A quarterly magazine of the IMF

December 2005, Volume 42, Number 4

People in Economics

Economics with a Social Face

Conny Lotze interviews development economist Nora Lustig, long-time advocate of employing social policies in the battle against poverty

Economics, long known as the dismal science, usually examines issues with clinical detachment. But Nora Lustig has spent her career trying to give it a conscience. She has been in the vanguard of development economists who not only insisted on the link between poverty reduction and macroeconomic policy but also advocated well-targeted social policies to help the poor break out of poverty for good. For a long time, "there was a sense that poverty reduction had to be done through growth, which seemed to imply that policy measures that aimed directly at poverty reduction weren't as important," she tells F&D. "But I think that we have shown that both are very important. If you want to reduce poverty more quickly with growth, you need policies that have a very profound impact on equalizing opportunities in many respects."

Lustig's curiosity about the causes of inequality and poverty and her drive to find solutions have been at the core of her work, which she has undertaken in academia, think tanks, and as an advisor to policymakers. Meticulous in her use of empirical data, she is credited with injecting a somber and scientific note into the often ideologically charged development debate in Latin America. "Lustig is unusual in that she is one of the few academics who has managed to be involved in both Latin American policy work, particularly in Mexico, and the Washington academic and multilateral organization world," says Andres Velasco, Professor for International Finance and Development at Harvard. "She brought perspective to the latter and rigor and discipline to the former." Lustig relentlessly pushed to include analysis of the effects of such factors as income distribution, education, and health care in the debate on overall economic development, which was dominated by macroeconomic concerns. She broke ground in 1999 with the concept of "socially responsible macroeconomics"—a call for policies that protect the poor during times of crisis and simultaneously help lower chronic poverty.

After the emerging market crises of the 1990s, the message sunk in, and multilateral agencies and developed countries realized that the process of eradicating poverty and achieving sustained development had to involve the poor as active participants. "It has to do with human behavior, and with the need to empower the poor to gain access to economic development," Lustig explains. Poverty reduction now tops the world's economic agenda. Just 15 years ago, Lustig points out, poverty was not even peripherally discussed at the Group of Seven industrial country summits. Now, in contrast, the world's economic movers and shakers are actively exploring innovative ways to aid poor people—such as investing in early childhood development, educating women, and promoting microfinance—all topics dear to Lustig's heart.

Yearning to question

Born in Buenos Aires, Lustig was the child of Austrian immigrants who had fled anti-Semitism in pre–World War II Europe. Although her parents worked hard, her father as a watchmaker and her mother as a bookkeeper, they found it difficult to break out of the lower-middle-class mold, given Argentina's economic instability in the 1960s. That, coupled with latent anti-Semitism, prompted the family to move to the United States in the late 1960s, settling in the San Francisco Bay area. Lustig enrolled in Oakland's Merritt Junior College, a primarily African-American community college famous for being the birthplace of the Black Panther movement. After qualifying for in-state tuition, she transferred to the University of California at Berkeley, where she obtained her Bachelor's and Ph.D. in economics. During Lustig's first years, Berkeley and other university campuses in the United States were gripped by student protest against the Vietnam war and support for the civil rights struggle.

But political activism was not her calling. Instead Lustig focused on examining the economic disparities within and across countries through academic research. Her thesis advisor, Albert Fishlow, now at Columbia University, recalls that "her principal focus was always on having an empirical basis for economic policy. She wanted to have the facts." In her dissertation, she used empirical verification to test hypotheses by Latin American economists about the effect of inequality on growth. Examining the relationship between income distribution, consumption, and growth in Mexico, she found that general conclusions could not be drawn. It taught her the importance of never ceasing to query. "Science requires us to always question what you've discovered today in case the evidence will suggest something different tomorrow," she says.

Her research took place at a time when most Latin American economies were relatively closed, and state intervention was rampant. Economic thinking was somewhat paralyzed by the political polarization associated with the Cold War. While U.S. universities kept close to the mainstream economic theory promoting free-market principles, many Latin American universities were inclined to Marxist/Socialist concepts. This was frustrating at times, she says, because it stifled constructive debate. Only with the end of the Cold War did views begin to merge into the broad consensus that changes in inequality and poverty would come through reforms, not revolution. "The fall of the Berlin Wall greatly benefited the field of economics," she says, "because people opened their minds and accepted that there may be more than a single route to economic development."

