Executive summary This report looks at the conditions under which 18 Latin American and Caribbean countries would individually be able to meet the extreme poverty reduction target established in the Millennium Declaration as one of the United Nations Millennium Development Targets. The 18 countries considered in this report are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela. The question that the report seeks to answer is whether or not each country will succeed in halving its extreme poverty rate as of 1999 (with respect both to an international poverty line which corresponds to the original dollar-a-day line and to a country-specific poverty line) by the year 2015.[1] Two scenarios are considered for each country: a historical" one, which extrapolates the country's growth and inequality dynamics of the 1990s into the future; and an "alternative" one. The alternative scenario simulates movements that would take each country closer to a hypothetical "regional ideal" (referred to in the report as "Maxiland"), which is both richer and more egalitarian than any country in Latin America or the Caribbean actually is today. Each of these scenarios is simulated by means of a simple procedure which generates counterfactual income distributions with higher means and lower inequality levels than those actually observed in 1999. The growth and inequality reduction parameters have been calibrated to generate all plausible (positive) combinations which yield the desired rates of poverty reduction. Steps were then taken to determine what it would take for each country to reach its target with respect to either line, along either path. For the alternative scenario, the analysis also covers a number of possible changes in employment levels, productivity, human capital stocks and transfers which would be statistically consistent with the simulated aggregate growth and inequality changes. The report's findings give grounds for both concern and (conditional) optimism. The simulations based on the countries' historical performances are what gives rise to that concern. If the countries in the sample were to continue to perform as they did in the 1990s, only 7 of the 18 would meet their poverty reduction targets (with respect to the international poverty line) by 2015. These countries are Argentina (pre-crisis), Chile, Colombia, Dominican Republic, Honduras, Panama and Uruguay. Another six countries would continue to reduce the incidence of extreme poverty, but at too slow a pace. These countries are Brazil, Costa Rica, El Salvador, Guatemala, Mexico and Nicaragua. The other five countries ?Bolivia, Ecuador, Paraguay, Peru and Venezuela? would actually see higher levels of extreme poverty due either to increases in inequality, decreases in per capita income, or both. Simulations of the alternative scenario, on the other hand, give cause for conditional optimism. Using this scenario, which was used to see how the countries' income distributions would change if they were to succeed in becoming both progressively richer and less unequal, it was found that the changes required for every country to meet their poverty reduction targets appear to be quite feasible. With respect to the international poverty line, this alternative scenario indicates that 16 countries could meet the target by combining average annual growth rates of GDP per capita of 3% or less with cumulative reductions in inequality of less than 4%. The two exceptions are Bolivia and El Salvador. With respect to the country-specific extreme poverty lines, the alternative scenario indicates that only two countries ?Bolivia and Nicaragua? would require both an average annual growth rate of GDP per capita of more than 2% and a reduction in inequality of more than 5% to meet the target. The findings therefore appear to indicate that even very small reductions in inequality can have very large positive impacts in terms of poverty reduction. For most of the countries that were considered, a one- or two-point reduction in the Gini coefficient would achieve the same reduction in the incidence of poverty as many years of positive economic growth would. A large part of the reason why recent poverty reduction efforts in Latin America and the Caribbean have yielded disappointing results is that the region's high levels of inequality have proved remarkably intractable. In the rare instances when countries have succeeded in reducing inequality, the pay-off in terms of poverty reduction has been large. While there exists a statistical trade-off between the rates of economic growth and inequality reduction required to reach certain poverty targets, there is no evidence that growth and inequality reduction are economic substitutes for one another. On the contrary, the balance of the evidence suggests that the region's high inequality levels are a hindrance to more rapid growth. The exercise covered in this report was based on the simulation of combinations of growth and inequality reductions which were statistically consistent with required rates of poverty reduction. Further research is needed on policy combinations that might generate such changes in an economically consistent manner. [1] The "Road map towards the implementation of the United Nations Millennium Declaration" (United Nations, 2001) stipulates that the target is to halve the proportion of extreme poverty which existed in 1990; 1999 has deliberately been chosen as the reference year, however, because it is the most recent point in time for which household data are available for a large number of countries in the region. [Back]"