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Coping with large shocks: What makes it different?

Rasmus Heltberg's picture

There is a question we often get asked when presenting our new book, Living through Crises. The question is about how the coping behavior described in the book differs from what poor people do to deal with the day-to-day shocks of living in chronic poverty. Based on qualitative, bottom-up research in 17 developing and transition countries, the book describes impacts of the food, fuel and financial crises on the lives of ordinary people and what people do to cope. It talks about the hardships and stresses from living through a period of deep crises; meals that gradually become fewer and less nutritious; people seeking more jobs and working longer hours to make ends meet; how the burden of coping often looks different for women, men, and youth; erratic school attendance and lower quality of care, nutrition and education for infants and children; and the stresses and tensions in family and community life wrought by economic hardships. The book also chronicles the sources of support people could rely upon, often family, friends and informal community groups with the state, NGOs and financial institutions playing small roles at best and being directly unhelpful at worst. The work described in the book helped inform the Global Monitoring Report 2012 and other Bank products.

So, how is the experience of living through the large, protracted and systemic economic shocks of 2008-11 different from what it is like to live in chronic poverty? The answer we have arrived at has two parts, both related to the informal nature of coping mechanisms.

The first part of the answer is that the rewards to individual workers from working harder can be quite small when many other workers pursue the same strategy. Universally, one of the first things people do when hit by an economic shock such as job loss or higher food prices is to seek more work. Since formal jobs are badly lacking, people invariably seek employment in informal occupations, often as self-employed in retail or services. This strategy may work under normal circumstances, but it is rarely effective when the economy is faced with a systemic shock because competition gets sharper and demand falls. In site after site, the research found that many other people were simultaneously pursuing the same idea, often trying to sell the exact same product, in a context of lower demand because the customers had been laid off or saw their hours cut.

The second part of the answer is that informal coping arrangements and informal social safety nets are hugely important in helping people cope but are distinctly less effective during systemic shocks. First, dealing with the multiple and protracted shocks (high food prices, recession, fiscal contraction, etc) eroded the savings and asset base of households and left them with few resources to cope with the next shock. Second, the availability of credit from formal and informal sources dried up during crises: banks and moneylenders were lending smaller amounts at higher interest rates while family and community-based credit sources exhausted themselves. Third, informal safety nets—altruistic gifts, remittances, free meals and so on to the needy—became less reliable as the better-off community members who would normally be donating faced hardships themselves. This led to local altruism becoming far more sharply targeted and sometimes rationed along ethnic or religious lines.
 
Therefore, the reality of people relying on highly informal coping mechanisms in which risk is shared among people that are quite similar to one another means that systemic shocks have far more adverse consequences than individual shocks (incidentally, a point often made in the vulnerability and risk sharing literature but rarely documented in as much detail as in our work). This is why we recommend investments in more formal and systemic sources of resilience. The value of social protection was seen, for example, in our eastern European and Central Asian sites where many respondents benefited from government cash transfers or support by employment centers. Other countries lacked effective pre-existing social assistance programs and were rarely able to launch new programs in a timely manner. However, free or subsidized education and school feeding programs helped keep children in school (when they were available and could be sustained during crises). Free or subsidized health services were also greatly appreciated.
 


Source:
Rasmus Heltberg, Naomi Hossain, and Anna Reva (editors), Living through Crises: How the Food, Fuel, and Financial Shocks Affect the Poor, World Bank New Frontiers of Social Policy, 2012. Also available online at: http://issuu.com/world.bank.publications/docs/9780821389409

See also Duncan Green’s
blog from the London launch of the book.
Video from the World Bank InfoShop launch event.