April 25, 2009—As the global recession threatens to hamstring the pace of poverty reduction everywhere, many countries—both rich and poor—hope to cushion the blow through a fiscal stimulus.
Some of the pressing questions that governments are trying to grapple with include the size of such stimulus packages, the types of spending they should consist of, and the channels through which they might work most efficiently to stimulate the economy.
A stimulus that favors the poor favors the whole economy
Martin Ravallion, Director of the World Bank’s Development Research Group, and an expert on global poverty, emphasizes that there are many reasons why a stimulus that favors poorer people is more likely to have a stronger impact than one that does not.
“There’s an obvious ethical reason why a stimulus should favor poor people, but there’s also a macroeconomic rationale,” said Ravallion, “Poor people, who are typically more constrained by a lack of credit, are much more likely to quickly consume or invest extra cash that becomes available through some form of stimulus.”
Historically, rich countries have taken countercyclical actions to stabilize their economies in times of economic stress through direct taxes and committed social spending.
“Developing countries need to be able to act countercyclically too,” observed Heidemarie Wieczorek-Zeul, Germany’s Minister for Economic Cooperation and Development, during a recently-aired BBC World debate, “Global Recession: A Developing World Emergency.”
“If there’s one thing that should not be missed during this crisis, it’s the opportunity to create pro-poor stabilizers in developing countries, similar to the automatic social safety nets that rich countries already have in place,” said Ravallion.
Rich countries can also look to developing countries—which have had more experience with disasters of various kinds, from famines and floods to financial crises—for ideas on how best to protect the poor.
Lessons from developing countries
Governments in developing countries have experimented with a wide range of social protection programs, including those that protect poor people from financial crises. The ways in which their public budgets have been programmed provide valuable lessons that could be useful to both rich and poor countries today.
“Some of the best social protection programs in the world have emerged during times of macroeconomic stress, and some of the worst,” said Ravallion, “It is difficult—but critical—to strike a balance between immediate relief and long-term poverty reduction.”
Increasingly, both rich and poor countries’ welfare reform efforts have tried to highlight the notion of “co-responsibility”—helping people to escape poverty now while also taking actions that reduce dependency on welfare in the long run.
"We know a lot more than we did twenty years ago about what works and what doesn’t," Ravallion said, “The ideal social safety net does not just protect the poor in times of need, but is also an integral part of the process of development.”
Two types of complementary programs that provide good examples of such incentives—also important in designing a pro-poor stimulus—are targeted cash transfers and relief work schemes. When these programs are designed effectively, they can go a long way toward stabilizing an economy in a manner that favors poor people.
Ravallion’s paper, “Bailing out the World’s Poorest,” reviews the arguments and evidence on these programs.
Smart transfers: cash for actions that help the next generation escape poverty
“Getting money into the hands of poor people and doing this in an effective and transparent way is very important,” said Ariel Fiszbein, Chief Economist for Human Development at the World Bank, “It’s also imperative to make sure that the delivery of basic services is sustained and doesn’t suffer because of the crisis.”
Conditional cash transfers (on which the World Bank recently published a detailed policy research report) are programs that give cash directly to poor people, who in turn agree to an action such as enrolling girls in school or taking babies to health clinics regularly.
Early influential examples of such programs—which have been multiplying around the world at a rapid rate—include Bangladesh’s Food-for-Education, Mexico’s Progresa/Oportunidades, and Brazil’s Bolsa Escola.
While conditional cash transfers are designed to help reduce poverty in the long run, they can also be used to step up assistance to poor people during times of crisis.
For example, Mexico was able to tackle the welfare effects of the food crisis of 2008 through a one-time top-up payment to Oportunidades participants. And in Indonesia, the Jaring Pengamanan Sosial program reduced school dropout rates among beneficiaries during the 1998 financial crisis.
Challenges in implementation abound, including setting the eligibility criteria in practice, resource constraints, elite capture at the local level, and unresponsiveness to changes in people’s needs.
Timely relief work for those that need it
The Employment Guarantee Scheme introduced in the 1970s in the state of Maharashtra, India, is an example of a relief work or workfare scheme that aims to support poor people in rural areas by providing them with unskilled manual labor at low wages on demand. Relief work is now on offer throughout India through the National Rural Employment Guarantee Act.
Workfare schemes often succeed in one critical area where conditional cash transfers lag. Provided they are well designed, they can adjust flexibly to the need for assistance.
“Like conditional cash transfers, a good workfare scheme relies on built-in incentives,” Ravallion explained. “Anybody who has a better option than unskilled manual work will take it, and when those on workfare find better work as the economy recovers they naturally move out of the scheme, thus ensuring that the help is received by those who need it most, while preserving incentives for escaping poverty by other means.”
Argentina’s Trabajar program illustrates the potential for a new wave of such schemes that stress the importance of asset creation. Work created through the program is typically useful work that would not otherwise be done in poor neighborhoods for lack of finance.
Key design features for such a scheme are that the assets created should be of lasting value, preference should be given to community-initiated projects in poor areas, the wage rate should not be higher than the market rate for similar work and anyone who needs work should be confident they can get it in a reasonably time.
A key role for social protection
“With a combination of well-designed and implemented conditional transfers and relief work schemes it is possible to protect a significant number of poor people in a crisis, without damaging their longer-term prospects of escaping poverty,” Ravallion said.
Robust social protection policies require a combination of relief work with transfers in cash or food targeted to specific groups who cannot work due to physical incapacity (including poor nutritional status, with the number of chronically hungry people set to cross 1 billion in 2009) or who should not be taken out of other activities such as school.
“A world that doesn’t learn from history is condemned to repeat it. While the recent G-20 meeting focused on financial issues, we need to learn from the history of past crises, when governments squeezed for cash, cut into social programs with often devastating impacts on the poor,” said World Bank Group President Robert B. Zoellick.
In April 2009, Zoellick announced the institution’s intent to triple support to social protection in fiscal year 2010.