Introduction Countries in Latin America continue to struggle to share the benefits of economic growth with the poor segments of their population. The progress towards achieving the first Millennium Development Goal of eradicating extreme poverty by 2015 is still far from being achieved in most Latin American countries. Another feature common in many countries in the region is geographic disparities in living standards that persist over time in spite of overall economic growth.

A better understanding of which factors influence disparities in living standards is crucial to provide better guidance to poverty reduction strategies. Two opposing views present divergent explanations on which factors are likely to influence the spatial distribution of poverty. The “concentration view” holds that poor areas arise from the persistent concentration in these areas of individuals with personal attributes that inhibit growth in their living standards. According to this view, otherwise identical individuals will have the same growth prospects independently of where they live. Thus, geography does not play a causal role in explaining the level of and growth in living standards. The other view holds that “geography” itself is the cause of the high level of poverty and weak growth of living standards over time. In areas better endowed with local public goods, such as better access to infrastructure and other basic services (electricity, water and sanitation), geographic externalities may facilitate the exit of poor households from poverty. This paper provides an applied framework to analyze which of these two views better explains spatial disparities in poverty in Ecuador.

Ecuador is located in northwestern South America, with an ethnically diverse population comprised of _mestizos_ (62 percent), Amerindians (25 percent), immigrants from European countries as well as unmixed descendants of early Spanish colonist (10 percent) and Afro-Ecuadorians (3 percent). The population of over 13,750,000 people (in 2008) is growing at a rate of 1.1 percent per year,<sup>1</sup> and one of every four Ecuadorians is between 15 and 29 years old. Nearly 60 percent of its population lives in urban areas and the rest in the rural sector. Ecuador’s economy depends heavily on oil exports, which accounts for an average of 35 percent of GDP (1997-2001). In the past three decades, GDP per capita growth has been low, at an average of 1.7 percent annually during 1970-2002. GDP volatility has been high, mainly as a consequence of external shocks such as downturns in commodity prices, as well as unstable fiscal policy. At the end of 1999 Ecuador faced a severe economic crisis due to several factors: external economic shocks, “El Niño” weather phenomenon (1997) and poor economic management. The economy recovered after the 1999 crisis, with GDP per capita rising to 2.1, 6.5 and 4.5 percent in 2003, 2004 and 2005, respectively. Average inflation fell from an annual rate of 52.2 percent in 1999 to 7.9 percent in 2003, 2.7 percent in 2004 and 2.1 percent in 2005.<sup>2</sup> Poverty and inequality remain a major concern for Ecuador. According to the World Bank’s Poverty Assessment for Ecuador (2004), poverty increased from 40 percent in 1990 to 45 percent in 2001 (mainly as a consequence of the 1999 crisis), and fell to around 36 percent between 2001 and 2004 (mainly as a consequence of macroeconomic stabilization). While poverty declined in both urban and rural areas, in 2004 the rural poverty rate was still more than twice the urban poverty rate.

With these differences in mind, the goal of this paper is to evaluate how much of the difference in standards for living across areas and regions in Ecuador can be attributed to disparities in the mobile nongeographic variables, and how much to location differences in the returns to those characteristics. The paper follows closely the methodological framework of Ravallion and Wodon (1999), in which they propose a methodology for decomposing the differentials in living standards between geographical areas into: a) differences in non-geographic characteristics and b) differences in returns to those characteristics.

> 1 World Development Indicators database, April 2008.

> 2 Idem.

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