Executive summary

II. The Evolution of Consumption Growth, Poverty and Inequality in Panama

Can Panama rely on economic growth alone to reduce poverty?

There is a solid consensus amongst international development experts that growth must be at the center of any successful poverty reduction strategy. As documented in the World Bank’s recent Flagship Report Poverty Reduction and Growth: Virtuous and Vicious Circle (Perry et. al. 2006), while in the long-run all pro-growth policies will lead to lower poverty, in the short-run the poor will be left behind if severe inequality is not addressed. Moreover, obtaining significant poverty reduction in the long-run may require growth policies that also help reduce inequality while the economy grows. Hence, countries with high income inequality and severe poverty like Panama may need to focus on a combination of growth and social policies that directly support the poorest segments of society if sustained poverty reduction is to be attained. The Flagship Report finds that targeted pro-poor policies, such as increased access to education and direct conditional transfers to the poor, have had direct positive and self-reinforcing impacts, not only on inequality and poverty, but also on growth.
Our analysis indicates that the recommendations of the flagship report are largely applicable to Panama. Despite strong recent economic performance, poverty in Panama (at slightly below LAC average of 40 percent) remains persistently high with only slight declines in recent years. Between 1997 and 2003, real per capita GDP grew at 1.5 percent per annum, but, during the same period, poverty fell only by about a half a percentage point, from 37.3 to 36.8 percent (Figure 2). This slight drop in poverty appears to be associated almost entirely with a small drop in inequality, since GDP growth has not been translated into consumption growth by the average Panamanian. Indeed, the Gini coefficient has dropped from 48.5 to 46.9 between 1997 and 2003.

Figure 2: Poverty Measures by Area –Headcount Ratio
Poverty	Extreme poverty
Note: Extreme poor refers to the population with per capita consumption below the extreme poverty line value. Moderate poor refers to the population with per capita consumption below the poverty line value. Source: World Bank staff calculations based on ENV 1997 and 2003 data.

Despite the slight decline in average per capita consumption and an unwavering moderate poverty rate, as seen in Figure 1 above, extreme poverty has dropped more notably than moderate poverty between 1997 and 2003. The extreme poverty headcount ratio, which measures the share of the population that is not able to afford an adequate daily diet, has dropped 12 percent, from 18.8 to 16.6 percent.¹

Where do the neediest in Panama live?

In 1997, the majority of the extreme poor, 56 percent, lived in non-indigenous rural areas. Slightly more than one third of them, 35 percent, lived in indigenous areas and a few, 9 percent, lived in urban areas. By 2003 this picture had changed substantially. The share of the extreme poor living in indigenous and non-indigenous rural areas became identical at 42 percent. And the share of the extreme poor living in urban areas almost doubled to 16 percent (Figure 3). Migration from rural to urban areas also appears to have played an important role in the decline of extreme poverty in rural areas and the increase in extreme poverty in urban areas.

The indigenous are by far the most destitute in Panama.

The already high poverty rate of Panamanians living in indigenous areas has deteriorated even further. Nearly all (98.4 percent) of those living in indigenous areas now live in poverty, and 90 percent live in extreme poverty. Because of the very high rate of extreme poverty in indigenous areas, even though they account for just 8 percent of the overall population, 42 percent of the nation’s extreme poor lived in indigenous zones.

Figure 3: Who are the Extreme Poor?
1997	2003
Source: World Bank staff calculation based on ENVs 1997 and 2003

Moreover, the vast majority of the residents of indigenous areas exhibit consumption levels that are far below the extreme poverty line. In other words, poverty is much deeper in indigenous areas. To see this, note that the median per capita consumption of extremely poor individuals living in indigenous areas (B.\238 per year) is less than half the extreme poverty line (B.\534 per year).² For the extreme poor living in urban and rural areas, the median per capita consumptions are substantially higher, at B.\440 and B.\339 respectively. This means that it would cost considerably more to lift an average indigenous person out of extreme poverty than it would to lift a rural or urban resident. Not surprisingly, as we discuss in more detail below, the levels of chronic malnutrition in indigenous areas are much higher than the levels in urban and non-indigenous rural areas.

Because of the deep poverty observed in indigenous areas, economic growth and non-targeted anti poverty programs may have limited impact on the wellbeing of the most destitute in Panama. For instance, despite the 12 percent drop in the extreme poverty rate between 1997 and 2003 (a measure of the number in poverty), the extreme poverty gap (an indicator of the depth of poverty that measures how far below the poverty line the average poor is located) was lowered only by 6 percent. In other words, growth and non-targeted poverty programs have tended to lift those that were closer to the extreme poverty line out of extreme poverty. However, many were left well below the extreme poverty line, particularly the indigenous. Therefore, policies and programs to assist the poor should not be judged only by their success in reducing the number of poor, but should also be evaluated by how far they bring the poorest of the poor closer to the poverty line.³
The implications for policy formulation are three fold:

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  First, given that a large proportion of the poor consume far less than what is needed to afford an adequate diet, policies aimed at promoting faster economic growth per se are unlikely to have significant impacts on the welfare of the poor in the short and medium runs. Instead, poverty reduction policies should be formulated to reduce the depth of poverty by focusing on those who live with consumption levels which are far below the poverty line. Otherwise, as our analysis indicates, even if average national consumption per capita grew at a high rate of 3 percent per year, extreme poverty would be reduced only by 7 percentage points by 2015, and 70 percent of the indigenous population would still live in extreme poverty, not being able to afford an adequate diet.
  

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  Second, universal compensatory policies aimed at regulating prices, such as minimum wage policies and programs subsidizing the prices of electricity, cooking gas, gasoline and water, are unlikely to significantly affect poverty rates given that the poor consume little of these goods and largely work outside the formal sector. Furthermore, such policies would distort relative prices in the economy, leading to inefficiencies in resource allocation and possibly hindering growth.
  

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  Finally, well targeted direct transfer programs are likely to be more effective in improving poverty indicators in the short and medium runs. Nevertheless, given the depth of poverty in the country, policymakers should consider not setting targets for these programs in terms of reducing only the extreme poverty rate. Instead, it would be prudent to select other more responsive measures as success indicators, as for example the extreme poverty gap or the poverty severity index.⁴ In fact, policy options designed to minimize the incidence of poverty alone should be avoided since they are unlikely to affect the poorest of the poor, who are too far from the extreme poverty line.