1 The Impact of the Financial Crisis on Inequality and Poverty in Latin America LAGO Working Group November 3, 2010 Nora Lustig Samuel Z. Stone Professor of Latin American Economics

What did we learn from previous crises? 2

Recurrence of crises

Economic Downturns and Human Development  In addition to the impact on income poverty, we are interested in the impact of economic downturns and higher food prices on: Malnutrition Infant and child mortality and morbidity Maternal mortality School attendance, drop-out rates and school attainment Also: Crime and violence Drug and alcohol abuse Assets

Why focus on the impact of economic downturns on human development ?  Direct impact on household and individual welfare  Indirect impact on household and individual welfare through the effect that a deterioration of human capital has on lifelong earnings (e.g., Glewwe, Jacoby and King, 2000)  If the effect is large enough, lower human capital can have a negative impact on overall economic growth and poverty rates in the future

Economic Downturns and Human Development: What have we learnt from past episodes?  Descriptive statistics  Econometric analysis

Descriptive Statistics The Classic Study: Adjustment with a Human Face (Cornia, Jolly and Stewart, 1988)  Roberto Macedo’s analysis for Brazil 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

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 Brazil, though not conclusive, some evidence that income fluctuations affected infant mortality In Chile, low weight at birth and malnutrition increased during some of the years depending on overall economic performance

Subsequent descriptive studies also found a negative impact on human development (Lustig, ed., 1995) In Venezuela, literacy for the 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

Subsequent descriptive studies also found a negative impact on human development (WDR 2000/1)  Argentina (1995): per capita protein daily intake decreased by 3.8 % total primary enrollment growth declined from 2.2 % in 1993 to 0.6 % in 1995  Dominican Republic (1990) infants suffering malnutrition rose from 9.6 % in 1987 to 17 % in 1991 total primary enrollment fell from 97.1 % in 1988 to 96.6 % in 1990

 Jamaica (1985): per capita daily protein intake decreased by 5.9 %  Mexico (1995) Percentage of deaths in infants and children due to anemia increased Slight fall in total primary enrollment  Venezuela (1994) per capita daily protein intake decreased by 2.9 % total primary enrollment fell from 94.5 % in 1993 to 91.7 % in 1995

 In conclusion, empirical evidence on the negative impact of economic downturns on health and nutrition is robust  What about the impact on education, the other very important dimension of human development/human capital? Evidence is more mixed

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

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

Falling household income a major cause of deterioration in human development indicators  The cause for lower health and nutrition levels seems to be lower incomes  Hence it is important to know the impact of downturns on incomes of the poor and near poor  Empirical evidence shows that the incidence, depth and severity of poverty increase during downturns.  There is also some evidence that the poverty-growth elasticity has an asymmetric behavior: it is higher during downturns than during recoveries (de Janvry and Sadoulet in Lustig ed., 2001)

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What happened during the 2009 crisis? 19

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22 4. The Impact of the Crisis on Living Standards  Unemployment  Real Wages  Remittances  Government monetary and in-kind transfers  Poverty  Inequality  Health and Education Indicators

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35 Conditional Cash Transfers in LAC (Source: Inter-American Development Bank, 2008) Without programPilotSmall scale (<25% poor) Medium & large scale (>25% poor) Bahamas Haiti Barbados Nicaragua Belize Suriname Guyana GuatemalaCosta Rica El Salvador Dominican Rep. Honduras México Uruguay ParaguayJamaica Panama Bolivia Trinidad y Tobago Venezuela Argentina Perú Brasil Colombia Chile Ecuador 11258

36 THANK YOU