WASHINGTON — In 2009, Latin America will move from a period of expansion to one of adjustment. Because of the global financial crisis, growth will slow down, unemployment rates will rise, and poverty will increase. And there will be fewer public resources to face enlarged social needs.

It is understandable, then, that policymakers are looking for ways to cushion the impact of the crisis, for ways to “stimulate” their economies. The problem is that they do not have many tools. There is, however, one particularly powerful tool that can boost both economic growth and social equity: transforming subsidies for all into subsidies for all the poor.

Traditionally, Latin American governments have paid for all or part of the cost of public services like electricity, gas, water, fuel, telephone calls or university education. And they have paid regardless of who uses those services, or of the purchasing power of the user.

Over time these “universal” subsidies were viewed as a mechanism to expand or maintain the middle classes — and thus became politically untouchable. But nobody really knew what share of each subsidy was benefiting which class, or how efficiently these services were being used. Since the services came as a gift from the state, there was little incentive to close the water tap, turn off the light or graduate on time.

Fortunately, during the past decade the quality of Latin American statistics has improved. It is now possible to estimate how much of each subsidy goes to whom. For instance, we now know that some Latin American countries spend more on fuel subsidies for their rich citizens than what they spend on social assistance programs for the poor.

Some countries invest more in free college education for well-off students than in public health. Others spend more on heating houses in wealthy districts than on creating jobs in shantytowns. And others subsidize airplane tickets, not a common means of transport among the destitute. The list goes on.

How much money is at stake? A lot. Latin America spends annually between 5 and 10 percent of its GDP in subsidies. It is no exaggeration to say that one-third of these subsidies is captured by the top quintile of the population — in other words, by the rich. That amount would be sufficient to at least triple the cash- transfer programs for the poor that have been successfully implemented in the region since the mid-1990s.

Compared to the developed world, Latin America has fewer means to stimulate its economy. Countries that had fiscal deficits before the crisis will now have a hard time borrowing to spend even more. Even those with surplus or accumulated “rainy day funds” may lack the institutional capacity to increase their actual investment spending fast enough.

Reducing taxes will have a limited impact given the high level of people working outside the regulated labor market in what is called the informal sector. And it does not seem advisable to ruin years of anti-inflationary efforts by allowing central banks to print money to fund the public treasury.

This is where the global crisis becomes an opportunity for Latin America. Due to their lack of credit and assets, the poor have unmet needs and use up every cent they get. On the other hand, the rich do not considerably reduce their consumption of public services when prices go up.

So, by redirecting subsidies toward the poorest households, we can increase total consumption in the economy. This is a matter of sound, countercyclical economic management, not just equity. And, of course, we can redirect subsidies without increasing total public spending or indebtedness.

Strangely enough, the financial turmoil has increased the political feasibility of that subsidy “focalization.” Who wouldn’t agree today that the rich should pay for the full cost of the power or fuel they use, if the resources were to be allocated to alleviate the suffering brought by the recession onto the most vulnerable?

Some of the region’s governments have already begun to dismantle their universal subsidies. With better and cheaper metering technology, they have been able to charge those who can pay, or to charge more to those who consume more. It is difficult to imagine a better time than now to expand measures such as these.

Marcelo M. Giugale is the World Bank’s director of economic policy and poverty reduction in Latin America and the Caribbean.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.