The Crisis and the World’s Poorest

Research has shown that past crises have left lasting effects. A study of the longer-term impacts of the East Asia crisis found that about half of Indonesia’s poverty count in 2002 was attributable to the 1998 crisis even though macroeconomic recovery had been achieved well before 2002. Many of the actions poor families have to take to help protect their current living conditions have lasting consequences. Debts rise; key productive assets (such as livestock or land) are sold. And kids are taken out of school to save money and add to the family’s current earnings.

 

When poor families are compelled to cut short their children’s schooling in response to a shock, this creates a lasting impact on poverty since school drop-outs tend to earn less as adults. This impact will vary, depending on the extent of the shock and initial conditions. Declining wages make child labor relatively less attractive, and schooling more so; but, at the same time, lower parental incomes increase the value of the extra money that children can bring to the family budget if they work. The balance of these forces varies from place to place. There is evidence that in low income countries schooling tends to decline in a macroeconomic or agro-climatic crisis while in middle- and higher-income countries school attendance increases. Impacts on the nutritional status of young children in poor families are also of special concern, since poor nutrition in the early years of life retards child growth, cognitive and learning ability, schooling attainments and, in all likelihood, earnings in adulthood.

 

Expected impacts on aggregate poverty

Poverty counts require household surveys, which will not be available for some time. Given these lags, we must rely for now on projections. Before the crisis, the incidence of poverty in the developing was on a trend decline. The proportion of the developing world’s population living under $1.25 a day in 2005 prices fell from 52 percent in 1981 to 25 percent in 2005; that implies 500 million fewer poor by this standard (from 1.9 billion in 1981 to 1.4 billion in 2005).

This trend would have almost certainly continued in the absence of the crisis. To assess the impact of the crisis we need to estimate the difference between the expected level of poverty, given the crisis, and what we would have expected based on the pre-crisis trajectories.

The poverty impact of the crisis in a given country will depend on how it affects both average consumption and the distribution of consumption relative to the mean. The World Bank’s Development Prospects Group has made projections for average consumption at the country level after the crisis. These can be compared to the Bank’s pre-crisis projections to assess the expected impact of the crisis. At the time of writing (mid-June 2009), we expect the crisis to knock almost 5 percentage points off the consumption growth rate for 2009, bringing it down to zero. The effects on growth impacts will tend to be greater in less poor countries. (Eastern Europe and Central Asia figure prominently in this group). This pattern will help dampen the overall impact of the crisis on poverty.

What about the distributional effects within countries? Experience suggests that relative inequality falls about as often as it rises during aggregate economic contractions, with zero change on average. So the most defensible assumption for estimating the effect on aggregate poverty is that the burden of the crisis will be more-or-less proportional to initial income. However, while this is plausible in the aggregate, distributional impacts can be expected in individual countries, with inequality rising in some and falling in others.

Applying country-specific growth projections to survey based data and aggregating them, we estimate that the crisis will increase the 2009 count of people living below $1.25 a day by 50 million.  More than half of this increase is expected to be in South Asia; 10million will be added to the poverty count in East Asia and 7 million in Sub-Saharan Africa. Another 64 million will be added to the number of people living under $2 a day. Given the current growth projections for 2010, there will be a further increase in poverty in that year, with a cumulative increase of 89 million people living under $1.25 a day and 120 million more under $2 a day by 2010.

Of course, aggregate poverty measures cannot tell the whole story. There will also be impacts on non-income dimensions of welfare. Colleagues in the Bank’s research department estimate that the crisis will lead to 30-50,000 excess deaths amongst infants in Sub-Saharan Africa this year; these will be disproportionately girls.

Social policy responses

Crisis responses need to balance short-term relief against the need for rapid recovery. Restoring economic growth will be crucial to recovery for the world’s poorest. Protecting the poorest through social assistance need not entail a trade off against growth. Indeed, it can be argued that to help restore growth, domestic stimulus efforts and external assistance should favor poor people; and any required fiscal adjustments should minimize negative impacts on the poor. A pro-poor stimulus is likely to be more effective because poor people tend to be more financially constrained—notably due to credit market failures—and so are most likely to engage in rapid consumption or investment when extra cash becomes available.

However, experience has been mixed. Crises have given birth to some of the worst “social protection” policies, as well as some of the best. Governments have sometimes been drawn into introducing generalized food and fuel subsidies that have come at a huge fiscal and economic cost, are not easily reversed, and have had at best modest impact on poverty. Yet some developing countries have been able to turn a crisis into an opportunity for dismantling inefficient subsidies in favor of more effective safety-net programs.

Relief work (“workfare”) is likely to be an important element of an effective social policy response. But design is crucial: a well-designed workfare scheme has built-in features that encourage only those in need of help to seek out the program and encourage them to drop out of it when help is no longer needed given better options in the rest of the economy. A famous example is the Employment Guarantee Scheme (EGS) in Maharashtra, India, which started in the early 1970s in response to the threat of famine. The EGS aims to assure income support in rural areas by providing unskilled manual labor at low wages to anyone who wants it. The employment guarantee is a novel feature of the EGS, which helps support the social insurance function, and also helps empower poor people. In 2004, India introduced an ambitious national version of this scheme under the National Rural Employment Guarantee Act. This promises to provide up to 100 days of unskilled manual labor per family per year, at the statutory minimum wage rate for agricultural labor, to anyone who wants it in rural India. The scheme was rolled out in phases and gained national coverage—just in time to help cushion the impact of both the crisis and the drought that hit many areas of the country this year.

An ideal workfare scheme will guarantee low wage work on community-initiated projects. The low wage rate ensures that the scheme is self-targeted in that the non-poor will rarely want to participate, and those needing relief during the crisis will voluntarily leave once recovery is underway. The federal or state government announces that it is willing to finance up to, say, 15 days of work a month on worthwhile community projects for any adult at a wage rate no higher than the market rate for unskilled manual labor in a normal year. The work is available to any adult at any time, crisis or not. As long as the guarantee is credible it will also help reduce the longer-term costs of risk facing the poor. Thus a well designed and implemented scheme of this sort it can help in fighting chronic poverty as well as transient poverty in a crisis.

Relief work will need to be supplemented by transfers, in cash or food, targeted to specific groups of people who either cannot work due to physical incapacity, including poor nutritional status, or should not be taken out of other activities, notably school. A recently popular class of transfer programs requires the children of the recipient family to demonstrate adequate school attendance, and health care in some versions. Early influential examples were Bangladesh’s Food-for-Education Program, Mexico’s PROGRESA program (now called Oportunidades) and Bolsa Escola in Brazil. Such programs aim to strike a balance between reducing current poverty (through the transfers) and reducing future poverty (through the behavioral responses). In a crisis, the largest benefits from such programs may well be found in the poorest countries, where the income effect on schooling will probably dominate. Targeting the transfers made as part of a fiscal stimulus to women in poor families can also improve the terms of the trade-off between current and future poverty reduction, notably by assuring that children benefit more.

Experience with such programs suggests that it should be possible to protect a significant share of the world’s poorest in a crisis. And with careful policy design, this can be done without damaging the longer-term prospects of escaping poverty, and even enhancing them.

Martin Ravallion is Director of the World Bank’s Research Department, the Development Research Group.

These are the views of the author and need not reflect those of the Bank, affiliated organizations or member countries.

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