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Crisis response in low-income countries

As opposed to earlier assumptions, many low-income countries and their population are severely hit by the financial and economic crisis. A quick overview on vulnerability and crisis response capacity in selected low income countries can be found in Tables 1 and 2 below. The special challenges which low-income and other developing countries are generally facing, are discussed in more detail here.

Table 1  Key vulnerability indicators for country exposure to the crisis (selected low-income countries)

 

Exposure indicators

Exposure assessment

Country

International Poverty rate

National Poverty rate

Remittances (% of GDP)

Exports
(% of GDP)

ODA
(% of GDP)

Slowing growth

Bangladesh

50%

50%

9.5%

17%

2%

Yes

High

Cambodia

40%

35%

4.2%

65%

9%

Yes

High

Kenya

20%

52%

5.4%

27%

4%

Yes

Medium

Nepal

55%

31%

15.5%

16%

6%

No

Medium

Pakistan*

23%

33%

4.2%

15%

2%

Yes

High

Tanzania

89%

36%

0.1%

17%

12%

Yes

High

Vietnam

22%

29%

7.9%

70%

4%

Yes

High

Pakistan has moved from the low-income category ($975 Gross National Income (GNI) per capita or less) to lower middle income ($976 - $3,855 GNI per capita) according to latest World Bank classification from September 2009. Source: Institute of Development Studies: Low-income country preparedness for social protection responses to the global crisis. Draft Paper. 5 March 2009

Table 2  Key indicators for the ability to respond to the crisis (selected low-income countries)  

 

Response ability indicators

Vulnerability

Country

Fiscal space

Government capacity

 

Bangladesh

Some

Medium

Moderate

Cambodia

Some

Low

Very high

Kenya

Some

Medium

Moderate

Nepal

Some

Medium

Moderate

Pakistan*

Low

Medium

Moderate

Tanzania

Some

Medium

High

Vietnam

Some

Medium

High

 

* Pakistan has moved from the low-income category ($975 GNI per capita or less) to lower middle income ($976 - $3,855 GNI per capita) according to latest World Bank classification from September 2009. Source: Institute of Development Studies: Low-income country preparedness for social protection responses to the global crisis. Draft Paper. 5 March 2009

 

The tables above suggest, that vulnerability and the ability to respond to the crisis differs between various low-income countries. Concerning government capacity, this section especially looks into social security schemes. Among the countries listed above, Vietnam is the only country that has introduced an unemployment protection scheme. But the scheme has not yet paid benefits. All countries do not know general social assistance programmes, but have more or less extensive social cash transfer schemes (conditional or unconditional) in place. Especially in Asia public work schemes are also common. In the following, the country examples shall be discussed in greater detail to illustrate the variety of reactions that can be found among low-income countries.

Bangladesh, Cambodia , Kenya, Pakistan, Tanzania and Vietnam

Bangladesh

The impact of the crisis on Bangladesh has not been as grave as in many other places yet. For those months for which we do have economic data (second half 2008), all main indicators such as production, export etc. remained largely stable. Probably the most important channel of transmission through which the impact of the crisis is spread to Bangladesh so far is the decline in remittances and the return of hitherto migrant workers who find themselves back home without income or social security entitlements. One of the prime destinations of Bangladeshi migrants are the Gulf countries, where residence rights are strictly connected to employment. Once migrant workers lose their job, they are sent back to their country of origin. Organisations such as the International Organization of Migration and the World Bank suggest that Bangladesh needs to take measures to provide for social safety nets for these returning migrant workers who will be unemployed. So far, no special measures have been implemented, neither have new schemes been announced nor an extension of existing programmes to returning migrant workers. Rather, the government seeks to find other countries to which the returning could turn in search for new employment.

