Transcript Crises and the Poor: Revisiting Socially Responsible Macroeconomics Nora Lustig Samuel Z. Stone Professor of Latin American Economics, Tulane University Non-resident Fellow Center for Global.

Crises and the Poor: Revisiting
Socially Responsible
Macroeconomics
Nora Lustig
Samuel Z. Stone Professor of Latin American Economics, Tulane University
Non-resident Fellow Center for Global Development and Inter-American
Dialogue
Child Friendly Budgets for 2010 and Beyond:
Toward Global Economic Recovery with a Human Face
UNICEF and Fordham University
February 18, 2010
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UNICEF has been the champion of
protecting the poor, in particular poor
children, from the costs of crises and
adjustment.
 More than two decades ago, the
Pioneer Study Adjustment with a
Human Face by Cornia, Jolly and
Stewart, 1988, put the issue of social
costs of adjustment on the map.

Why focus on the impact of economic
downturns on poverty?

Direct impact on household and individual welfare


Indirect impact on household and individual welfare
through the effect that a deterioration of human capital
has on lifelong earnings


=> Transitory poverty.
=> Chronic poverty.
If the effect is large enough, lower human capital can
have a negative impact on overall economic growth
and poverty rates in the future

=>Growth.
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Outline

Crises are recurrent.

Impact of crises on poverty and social
indicators/human capital: what have we learned
from previous economic downturns?

Ingredients of a pro-poor crisis response.
 Transmission mechanisms.
 Characteristics of macroeconomic policy mix.
 Composition of government spending and
revenues.
 Adequacy of safety nets.
4
Recurrence of crises
5
6
Economic Downturns and Social
Indicators: What have we learnt from
past episodes?

Descriptive studies

Econometric analysis
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Descriptive Studies

Roberto Macedo’s analysis for Brazil in the late 1980s
found:



seasonally adjusted IMR increased from 65/1000 to 73/1000 in
the first part of the 1980s. The main cause: the sharp
deterioration in wages and earnings of that period
in particular, percentage of infant deaths due to malnutrition
increased starting in 1982 and the proportion of infant deaths
due to infectious and parasitic diseases and respiratory
disease rose in 1984
hospital-based data shows that infants with low birth weight
increased between 1980 and 1983
Subsequent descriptive studies also found a
negative impact on human development
(Lustig, ed., 1995)



Average IMR continued to fall during the 1980s in the
countries included in the study (Argentina, Brazil, Chile,
Mexico, Peru and Venezuela) but, with the exception of Chile,
at a slower rate than in the previous decade
In Mexico, infant and child mortality due to nutritional
deficiencies increased, reversing a trend observed during the
previous decades
In Chile, low weight at birth and malnutrition increased
during some of the years depending on overall economic
performance
Subsequent descriptive studies also found a
negative impact on human development
(Lustig, ed., 1995)


In Venezuela, literacy for the 15-19 yrs. Cohort fell
between 1981 and 1990
In Mexico, the enrollment rate in the first year of
primary school was lower and the proportion of
students moving to post-secondary school after
completing secondary school fell
Descriptive studies find a negative impact on
social indicators/human capital, WDR 2000/1
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Ec o n o m ic D o w n tu rn s a n d H e a lth a n d N u tritio n : E c o n o m e tric E v id e n c e
V ariable
S hock
Infant
M ortality
R ate
1988 -1992
P eruvian
econom ic crisis
Infant
M ortality
R ate
C hild
M alnutrition
Infant
M ortality
R ate
E ffect
D ata
F indings
A uthor
+
P eru - D H S
and L S M S
Increased IM R of 2.5 percentage
points for children born during
the crisis, w hich translated into
17,000 child deaths in excess.
Indonesia’s
1997/1998
financial crisis
1990’s crisis in
C am eroon,
+
IF L S
+
DHS
Increased infant m ortality risks
by about 3.2 percentage points
both in rural and urban areas.
P revalence of m alnutrition for
children under three years
increased from 16% to 23%
betw een 1991 and 1998; it w as
higher for children of low
socioeconom ic status and those
from rural areas.
P axson
and
S chady
(2005), W orld
B ank
E c.
R eview
R ukum nu aykit
(2003)
GDP
fluctuations
+
D H S and
W B of 59
developing
countries
(1975-2004)
A one-unit decrease in log G D P
is associated w ith an increase in
m ortality of betw een 18 and 44
infants per 1,000 children born,
w ith fem ale infant m ortality
being m ore sensitive than m ale.
P ongou,
S alom on and
E zzati (2005)
S arah B aird;
Jed F riedm an;
N orbert
S chady
(2007), W orld
B ank
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Higher Food Prices and Health and
Nutrition: Econometric Evidence

JAMAICA (1991), Datt and Hoogeveen (2003)
found that in the aftermath of the liberalization
of the exchange rate:


poor children weighed significantly less than
comparable children a few months later
the elasticity of weight for height with respect to
food price inflation was very high => significant
impact on nutritional status resulting from higher
food prices

Empirical evidence on the negative impact
of economic downturns on health and
nutrition is robust.