Learning from Mexico

While completing her dissertation in 1979, Lustig taught economics for 14 years at the prestigious Colegio de Mexico, where she had moved with her husband, a Mexican economist, whom she had met at Berkeley. She was still teaching when the 1982 debt crisis hit, seeing first-hand the impact on the poor. Struck by the Mexican government's scaling back of a pro-poor program that had already been very small to begin with, Lustig took a closer look at the social impact of crises and economic policies. She summarized her findings in the book Mexico: The Remaking of an Economy, which she published in 1992 while she was a Senior Fellow at the Brookings Institution. The book, which won the 1994 Outstanding Book Award from Choice magazine, a U.S.-based academic journal, examined Mexico's outward-oriented development strategy and its effects on poverty and inequality. It was published at the height of what was called "Mexico-optimism" when Mexico was viewed as the model reformer among developing countries. Although upbeat about Mexico's economic prospects, Lustig did not share the euphoria, which came to an abrupt halt with the 1994/95 peso crisis.

Despite an unprecedented rescue package of more than $50 billion, which included $20 billion from the United States and $17.8 billion from the IMF, Mexico was unable to avoid its largest recession since the 1930s. In the 1998 update of her book, Lustig wrote that although it was hard to quantify the recession's impact on the poor for lack of direct information, several indicators suggested that it must have been severe, which was subsequently corroborated by the sharp rise in the incidence of poverty between 1994 and 1996. Mexico did not have adequate mechanisms in place to cope with the sharp rise in unemployment and steep drop in wages. The biggest losers in a crisis are always the poor, she says. "The most common reason for large increases in poverty in the short term is economic crisis."

Lustig realized then that the effect of a sharp rise in poverty on long-term growth had been grossly underestimated, if not entirely neglected, because economic policies had focused mainly on macroeconomic stabilization and paid little attention to social factors. But, she insists, it is important to include them in policy considerations. An economic crisis like the one in Mexico forces poor people to decimate their already small financial, physical, and human assets, and thus traps them at an even lower level of income, and further reduces their chances of contributing to the country's economic growth. "If children are being pulled out of school, or babies do not receive the right nutrition because the mothers don't have access to it, they have a slimmer chance of advancing later in life and becoming productive participants in the economy."

Her research and writings became mandatory reading for a new generation of Latin American economists, who were drawn to her resolute advocacy of pursuing macroeconomic stability while seeking intelligently designed social policies. "What appealed to students like me was that she tackled the issues in a very serious way," says Luis Felipe Lopez Calva, Economics Professor at Mexico's Tecnológico de Monterrey and Director for the UN's biannual Mexican Human Development Report. "In Mexico, more people in economics are working on poverty and inequality issues using rigorous methodologies because of her." Indeed, because of her thorough analytical approach, Lustig was able to breach the intellectual divide between different schools of thought on economic development and bring together researchers and practitioners (see Box 1). "She has a lot of good ideas and she puts them into action," says Lopez. "She aims quite high, but she always delivers." Lustig also sits on the Boards of Directors of the World Institute on Development Economics Research, the Center for Global Development, and the Earth Institute. She has served on various commissions, including the World Health Organization's Commission on Macroeconomics and Health, and she now presides over the Mexican Commission on Macroeconomics and Health.

Champion for safety nets

When Lustig joined the Inter-American Development Bank (IDB) in 1998 as Senior Advisor on Poverty and head of the newly created Poverty and Inequality Advisory Unit, she built on the Mexican experience to draw attention to the importance of well-targeted safety nets in the face of systemic shocks. She argued that adequate safety nets need to be in place before the advent of shocks—macroeconomic crises, large-scale natural disasters, or widespread disease—and before the negative effects of profound structural reforms, such as trade liberalization, affect poor producers who cannot compete in the short run. "Protecting the poor from sharp income falls with efficient and properly funded safety nets is not only equity-enhancing, it also promotes growth," she says. The impact of crises on child malnutrition and school attendance can be long-lasting. A pro-poor response to crises should be an integral part of a country's poverty reduction strategy. "On poverty issues, Nora was ahead of the game. She was the first to pay attention to the safety net issues," says Nancy Birdsall, president of the Center for Global Development.

