Crises and the Poor: Socially Responsible Macroeconomics

Abstract

Macroeconomic crises not only affect the current living standards of the poor, but their ability to grow out of poverty. This paper presents evidence on the impact of economic crisis on poverty and inequality in Latin America. Crises not only result in higher poverty rates but may cause irreversible damage to the human capital of the poor. In light of this evidence, the author concludes that crisis avoidance and a pro-poor response to crisis should be a major component of a poverty reduction strategy. Therefore, the role of exchange rate policy, capital controls and counter-cyclical fiscal policy in generating or avoiding crisis is analyzed. Responses to macroeconomic crisis are assessed by considering the effects of different policy combinations, the use of safety nets and the composition of fiscal adjustment to protect the income of the poor in the face of macroeconomic adjustment. The main lesson is that socially responsible macroeconomic policy can protect the poor during times of crisis and simultaneously contribute to lower chronic poverty.

JEL Classification: H51, H52, H53, I3, O11, O12