Bailing out the world’s poorest

Following on shortly after the food price increases of 2007 and 2008, the current financial crisis is likely to have deep implications for poor people in the developing world. No doubt, a social protection response, supported by developed countries, could go a long way toward mitigating these effects. But during past crises, the international community has tended to respond in a short-term way, neglecting to take into account the longer-term implications of their interventions on growth and poverty reduction in developing countries. In this context, a new report brought out by the World Bank reviews past social protection experiences and outlines the lessons learnt.

A social protection response essentially puts in place an insurance system for those who are relatively uninsured or face high costs of self-insurance. It should ideally comprise of a combination of transfers of cash or food on the one hand, and relief work at minimum wages, on the other. Although social protection measures aim to both compensate the poorest losers and promote their longer-term recovery, in practice a tradeoff can be expected between impact now and impact in the future. The terms of that tradeoff will depend on the types of programmes that are adopted. In general, social protection programmes need to bear in mind that:

• there are likely to be heterogeneous impacts of a crisis within a given country, depending on household wealth, demographics, education attainments and location, amongst others
• safety net policies are only one element of the set of policy responses to a crisis, including policies to restore macroeconomic stability and economic growth and assure that the financial system is sound
• safety nets must respond flexibly to the needs of the poor rather than rely heavily on administrative discretion

The report points out that the current crisis creates an opportunity for developing countries to support or build effective safety nets that are permanent and automatic, dealing simultaneously with crises and the more routine problems of transient poverty in normal years. Recognising that the impact of a shock is closely connected to deeper problems of underdevelopment – including credit and insurance market failures, underinvestment in local public goods and weak institutions - social protection should, therefore, be considered as an integral part of countries' poverty-reduction strategies. Of course, the poorest countries are likely to find such an approach unaffordable and will be compelled to make hard choices. Unfortunately, this comes at a time when foreign aid flows are under pressure as OECD countries focus on stimulating domestic demand.