Macro Crises and Safety Nets A cross-country perspective K. Subbarao South Asia (Social Protection)

Macro crisis and poverty: links Evidence across Latin America, East Asia and Eastern Europe show strong links between macroeconomic downturns and rising poverty. One estimate shows every percent decline in growth increases poverty by 2 percent. This effect is greater if crisis increases inequality, as in Latin America.

Crisis and Poverty: selected countries Argentina: % poor 10.1 (1980) 25.2 (1987) Mexico: % poor 36.0 (1994) 43.0 (1996) Korea: % poor 9.2 (1996) 23.1 (1998) Thailand % poor 11 (1996) 16 (1998); 31 (Northeast)

Transmission mechanisms Changes in relative prices (e.g., lower output prices for farm products or higher input prices) Falling demand for labor, declining wages and/or rising unemployment Cutbacks in real spending on public services Reductions in private transfers

Korea’s economic reform and Safety Nets: The Context The main challenge: Restoring macroeconomic stability while limiting costs to real economy and adverse impacts on the vulnerable. Korea’s financial crisis has dramatically reversed the impressive record in poverty reduction achieved since 1990

Impact of the crisis….. The incidence of poverty has doubled from 9 percent in 1997 to 18 percent in 1998.

Impact of the crisis….. Likewise, the unemployment rate increased four-fold...

Prior to the crisis, the dominant paradigm was: Private transfers buoyant, Korea’s extended family is capable of absorbing the crisis-induced hardship, Increase in poverty is in any case modest and temporary, and Other OECD countries are in deep trouble fixing their “bloated” welfare states -- a situation Korea would like to avoid.

So publicly funded safety net was rather modest in 1997………. Two broad programs: a social insurance system (health+pension) that covered workers in large enterprises and in government (largely non-poor), and a livelihood protection for those who cannot work – together accounting for 1.9% of GDP, compared with 6 to 20% of GDP in other OECD countries.

Eventually the crisis has forced a dramatic paradigm shift …... Allocation to livelihood protection was increased from W0.3 tri. in 1998 to W0.8 tri. and coverage increased by 37% Unemployment insurance extended to workers in enterprises with 5 workers (covering most small scale activities) A temporary public workfare program was introduced and quickly expanded with a supplementary budget After the crisis ended, first two programs continued on a permanent basis

Thailand: The Context Crisis worsened living standards -- real per capita income in 2/98 was 21% lower than would have been the case without the crisis Poverty rose from 11% in 1996 to 16% in 1998 (and to 31% in the northeast) Poverty incidence in 1998 higher than average for children and the elderly Heavy reliance on private transfers and remittances from Bangkok Very low total spending (0.19% of GDP) on all safety net programs

Strengths and weaknesses of the system… A network of grassroot level social welfare workers, BUT Overall under-funding Poorly designed programs Inequitable regional allocation of resources (north-east suffered) Consequential implicit rationing by social welfare workers (i.e., exclusion errors)

Mexico…impacts Social impacts of the crisis were quite serious High cut-backs in social spending Expenditures on targeted programs cut; exclusion errors pervasive Infant and pre-school mortality increased More children were dropping out of school Unemployment rate increased (3.4% to 5.6%)

Mexico…responses Excellent evaluation (M&E) system Response to 1996 crisis was the famous Progresa that linked cash transfers to human development Considerable research has shown its positive impacts – average incomes of poor Progresa families increased by 22% In 1998 cost of Progresa was 0.2% of GDP; it benefited 2 million poor households Excellent evaluation (M&E) system

Argentina….crisis and impacts In 1995 GDP per capital fell 4.2%, private per capita consumption by 6.4% Inequality and poverty increased Real wages fell by 22% Per capita protein intake decreased Primary enrollment rate declined

Argentina…response to crisis Argentina expanded its nation-wide work fare program, Trabajar Trabajar costed 1% of GDP but reached 350,000 unskilled and unemployed workers Trabajar transferred 26% of family income on average, and 74% of income in botton 5% of income distribution Evaluations have shown excellent targeting outcomes Political economy…program replaced by cash transfer (with much less targeting outcomes)

Lessons from experience….. A pro-poor response to crises should be an integral part of a country’s policy Good to have one or two well-designed safety net programs all the time -- expand when crisis hits Avoid “overkills”, provide the poor with a minimum consumption floor Improvising in the heat of the crisis may be “too little, too late” response.. Most attractive safety nets are those that provide current transfers and encourage investment in assets of the poor Unemployment insurance and/or public workfare deserve special consideration in a globalizing world