Protecting the poor from the current crisis

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Protecting the poor from the current crisis

• Hassan Zaman
• The World Bank
• IFPRI/Cornell Symposium
• April 24th, 2009
• (several slides derived from earlier joint
  presentation with M. Grosh for a technical
  briefing to the World Bank Board on April 21st,
  2009)

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Current crisis transmitting macro shocks to
households impacts

• Falling export demand / commodity prices / FDI ?
  rising unemployment and falling real wages
• Copper mines closures in Zambia and Mongolia
• 25 million jobs lost in China alone
• Indonesia 1998 crisis led to 20-30 fall in real
  wages
• Lower remittances ? falling incomes
• Clear slowdown (5-8 decline projected for 2009)
• Credit crunch ?negative wealth effect
  (especially ECA)
• Fiscal squeeze on essential public services when
  people switching away from private providers and
  greater need for safety net spending

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All of which adds up to more people living in
poverty

• Growth slowdown means 53 million fewer people
  will escape poverty in the developing world at
  the 1.25/day line (65 more million people at the
  2/day line)
• In Sub-Saharan Africa the growth slowdown
  essentially eliminates all progress in reducing
  the number of poor between 2008 and 2009
• In Europe and Central Asia region, larger growth
  slowdowns may lead to actual increases in the
  poverty rate of 0.5 to 2 percentage points,
  depending on the severity of the negative growth
  scenario
• Bulgaria increase of 0.5 to 1.1 percentage
  points
• Turkey increase of 1.5 percentage points

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...and to worsening MDG outcomes
Progress towards MDGs --- all developing
countries

• Developing countries already lagging on MDGs
  before crisis
• Earlier crises had significant negative impacts
  on infant mortality especially that of girls
  infant deaths may be 200,000-400,000 per year
  higher between 2009 and 2015 than in absence of
  crisis
• Evidence on impact of crises on schooling more
  ambiguous and will vary across countries
  depending on incomes

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Impacts reinforced, or sometimes, compensated by
food prices

• Current prices of key staples lower compared to
  last year in many countries, reflecting global
  trends e.g. Bangladesh, price of coarse rice
  almost half that of April 2008
• On the other hand for various reasons prices in
  several countries remains high (e.g. Chad, El
  Salvador, Tajikistan, Sudan)
• Household level impacts potentially most severe
  in the subset hit by economic crisis and
  continuing rise in food prices

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Safety nets are part of a larger policy menu

• Need to balance short-term objectives
• Sustaining aggregate demand (fiscal stimulus)
• Addressing declining private consumption
• Closing or reducing the output gap
• Mitigating crisis impacts
• Supporting/restoring the financial sector
• Assisting vulnerable groups (safety nets)
• While protecting medium-term growth and
  development goals
• Careful management of fiscal deficit
• Ensuring spending on health, education, and
  infrastructure and development of
  cost-effective and flexible safety net system

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Challenges for safety nets during a crisis

• Fiscal space is constrained and multiple
  pressures on budget
• Targeting
• Existing systems geared to chronic poor, who do
  need additional support during crisis
• Others (e.g. returning migrants, newly
  unemployed) may need help but are more difficult
  to target
• Time it takes time to build adequate
  administrative structures yet people need
  immediate response
• Strong political economy pressures to
  retain/expand various subsidies especially where
  targeted programs are small
• Institutions SSN programs are often spread
  throughout government, with no effective
  coordinating leadership

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Financing Social Safety Nets

• Well-designed system do not need to be expensive
• Mexicos Oportunidades cost only 0.4 of GDP
• But current levels of spending (average 1-2 of
  GDP) on social safety nets are insufficient to
  meet needs
• How should expansion of SP systems be financed?
• Often scope for consolidation of existing,
  fragmented programs (Brazil, Jamaica, and
  Argentina)
• Significant scope from moving from product
  subsidies to households transfers/CCTs (Mexico
  late 1990s, Indonesia 2004, and Philippines 2008)
• Political will to raise revenue and re-prioritize
  spending towards safety nets partly affected by
  whether safety nets linked to growth strategy
  (infrastructure creation/maintenance, human
  development)

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Spending on Safety Nets is Modest
Mean 1.7 of GDP median 1.4 of GDP (n72) For
1/2 of countries is about 1-2 of GDP
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Greater flexibility, less dogma

• Subsidies important to distinguish between
  universal subsidies which depress incentives and
  take up large share of budget vs. smaller
  subsidies targeted at vulnerable groups
• Cash vs. food transfers in principle cash more
  efficient and less prone to leakage. However,
  food, particularly fortified food, can lead to
  nutritional gains, so trade-off with governance
  issues ought to be recognized
• Yet mindful that actions today dont undermine
  medium term safety net goals

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Linking country-level quick diagnostics with
safety net response - Armenia
Poverty Trends and Projections of Extreme
Poverty, 20082010

• Poverty impact from lower growth, unemployment,
  lower wages, falling remittances and higher
  inflation (devaluation)
• Cumulative impact is 7 point increase in
  poverty (2007-09)
• Estimate to mitigate impact on very poor is 0.4
  of GDP (using increase in poverty gap)
• Options to mitigate impact include expanding the
  Family Benefit program (with improvements in
  targeting) and scaling up public works schemes

Poverty Gap due to the Economic Crisis (AMD MM),
2009
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Concluding thoughts

• Impact considerable and in some countries high
  food prices adding to economic crisis impact
• Rapid assessment of extent of impact and rough
  cost (e.g. Armenia) required in each country
• Safety net responses will require expenditure
  reallocations and likely external resources
• Second/third best policies/programs will often be
  used though in some cases crisis can be an
  opportunity for medium term development of the
  sector
• Linking safety nets with growth strategy
  important for medium term fiscal sustainability