equidad: volume 2 : no. 2 : october, 2001

Inter-American Development Bank Sustainable Development Department Poverty and Inequality Unit

October 2001, Vol. 11, Number 2

Social Policy with Economic Responsibility / Economic Policy with Social Responsibility

The IDB and the Reduction of Poverty and Inequality GUSTAVO YAMADA AND OMAR ARIAS

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he reduction of poverty and promotion of social equity in Latin America and the Caribbean constitute one of the Bank’s two priority objectives (along with the promotion of environmentally sustainable growth). These Bank priorities are consistent with the commitment undertaken by all countries in the region to address these issues, a commitment reaffirmed at the highest level at the recent Summit of the Americas in Quebec City. There, the Heads of State and Government of the region committed themselves to further efforts to attain the International Development Goals, especially the goal of reducing the percentage of those living in extreme poverty in the region by 50% by 2015 from the levels of 1990. However, the modest progress the region made in reducing poverty in the 1990s compromises its chances of achieving that goal. Therefore, while the economic growth of the countries in the region must be accelerated, that alone will not suffice.

Additional measures are needed in the areas of creation of opportunities, human development, social protection, the quality of life, and political and social inclusion in order to ensure that the poor benefit from growth on an equal if not greater scale than the non-poor.

In 2000, the Bank directed a substantial part of its lending and non-lending activities toward poverty reduction and promotion of social equity, with emphasis on the concept of socially responsible macroeconomics. About half (51.8%) of the total volume of IDB-approved loans went toward poverty reduction and promotion of social equity (so-called SocialEquity-Enhancing, or SEQ, loans). Some 46.8% of the total number of approved lending operations were SEQ operations. Included Continued on page 3

The Importance of Protecting the Poor from the Economic Cost of Illness

Poverty Reduction Strategies in Central America and the Bank’s Role

CESAR PATRICIO BOULLION

CHARLES RICHTER (*)

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ne of the most sizeable and least predictable shocks to the income generation capacity of families is associated with major illness.

There are two important economic costs associated with illness: the cost of the medical care used to diagnose and treat the illness, and the loss in income associated with reduced labor supply and productivity. The size and unpredictability of both these costs suggest that families may not be able to ensure their consumption levels during periods of major illness, especially in developing countries where few individuals are covered by formal health and disability insurance. The Poverty and Inequality Unit and the STEP Program (Strategies and Tools against Social Exclusion Program) of the International Labor Organization organized a oneday workshop on The Economic Cost of Illness: Extending Financial Protection to the Poor and Excluded at IDB headquarters in June 2001. The workshop addressed two main issues: (i) how living standards can be protected from the economic costs of illness; and (ii) how social protection can be extended to those currently excluded from financial insurance schemes. Participants in the workshop included Professor Paul Gertler of the University of California at Berkeley, Professor David Bloom of Harvard University, and staff of the Pan American Health Organization, World Health Organization, International Labor Organization, the World Bank, and the IDB. Data presented at the workshop from Indonesia and Mexico show that the economic costs associated with major illness are significant.

The discussions in the workshop suggested an additional rationale for subsidized medical care in developing countries, viz., consumption

eset by some of the severest cases of poverty in the Western Hemisphere, three Central American countries – Guatemala, Honduras and Nicaragua - are in the process of preparing Poverty Reduction Strategies (PRSs). These aim to sharpen the focus of public investments on poverty reduction. PRSs are country-driven, country-prepared, and country-led efforts that span the short-, medium- and long-term.

The generation of a national consensus and commitment to poverty reduction forms an integral part of the PRS process. Ample consultations with civil society help to generate these commitments. The consultations also enrich the PRSs through the incorporation of stakeholder views and priorities.

PRSs include an analysis of poverty and its determinants, followed by the definition of strategic guidelines and programs to attack the root causes of the problem. To be effective, PRSs specify the institutional and financial mechanisms required to carry out the strategies and to ensure the macroeconomic viability of proposed investments. PRSs also set goals and targets and help measure progress toward their achievement through establishing monitoring and evaluation systems.

Honduras and Nicaragua have special incentives to prepare PRSs because the latter are conditions for debt relief under the HighlyIndebted Poor Country (HIPC) initiative. Both countries have prepared drafts of complete PRSs. Although Guatemala is not eligible for HIPC

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(*) Social Specialist, Social Programs Division 2, Regional Operations Dep. 2

The Participation of the IDB in the Bolivian Poverty-Reduction Strategy MONICA RUBIO (*) In spite of the excellent record for implementing macroeconomic policies and structural reforms, Bolivia (with 63% of its population classified as poor and with social indicators that are considered among the least favorable in the region) still confronts the challenge of reducing poverty. It is within this context that the country participates in the Original and Enhanced HIPC Initiatives, which provide debt alleviation to eligible countries linked to the attaining of poverty reduction objectives.

