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Fighting poverty

Credibility is the key

by Eleonore von Bothmer, Hans Dembowski
Governments must use their budgets and fiscal policy to promote social cohesion and reduce poverty. In Latin America, however, doing so is very difficult. One reason is the wide-spread lack of trust in the state and its institutions.

The example of the rich European nations shows that democratic debate over public revenues and expenditure leads to compromises which help bring about social stability and legitimacy. However, the example of advanced economies cannot readily be transferred to disadvantaged regions of the world. Experts from Latin America point out that their region differs from the EU in many respects. Among other factors, they refer to
– the fourfold higher average income in Europe,
– the far larger gap between high and low incomes in Latin America and the
– greater ethnic diversity of their continent, with over 600 different ethnic groups.

EU member states typically account for around 40 % of their country’s gross domestic product. The corresponding share for Latin America is considerably lower, amounting to only 13 % in poverty-stricken Guatemala and 14 % in El Salvador. José Luis Machinea from the UN Economic Commission for Latin America and the Caribbean (ECLAC) points out that in his region of the world, tax revenue is not used to redistribute incomes. Unlike in Europe, he stresses, there is “no welfare state, no tradition of social protection” in Latin America.

According to Machinea, Latin American economies are based primarily on commodities and low wages. By contrast, Europe focuses on high-tech products, high levels of education and expensive labour. Latin America thus has to make up ground economically in order to also catch up in terms of social policy. Machinea regards the fact that the poverty rate has fallen by around ten points from 44 % since the beginning of the decade as a good sign. In mid-March, he and other experts from the region gave their views at a conference in Berlin organised by InWEnt and the German Development Ministry to prepare for the EU/Latin America and the Caribbean Summit to be held in the Peruvian capital Lima in May.

Host country Peru has made progress in recent years. According to José Arista Aribaldo, deputy minister of finance, the number of poor people fell by four points to 44.5 % between 2000 and 2006. From his point of view, governments have to use the funds they have at their disposal sensibly. He says Peru’s government used to dissipate its energy by running 82 welfare-related programmes. Today, the government is focussing on a mere 26 programmes. Moreover, the action of different ministries and government agencies has become better coordinated.

It is an undisputed fact that employment is important to alleviate poverty. Work generates incomes – and incomes are the base of tax revenues. However, growth in the private sector is not enough to enable a government to design social policies. Even if the vast majority of the population earn enough money to pay taxes, they will only be prepared to do so if they are confident these funds will not be wasted.

The international organisation Trans­parency Internatio­nal therefore high­lights the consequen­ces of corruption at all levels of the state apparatus. In Latin America, this is the main reason why there is such a very low acceptance of taxes. Too many people have the impression that governments do not take care of them, and that they do not really belong to society.

Heidemarie Wieczorek-Zeul, Germany’s development minister, warned at the Berlin conference that, without social cohesion, democracy itself will face serious difficulties. She emphasised that developing countries need well-run fiscal systems and cohesive social policies if the UN Millennium Development Goals are to be achieved. (eli/dem)