In support of a bailout

This page in:

No, not the $700 billion bailout of US banks. Martin Ravallion makes the argument for Bailing out the World's Poorest in a new working paper. While bankers (or ex-bankers) can probably fend for themselves, the world's poor are not so lucky:

[T]he welfare losses can last a lot longer than the crisis itself. The poorest can be particularly vulnerable to even small shocks. Productive activity is simply not feasible at low levels of nutrition; this “threshold effect” means that a negative shock of sufficient size can push a poor household past its tipping point and so put it on a path to destitution, while the same household bounces back in due course from even a slightly smaller shock.

And while bank bailouts raise tricky questions of moral hazard, that's not really an issue for the poor:

[B]ailouts in a crisis raise concerns about moral hazard. Using public money to help those who took high risks, and lost out, can encourage excessively risky behavior in the future. However, such concerns carry rather less weight when talking about bailing out the poorest in the wake of the current crisis. It was not their risky behavior that precipitated the crisis, though (without effective public action) they may well end up carrying a significant share of the welfare impact, including beyond the crisis. More fundamentally, uninsured risk spills over into production and investment decisions of poor people in ways that can severely impede longer-term prospects of escaping poverty. (This is not a new point; indeed, the idea has roots in the writings of classical political economists such as Adam Smith and Turgot.) Lack of insurance for the poor is arguably a more important reason for persistent poverty than too much insurance.


Ryan Hahn

Operations Officer

Join the Conversation

The content of this field is kept private and will not be shown publicly
Remaining characters: 1000