One of the conditions that the country had to fulfill in order to comply with the requirements to obtain this help was the elaboration of a Bolivian Poverty Reduction Strategy, or BPRS(**).

The Bank supported the country actively during the preparation of the BPRS. Both its leadership role with the introduction of the “social matrix” of the Original HIPC Initiative (that included commitments of the country related to social policies and performance indicators), and the preparation and execution activities of the “Fiscal Adjustment and Protection of Social Spending” loan, became the basis of a coordination and collaboration effort between the government, the Bank, the World Bank and the IMF, that took advantage of the lessons learned during the first phase, for the Enhanced HIPC Initiative and the preparation of the BPRS. The following points summarize the participation of the Bank in this process: (i) financing of the National Dialogue and of the participation of the leader of the coordinating group in the preparation of the BPRS; (ii) participation in the preparation of macroeconomic and financial scenarios, as well as the Analysis of Foreign Debt Sustainability; (iii) coordination of the Fight Against Poverty Group that brings together representatives of the international community in Bolivia with the objective of supporting the government in the preparation of the BPRS; and (iv) through a technical multidivisional group, permanent support to the Bolivian group in charge of the preparation of the BPRS, through technical dialogue on content and methodological aspects of the BPRS, preparation of inputs and comments to the BPRS, and participation in coordination meetings and joint evaluation missions with representatives of bilateral organizations, the World Bank The Bolivian Strategy for the and the IMF. Reduction of Poverty In the implementation phase of the BPRS, the Bank will support the country through its With the objective of reducing poverty and promoting credit operations being executed human development, actions are established in four lines and prepared. Of particular of strategic action, and in cross-cutting areas favoring relevance is the sectoral loan ethnic groups, gender equality, environment and “Support to the implementation institutional strengthening. of the BPRS” that will contribute to the effort of the Bolivian The four strategic components, related amongst each Government to begin the other, that defined the actions against poverty are: implementation process of the 1. Enhancing employment and income opportunities, Bolivian Poverty Reduction fomenting the productive capacity; promoting rural Strategy with emphasis on social development through more investment in productive and inclusion aspects. commercialization infrastructure; supporting the micro and small industry and developing microfinance.

2. Developing capacities , thus guaranteeing improvements in the quality of the services in primary education and preventive health, and a larger access of the population to adequate living conditions.

3. Increasing the security and protection of the poor, in particular of the most vulnerable groups (children, elderly, populations affected by natural disasters).

4. Promoting social integration and participation, encouraging social participation in order to extend the popular participation and decentralization.

Inter-American Development Bank Sustainable Development Department

Poverty and Inequality Unit Mission Statement

The mission of the Unit is to provide technical leadership for the Bank and its member governments’ work in the area of poverty reduction, and to contribute to enhancing the quality of the Bank’s lending and non-lending activities so as to increase their poverty reduction impact.

Senior Advisor and Chief Nora Lustig Gustavo Yamada Robert Ayres José A. Mejía Ena V. Rosas Aura Oradei Eliana Villagómez

Omar Arias César Bouillon José Montes Neli Vera Díaz Ignacio Sánchez

This newsletter is published biannually by SDS/ POV of the Inter-American Development Bank.

Contact us through our website at: http:// www.iadb.org/org/sds/pov or email us at: Povunit@iadb.org.

Editors: Gustavo Yamada, Robert Ayres and Eliana Villagómez, with the assistance of Neli Vera Díaz and Luis Tejerina.

(*) Economist, Social Programs Division 1, Regional Operations Department 1 (**)As a consequence of the approval of the BPRS in the directories of the World Bank (WB) and the International Monetary Fund (IMF) during the first days of June of this year, the country will receive a reduction of the total debt related to these new initiatives of US$1.3 billion in NPV, or approximately US$2.1 billion in nominal terms.

Inter-American Development Bank

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Poverty Reduction Strategies Continued from page 1 debt relief, its efforts to reduce poverty are consistent with the thrust of the country’s Peace Accords. To date, Guatemala has identified strategic guidelines and has prioritized key investment programs. Future work will focus on refining the strategy and defining implementation mechanisms.

The three draft PRSs for Central America share important points in common. Each places the highest priority on achieving economic growth with equity, principally through development of the rural economy. The PRSs also call for widening the coverage and improving the quality of social services, decentralizing the provision of public services, and strengthening municipal governments.

Bank Support.

Consonant with the high priority placed on poverty reduction by the Inter-American Development Bank’s Eighth Replenishment, the IDB provides ample support to country efforts to achieve this objective.

