Abstract
Strategies based on growth and inequality reduction require a long-run horizon, and this paper therefore argues that those strategies need to be complemented by poverty alleviation programs. With regards to such programs, informality in Latin America and the Caribbean is a primary obstacle to carry out means testing income-support programs, and countries in the region have therefore mostly relied on proxy means testing mechanisms. This paper studies the relative effectiveness of these and other mechanisms by way of a formal model in which workers choose between job opportunities in the formal and informal sectors. Although the means testing mechanism allows for a more pro-poor design of transfers, it distorts labor decisions made by workers. On the other hand, (exogenous) proxy means testing does not cause distortions, but its pro-poor quality is constrained by the power of observable characteristics to infer income levels. However, since taxation is necessary to fund programs, redistribution becomes less effective, especially for programs other than means testing. The paper concludes by discussing the implications of these results for the design of more efficient targeting programs.
Highlights
For several decades, poverty has been on a steady downward path, both worldwide and in Latin America and the Caribbean (LAC)
4.2.7 A means testing program with a proxy means transfer to informal workers In examining the effect of proxy means testing programs, we argued that their overall effectiveness in terms of poverty reduction depends on the empirical relation between observable characteristics and income
5 Conclusions From a long-term perspective, Latin America and the Caribbean have benefited from a substantial decrease in the incidence and depth of poverty
Summary
Poverty has been on a steady downward path, both worldwide and in Latin America and the Caribbean (LAC). This paper estimates the contribution of growth and inequality toward poverty reduction by means of regression-based decompositions, finding that growth has been the main driver behind falling poverty in LAC. Even when growth and declines in inequality are sustained, this paper argues that there is a need to complement these developments with poverty alleviation programs This is because improvements do not automatically spill over to everyone, and groups without the proper human capital and access to better opportunities are unlikely to be able to gain their share of these benefits. It makes taxation of the non-poor and targeting of the poor less efficient, weakening the overall distributive effect of public programs These effects are stronger if income support is provided to informal workers, even by means of proxy means testing.
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