How the Commodity Boom Helped Tackle Poverty and Inequality in Latin America

IMF Blog, June 21, 2018

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Latin America is the only region to significantly lower inequality over the past two decades, and the commodity boom helped make it happen.
Poverty decreased from about 27 to 12 percent across Latin America from 2000 to 2014.
Inequality decreased almost 11 percent across Latin America from 2000 to 2014.
The commodity boom raised prices of commodities like oil and metals, driven by growing demand from emerging market economies such as China and India.
South America, home to many commodity exporters, experienced a significant boost in its terms of trade during the boom.

The booming commodity sector expanded and drew in labor, raising wages and employment.
Demand for workers spilled over to other sectors, such as construction.
Government revenues increased, supporting higher public investment and spurring job creation.
Commodity exporters saw significantly larger real labor income and employment gains than non-commodity exporters.
Lower-skilled workers gained the most, which contributed heavily to reductions in poverty and inequality.
Some governments used higher revenues to increase social transfers to lower-income groups (examples below), further reducing poverty and inequality.
- Renta Dignidad in Bolivia (non-contributory pension)
- Pension 65 in Peru (non-contributory pension)
- Bolsa Familia in Brazil (conditional cash-transfer program)
Overall, labor income gains played a larger role in poverty and inequality reduction than government transfers because labor income accounts for a much larger fraction of overall household income.

Several commodity-exporting countries (Bolivia, Brazil, Peru) redistributed large parts of natural resource earnings back to municipalities and regions where resource extraction is located.
Municipalities in Bolivia and Brazil with larger natural resource-related fiscal transfers (shares in royalties and other commodity-related taxes) experienced somewhat larger declines in poverty.
Drawbacks observed:
- Some local governments with the biggest windfalls per capita began to accumulate large deposits during the boom, while other regions with acute investment needs, poor infrastructure, and high poverty levels remained underserved.
- The volatile nature of commodity revenues creates management challenges, amplified at the local level by weaker institutions and less qualified staff.
- Example regions that faced serious budgetary pressures after the boom due to collapsing revenues: Tarija (Bolivia) and Rio de Janeiro (Brazil).

To maintain the quality of social and infrastructure spending, governments will need to raise more revenue and spend more efficiently.
Latin America currently spends significantly less on social protection than emerging market economies in Europe or advanced economies.
Policy actions recommended in the source:
- Increase revenues from progressive personal income taxes, which tend to be less in Latin America compared to other regions.
- Reduce energy subsidies, which typically benefit the rich far more than the poor.
- Better target existing social spending, and make sure other spending is not being wasted.
- Take greater account of spending needs (for example, population size and poverty levels) when transferring fiscal resources associated with production of commodities to regions and municipalities.
- Consider greater use of stabilization funds for volatile natural resource revenues, with clear rules and governance arrangements.
- Continue enhancing capacity at the local level (further training local government staff, ensuring access to the right technologies, and trying to avoid excessive staff turn-over).
- Improve the quality of education, given its important role in reducing inequality and lifting people out of poverty during the boom.

Source: Ravi Balakrishnan and Frederik Toscani, June 21, 2018 (How the Commodity Boom Helped Tackle Poverty and Inequality in Latin America).