During the PRS preparation stage, Bank support makes ample use of non-reimbursable Technical Cooperations. These consist principally of help in: (i) setting up the technical units that prepare and manage the PRS process; (ii) preparing technical analyses, usually through consultant services; (iii) reviewing and commenting on draft PRSs; and (iv) identifying implementation mechanisms for carrying out PRSs. The latter require the identification of institutional and financial structures as well as the establishment of indicators and mechanisms for monitoring and evaluation.

The Bank is gearing up to provide ample support to countries in the execution of the PRSs. It is adjusting its lending program to reflect the country priorities specified in the PRSs. In addition, a loan approved for Nicaragua in late 2000 helps establish an execution mechanism for implementing the PRS. Similarly, there is a sector loan under preparation to support implementation of the Honduras PRS.

The IDB and Poverty

Returning to Mexico

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Nora Lustig, Senior Advisor and Chief of the Poverty and Inequality Unit of the Bank since its inception in 1997, returned to Mexico to become President of the University of the Americas, Puebla, one of the leading private universities in Mexico, effective October 1.

Ms. Lustig will leave behind an exceptional legacy covering a vast agenda, including production and dissemination of knowledge on the determinants of poverty and inequality; organization of regional networks and policy dialogues; and technical support to the IDB loan program, with the aim of mainstreaming the goals of poverty reduction and social equity enhancement in all the diverse activities of the Bank.

We are sure that Nora will continue her active role in the promotion of the agenda of poverty and inequality reduction in the region from her new position, and we wish her success in this new stage of her outstanding professional career.

among the SEQ loans are poverty-targeted investments (PTIs), which in 2000 accounted for 31.7% and 40.7% of the total volume and number, respectively, of approved investment loans.

Examining the Bank’s activities from a qualitative perspective, innovative operations have been conducted in the four priority areas that the Bank has singled out in its Institutional Strategy, namely: social development, modernization of the state, competitiveness, and regional integration. Likewise, sector loans with components to protect social spending continued to be approved. In addition, operations of the Multilateral Investment Fund involving microenterprise, microfinance, and labor training contributed directly to the IDB’s poverty reduction goals, while other IDB-group lending operations such as the Inter-American Investment Corporation’s loan and investment operations indirectly served to reduce poverty.

As for non-lending activities, in 2000 numerous efforts were made to make poverty reduction and the promotion of social equity a priority on the policy agendas of the countries of the region. Both the operations and central departments of the Bank have devoted a significant volume of human resources and technical cooperation to assist in developing national poverty reduction strategies, and to organize dialogues with the governments and representatives of civil society to build a consensus around comprehensive measures and plans to combat poverty and promote social equity. Also, the research activities and measures to help generate better information on living conditions—through the Program for the Improvement of Surveys and the Measurement of Living Conditions in Latin America and the Caribbean (MECOVI)—have improved the design and implementation of poverty-reduction policies and projects in the countries of the region.

The Bank has prepared a plan of action in areas of particular emphasis using a multidimensional approach to combat poverty and with specific activities for future years. The activities fall into five groups: 1) support for the elaboration of national poverty reduction strategies; 2) actions in nonsocial sectors whose benefits accrue directly to the poor; 3) institutionalization of comprehensive social protection systems; 4) actions in social sectors whose benefits accrue directly to the poor; and 5) monitoring and impact evaluation of Bank-supported projects.

The actions to support the poverty reduction strategies, institutionalize comprehensive social protection systems, and improve data on poverty and social development were included among the future IDB strategic programs introduced at the recent Summit of the Americas. In addition, the Bank is currently updating its strategy for poverty reduction and social equity enhancement and is helping to map strategies for the four priority areas identified in its Institutional Strategy, making sure that the objectives of poverty reduction and equity enhancement are incorporated into these sectoral strategies and in future Bank loans.

For further reading see “Poverty Reduction and Promotion of Social Equity Report on Activities in the Year 2000 and an Action Plan in the Areas of Special Emphasis” at http://www.iadb.org/sds/pov.

Poverty and Inequality Unit • October 2001

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Many Faces of Poverty On June 12, Nobel Prize-winning economist Amartya Sen spoke at IDB headquarters in Washington, D.C. Sen, a Professor at Harvard University and a Master at Trinity College, Cambridge University, compared the experiences of India and other countries of Asia with Latin America in fighting poverty, and described the lessons that can be learned. He also spoke on the multiple dimensions of poverty, a subject he has explored for decades.

Prof. Sen speaks to IDB staff on the Considered one of the most influential multiple dimensions of poverty and innovative analysts of poverty and social equity, Sen has emphasized that poverty is more than an economic condition, in which the basic necessities of life, such as food, housing, and clothing, are lacking. Poverty, in his view, is also the absence of capacity or opportunities to change this situation.

