Poverty still is one of the central problems in the LAC region. As measured by international poverty lines, approximately one out of every five people in the region is poor. The elimination of poverty thus continues to be one of the main challenges facing the region and remains at the top of its policy agenda.
Clearly, one way to reduce absolute poverty is by stimulating economic growth. In reality, it is unlikely that poverty can be reduced to any significant degree without persistent economic growth. Ultimately, an economy that grows on a sustained basis is an economy in which wages will be rising, thereby lifting households out of poverty. In the LAC region, Chile is an impressive success story in terms of poverty reduction. Between 1987 and 1998, real per capita income increased at an annual rate of 5.7% while the poverty rate dropped by 60%.
Even though growth is fundamental in the battle against poverty, it is unlikely to be enough, even when growth is very rapid. This is especially true in the presence of high levels of inequality such as those existing in the LAC region (Besley and Burgess 2003). Cost-effective redistribution is also needed to succeed in eliminating poverty.
The standard framework within which economists and policymakers have traditionally thought about redistribution is that of an equity/efficiency trade off in which society's redistributive goals must be weighed against the supply-side distortions that taxes and transfers create in the economy.