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Protecting the poor from macroeconomic shocks

  • Ferreira, Francisco
  • Prennushi, Giovanna
  • Ravallion, Martin

Many developing countries faced macroeconomic shocks in the 1980s and 1990s. The impact of the shocks on welfare depended on the nature of the shock, on initial household and community conditions, and on policy responses. To avoid severe and lasting losses to poor and vulnerable groups, governments and civil society need to be prepared for a flexible response well ahead of the crisis. A key component of a flexibly responsive system is an effective permanent safety net, which will typically combine a work-fare program with targeted transfers and credit. Once a crisis has happened, several things should be done: 1) Macroeconomic policies should aim to achieve stabilization goals at the least cost to the poor. Typically, a temporary reduction in aggregate demand is inevitable but as soon as a sustainable external balance has been reached and inflationary pressures have been contained, macroeconomic policy should be eased (interest rates reduced and efficient public spending restored, to help offset the worst effects of the recession on the poor). A fiscal stimulus directed at labor-intensiveactivities (such as building rural roads) can combine the benefits of growth with those of income support for poor groups, for example. 2) Key areas of public spending should be protected, especially investments in health care, education, rural infrastructure, urban sanitation, and micro-finance. 3) Efforts should be made to preserve the social fabric and build social capital. 4) Sound information should be generated on the welfare impacts of the crisis.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2160.

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Date of creation: 31 Aug 1999
Date of revision:
Handle: RePEc:wbk:wbrwps:2160
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  1. Datt, Gaurav & Ravallion, Martin, 1996. "Why have some Indian states done better than others at reducing rural poverty?," Policy Research Working Paper Series 1594, The World Bank.
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  8. Ravallion, Martin, 1999. "Appraising Workfare," World Bank Research Observer, World Bank Group, vol. 14(1), pages 31-48, February.
  9. Lipton, Michael & Ravallion, Martin, 1993. "Poverty and policy," Policy Research Working Paper Series 1130, The World Bank.
  10. Thorbecke, Erik, 1991. "Adjustment, growth and income distribution in Indonesia," World Development, Elsevier, vol. 19(11), pages 1595-1614, November.
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