After several decades of falling poverty in East Asia, the World Bank reports that the financial crisis has caused a substantial surge in the region's poverty rate, and recommends that international financial rescue packages be better balanced to cushion the poor from the worst effects of crises. Countries that until recently believed they were turning the tide in the fight against poverty are witnessing its re-emergence. The Bank says that 'social safety net' measures such as unemployment insurance, subsidized school fees, job creation programs, and food subsidies are essential for eventual broad-based recovery.
According to the World Bank, in 1987, 1.2 billion people lived on less than $1 per day; in 1993, that number was closer to 1.3 billion. In 1999, if the proportion of people living in poverty has remained the same as in 1993, there could be 1.5 billion people living in abject poverty at the dawn of the new millennium. The Bank warns that as the numbers of poor people continue to rise, world leaders cannot be complacent.
In a new working paper circulated recently to international policy makers - Macroeconomic Crises and Poverty: Transmission Mechanisms and Policy Responses - the World Bank gauges the impact of economic crises on the lives of the poor, and how governments respond, drawing on recent experience in East Asia, and past crises in Latin America and Africa. It sets out an agenda for safeguarding the needy during times of crisis, detailing, for example, how social safety nets should be set up or strengthened, before economic crisis strikes, to reduce its potential for human suffering.
"The financial turmoil of the last two years has dealt a blow to the expectations we had for reducing poverty. Just a short time ago, we had confidence that the international development goal of halving poverty would be met in the next 20 years in most areas of the world. Today, countries that until recently believed they were turning the tide in the fight against poverty are witnessing its re-emergence along with hunger and the human suffering it brings," says World Bank Group President, James D. Wolfensohn. "We must now draw on the lessons of recent experience to help us reshape our strategies for the future."
Wolfensohn says that the overarching lesson for policy makers arising from the East Asia crisis, and its subsequent spread to Russia, Brazil, and other emerging markets, is the need to avoid irreversible welfare losses for the poor. These can occur, when, for example, children are taken out of school to help their families and never resume their education, higher infant malnutrition slows children's mental development, or crisis-related unrest becomes a permanent fixture.
Regional Poverty Updates
Forecasts made eight months ago by the World Bank suggested that Indonesia, Malaysia, and Thailand were expected to suffer 'significant' increases in poverty, while in the Philippines, where growth was to remain positive, progress in the fight against poverty was likely to slow but not reverse itself. Early survey results confirm that the impact of the crisis has been very severe. Estimates for Indonesia indicate an increase of around 10 percentage points in the incidence of poverty, corresponding to something like 20 million newly poor people - the equivalent of a medium-size country. Significant increases in poverty took place in urban Korea, and to a lesser extent in Thailand.
|Estimated impact of the East Asia crisis on households (using national poverty lines a) |
|Change in average standards of living 1997/98 (percent)||-24.4||-13.6||-21.6|
a. Poverty lines of around $1/day in Indonesia, $2/day in Thailand and $4/day in Korea.
b. Survey evidence from selected areas.
c. Poverty incidence for Thailand as of 1996.
The picture for South Asia is mixed. Growth rates for the region have remained positive and significant - per capita GDP growth for 1998 for the region is expected to be 2.7 percent - but recent data on rural wages in India suggest a stagnation.
- In India, by the late Nineties (1997), an estimated 340 million people were living in poverty, up from an estimated 300 million in the late 1980s.
- Bangladesh, which had been performing well, has been hit by devastating floods; and performance has been poor in Pakistan.
Prospects for Africa remain worrisome. Africa is less integrated into global financial markets than other regions and - with the notable exception of South Africa - has therefore experienced less of a contagion effect from financial shocks. Nevertheless, the crisis is already having an impact, with slumping prices for many commodities, slower world trade growth and the prospect of increased competition from countries with depreciated exchange rates. In addition, conflicts continue to rage in some of the region's poorest countries.
The combined effect of lower commodity prices, conflict, and in some cases, bad weather has been to cut growth in Sub-Saharan Africa; GDP growth in 1998 appears to have been below the rate of population growth, implying a decline in per capita income. A small number of countries that are undertaking reform programs - for example, Uganda and Tanzania - have fared better, but many more are ravaged by conflict.
