Permanent effects of economic crises on household welfare: Evidence and projections from Argentina’s downturns Guillermo Cruces Pablo Gluzmann CEDLAS – Universidad Nacional de La Plata, CONICET Luis Felipe López-Calva UNDP-RBLAC NIP Network Meeting New Orleans, Tulane University, April

One slide presentation Objective: estimate the impact of the economic crisis on household welfare. Extension: document permanent effects. Motivation:  Transient or permanent?  Not easy to find (beyond poverty & employment)  Ambiguous impacts for some outcomes Use data from Argentina’s up and downs to estimate crisis effects, and extrapolate. Significant effects on maternal and infant outcomes, more ambiguous for education. What is not included: flawless id strategy, fancy IV estimates. © Hugo Ñopo, 2006

Motivation and objective

Motivation Part of a regional UNDP-RBLAC project on the impact of the recent financial crisis on household welfare in LAC. Case study for Argentina. Objective: estimate the impact of the economic crisis on household welfare. Feasible short term estimates:  No ideal data (in fact no data in ARG)  No flawless identification strategy

Objective No contemporary data for Argentina… access to surveys, quality, prices, and GDP. Exploit Argentina’s up and downs to estimate past crisis effects and extrapolate. Some relatively obvious (& easy) impacts:  Poverty  Unemployment Extension (and focus): permanent effects. Motivation:  Some seem obvious, but not easy to document (e.g.: Ernesto’s paper later today)  Ambiguous impacts for some outcomes

GDP and changes in GDP

Discussion: Potential effects of crises

Ambiguous effects of crises: Ferreira and Schady’s 2009 framework Aggregate income shocks can have ambiguous impacts on investments in child education and health. Not necessarily pro-cyclical: income and substitution effects. In F&S: income effect dominates for poorer countries, with less developed credit markets, and less protected public spending. Ambiguous effects in middle-income countries.

Previous evidence Crises result in higher school enrollment:  Brazil (Duryea and Arends-Kuenning 2003)  Mexico (McKenzie 2003)  Argentina (Lopez-Boo 2008)  Peru (Schady 2004) Negative shocks to crop prices increase enrollment:  Nicaragua (Maluccio 2005)  Brazil (Kruger 2007) Crises increase infant mortality:  Mexico (Cutler et al. 2002)  Peru (Paxson and Schady 2005) + This project: Aguero & Valdivia, … Source: Ferreira and Schady, Aggregate Economic Shocks, Child Schooling and Child Health, WBRO and PEGNET Presentation, 2009.

Protected?

Estimation strategies

Estimation strategy Objective: estimate the impact of the current crisis on socioeconomic outcomes. Methodology: projections based on past experience. 1. Methodology 1: growth elasticities of relevant outcomes over 15 years (provincial panels – id through regional variation). 2. Methodology 2: estimates of the impact of the 2001 crisis (difference in differences - ad hoc/upper bound). Outcomes: schooling, child and overall poverty, maternal and infant mortality, low weight at birth.

GDP elasticities (regional data) Compute growth elasticities of the outcomes. Limitation at the national level: Short time span – little variation. Solution: Exploit time and regional variability from a panel of per capita GDP and outcomes at the province (25) level to identify the relevant elasticities.

Y jt denotes the outcome of interest for province j in time t. X jt are a series of covariates (e.g. gender composition and mean age) for each province F j captures regional fixed effects. is the semi-elasticity of the selected outcome with respect to per capita GDP. Regression with fixed effects at the province level, weighted by province population, robust standard errors.

Fixed Effect Model Strongly significant effects on poverty (expected) Significant effects on health outcomes and no significant effects on educational indicators

No significant negative effects on education (an ambiguous impact in years of education) Also: asymmetrical relationship for growth and recession periods

Asymmetrical relationship for growth and crisis periods

Larger poverty & child mortality effects during crises, no effect on maternal mortality

Beyond simple elasticities… School attendance 6 to 12 School attendance 13 to 17 Child Mortality Maternal Mortality

Upper bounds of crisis effects: evidence from a “worst-case” scenario The evolution of outcomes over the recession and the large crisis reveals a specific effect. Not the long(ish) term elasticity: a “crisis” elasticity. Computing a “worst case scenario” impact: Panel of outcomes at the province (25) – but calibrate the timing of the “exposure period” to obtain an upper bound.

Y jt denotes the outcome of interest for province j in time t. T is dummy variable that is equal to 1 during the crisis period ( , or equivalently ), D identifies the last year in each period (crisis and reference). is an idiosyncratic shock uncorrelated with the regressors. captures the difference in outcomes attributable to the crisis (interaction term in DiD estimation).

Results...

Effect on poverty according to the elasticity approach

Conclusion

Regional and time variation in Argentina provides evidence of permanent effects of crises through maternal and infant health. Asymmetric effects (hysteresis?). Middle income country: no major negative effects on education (some ambiguous), but negative effects in upper bound estimates.

Conclusion Current crisis: difficult to state without credible GDP (and other) data. But probably milder than worst case estimates. Protect social expenditure during crises, even in middle income countries.

Thanks!

Fixed Effect Model Projections

...and new projections

Previous evidence Source: Ferreira and Schady, Aggregate Economic Shocks, Child Schooling and Child Health, WBRO and PEGNET Presentation, 2009.