Good health and longevity; adequate education; access to land, credit, or other productive resources; an ability to avoid and cope with sharp declines in income; supportive families and communities; justice; freedom from discrimination, abuse and violence; and “voice” in the institutions that shape governance and the access to opportunities: these are elements often missing from the lives of the poor that have been emphasized by Professor Sen in his work on the “many faces of poverty.”

Prof. Sen’s conference took place in the framework of activities of the Poverty Reduction and Social Protection Network, which is part of the Regional Policy Dialogue, an initiative of the Board of Executive Directors of the IDB.

First IDB Knowledge Exchange Fair The first IDB Knowledge Exchange Fair took place on May 23 and 24. This event offered the opportunity of learning about the diverse initiatives and programs being carried out by the Bank’s different departments, units and networks. The Poverty and Inequality Unit was a part of this event, and it presented its main activities designed to contribute to the Bank’s efforts to help reduce poverty and enhance social equity in Latin America and the Caribbean.

Fourth Meeting of the LACEA/IDB/World Bank Network on Inequality and Poverty (NIP).

This meeting will be held at the annual meetings of LACEA, in Montevideo, Uruguay, on October 17. Activities will include a full day of presentations among network participants of ongoing research on the distributive impacts of privatization and deregulation, and on social exclusion related to race and ethnicity, as well as keynote speeches by prominent scholars on the impact evaluation of poverty reduction programs and the measurement of social exclusion.The organizers of the meeting are Omar Arias (IDB, Washington, omara@iadb.org) and Maximo Rossi (Universidad de la República, Uruguay, mito @ decon.edu.uy)

Fourth Meeting of the Social Equity Forum The meeting will take place on November 1-2 at the Bank’s Headquarters in Washington, D.C. The subject of the meeting will be “Transparency, Governmental Responsibility, and Social Equity.” Particular attention will be given to the role played by civil society organizations in strengthening transparency and accountability, and thus in enhancing of social equity. The aim of the SEF is to elevate issues regarding social equity to the forefront of policy debates in the region, and to share experiences with the aim of better formulating and implementing policies designed to enhance social equity. For further information, please contact Neli Díaz, nelid@iadb.org (202-623-3326)

Conference on “Crises and Disasters: Measurements and Mitigation of their Human Costs” The Poverty and Inequality Unit will co-sponsor this conference with the International Food Policy Research Institute (IFPRI), the World Bank and the United States Agency of International Development (USAID). The conference will take place at IDB headquarters on November 13-14. It will present papers on the issues of ex-ante risk minimization, the impact of shocks on poverty and inequality, and public sector responses to shocks.

For more information please contact Ena Victoria Rosas, enavr@iadb.org (202-623-2539).

Poverty Reduction and Social Protection Network.

Members of the Poverty and Inequality Unit at the Fair with President Enrique Iglesias.

Protecting the Poor Continued from page 1

Upcoming Events

The next meeting of this network of policymakers will take place on December 10-11 at the Bank’s Headquarters in Washington, D.C.The goal of the network is the creation of a forum in which the countries of the region can share experiences, learn about practices being implemented outside the region, and explore opportunities for regional cooperation in poverty reduction and social protection. The network is commissioning studies of best practices on relevant topics, including, comparative institutional aspects, fiscal aspects of social programs; vulnerable groups, gender and poverty; and growth, employment and poverty. Several of these topics will be discussed in the December meeting. For further information, please contact Ignacio Sánchez, ignacios@iadb.org (202-623-2033)

insurance. While data indicate that families are able to insure against the costs of small frequent illnesses, they are unable to insure against the costs of illnesses that imply large outof-pocket health expenditures and consequently high costs associated with the reduction of family labor supply. Governments should consider how to insure against the medical care costs of large illnesses, for example, through caps on fees for inpatient hospital stays, or by developing prepayment schemes. They should also consider options to provide for consumption insurance for households hit by a catastrophic illness to one of their members.

The findings presented in the workshop also have implications for another major form of social insurance in developing countries—how to finance medical care publicly through payroll taxes, while allowing beneficiaries to purchase medical care from private providers. Since low-income countries have limited abilities to tax, the resources available for social insurance are severely constrained.

This results in a trade-off between catastrophic coverage, with a high deductible but uncapped coverage, and “first-dollar” coverage, with coverage of all expenses from the first dollar but a low cap on total covered expenditures. Surprisingly, many low-income countries have adopted the latter strategy. The rationale for this choice is the concern that the lower-income groups may not be able to afford the deductible, and therefore would not benefit from the insurance. However, if families are able to insure against small health shocks, then first-dollar, capped-benefits provide little increased insurance but rather crowd out private insurance. Countries would be much better served by moving toward models of insurance that provide coverage against catastrophes and that include consumption insurance.

Inter-American Development Bank

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