Macroeconomic Policy, Poverty, and Equality in Latin America and the Caribbean

This paper takes up a question frequently raised but rarely addressed empirically - do macroeconomic policy changes and exogenous macro shocks have significant impacts on poverty and income inequality more generally? For 15 countries in Latin America and the Caribbean over the past two decades, the answer is unequivocally "Yes." Specifically, poverty reduction appears to be generally associated with increases in GDP and GDP per capita, reductions in unemployment, reductions in inflation, increases in the minimum wage, reductions in overall inequality, and increases (or at least stability) of the share of social expenditures in GDP. The foregoing relationships are observed over macro "episodes" (typically bounded by substantial economic disturbances and/or major realignments in policy). Countries and overall time periods examined include Argentina, 1974-96; Bolivia, 1980-96; Brazil, 1985-96; Chile, 1974-96; Colombia, 1978-95; Costa Rica, 1989-96; Cuba, 1989-96; Dominican Republic, 1981-96; Ecuador, 1970-96; Jamaica, 1960-95; Mexico, 1984-94; Nicaragua, 1980-93; Paraguay, 1970-96; Peru, 1985-95; and El Salvador, 1980-96. Within this data set, the authors identify 49 episodes. Poverty incidence is estimated for 45 of them: it stays stable or rises in 26 and decreases in the remaining 19 cases. The sample appears to be large enough to provide insight into distributional processes which operate across nations, or at least developing countries in the Western Hemisphere. The paper concludes with some implications for economic policy.