A World Bank research claims that stimulus packages, being approved and implemented by many a country, are more likely to succeed if they favor poorer people.
As the global recession threatens social cohesion everywhere, many countries are introducing fiscal stimulus actions into their economies in order to ease the harsher consequences of the recession, first, and stimulate the return to the normal economic cycles.
Some of the pressing questions that governments are trying to answer include the size – in terms of money – and quality – in terms of receivers of stimulus actions. Also, the types of spending they should consist of, and the channels through which they might work most efficiently to stimulate the economy.
Martin Ravallion, Director of the World Bank’s Development Research Group, and an expert on global poverty, emphasizes that there are many reasons why a stimulus that favors poorer people is more likely to have a stronger impact than one that does not.
“There’s an obvious ethical reason why a stimulus should favor poor people, but there’s also a macroeconomic rationale. Poor people, who are typically more constrained by a lack of credit, are much more likely to quickly consume or invest extra cash that becomes available through some form of stimulus.”
Historically, rich countries have taken countercyclical actions to stabilize their economies in times of economic stress through direct taxes and committed social spending. Many researchers are convinced “developing countries need to be able to act countercyclically too,” as observed by Heidemarie Wieczorek-Zeul, Germany’s Minister for Economic Cooperation and Development, during a recently-aired BBC World debate.
“If there’s one thing that should not be missed during this crisis, it’s the opportunity to create pro-poor stabilizers in developing countries, similar to the automatic social safety nets that rich countries already have in place,” said Ravallion.
With their long-sanding experience in dealing with famine, flood, financial xrisis and social issues in general, developing countries can also be a good source of inspiration for richer countries for ideas on how best to protect the poor.
Governments in developing countries have indeed experimented with a wide range of social protection programs, including those that protect poor people from financial crises. The ways in which their public budgets have been programmed provide valuable lessons that could be useful to both rich and poor countries today.
“Some of the best social protection programs in the world have emerged during times of macroeconomic stress, and some of the worst,” said Ravallion, “It is difficult—but critical—to strike a balance between immediate relief and long-term poverty reduction.”
Increasingly, both rich and poor countries’ welfare reform efforts have tried to highlight the notion of “co-responsibility”—helping people to escape poverty now while also taking actions that reduce dependency on welfare in the long run.
“We know a lot more than we did twenty years ago about what works and what doesn’t,” Ravallion said, “The ideal social safety net does not just protect the poor in times of need, but is also an integral part of the process of development.”
Two types of complementary programs that provide good examples of such incentives—also important in designing a pro-poor stimulus—are targeted cash transfers and relief work schemes. When these programs are designed effectively, they can go a long way toward stabilizing an economy in a manner that favors poor people.
Ravallion’s paper, Bailing out the World’s Poorest, reviews the arguments and evidence on these programs.