Crises and Safety Nets

1. Crises and Safety Nets A cross-country perspective K. Subbarao Lead Economist, World Bank

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…. • Latin America region is interesting because of repeated crises during the 1980s and 1990s • Two findings are worth noting -- • Poverty increased after the crisis, • In some countries, inequality too increased.

4. Crisis and poverty

5. Social indicators worsened.. • In Mexico, infant and pre-school mortality rose after the crisis, reversing the trend from the previous decade, • School attendance was also hit: recent research shows average increase for years of schooling slowed down from 1.9 years in 1950-70s to 1.2 in 1970-80 due to GDP shocks

6. What does this suggest? • Adequate crisis response via social risk management should be a high priority, • Poverty-sensitive response should aim to maintain adequate consumption levels, • Ensure that the poor continue to have access to basic social services, • prevent irreversible adverse human capital impacts and dysfunctional behaviors.

7. Pro-poor response.. • Protect pro-poor expenditures, • Reduce adverse impacts via safety nets • Rank existing program, select the best, • Ensure appropriate institutional mechanisms are in place to implement programs, • Evaluate the experience and transmit best practices across countries

8. Lessons for East Asian countries • A pro-poor response to crises should be an integral part of a country’s policy: good to have safety net programs all the time: expand when crisis hits; run on a small scale during normal times. • Avoid “overkills” and try to provide the poor with a minimum consumption floor.

9. Lessons…... • Safety nets that provide current transfers and at the same time encourage investment in assets of the poor are most attractive. • Safety net spending is to be considered as an investment, not as consumption. • Experience shows that improvising in the heat of the crisis may be “too little, too late” response.

10. Lessons... • The worst thing that can happen is a permanent reduction in the stock of human capital of the poor, due to malnutrition or erosion of skills -- such developments will lower longer term economic growth. • Now let us look at Indonesia, Malaysia, and the Philippines. (We have already analyzed Korea and Thailand).

11. Indonesia... • Social impacts of the crisis have been grave: people in Java and in urban areas appear to have been the worst hit. People with less linkage to formal economy suffered less. • Government’s response: • Efforts to provide food at affordable prices, • Employment and income maintenance, and • Preserving access to critical social services.

12. Indonesia continued... • Targeted rice program was reaching 9.7 million in 2/99; 20 kg. Rice per month are sold at highly subsidized prices. Independent monitoring by NGOs encouraged. Main challenge: define the scope and target the program to the needy. Expand to peri-urban areas to reach poor migrants and hhs with no residency cards.

13. Indonesia continued... • Impact on labor markets far from uniform. In urban areas and rural Java, real wages fell dramatically. Response: • expand labor-intensive public works (padat karya), • create new “community funds” in poor areas, • vocational training and job placement, • credit schemes and others to encourage smes.

14. Indonesia:remaining challenges.. • Effective monitoring, internal oversight, and wider civil society involvement, • Matching instruments to objectives. PWs good as a response to unemployment, but less-than-ideal response for structurally poor areas; community funds may help demand-driven solutions to structural poverty but may not absorb large numbers of unemployed workers in a short time.

15. Indoensia: remaining challenges • Matching budget allocations to institutional capacity. Government deserves credit for expanding budget quickly, but this also created concerns due to limited absorptive capacity and potential for leakage, • Quick delivery results in weaknesses in targeting, project selection, transparency, community participation.

16. Indoensia... • Low female participation, • Fragmentation of programs along five line Ministries and poor coordination. • So the challenge here is… • Improve design of programs, • Consolidate management structures, • Increase transparency and oversight.

17. Malaysia... • Early effects of the crisis were felt by the poor and the near-poor (low-paid and low-skilled urban workers and the unemployed), • Unemployed doubled: 3% in 97 to 5-6% 98 • The government has increased the scope of safety net programs and is protecting investments in social sectors.

18. Malaysia…... • Expanded poverty targeting in three states where most the poor live (Kelantan, Terngganu and Sabah), • Increased public spending on health and education to meet shift of demand from private to public sector services. • Replaced price controls with in-kind vouchers to ensure access of the poor to essential commodities.

19. Malaysia…. • Beginning to address labor market issues: how to introduce productivity-based flexible wage systems to reduce unemployment and maintain competitiveness and how to evolve a safety net to address the needs of the vulnerable and the elderly in society.

20. What more needs to be done... • New antipoverty programs will be needed to cater to the needs of the self-employed, who constitute a high % of working poor, and the unemployed unskilled workers -- the first casualities of economic contraction. • Programs need to focus on urban areas, • Regional poverty targeting will be needed.

21. What more needs to be done.. • An urban public works program appears to be an ideal candidate, • An unemployment benefit program appears to be an essential component of safety net strategy, • The current coverage of child-linked benefits very narrow; needs to be expanded.

22. The Philippines…. • The decisive impact of the crisis on the unemployment rate was to be seen beginning of 10/98 when it peaked (9.6%) • In the Philippines, extended family is the main safety net: overseas remittances critical component of safety net. • Reverse migration and a decline in remittances dried up informal safety net.

23. The Philippines continued... • Household responses to the crisis alarming: 12.1% of poorest hhs took children out of school, reduced food intakes, child labor increased. Responses: • Subsidized rice: not very effective -- fails both as a subsidy program for producers and also as a consumer subsidy due to heavy leakages. Design changes (inferior goods) needed.

24. The Philippines... • The government is now shifting to a targeted subsidy specifically for the poor instead of a general price subsidy. • Direct and Indirect job creation. • Notable attempts to increase labor absorption during 1986-94. The most recent is Kabuhayan 2000 - a plan to create 2 million jobs. None of the programs were carefully evaluated. A major problem is the level of the wage rate.

25. The Philippines…. • Program was offering P110 wage when many were willing to work at P60; the program was attracting the non-poor; less scope for self-selection of the poor into the program. • Another set of initiatives comprised of livelihood creation programs: a variant of credit-based self-employment job creation. • Huge subsidies, poor performance.

26. The Phillippines…. • Notwithstanding more than two decades of experience with workfare, credit programs, and food subsidies, the country needs to pay attention to improve the design of programs. Much can be gained from international good practice with respect to all of these initiatives -- good in themselves, but bad in practice owing to poor design.

27. A summary of lessons…. • Design programs well, be prepared for the crisis, expand programs when crisis hits. • Programs such as unemployment insurance and public workfare deserve special consideration in a globalizing world. • Crisis has underscored the importance to maintaining a reserve “fund” for safety net programs, to be drawn when needed for expanding (existing) programs.