Latin American and Caribbean (LAC) governments need to cushion the impact of the global financial crisis.

The tools to do so are limited, but among them is one particularly powerful tool that can boost both economic growth and social equity: shifting from subsidies for all, to subsidies for all the poor.

Traditionally, our governments have paid for all or part of utilities and services as varied as electricity, gas, water, fuel, telephone calls, or university fees. And they have paid regardless of who used these services or utilities or the purchasing power of these users. Over time, these 'universal' subsidies were viewed as a mechanism to expand the middle classes and so became politically untouchable.

Little incentive

But nobody really knew what share of each subsidy was benefitting which class. We even ignored how efficiently these services were being used; since it came as a gift from the government, there was little incentive to close the taps, turn the lights off or graduate early.

Fortunately, during the past 10 years, the quality of our statistics has improved. We now are able to estimate how much of each subsidy goes to whom.

For instance, we now know that some countries in the region spend more in fuel subsidies for rich citizens (emphasis on 'rich') than they spend in all their social security programmes.

Some countries invest more in free college education for well-off students than they allocate to public health. Others spend more resources for heating housing in wealthy districts than investing in job creation in shantytowns. And others subsidise airplane tickets, a means of transportation not exactly common among the destitute. And the list could go on and on.

How much money are we talking about? A lot. LAC spends annually between five and 10 per cent of its GDP in subsidies. We wouldn't be exaggerating if we said that one-third of these subsidies is captured by the top quintile of the population, in other words, by the rich. The amount would be sufficient to at least triple the direct transfer programmes for the poor that have been successfully imple-mented in the region during the past decade.

Crisis as opportunity

In 2009, Latin America and the Caribbean will move from a period of expansion to another of adjustment. While growth will slow down, unemployment rates and the risk of rising poverty will increase.

And there will be fewer public resources to face increasing social needs. It is understandable, then, that our governments are looking for ways to cushion the impact of this crisis and to 'revitalise' their economies.

Unlike the developed world, LAC has fewer resources to boost its economy.

Investment spending

Countries with fiscal deficits before the crisis will hardly find resources to spend more. Even those with surplus or accrued funds - except for a few special cases - can lack the institutional capacity to increase their investment spending fast enough.

Reducing taxes will have a limited impact, given the high levels of informality. And it doesn't seem advisable to ruin years of anti-inflationary efforts by allowing our central banks to print money to fund the public treasury.

This is where the global crisis becomes an opportunity for Latin America and the Caribbean. Targeting subsidies to the poorest households is not only a matter of equity but also of sound economic management. The reason for this is, due to their lack of credit and assets, the poor have unmet needs and use every cent they get.

On the other hand, the rich will not considerably reduce their consumption if the prices they pay for utilities increase. The point is to change the target population of public spending without increasing total spending or indebtedness.

Strangely enough, the financial turmoil has increased the political feasibility of targeting. Who wouldn't agree today that the rich should pay for the power or fuel they use if the resources were to be allocated to alleviate the suffering of the most vulnerable? In fact, 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 increase the rates for those who consume more. If this is not the right moment to expand these measures, we will hardly find a better one.

Marcelo Giugale is the World Bank Poverty Reduction and Economic Management Director for Latin America and the Caribbean. acedeno@worldbank.org