Crises and the Poor: Socially Responsible Macroeconomics

B etween 1980 and 1998, Latin America and the Caribbean experienced more than forty episodes in which gross domestic product (GDP) fell by 4 percent or more. Poverty increased sharply during these episodes. Despite this, most countries in the region do not have appropriate instruments to shield poor people (and the near-poor) from the brunt of macroeconomic shocks. Improvising to protect the poor in the heat of a crisis is a recurrent phenomenon. Furthermore, evidence shows that spending targeted to the poor is procyclical—even more so than the rest of the budget. That economic crises cause poverty to rise should not come as a surprise. What has received less emphasis, however, is that crises can lock poor people—and their children—in long-term poverty traps. During crises, poor people can face an irreversible reduction of their assets, including their human capital. Because economic crises are a classic case of an aggregate shock, poor people cannot resort to self-insurance, informal insurance, or the credit market to smooth consumption effectively. In addition, poor people are not likely to be part of the formal social insurance system because a large portion of them are self-employed or they work as wage earners either for microenterprises and small firms that cannot afford to participate in contributory systems or for ruthless employers