Transcript Macroeconomic Impact of Recent Crises

Impact of Crises on the
Vulnerable
Sanjeev Gupta
Deputy Director
Fiscal Affairs Department
International Monetary Fund
ODI/UNICEF Conference on “The Global
Economic Crisis”
London, November 9-10, 2009
Channels through which
vulnerable are affected

Contraction in output, resulting in job losses (e.g., due
to fall in demand for exports and tourism, lower
remittances)

Increases in inflation (e.g., due to external factors,
weather or exchange rate depreciation)

A cut in public spending on critical programs due to
increased fiscal pressures (e.g., arising from falling
revenue receipts, lower aid flows)

All these factors cut into real household incomes
What was the impact of recent
crises?
A. Food and fuel crisis, 2007-08

Increased inflation, especially in emerging market and lowincome countries because the share of food and fuel is
relatively large in the household basket

Despite fiscal pressures, fiscal policy was accommodative--the
median increase in fiscal deficit for 92 non OECD countries
was 0.7 percent of GDP in 2008. Public spending increased
because of higher fuel subsidies, expansion in transfer
programs (e.g., conditional cash transfers, school feeding
programs), and higher public sector wages. Revenues fell with
lowering of fuel and import taxes
What was the impact of recent
crises? (cont..)
B. Global Financial Crisis, 2008

World economic activity is projected to fall by 1 percent
in 2009—the first such decline since WW II

All countries are affected, although the magnitude of
the impact is different across regions. Growth in
emerging and developing countries is projected to drop
to 1.7 percent in 2009 from 6 percent in 2008
What was the impact of recent
crises? (cont..)

Inflationary pressures will remain subdued as food and fuel
prices have receded from their peaks and large output gaps
persists

Once again, budget deficits are projected to increase in 2009


For LICs and emerging market countries, the increase would range
between 3 and 4 percentage points of GDP, respectively
Many countries have implemented fiscal stimulus. Spending (both current
and capital) in LICs is projected to increase by about 2 percent of GDP.
Revenues are projected to decline by 1 percent of GDP
 Most countries have sought to increase or at least preserve social
spending (more later)
Impact on poverty

The two crises have led to higher poverty:

According to the World Bank


As a result of the food and fuel crisis, an additional 80-100 million
people will be trapped in extreme poverty in 2009
The financial crisis may add another 89 million people to extreme
poverty by 2010

Data on actual spending on social sectors during these crises
are not yet available. However, this spending increased in
relation to GDP during 2000-2006

For LICs for which consistent data are available since 2006,
29 countries are budgeting to either protect or increase social
spending during the current crisis, including 19 that have
Fund-supported programs in 2008-09
What is different in these crises

Fiscal policy has been more accommodative

Made possible by fiscal space created by debt
relief and adoption of sound policies prior to
the crisis. Reflected in falling average debt-toGDP in LICs prior to the crisis
Issues for discussion

Was the policy response appropriate during the last two
crises?

Are there any programs that should be strengthened
and be part of a counter-cyclical policy response during
future crisis?

Are different programs (i.e., cash transfers, generalized
subsidies, public works, etc.) equally effective in
providing safety net to the poor in different crises?
Papers for this session

Three papers:
Two papers analyze the impact of crises on child
health, using cross-country data and case studies of
five countries in Latin America and the Caribbean
 The third paper studies Ghana’s experience in
dealing with crisis and adequacy of its social safety
nets
