55.9 51.6 53.4 57.4 57.4 53.7 50.6 Nicaragua 29.3 20.3 52.2 41.4 45.7 47.1 Panama 12.3 13.2 11.6 11.8 9.9 10.2 25.3 24.0 21.2 20.9 20.4 18.7 52.0 51.9 51.8 51.9 51.7 50.7 Southern Cone 7.7 6.3 5.1 4.8 4.0 4.6 16.5 14.8 12.8 11.5 10.6 11.2 48.9 48.4 47.5 46.5 46.4 47.1 Argentina (urban) 8.0 6.1 4.6 4.7 4.5 5.4 16.3 14.1 11.6 10.8 10.8 12.7 45.3 44.5 43.6 42.5 42.3 42.7 Chile 4.1 2.9 2.0 11.6 9.9 6.8 52.0 50.8 50.5 Paraguay 17.9 16.1 14.3 12.0 8.3 9.0 32.5 30.5 27.5 24.1 20.2 18.8 49.7 51.8 52.6 48.2 48.3 51.7 Uruguay (urban) 3.5 2.8 2.6 2.6 2.4 2.0 11.9 10.7 8.6 8.3 7.8 6.7 46.5 45.5 43.6 41.5 42.1 41.8 Source: LAC Equity Lab tabulations using SEDLAC data (CEDLAS and the World Bank). Note: Poverty lines and incomes are in 2005 US$ purchasing parity power (PPP) per day. LAC and sub-regional poverty indicators are calculated using pooled data from the relevant set of countries. In order to analyze the same set of countries every year, interpolation was applied when country data were not available for a given year. Poor Bottom 40 Top 60 All Profile of households Demographics Household size 4.3 4.2 3.0 3.4 Number of children (ages 0-14) 1.7 1.5 0.6 0.9 Proportion living in rural areas 38.8 32.5 12.6 19.1 Education and income School enrollment (ages 6-14) 93.8 94.7 96.9 95.8 School enrollment (ages 15-24) 43.6 45.0 55.1 51.1 Years of education (ages 18 and over) 6.1 6.6 9.5 8.6 Median daily per capita income (2005 US $PPP) 2.6 3.7 13.0 9.3 Characteristics of the main earner Average age 45.0 45.7 50.6 49.0 Female 34.5 34.0 34.0 34.0 Average years of education 5.5 6.0 9.0 8.0 Labor profile of individuals (Ages 18-65) Labor market Labor force participation 64.3 66.2 77.7 73.8 Female 47.1 49.6 66.5 60.8 Male 85.5 85.8 87.8 87.2 Unemployment rate 13.5 11.1 4.1 6.1 Female 14.7 13.2 5.3 7.5 Male 9.7 8.4 3.7 5.1 Type of employer Private large firm 18.2 24.4 41.4 36.5 Private small firm 78.9 71.1 44.1 51.9 Public sector 2.9 4.5 14.5 11.6 Type of worker Employers 4.8 4.0 5.0 4.7 Self-employed 34.3 30.2 20.3 23.2 Unpaid workers 15.1 11.1 3.1 5.4 Wage employees 45.8 54.7 71.6 66.7 Sector of employment Primary sector 42.8 32.4 8.5 15.6 Manufacturing 10.7 12.4 14.7 14.0 Construction and utilities 9.0 10.3 9.0 9.4 Retail 21.1 24.6 27.4 26.6 Services 16.4 20.3 40.4 34.4 Source: SEDLAC (CEDLAS and the World Bank). Note: All indicators are percentages unless otherwise noted. 1. The indicators reported in this brief can be found in the LAC Equity Lab website at www.worldbank.org/equitylab. See Annex 1 for acknowledgements and a description of the data and methodology used in this brief. 2. This report follows Ferreira et al. (2012), defining economic classes based on the concept of economic security: the vulnerable, who have incomes between $4 and $10 a day; and the middle class, living on between $10 and $50 a day (2005 PPP). The vulnerable group are those with a higher probability of falling into poverty in any given year. Source: Ferreira, F., J. Messina, J. Rigolini, M. Lugo, R. Vakis and L. López-Calva. 2012. “Economic Mobility and the Rise of the Latin American Middle Class.” World Bank Publications. 3. Based on 2012 trends, the middle class would have become the largest group in the region by 2016. Source: World Bank. 2014a. “Social Gains in the Balance: A Fiscal Policy Challenge for Latin America and the Caribbean.” Repor t 85162 (February), World Bank, Washington, DC. 4. World Development Indicators and estimates from the World Bank’s January 2015 Global Economic Prospects. 5. See Annex 1 for technical notes regarding the estimation of inequality and Annex 2 for the Gini coefficient for each country. 6. This figure is based on the Growth Incidence Curve (GIC) methodology; however, to decompose income growth by source of income, this curve is reported as average annual growth rather than annualized growth. For more details on the GIC methodology, see Ravallion and Chen (2003). “Measuring Pro-poor Growth.” Economics Letters, 78 (1): 93–99. 7. LFS are available sooner than household surveys but with less information about household income and often limited to urban populations. 8. Barros et al. (2009) developed the HOI. Source: Barros, R. P., F. Ferreira, J. Molinas and J. Saavedra-Chanduvi. 2009. “Measuring Inequality of Opportunities in Latin America and the Caribbean.” World Bank. Washington, DC: Palgrave Macmillan.