Transitory Shocks, Permanent Effects: Impact of the Economic Crisis on the Well-Being of Households in Latin America an

1. Transitory Shocks, Permanent Effects: Impact of the Economic Crisis on the Well-Being of Households in Latin America and the Caribbean Almudena Fernandez Luis Felipe Lopez-Calva UNDP Regional Bureau for Latin America and the Caribbean London, 9 November 2009

2. Content • Objective • Conceptual Framework • Methodology • Empirical Evidence • Final Remarks

3. Objective • Results from the project The Effects of the Economic Crisis on Household’s Well-being in Latin America and the Caribbean conducted by UNDP’s Regional Bureau for Latin America and the Caribbean. • Aims to understand how transitory macroeconomic downturns have permanent effects on households’ well-being in Latin America and the Caribbean, as measured by various social indicators. • Developed a methodology to measure the effects of past crises on health, education and poverty and hired local teams to implement it in five countries

4. Conceptual Framework • Crises affect the well-being of households in the long-term depending on how they affect their stock or accumulations of income-generating assets1. • Economic crises can: • decrease the stock of income-generating assets held by households (using savings, selling physical assets); • decrease the rate at which assets are used (unemployment); • decrease the market value of assets (wages, prices); • affect the accumulation of income-generating assets for future generations (education, health). 1Attanasio, Orazio and Miguel Szekely (1999)

5. Conceptual Framework II • How much households choose to reduce their income-generating assets depends on1: • Income effects • Substitution effects • Heterogeneity according to household characteristics • Which of these effects dominates determines the extent to which households forgo future consumption vis-á-vis current consumption. 1 Ferreira, F. and N. Schady (2008)

6. Methodology • The empirical analysis was conducted using data from past crises, and various methodologies: • difference-in-difference • fixed effects • instrumental variables • “Economic crisis” were defined as an aggregate negative economic shock characterized by a sharp decline of the GDP per capita. • Outcomes of interest: health, education, and poverty and which is studied in each country depends on the availability of data at the country level.

7. Empirical Evidence: Poverty

8. A look at the data hints at poverty increases during economic downturns. Poverty and GDP Per Capital in LAC Evolution of Poverty in Argentina

10. Empirical Evidence: Health

13. Empirical Evidence: Education

15. Summary of Results 1 Using lagged growth rates 2 Using prenatal care as proxy Entries in red are statistically significant.

16. Final Remarks • Economic downturns have significant impacts in long-term households’ well-being. • In all countries studied, economic downturns have a negative impact on child mortality or child health. • For those countries in which the effects of the crises on poverty are examined, there is also strong evidence that recessions are associated with increases in child and overall poverty. • Results on education are ambiguous.

17. Policies to mitigate the effects of crises should move beyond programs to establish a comprehensive social protection system that protects the income of households during economic downturns. • Maintain or expand the provision of public services, mainly education and health • Provide incentives that prevent reversals in asset accumulation in order to reduce the vulnerability of households’ well-being to temporary shocks.

18. Transitory Shocks, Permanent Effects: Impact of the Economic Crisis on the Well-Being of Households in Latin America and the Caribbean Almudena Fernandez Luis Felipe Lopez-Calva London, 9 November 2009