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Why the Poor Invariably Pay the Price for this Crisis

Raj Nallari's picture

Even in normal economic times, the poor as a group do not affect public policy. Why then would it be different during a financial crisis, when saving the elites and saving the ‘financial world’ is of paramount importance?

The financial crisis originated in the USA and Western Europe and spilled over to the relatively poorer countries in Emerging Europe, Asia and Africa and to a lesser extent the Latin American countries. The middle and low-income countries were better prepared in 2009 to address the social fallout of the financial and economic crisis than in 1997, but available information from household and labor surveys still find that the people below the poverty line in developing countries have been disproportionately impacted due to the crisis.

To wit, this crisis initially led to credit crunch, lowered export and output growth and increased unemployment and poverty, lowered flow of remittances, reduced fiscal space as revenues fell sharply (due to lower business profits, fall in stock prices, lower commodity prices, lower output) while ‘bailout’ spending increased dramatically (support to industries, fiscal stimulus). The crisis of 2008-09 could be dubbed the ‘Great Reversal’ for when it is ultimately over, it will undoubtedly show that decades of poverty reduction has been eroded. The World Bank estimates that 53 million new poor may have been added to about 2 million already poor in the world.

Within countries, there is uncertainty about which groups will be impoverished during this crisis. Not only have the poor and vulnerable been adversely affected, but also those in middle class, working in export manufacturing and services. As such more people in urban industrial areas may have been affected than rural folks.

For example, the International Labor Organization (ILO) 2009 Global Jobs Pact reports on the Hangzhou economy, where despite the fiscal stimulus the number of newly-employed people declined with occupational vacancies dropping and many people lost their jobs as companies cut jobs. McKinsey and Ernst and Young surveys of company managers also support such a trend across developed and developing countries.

In Hangzhou, at the start of the financial crisis, 75% of women workers, mostly at minimum wages, were employed by limited liability companies, private companies and foreign firms, mostly in manufacturing firms and services. By the latter stages of the crisis the number of women employed in these sectors fell. Women continue to be ‘shock absorbers.’

ILO also reports that 43 million jobs have been lost during the crisis, 20 million in China alone. But the real size of the crisis is even larger as many workers have dropped out of labor force, and some of those still working are in part-time jobs, often working at reduced wages. If the Asian crisis of 1997-98 is any indication, the labor force participation (and output growth) never reaches pre-crisis levels even in the long term. Moreover, in developing countries, earlier experiences suggest that higher levels of informal employment tend to persist well beyond crises. Unemployment rates remain high and lag economic recovery. For example, in the EU-15 during the early 1990s, the incidence of long-term unemployment among prime age workers rose over 8 percentage points and remained stubbornly high for many years. When the poor are ‘hit’ they stay ‘hit’ despite the fiscal stimulus packages in 40+ countries and government proclamations to the contrary.

Depending upon their fiscal position, governments across the world have ‘bailed’ out the financial sector and/or too big to fail manufacturing firms, and resorted to fiscal stimulus packages, the total fiscal costs of which ranged from 1% of GDP in countries such as India to 15% of GDP in China. It is hard to find any country that had pro-poor fiscal stimulus and it is hard to argue that bailing out the financial sector was pro-poor especially when even in US about 10 million, definitely poor, do not even have savings accounts in commercial banks and many more do not even get access to credit from these banks. Why should social programs for the poor need to be ‘temporary and targeted’ while ‘bail outs’ for the financial sector and large industrial firms ‘at will and carte blanche’?

The relatively poor and vulnerable would also be affected by the financial crisis which eroded funded and unfunded pension schemes. For example, there are large potential losses on Funded Pension Schemes (which invested in stocks and mutual funds) in South Africa, Chile and Brazil. Similarly, potential government support due to pre-defined guarantees of minimum benefits or rate of returns for defined contribution pension plans in many Eastern European countries are under pressure due to tight fiscal situation.

The tightened fiscal situation of most governments brought about by the global crisis will likely result in cutbacks in social spending to health, education, nutrition, and basic infrastructure services that the poor need to access to survive. In general, why don't poorer neighborhoods have regular public transport – higher crime and violence, lack of demand or lack of public resources?

The global crisis has also led to a steep decline in migrant remittances from Moldova (remittances account for 40% of GDP), Sri Lanka, Bangladesh, Nepal, Turkey and many other developing countries. In Cambodia alone, over $40 million dollars in migrant remittances have been lost. Millions, possibly billions of more dollars are not being sent to the recipients in these countries, who are usually poor and vulnerable relatives, who primarily use the remittances for personal consumption.

Should we still wonder about who will pay the price for this crisis? The middle-class in higher taxes for the ‘bailouts’ and higher fiscal deficits and the poor in jobs and incomes lost, less essential services and fewer migrant remittances and public resources.

Reminds one of the poems by Oliver Goldsmith (in the Vicar of Wakefield):

“Ill fares a land, hastening ill a prey,
Where wealth accumulates and men decay”



Submitted by Caitlin Weaver on
The global financial crisis provides a sharp reminder of how weak lending practices not only affect the lives of many people but also can have severe systemic consequences. However, policies designed to protect may unintentionally restrict the extension of credit, especially to poorer borrowers. While the financial crisis provides evidence of the need for greater consumer protection, adding costs and complexity to credit processes may slow renewed formal lending. Confronted by these growing pressures at a macro-economic level, policy makers and regulators face a “regulator’s dilemma”: how much and how to intervene in credit markets to protect not only those borrowers who already have access to formal credit, but also to protect access to credit itself. At the heart of successfully resolving this dilemma, as in all such dilemmas, is the process of carefully identifying and evaluating the trade-offs involved. David Porteous provides a thoughtful account of these tradeoffs in his new Framing Note for the Financial Access Initiative:

Submitted by Anonymous on
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