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Better rural investment needed to reduce poverty in Latin America and the Caribbean, says the World Bank

Study notes that public expenditures still tend to benefit more urban than rural activities

Posted: February 18, 2005 Related item: Economic outlook brighter for Latin America, Caribbean  

Washington — The countries of Latin America and the Caribbean need to invest more and better in rural communities as their economic contribution to national development is twice as large as officially believed, according to a new World Bank report released February 14.

Beyond the City: the Rural Contribution to Development, prepared by a team of researchers led by Guillermo Perry, is the World Bank's major annual research study on Latin America and the Caribbean (LAC). The report evaluates the effects of the rural sector on national growth, poverty reduction, and environmental degradation both in rural areas and the rest of the economy, as well as the public policies that can enhance its contribution to overall national development.

"The rural contribution to development in Latin America and the Caribbean is larger than what we commonly believe," said Guillermo Perry, World Bank Chief Economist for Latin America and the Caribbean and co-author of the study. "Most countries in the region are failing to deliver the right mix of public policies in the rural space, either from a growth or a poverty reduction perspective."

According to the study, while rural natural resource activities only account for 12 percent of regional GDP, their effect on national growth and poverty reduction is nearly twice as large due to the forward linkages to other economic activities and their high contribution to exports. For instance, for each one percent growth of the rural natural resource sector, there is a 0.22 percent increase in national GDP and a 0.28 percent increase in the income of the poorest families. This represents more than twice the expected 0.12 percent increase corresponding to the sector's share of GDP.

In addition, the research found that the rural population in the region is actually 42 percent of the total, almost double the official figure of 24 percent, when measured according to the Organization for Economic Cooperation and Development criteria for defining rurality which include both population density and distance to major cities. This means that rural problems, such as poverty, have been highly underestimated and need much greater attention and more adequate public policies.

"The rural contribution to development in the region has been hampered by insufficient investment in public services," said Daniel Lederman, World Bank senior economist for Latin America and the Caribbean and co-author of the report. "The rural communities face the highest poverty rates, lack of access to public services and private markets, and inadequate infrastructure to realize their full potential."

About 37 percent of the poor in LAC–some 65 million people-- live in rural areas, according to official definitions. In countries such as Bolivia, Guatemala, Honduras, Nicaragua, Paraguay and Peru, at least 70 percent of the rural population lives in poverty, while in Mexico, about 35 percent of people in rural areas do not make enough to pay for a minimum food basket.

The study notes that public expenditures still tend to benefit more urban than rural activities and that public spending on the farm sector is lower than its contribution to overall development, but concludes that the composition of rural public expenditures is the real problem.

This is because a substantial part of rural spending is in the form of subsidies to specific producer groups rather than investments in the provision of public goods, such as rural education, health and social protection, rural infrastructure, research and development, environmental protection and targeted antipoverty programs.

On the trade side, Beyond the City: the Rural Contribution to Development says LAC countries will benefit from increased liberalization and market access (reduced border protection) in agricultural goods worldwide, but that a reduction in subsidies to producers in industrialized nations would have an unequal impact on the region.

According to the report, while net agricultural exporters, especially in the Southern Cone, would benefit from a reduction in subsidies to producers in rich countries, food-importing nations in the region would see prices increase. In order to avoid price increases for poor consumers, net importers would then need to reduce their own high tariffs on such products.

The study concludes that countries need to put in place programs to support the restructuring of small domestic producers in importing sectors that are unable to compete even with a reduction of subsidies in rich countries. Ideally, these programs should combine temporary income transfers with technical support and better access to credit and services.

"The challenge for Latin America and the Caribbean is how to take advantage of the most dynamic agricultural sectors while helping the more vulnerable with special restructuring and anti-poverty programs," said Perry.

The study also stresses the need for a better integration of sectorial and regional policies as poverty in rural areas is not only associated with agriculture but also with specific regions, such as Southern Mexico, Northeastern Brazil or Colombia's Caribbean coast, and as nearly half of rural incomes in the region come from off-farm activities.

According to the report, success in reducing poverty in marginalized regions will depend on the ability of both central and local governments to work with local communities to identify economic opportunities and constraints and to balance local needs with national interests. In some cases it will require a proper valuation of environmental services and devising effective and innovative ways for national and global communities to adequately pay for them.

Source: World Bank Organization


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