Latin America and the Caribbean
The prospects for Latin America are clouded by the crisis in Brazil, but per capita GDP growth was significant in 1997 and still positive, albeit lower, in 1998. The region has recently suffered from devastating natural disasters - from the effects of the El Niño weather patterns to the ravages of Hurricane Mitch in Honduras and Nicaragua. Moreover, recent evidence of rising inequality in some areas - most notably, urban Brazil - adds to concerns about the already high disparities present in the region.
Eastern Europe, Central Asia, Middle East and North Africa
Sharp declines in growth and increases in poverty are also anticipated in Russia, the Ukraine, and Romania. Despite significant growth in other areas of the Eastern Europe and Central Asia region (most notably Poland and Hungary), growth in GDP per capita for the region as a whole is expected to be zero. Negative GDP per capita growth and an increase in poverty are also expected in the Middle East and North Africa.
"In sum, the global picture that emerges at the end of the 1990s is one of stalled progress, as a result of the East Asian crisis, rising numbers of poor people in India, continued rises in Sub-Saharan Africa, and a sharp worsening in Europe and Central Asia," says the World Bank's Director of Poverty Reduction and Economic Management, Michael Walton. "We do not have a global estimate for the end of the decade, but if there is no change in the proportion of people in poverty over the course of the decade - at 30 percent living below $1 a day - that would imply an increase from 1.3 billion living under $1 a day in 1993 to around 1.5 billion in 1999."
Rescue Packages Must Protect the Poor in Times of Crisis
Given the human impact of the crisis on the lives of millions of people in East Asia and other developing and transition countries, the World Bank believes that international financial rescue packages must be better designed in future to protect the poor, the sick, and the elderly from the worst effects of crisis.
When economic crisis strikes, households are affected in several ways. Different sources of household income such as wages, salaries, self-employed earnings, and government benefits for social security or unemployment payments either shrink or stop, and prices for household goods and services can rise sharply. There are also effects at the level of the broader community, which affect individual welfare.
- changes in consumer prices, which have a knock-on effect with wages, employment patterns, and consumption levels;
- changes in the job market, which can reduce wages and cause unemployment;
- changes in the rates of returns on investments and assets; and
- changes in the level of government benefits, be it in terms of public health or public safety.
A number of these are painful short-term effects, which are serious enough. But many are associated with undesirable longer-term effects on households, such as lower investments in education and health, which may lead to lower economic growth and greater inequality.
Protecting the Poor in a Crisis: An Agenda for Action
The right policies can help cushion the impact of a crisis on the poor right from the start. Therefore, an agenda for these programs should include the following actions:
- Choose stabilization policies that achieve their macroeconomic objectives at the least cost to the most vulnerable. Macroeconomic policy has an important role to play in re-igniting growth and thereby reducing poverty. It is important to recognize that governments will have to prune some spending and prioritize budgets during a crisis to get their current account deficits under control. However, as soon as there is a sustainable external balance, and inflation is contained, economic policy should be eased. Reducing interest rates and restoring targeted public spending as soon as possible can help offset the worst effects of recession on the poor.
As the downturn in East Asia became more severe than expected, a policy of relaxing fiscal constraints emerged as the right macroeconomic and poverty-alleviation response, and became a key element of internationally supported adjustment programs in 1998, notably in Korea, Indonesia, and Thailand.
In choosing a combination of policies, policymakers should always try to avoid high inflation, as the poor often rely on fixed incomes and are obviously hurt by quickly rising prices.
- Ensure that fiscal adjustment protects services for the poor, and that these are provided by effective, inclusive institutions. Fiscal policies that protect spending on basic education and health can prevent cuts in services. In education, expenditures on primary schools, and on non-salary items, which are essential for quality, should be maintained and targeted subsidies to reduce school drop-out rates among the poor should also be increased. In health, spending for health care provision at the lower levels of the health system, should also continue.
Beyond health and education, policies should protect other public investments that affect the productivity of the poor - most notably, investments in rural infrastructure and the provision of micro-finance or small-scale lending at the village level. Fiscal stimulus aimed at job creation such as building or maintaining rural roads and other rural employment programs would combine the benefits of economic growth with those of income support for poor groups. Wherever possible, price subsidies should also be given to the poor as long as the economy can afford them - but evidence from Latin America suggests that a crisis may not the best time to reform existing subsidies, as resistance from those hurt by the change may stop reforms.
