Executive summary

Poverty Reduction Through 2015

1.25This section considers the prospects for extreme poverty reduction through 2015, under various growth and inequality scenarios by simulating changes in consumption.¹³ We project forward year-by-year changes in poverty by applying various growth rate assumptions to the consumption data in the household survey. The simulated changes are for per capita consumption. Panel (i) of Figure 1.5 shows the poverty impact of annual growth rates of 1, 2 and 3 percent, assuming that inequality remains unchanged. Panel (ii) shows the simulated impact on poverty using the same growth rates but assuming that inequality, as measure by the Gini coefficient, declines by 1 percentage point (from 0.42 in 2003 to 0.41 in 2015).¹⁴

1.26With no change in inequality, rapid growth will be required to substantially bring down the extreme poverty rate. With consumption growth of 1 percent per year and constant inequality, the extreme poverty headcount will drop only slightly, from 16.6% in 2003 to 13.8% in 2015. Under a much more optimistic scenario of 3 percent annual growth, the extreme poverty headcount will drop to 9.7% by 2015. A drop in inequality of 1 percentage point would reduce extreme poverty further. With a 1 percent growth rate and a 1 percentage point drop in inequality, the national extreme poverty rate would fall to 12.7% in 2015.

Figure 1.5: Extreme Poverty Impact of Different Growth Scenarios – Exercise 1
(i) Simulated changes in extreme poverty using three different growth scenarios with no associated changes in inequality	(ii) Simulated changes in extreme poverty using three different growth scenarios with an associated decrease in inequality of 1 percent between 2003 and 2015
Source: Own estimate based on ENV 1997 and 2003 data.

1.27

Figure 1.6: Extreme Poverty Impact of Different Growth Scenarios – Exercise 2

Source: Own estimate based on ENV 1997 and 2003 data.

We can summarize the potential poverty reduction of various combinations of growth and inequality changes using iso-poverty curves. Each curve of the Figure 1.6 depicts combinations of Gini coefficients and growth rates that yield a constant poverty headcount in 2015. To reach a certain level of extreme poverty in 2015, higher growth is necessary when inequality increases. For example, if the Gini coefficient were to rise to 49, Panama would need to generate an annual per capita consumption growth rate of 6% through 2015 to reduce poverty to half of its 2003 level.

Final Comments

1.28This chapter has examined the evolution of poverty, growth, and inequality in Panama over the period 1997-2003 and considered various scenarios for poverty reduction through 2015. As in many countries, the growth rate of GDP in Panama diverges substantially from the growth rate of consumption in household surveys. Unfortunately, there is no clear explanation for these differences. The pattern in Panama is similar to that observed in other countries and in line with the known tendency of GDP growth rates to be biased upwards and survey-based consumption growth rates to be biased downwards. Our empirical analysis suggests that the differences are probably not due to changes in survey coverage of wealthy households. The alternative explanation is that the differences are due to a combination of errors and differing coverage between the National Accounts and the survey data. A comparison of GDP growth with survey income growth shows that the main sources of growth for the two measures differ substantially also. Unfortunately, it is not possible to judge which measure is more correct. The remainder of the growth and poverty analysis focuses on growth of consumption in the household survey.

1.29Overall, the survey data shows a mixed pattern. Consumption growth in rural areas led to a significant decline in rural extreme poverty. On the other hand a drop in consumption and a worsening of inequality in urban areas led to a increase in urban extreme poverty. In indigenous areas both a drop in consumption and a decrease in inequality resulted in a significant increase in extreme poverty. For the country as a whole, the result was a small drop in extreme poverty and drop in inequality, as the gap between rural and urban areas declined. Part of the decline in extreme poverty was due to the shift of population from rural areas to urban areas.

1.30In terms of policy, the results in this chapter point to one clear conclusion: because extreme poverty is so highly concentrated in indigenous areas, and because the indigenous are so far below the extreme poverty line, it is vital to target future anti-poverty policies and programs to the indigenous comarcas. Our results also show that the indigenous are less likely to benefit from economic growth and therefore will tend to contribute more and more to extreme poverty.. Rural areas, which witnessed substantial declines in poverty 1997-2003, but are still home to large numbers of the poor, should be the secondary focus of anti-poverty programs.