Inter-American Development Bank Office of the Chief Economist Working Paper 342 Washington D.C. POLICY OPTIONS FOR POVERTY ALLEVIATION

This work builds on previous research to develop some methodology that simplifies the identification of the best policy options for poverty alleviation in a given country. The argument we develop is that when a population can be divided into subgroups according to an easily identifiable characteristic, the problem of alleviating poverty through a targeted mechanism can be viewed as one of choosing among three options: (i) provoking a marginal change in the average income of certain subgroups; (ii) changing the distribution of resources within subgroups in the margin; and (iii) generating a marginal change in the differences between the subgroups. To asses the impact of each possibility we derive a formula that measures the elasticity of a poverty index to changes in the level and distribution of income, and argue that the between-group elasticity is an indicator of the potential of using one characteristic rather than another. This indicator simplifies the ranking of characteristics in terms of their usefulness for guiding resource allocation, and provides a broad picture of the options that policy makers have at hand. To illustrate the usefulness of the methodology, we will apply it to recent data from Mexico. JEL Classification: I3, O54, D63, O2