Current programmes in the field of social security include the public food distribution system (PFDS), Rural Employment and Road Maintenance Programme (RERMP), and 100 Days Employment Generation Scheme, widows allowances and pensions. Some of the schemes such as the PFDS and 100 Days Employment Guarantee Schemes have been introduced just a year ago. For example, under the PFDS the government provides primarily in-kind and some in cash support to particularly vulnerable groups, people affected by natural calamities and disasters. Total food grains distribution in the financial year 2008-09 through PFDS was 697.89 thousand metric tons. The RERMP was introduced for the ultra poor and destitute women of some of the crisis prone districts, and is designed to give work to 52,000 women, who will be employed to work in the maintenance of 90,000 kms of road network in the northern part of the country.  The ‘100 Days Employment Generation Scheme’ was introduced last year with an allocation US$ 291.5 million to generate employment for 2.92 million man-days.. Another recently introduced programme targets low income working mothers, especially those in the garment industries, for whom a monetary support worth US$ 2.92 million for the fiscal year 2008-09 was foreseen. A danger in the current crisis might be, that the funding for its development programs, including social protection programs, are largely donor funded – funding which might decrease given the global events and economic climate. Thus, although Bangladesh is expected to the be highly exposed to the crisis, the worst effects have not taken root yet. 

Cambodia

Although Cambodia has made remarkable economic progress over the past years, including double-digit growth for several years, it remains one of the poorest countries in Southeast Asia with a GDP of just US$ 320  per capita. Underemployment is widespread and already the food crisis of last year had a severe impact on the country’s poor. Now, in the economic crisis, all major drivers of growth (agriculture, tourism, construction and garments) have declined; the important garment sector alone has lost 70,000 workers.  As exports and FDI collapsed the estimated growth rate of Cambodia for 2009 is down to roughly 2 per cent (compared to 10 per cent in 2007). With its small, open and highly export-dependent economy Cambodia has thus been hit hard by the crisis. 
 

So far social security provisions are scarce, especially income support for the working age poor and under-employed was hitherto literally non-existent. But, the Government of Cambodia has embarked on an initiative to set up a comprehensive social safety net in the medium-term, admittedly, so far this initiative is still in its infancy stage and various options are deliberated.

Agreement on one component was reached in late July 2009 and will be a cash-for-work programme that was announced in by the Cambodian government and the Asian Development Bank (ADB). The US$36 million programme targets the rural poor in seven provinces or 200 communes who will no longer be paid in rice but in cash. The programme will run over the coming three years and include the construction and improvement of roads and irrigation systems. The bulk of the funding will come from ADB, which is to provide $30 million, which is partly a grant ($18 million)  and partly a concessional loan ($12 million), while the government is to contribute the rest.

The programme follows an earlier initiative of ADB, which has – together with the government - provided "labour rice" to more than 500,000 poor people in the seven provinces since October 2008. The current economic slowdown spurred the decision to pay people cash, because in the crisis most people in rural areas lack work and the money with which to buy food and goods. This switch to providing cash rather than rice follows a call by ADB Vice President Ursula Schaefer-Preuss for governments in the region to consider paying cash to vulnerable families hit by the global economic crisis. ADB encouraged Conditional Cash Transfers (CCTs) „to provide counter-cyclical funds into the hands of the most vulnerable, who are likely to spend the money on essential items such as food and housing,"ADB Vice President Ursula Schaefer-Preuss was quoted in the Phnom Phen Post.

An additional important component of the Cambodian crisis response is the training which shall be made available to some 40,000 laid-off workers from the garment industries. But, generally crisis response and especially the social security response remains patchy. The cash-for-work programme is without doubt a crucial component of the Cambodian crisis response. A comprehensive response in the field of social security on the other hand, calls for the gradual introduction of sustainable social security schemes which then allow swift crisis response in future economic storms. This has not yet been taken up yet. Equally, it must be mentioned, that Cambodia can hardly stage massive social programmes from domestic sources, but is need of further donor support if the social response is to be extended. 

