Although the progress toward poverty reduction remains sluggish, other dimensions of social welfare in the Latin American and Caribbean (LAC) region show signs of improvement. Adult literacy and school enrollment rates, life expectancy at birth, access to safe water, and nutrition indicators are improving. However, other factors demonstrate that many problems persist, especially the inequality between rich and poor. This report analyzes the evolution of poverty and inequality in the LAC region from 1986 to 1996 with projections to 1998. It reviews the policies which have been advocated or implemented to reduce poverty. The report combines: (1) the results of new empirical work using household surveys from 12 countries (Argentina, Bolivia, Brazil, Chile, Colombia, Dominican Republic, Ecuador, Honduras, Mexico, Paraguay, Uruguay, and Republica Bolivariana de Venezuela); (2) short theoretical developments, some of which introduce new research techniques; and (3) a review of the literature on issues related to poverty, inequality, and social policy in LAC. Chapters three through six follow the framework proposed in the forthcoming World Development Report 2000-2001. The framework identifies three essential elements for poverty reduction: (1) opportunities for the poor and investments in the human capital of the poor; (2) security through social safety nets; and (3) empowerment. Contains extensive tables and figures and 213 references. (BT)