Can we manage this crisis differently? Bailing out the poor, not just the banks

Author : Minouche Shafik
Date : January 26th, 2009
In every economic crisis, it is the poor that suffer the most. Whether it is individuals or countries, they are the most vulnerable and lack the savings and the institutions to support them during difficult times. In past crises, we have focused too late on adverse effects on poor people. Can we do it differently this time?
The current economic downturn, unlike the East Asia crisis, started in the richest countries and has now affected the major emerging markets. The effects on low income countries are being felt, not mainly through financial markets, but through the volatility of commodity prices, the decline in export volumes and remittances. Reporting from DFID’s offices (Ethiopia, Bangladesh, India, Pakistan) indicate that in some cases poor households are taking children out of school to save money, and families, especially women and girls, are eating less or lower quality food, leading to concerns about malnutrition. Estimates are that the economic crisis has already put 100 million people back into poverty.
It is interesting to recall the lessons from previous shocks. During the recession of the 1980s, many developing countries embarked on structural adjustment programmes. While the economic reforms were often necessary, the awareness of the negative effects quickly became apparent and caused political problems in many countries and for the international financial institutions. The appeals for “adjustment with a human face” ensued and instruments such as Social Funds were established in many countries to cushion the effects through community development, skills training, and microfinance. While these Social Funds were often quite effective, they often took too long to establish and failed to play a truly countercyclical role in helping the poorest cope with economic adjustment.
For developing countries, this crisis started with the spike in food prices in early 2008. Interestingly, there was once again an appeal to create new institutions. The international response focused on a set of short term measures (food aid, social protection, input subsidies, etc.) and longer term measures (investment in research, infrastructure). But within months of agreement on this, food prices had started to fall and energy prices skyrocketed. Once again, there was a search for ways to alleviate the adverse effects. And once momentum on an international response coalesced, oil prices fell by two-thirds.
What lessons can we draw from these experiences? First, it is the nature of globalisation that there will be shocks. Those shocks may be food or fuel prices or credit squeezes or flights to quality, but they will come. Second, attempts to orchestrate a tailored response to protect the most vulnerable will almost always lag behind the need. This is inevitable given the long lead times required when new institutions are desired. Third, the best mechanisms are those that provide protection from any shock and use existing institutions and programmes to keep the most vulnerable above a minimum threshold.
Some countries have formal systems of social protection which can vary from reasonably good (Brazil, Ghana, India, Bangladesh, Indonesia, Vietnam), to limited (Uganda, Zambia, Ethiopia, Pakistan, Central Asia, Caribbean, Iraq) to still under preparation (Kenya, Sierra Leone, Cambodia). But in many countries there is no formal system and poor households rely on informal mechanisms such as remittances (Pakistan, China) or digging into modest savings (China), borrowing from moneylenders (Bangladesh), or drawing down on assets such as livestock (Tanzania) in order to cope. A good example of a well designed social protection scheme is Ethiopia’s Productive Safety Net Programme, which provides cash and food transfers for over 7 million people. £13 ($18) per month pays for cash transfers to support an entire family. The overwhelming majority (84%) of households spend some or all of this cash on buying staple food, ensuring improved health and nutrition outcomes and protecting families from having to sell productive assets to pay for food. Over a quarter of recipients (28%) also use some of the funds to keep children in school. Cash is also used to settle health bills and to facilitate asset accumulation by many families, especially livestock purchases. The programme proved its value last year, protecting many families from high food prices and drought and enabling the government and donors to use the existing programme to extend the duration of assistance.
DFID does not see the money we have committed to social protection as a welfare programme, although clearly for some households it will provide this function. The real pay off from social protection is in protecting other investments we are making in development (Ravallion, 2008). There is strong evidence that economic shocks in poor countries cause rising infant mortality, falling school enrollment, and falls in nutrition levels (Ferreira and Schady, 2008). Severe malnutrition in early childhood often leads to stunted physical development and deficits in cognitive development - all of which reduce life chances and result in significant losses in life-time earnings (Alderman et al, 2006; Behrman et al, 2004). The costs of preventing such malnutrition can be very low because of recent technological advances - as noted in Josette Sheeran’s January 8 contribution to Ideas4development.
In the months ahead, more poor countries need to be instituting social protection schemes to ensure that this economic crisis does not cause persistent poverty across generations and undermine recent progress, especially on education. When the Tequila crisis hit Mexico in 1994, it triggered the design of the famous PROGRESA programme which resulted in the establishment for the first time of an effective safety net for the country’s poor. More countries should do the same and more donors should be allocating funding to social protection. Robert Zoellick has called on the US to pledge 0.7 per cent of its stimulus package to a vulnerability fund for developing countries, who cannot afford a fiscal stimulus, to help them manage the consequences of the crisis (”A Stimulus Package for the World”, New York Times, 22 January 2009). Ideally we would create a shared funding mechanism that would send a strong signal that, alongside international policy coordination to protect the world’s financial systems, we will work together to protect the poorest from the inevitable shocks that globalisation brings. Without that, we risk losing the international consensus around globalisation and the value of past and future investments in development.