Kenya
In recent years (2007) Kenya's economy expanded by 7.1 percent before a combination of post-election violence, poor weather and the fallout from the financial crisis stunted growth. The country has also witnessed a heavy decline in remittances, according to the Central Bank of Kenya Kenyans abroad sent 38 percent less than they did during the same period last year. Also another major engine of growths, the tourism industry is heavily affected, bookings and revenues are down by 30 per cent in the first 9 months of 2008 compared to the previous year. The negative economic climate is also reflected in Kenya’s stock exchange in Nairobi, where prices have declined by nearly 40% since April 2008, and 20% in October 2008 alone.
As a response to the crisis Kenya will boost government spending by nearly a quarter to push annual growth back to 3 percent, after it plummeted to 1.7 percent in 2008. Spending on development for the fiscal year starting in July 2009 was expected to focus on infrastructure development in roads, energy, water and irrigation projects. While infrastructure is rocketing, social security spending receives little attention in crisis response so far. The government said it plans to develop a comprehensive national social protection policy and has already set aside KhS1 billion (out of KhS2 billion originally foreseen for drought relief) to ensure food security and improve welfare for vulnerable groups. The only concrete measure in the field of social security are additional KhS200 million allocated to cash transfers for persons over 65 and mentally challenged. To finance additional spending, Kenya's budget deficit will jump to 6.6 percent of GDP, which Kenya tries to secure from local markets rather than international lending. 

Pakistan
The macroeconomic conditions in Pakistan have deteriorated significantly due to domestic as well as international factors, the global financial crisis is one of them. The growth of GDP is expected to slow down, in parallel the growth of Pakistan’s volume of trade is reduced in response to the tightening of macroeconomic policies in 2008/09. But, the inflation is expected to decline and the foreign exchange reserves position will be strengthen, due to the government’s efforts to tighten fiscal policies and monitoring of policies aiming at stabilization of the macroeconomic situation in the country with a view to the restoration of the investors’ confidence.
Among the measures taken as a response to the crisis are also initiatives, which aim to shield the vulnerable groups from the adverse economic developments of inflation and economic slowdown. The most important of which is the Benazir Income Support Program (BISP) with the initial endowment of PRs34 billion to provide income support to 7 million households. This aims at the expansion of an effective social safety net and constitutes an integral part of the overall government stabilization program. Additionally, the fiscal program for 2008/09 envisages an increase in social safety net spending from 0.6 percent of GDP to 0.9 percent. Furthermore, the government has launched the BISP, for which the budget already allocated PRs34 billion (0.3 percent of GDP). The design of the BISP, in particular the targeting of transfers and the delivery mechanism, will be reviewed in the first half of 2009, in consultation with the World Bank. The government also plans to expand social safety net spending by an additional 0.3 percent of GDP, for which further external assistance (mainly in the form of grants) is being sought from donors. While a more comprehensive and better-targeted social safety net is being designed, these additional funds will be allocated to scale up other existing programs, in particular cash transfers under the Bait-ul-Mal program. Also, part of the additional resources could be used to cover larger than envisaged electricity subsidies for poor household.

Tanzania
Tanzania suffered adverse economic developments as the traditional drivers of growth, tourism, remittances, FDI and agricultural exports such as tea and coffee declined. The country is also Africa's third biggest gold miner and a natural gas producer. The decline in growth is expected to fall to 5 percent in 2009 from 7.4 percent a year earlier, hence the effect is not as grave as in other countries. Tanzania’s plans to counter the effects of the crisis were mad public by its president in June 2009. He announced a major fiscal stimulus which is primarily devoted to infra-structure projects, such as railways, roads and energy projects as well as basic services such a water. In total, Tanzania plans to spend 31 percent more than in the previous financial year (starting in July). Roughly one half of the spending is devoted to infrastructure, support to farming, schools and health together. Among the measures is a the substantial increase of old-age pensions from TZS20,000 to TZS51,000 (roughly US$40), a breakdown on the other additional spending in the social sector was not yet available.
But, while the growth rates look rather healthy compared to other countries, analysts worry that Tanzania may be pushing its budget deficits too high and hence suffer in the future. Generally, Tanzania has a very high ration of ODA (12% of GDP)  and also many of the projects announced in June 2009 will need donor funding or additional lending. For example the investments into the railways are financed with a loan by the World Bank. And Tanzania in May 2009 reached an agreement with the International Monetary Fund (IMF), which approved a 12-month US$336 million arrangement under the the Exogenous Shocks Facility (ESF) to cushion the country from the effects of the global economic crisis. But the government is also looking for domestic financing sources, it e.g. announced higher taxes on luxury goods such as beer and cigarettes in order to make necessities more affordable for the poorer sections of the population.

