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

2. 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.

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

4. 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

5. 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

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

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

8. 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.

9. 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.

10. 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

11. 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

12. 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)

13. 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%)

14. 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

15. 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

16. 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)

17. 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