- Set up or reinforce safety nets capable of providing effective insurance before a crisis and assistance once a crisis hits. Programs that help the poor cope with the impact of the crisis should be supported or expanded. In a short-run crisis, the focus should first be on programs that already exist and can be expanded quickly, such as public works schemes and other 'workfare' programs, which can provide employment for the poorest and reduce open unemployment, or feeding programs for children. Expanding unemployment assistance may be an option in countries where such programs are already in place.
- Set up policies and initiatives that help preserve the social fabric of societies in crisis and build social capital. There is evidence that at least some of the negative social impacts of a crisis - rising social tension and the breakdown in family and community ties - may persist after the end of the crisis. There is also growing evidence that the cost of this higher level of violence, both in direct human terms and in terms of displaced or discouraged economic activity, can be quite high. It is important not to neglect this policy area, where best results may be achieved through partnerships with local NGOs and civil society organizations in general.
- Policy packages that protect the poor must have sufficient national political support. Without widespread social and political support, such policies are unlikely to be implemented. Crises can sometimes create the right political climate to carry them out by creating a sense of urgency and a spotlight on the plight of the poorest, and concern that social unrest may threaten the fabric of society. Whether governments can seize the opportunity will depend both on the extent to which reforms have been prepared prior to a crisis, and on whether national political dynamics allow governments and community groups to support the necessary changes in the face of previously entrenched interests.
Better Safe Than Sorry: Preparing for Crises
While occasional crises are inevitable, responding to them in a manner that best protects the poor needs advance preparation. This will be easier to do if measures to protect the poor are built into long-term development strategies.
Perhaps the most important element of crisis forward planning is having adequate safety nets in place before an emergency strikes. Earlier crises in Latin America and the current experience in East Asia, as well as crises brought about by natural disasters in Asia and elsewhere, have revealed a great deal about the importance of safety nets. Two main lessons emerged.
First, existing safety net mechanisms are often inadequate. Their coverage can be limited and they may not be able to help everyone who needs assistance during a crisis. In addition, the poor are either unaware of the programs or lack the ability to get the help they need.
Second, it is very difficult to set up effective safety nets during a crisis. Governments are often unprepared, ill informed, and slow to take action. Financial resources are scarce, and human resources stretched. Building up the infrastructure and the capacity to manage a program takes a long time.
Without an adequate safety net in place before a crisis hits, the poor are likely to be hurt disproportionately. Accordingly, setting up safety nets in good times may be the only effective way to protect the poor during crises. Recent experience suggests that we re-examine the distinction between 'relief' programs and regular 'development' programs. Instead, an effective safety net for the poor should be seen as a long-term investment in development.
Some key principles should guide the design of a safety net. It should provide a better way to insure the poor against the risk of income loss. While other elements of a country's poverty alleviation strategy are aimed at achieving economic growth and investing in human capital, safety nets are meant to provide insurance. The poor frequently rely on informal insurance mechanisms including strategies to reduce or diversify risk, but these often incur high costs. The key issue for policy is not whether publicly provided safety nets displace existing private mechanisms, but whether they provide insurance more efficiently and at a lower cost.
"The East Asia crisis, and its spillover into other emerging markets, offers the world an opportunity to devise a new approach to crisis, one that rightly puts concern for the poor and the vulnerable right at the center of its response," says the author of the new paper, World Bank Economist, Giovanna Prennushi. "The poor always get hit the hardest during times of crisis, if nothing else because they have little to fall back on, and often have to cut down on essential expenditures, like food, education for their children and health care. By helping countries establish stronger social protections, the international community may be able to prevent the sudden impoverishment of millions of people when crisis strikes."
The World Bank's Poverty Update and new Working Paper are available:
For information on Safety Nets, see http://www.worldbank.org/poverty/safety/.
For detailed data on the world's people, economy, and environment, visit the website for the World Bank's World Development Indicators 1999 at http://www.worldbank.org/data/wdi.