Vietnam
Even before the onset of the crisis Vietnam’s economy had entered a period of macroeconomic instability with high inflation and current account deficits. When hit by the global financial crisis, the broader economic environment deteriorated further. Negative external shocks exposed serious structural weaknesses in the economy. Domestic consumption weakened and so crucial export orders decreased, industrial production stagnated and unemployment increased rapidly. Therefore in 2008 Vietnam showed the lowest economic growth rate in a decade 6.2%.
To counter this adverse developments, a stimulus package of US $6 billion was announced in December 2008. The package, amounted to 6.8% of GDP and is hence very large by international standards. It aims to revive the slowing economy with tax cuts, interest rate assistance, as well as spending on infrastructure, housing, schools and hospitals. But, with high levels of fiscal deficit, trade deficit and inflation, as well as decreasing oil revenues, there is limited room for manoeuvring to promote aggregate demand. In consequence, Vietnam’s capacity to ride out this period of difficulties depends crucially on its ability to bring back growth. On the other hand, maintaining long-term macroeconomic stability  remains a challenge. The recovery is likely to be led by export growth, but this presupposed that global demand picks up again, and influence on this development is not in the hands of the Vietnamese government.

Conclusions
As one can see from the information on a number of low-income countries, the effect of the crisis and their reactions to it are even more varied than the tables at the beginning of the page suggest. The policy responses range from tiny investments in Kenya, to massive programmes e.g. in Cambodia. The examples also show that where large scale investments in social protection are made, these are most often supported by donor funding. Governments in low-income countries may not be released from their duty to care for the welfare of their citizens, but in the current economic situation donor funding is in many cases crucial to avoid the worst social fallouts.


In more cases than those discussed here, policy makers acknowledge the need to tackle to the social dimension of the crisis, yet, they are often faced with defunct social security structures next to the lack of funding. What existing small scale programmes can certainly already do is to gradually build capacities of benefit delivery and administration, and they can deliver benefits to a limited number of people targeted within the scheme, or maybe enlarge the group of beneficiaries a little. But, these schemes may not be solution when the objective is comprehensive social security for all. Thus a long term strategy on how social security can gradually be extended to all may not be left aside when designing crisis response and when thinking about social security needs in the medium and longer term. Crisis response should therefore avoid investing into quick fixes for poverty while neglecting longer term solutions that would help correct the fundamental inequities in the domestic and global economy as well as society.


The quick look at a number of low-income economies also shows once again how interdependent global economic processes are. If Northern employees earn less, or are afraid about loosing their jobs, they may not go on vacation to Kenya, which successively suffers a massive decline in income from one of its major economic sectors. This also calls again for coordinated crisis response; the stimulation of global demand is out of reach for a single country. 
 

 

Main Resources

More information on Bangladesh , Cambodia Pakistan Vietnam, and their respective crisis response can be found on the ILO’s Global Jobs Crisis Observatory  

The page also gives information on crisis response in a number of other countries in the section on national stimulus.

The Overseas Development Institute has published a number of papers and background notes on developing countries and the financial crisis.  These include an in depth assessment of Kenya’s affectedness by the  crisis.

Can low income countries afford social security??

The document Can low-income countries afford basic social security?, based on a costing exercise undertaken in 7 African and 5 Asian countries, shows that low-income countries can afford a basic social protection package including health services to everybody, basic cash benefits to the elderly and families with children, and social assistance to a proportion of the unemployed.

Even if a complete basic social protection package cannot be implemented at once, a sequential approach can generate immediate benefits in terms of poverty reduction, pro-poor growth and social development.

A basic social protection package is demonstrably affordable, as the costing exercise in this document shows. The condition is that the package is implemented through the joint efforts of the low-income countries themselves and the international donor community.

All these steps have begun in a number of low-income countries in Africa and elsewhere (recent developments incountries like Tanzania, Zambia, Mozambique and Nepal are just a few examples), and there are signs that the process will accelerate in the nearest future.