For education, evidence is more mixed.
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Economic Downturns and Education: Econometric
Evidence
Skoufias (2003) World Development, Special Issue



Jacoby and Skoufias (1997) find that school attendance
of poor children in rural areas decreases in India
during downturns
Duryea (1998) and Skoufias and Parker (2002) find
similar negative effects for Brazil and Mexico,
respectively
Flug, Spilimbergo and Wachtenheim (1998) find a
significant negative correlation between income
volatility and secondary school enrollment
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However…

McKenzie (2003) finds that high school enrollments
increased during crisis.

Duryea and Arends-Kuenning (2003) find that the
probability to attend school is negatively correlated with
wage rates in urban Brazil.

Schady (2004) finds no effect on school attendance and
higher number of grades completed for those exposed to
the crisis in Peru and that the crisis lowers the opportunity
cost of school.
=> Impact on school enrollments and attendance can go
either way depending which effect dominates: income or
substitution effect.
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
Transmission Mechanisms
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Transmission Mechanisms
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Pro-poor Crisis Response
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Pro-poor Crisis Response
 Characteristics
of macroeconomic
policy mix: fiscal, monetary and
exchange rate rules.
 Composition of government
spending and revenue.
 Adequacy of safety nets.
20
Sources:



Nora Lustig (2010) “Protecting Latin America’s
Poor During Economic Crises,” Policy Brief No.
2, Inter-American Dialogue, Washington, DC,
February.
Nora Lustig (2000) “Crises and the Poor: Socially
Responsible Macroeconomics,” Economia.
Journal of the Latin American and Caribbean
Association, Fall.
World Bank (2000/1) Attacking Poverty, World
Development Report, Chapter 9.
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Macroeconomic Policy Mix
22
23
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Macroeconomic Policy Mix when
Adjustment is Inevitable

Trade-offs:
 Unemployment/Output contraction
and reducing inflation.
 Short and sharp vs. smaller
contraction with more gradual
recovery. Poor may prefer the latter.
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Macroeconomic Policy Mix

Role of Multilateral Financial Institutions:
 First and foremost, provide resources to
expand the policy space for countercyclical fiscal and/or monetary measures.
 Provide assistance in policy response
design, including an assessment of tradeoffs and the impact of alternative courses
of action on the poor.
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Composition of Government
Spending and Revenues
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Composition of Fiscal Policy

In practice, fiscal cuts are frequently
not pro-poor because of:
 Lack of adequate information.


Need for up-to-date public expenditure
reviews.
Political economy factors.
 Could introduce “triage” rules –i.e.,
which spending items will be
protected--during budgetary
process.
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Safety Nets

Safety nets are important because they can:



play a crucial role in reducing the impact of crises
on the poor
help avoid irreversible damage to poor households’
human capital
can compensate the poor for the welfare losses
stemming from adjustment policies
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Safety Nets

Safety nets should include a wide range of programs:


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






public works
emergency employment programs
unemployment insurance
cash transfers
tax rebates
food-related transfers
food subsidies
scholarships for poor children
social funds
fee waivers for essential services
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Safety Nets
Warning:

Social programs that focus on long-term development
such as Conditional Cash Transfers are not the best
tool to protect the poor from the impact of shocks such
as an economic crisis.

Large infrastructure projects may be less effective to
combat unemployment because they are not labor
intensive and take time to be put in place.
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Safety Nets

Most developing countries lack effective safety nets
that protect poor people from the output, employment,
and price risks associated with systemic adverse
shocks.

When these mechanisms are not in place before a
crisis occurs, policymakers are often forced to
improvise or to use programs designed for other
purposes and other beneficiaries.
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Safety Nets in Low and Middle-Income
Countries
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53
37
31
29
24
21
20
16
12
LOW INCOME
MIDDLE INCOME
School feeding
Food ration/stamp
Food for Work
Cash Transfer
School feeding
Food ration/stamp
Food for Work
Cash Transfer
8
School feeding
Food ration/stamp
Food for Work
Cash Transfer
8
TOTAL
Source: Author’s construction with information from the World Bank (2008d) and expanded with ADB (2008) and World Bank (2008e).
Income classification data from the World Bank. The World Bank classifies 49 countries as low-income and 95 as middle-income; in the graph 39
are those countries that implemented one or more programs (30 low income and 46 middle income countries ).
Safety Nets

International organizations should help
countries design safety net programs and find
the fiscal space to fund them.

For countries too poor to fund safety net
programs, MFIs can provide concessional
financing.
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Summing up
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