Crises and the Poor: Revisiting Socially Responsible Macroeconomics

1. 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

2. 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.

3. Why focus on the impact of economic downturns on poverty? • Direct impact on household and individual welfare • => Transitory poverty. • Indirect impact on household and individual welfare through the effect that a deterioration of human capital has on lifelong earnings • => 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.

4. 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.

5. Recurrence of crises

7. Economic Downturns and Social Indicators: What have we learnt from past episodes? • Descriptive studies • Econometric analysis

8. Descriptive Studies • Roberto Macedo’sanalysis 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

9. 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

10. 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

11. Descriptive studies find a negative impact on social indicators/human capital, WDR 2000/1

13. 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

14. Empirical evidence on the negative impact of economic downturns on health and nutrition is robust. • For education, evidence is more mixed.

15. 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

16. 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.

17. Transmission Mechanisms

18. Transmission Mechanisms

19. Pro-poor Crisis Response

20. 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.

21. 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.

22. Macroeconomic Policy Mix

25. 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.

27. Macroeconomic Policy Mix • Role of Multilateral Financial Institutions: • First and foremost, provide resources to expand the policy space for counter-cyclical fiscal and/or monetary measures. • Provide assistance in policy response design, including an assessment of trade-offs and the impact of alternative courses of action on the poor.

28. Composition of Government Spending and Revenues

32. 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.

33. 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

34. Safety Nets • Safety nets should include a wide range of programs: • 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

35. 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.

38. 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.

39. Safety Nets in Low and Middle-Income Countries 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 are those countries that implemented one or more programs (30 low income and 46 middle income countries ).

40. 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.

41. Summing up