News and Events

A bad time to be poor

Posted: 2011-04-18
Category: Opinion
By Ronald U. Mendoza

April 18, 2011 – IT IS never a good time to be poor, but crisis periods are particularly pernicious.
Crises of various types are increasing in their frequency and severity across the world—food price spikes, financial and economic turbulence, natural disasters and other catastrophic events give a sense of the rising risk faced by all countries, rich and poor alike.

There are many factors behind this, a chief one being our growing interconnectedness across national borders.

We witnessed in 2009 how the collapse of a major bank in New York could create ripple effects across the world’s major financial centers, eventually reaching even underdeveloped regions that depend on these centers as export markets and sources of capital.

Ripple effects
Experiences with SARS and the bird flu suggest that a virus in Shanghai could be carried to Los Angeles, Berlin or most other major cities in less than a day-such as via travelers taking direct flights that now link most major cities.

Indeed, even the recent disaster in Japan has not only created severe human tragedy, but has also created ripple effects throughout the world. For instance, it turns out that two companies in Japan supply about 90 percent of a specialty resin used in microchips that are then used in the smartphones and other electronic devices we all have come to depend on.

The disruption in their supply of this resin will surely affect the rest of the global supply chain.
That these different crises affect almost everyone is now widely understood. However, there is also growing evidence that crises-including many we have seen lately, such as the food price shocks, the global slowdown, and perhaps even the ongoing volatility in commodity prices—are especially harmful to the poorer and lower income segments of the population.

Their disproportionally negative impact on this part of the population stems from two main reasons: (1) poor and low income families are more likely to be harmed even by a small shock to their incomes given their already vulnerable situation; and (2) largely because of this, they are also less likely to recover quickly.
Indeed, analysts in the United States have begun to point to worrying signs of unequal recovery patterns from the global economic crisis.

US technology companies like Facebook, Google and Skype are now aggressively expanding and hiring.
Indeed, US unemployment fell slightly in March to 8.8 percent (compared to about 9 percent in January and February) and more than 200,000 jobs were added to the payroll.

However, analysts are quick to note that most of the people hired are well educated (those with college degrees), and the unemployment figures leave out the vast majority of discouraged workers who may have stopped looking for jobs (and therefore no longer count in the labor force).

In addition, even as over-all home sales in California, home to many of that country’s tech companies, continued to decline in 2010, the number of homes that sold for $1 million or more actually increased last year for the first time in five years.

Bill Rogers, an economics professor at Rutgers University in the US characterized the recovery as “bifurcated”-very different recovery outcomes experienced by different parts of the population. The rising tide is not lifting all boats.

There are risks that a similar bifurcation of recovery outcomes could occur in many developing countries, including the Philippines.

Recent policy research suggests that poor and low income families across the developing world have been badly hit, and are often marginalized during the recovery process for various reasons.
Aftershocks

For one, their remaining buffers and capability to cope are probably going to be at their weakest, even as they face many aftershocks from the global slowdown (such as diminished and unpredictable aid, sluggish export revenues, tighter public sector budgets and increased debt levels) as well as altogether new crises and shocks which seem imminent (such as the continued volatility in food and commodity prices).
It also takes a relatively longer time for a poorer family to recover from crises, particularly when they have undertaken a variety of coping strategies that are difficult to quickly reverse.

Using up savings, selling productive assets like livestock, taking on more debt, and pulling children out of school are some of the harsh coping behaviors they turn to, and these in turn further weaken their prospects to escape from poverty. Eventually, many are trapped in a vicious cycle of crisis vulnerability.
Recent data and evidence on the Philippines provide cause for concern.

From 2000 to 2009, Philippine real GDP per capita growth (2000 US$) averaged about 2.6 percent, reflecting its best performance in growth terms since the 1970s. However, during this same period, various measures of poverty and deprivation either persisted or worsened. Filipinos living on less than $2 a day represent about half of the population, and this has remained stubbornly persistent for the past two decades.

Indeed, a top economic policy official in the last administration lamented that 34 uninterrupted quarters of positive economic growth during the better part of the 2000s did little to reduce poverty in the country.
Instead, self-reported hunger increased during the 2003-2009 period. The dip in growth during the onset of the global financial crisis from 2008-2009 is likely to have further contributed to poverty and deprivation.
In addition, with a Gini coefficient (an indicator of income inequality used by economists) of about 44, the Philippines ranks among the highest in income inequality relative to the rest of Asia. In a sample of 90 countries with data on inequality from 2000-2008, the Philippines ranks in the top third in terms of severity in inequality.

Crises could exacerbate the inequality between those who are well resourced and more resilient and those who are poorer and less capable to protect themselves and take advantage of forthcoming recovery.
Higher inequality is therefore one of the principal threats in a world characterized by frequent crises.
The sobering reality is that just as boom periods do not necessarily benefit the poor (recall the Philippines’ recent experience of growth with increasing poverty and hunger), so do crises often disproportionately harm them, and recoveries tend to leave them behind. Here lies the crux of the argument for government intervention.

Without sufficient government action notably in the area of social protection, economic booms and busts as well as crises of various types will lead to a world of vastly disparate human development outcomes.
The motivation for action is not just one of charity. If left to fester, crises could turn into “inequality machines” perhaps leading to a social crisis that makes all others pale in comparison.
(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is Associate Professor of Economics at the Asian Institute of Management, and Executive Director of the AIM Policy Center. Prior to joining AIM, he was a senior economist with the United Nations in New York. Feedback at map@globelines.com.ph. For previous articles, please visit map.org.ph).

This was published in Philippine Daily Inquirer.

Comments

There are no comments

Post a comment