Lustig believes that to remain effective in the long term, these social programs have to be part of the established institutional framework, adjusting to economic circumstances when necessary. "Safety nets should be flexible, and the allocation of public resources to programs targeted at the poor should be countercyclical." In other words, during times of broad-based economic growth that benefits a majority of the population, social programs can be scaled down, but during times of economic distress, they should be expanded to prevent poverty from rising. For example, employment programs have been applied in some countries on a regional basis, she says, citing a renowned rural employment program in India that is activated when crops fail. But Lustig is impartial as to the shape and form of such programs (see Box 2).

To learn which types and components of social programs work, their impact needs to be evaluated rigorously and empirically, Lustig insists. But reliable data on factors that help measure and diagnose poverty—such as income, education, gender, employment, demographics, and location—have long been sparse in Latin America. For that reason, one of her key projects at the IDB was trying to improve the quality of household surveys on income and living conditions within the region. She pursued impact evaluations of poverty reduction programs within the IDB's lending operations and initiated multiyear studies on social protection systems, labor market regulations, and other public programs. "She was the architect of the work on poverty," says Birdsall, then the IDB's Executive Vice President. Out of this work also grew a project with the World Bank on income distribution in three East Asian and four Latin American countries, which culminated in the 2005 book The Microeconomics of Income Distribution Dynamics, edited by François Bourguignon, Francisco Ferreira, and Lustig. With more household survey data for developing countries available and better tools to analyze them, the book explored how and why income distribution changes over long periods of economic development.

Attacking poverty

While at the IDB, Lustig was tapped by the World Bank to be deputy director for the 2000/01 World Development Report (WDR) on poverty. When the project became shrouded in controversy and lead author Ravi Kanbur resigned before publication, Lustig was asked to take over. Concerns had been raised about the analytical underpinnings of the early drafts of the report and its overall message, which was seen in some quarters as potentially too critical of IMF– and World Bank–sponsored structural adjustment policies, with too little emphasis placed on growth. Lustig countered the apprehension by circulating the final draft to a broad range of international experts of diverse views for comment. The final report, entitled "Attacking Poverty," urged a broader, more comprehensive approach to poverty reduction by tackling inequalities directly through greater economic opportunity, empowerment, and security. Despite the controversy, Lustig "stuck to her guns under a lot of pressure and very little time," says Birdsall, achieving what had been envisioned by the team from the very beginning: to emphasize empowerment and the reduction of inequalities as an essential part of a poverty reduction strategy. Reaction to the report from all sides was broadly positive, and Oxfam called it "a flagship document that the World Bank can be proud of."

Lustig says that by emphasizing the concept of empowerment, the WDR made clear that poverty reduction could not be treated as social engineering. "The WDR brought to center stage the institutions and rules of the game in the world system as part of the poverty reduction agenda." The 2006 WDR on equity and development advances this notion further, arguing that policies that level the economic playing field can be successful only if accompanied by similar efforts to level the domestic political playing field. Lustig wholeheartedly agrees, noting that "change will have to come through the political process and more democratization." But she adds that in Latin America so far, "the countries' elites have not done their share to change the rules of the game."

Coming full circle

After Washington and a four-year stint as president of Mexico's prestigious Universidad de las Americas in Puebla, Lustig recently returned full-time to academia. In September 2005, she launched the Study Center on Globalization and Development at one of Mexico's top private universities, the Tecnológico de Monterrey. As its director, Lustig is emphasizing those elements that have characterized her own career: encouraging empirical study and analysis; sharing knowledge and exchanging ideas; and bringing together opinion leaders and policymakers.

She plans to disseminate a newsletter throughout Latin America. And she wants to help small producers gain access to global markets by teaming up grassroots organizations and other groups, including the university's business school and local governments. She calls this "making globalization work for the poor." Lustig intends to maintain close ties to Mexico's political scene, and as the foremost economist on poverty issues in Mexico, her advice is sought by a wide range of political players. Her spare time is saved for friends and family—her son and daughter are in college––and dabbling in semi-abstract oil painting.

With the battle against poverty now at the top of the world's agenda, Lustig is looking forward to fully engaging in the debate again. She says the consensus underlying the Millennium Development Goals is a good incentive for governments to implement the appropriate policies. She is pleased that the debate has reached a point where "people are not repeating mantras anymore," but instead are focusing on the systemic problems that keep the poor and disadvantaged from advancing economically and the economies from realizing their full potential.