Given this insight, and based on our motivating example of Figure 1, a natural question arises: how much of the fall in the monetary poverty during the Golden Decade in LAC was permanent and how much was cyclical? As shown in Figure 1, emerging regions such as LAC made tremendous progress in terms of reducing monetary poverty during this period, with the headcount ratio for the 5.50-dollar poverty line falling by almost 20 percentage points (from 42.1 percent in 2003 to 23.4 percent in 2014). Needless to say, the relative importance of permanent versus cyclical reductions in poverty has critical implications for (i) assessing the long-lasting magnitude of the fall in poverty, and (ii) the public policies that may be put in place to deal with permanent versus cyclical falls in poverty.

To decompose the fall in monetary poverty between permanent and cyclical components, we follow the very influential methodology proposed in a seminal paper by Datt and Ravallion (1992). Using microdata from household surveys, Datt and Ravallion (1992) decompose the change in poverty between two points in time into (i) a “growth component” and (ii) a “redistribution component.” The growth component is identified as the change in monetary poverty between two years that would have occurred if the income of each household member had changed in the same proportion as the national mean income, keeping constant the shape of the income distribution (measured by the Lorenz curve). The redistribution component reflects the change in monetary poverty that would have occurred if the income distribution had changed as it did, but with no changes in mean income.<sup>18 19</sup> Applying Datt and Ravallion’s (1992) methodology to the period 1995-2010, Ferreira _et al._ (2013) show that monetary poverty – using a poverty line of 4 dollars a day (2005 PPP) – fell about 17 percentage points, of which 66 percent was due to the growth component and the remaining 34 percent to the redistribution component. In other words, the substantial increase in mean income in LAC was the main driving force behind the dramatic progress in poverty reduction, even though redistribution arguments still played an important role.<sup>20</sup> We obtain virtually identical figures after expanding the sample until 2017 and using the 5.50-dollar (2011 PPP) poverty line: a growth component of 67 percent and a redistribution component of 33 percent. This redistribution component is largely explained by the increase in social expenditure in most countries in the region, and the implementation or expansion of existent non-contributory social protection systems, such as the conditional cash transfer programs (López-Calva and Lustig, 2010; Gasparini and Cruces, 2010). The resources allocated to these programs increased as a percentage of GDP in the 2000s, as did the number of

> 18 We use a slightly different methodology from the one proposed by Datt and Ravallion (1992).  Following Gasparini _et al._ (2013) and Inchauste _et al._ (2014), we get rid of the problems of (i) whether to use the initial or end year as the reference period and (ii) how to interpret the residual change in poverty that is not accounted for, by computing the decomposition twice, alternating the reference period, and taking the average growth and redistribution effects.

19 One important limitation of this decomposition is that since growth, inequality, and poverty are jointly determined in general equilibrium, this approach cannot explain the fundamental factors behind poverty changes. However, it is very useful to illustrate the way incomes have changed and affected poverty. See Ferreira (2012) for further discussion.

> 20 In fact, the relative importance of the redistribution effect is much lower in other regions.  Alvaredo and Gasparini (2015) carry out this decomposition for developing countries by region, using the 2-dollar (2005 PPP) poverty line and find that, during the period 1999-2010, characterized by poverty alleviation in all regions in the world, the shares of growth and redistribution effects were, respectively, 99 and 1 percent for East Asia and Pacific, 91 and 9 percent for Europe and Central Asia, 67 and 33 for LAC, 79 and 21 for Middle East and North Africa, 91 and 9 for South Asia, and 100 and 0 for Sub-Saharan Africa.

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