Impacts of Economic Crises on the Poor

ECONOMIC CRISES 9

Impactsof Economic Crises on the Poor

Impactsof Economic Crises on the Poor

Abstract

Sincethegreatdepressionof 1936, theworldhas witnessedunprecedentedlevels of economiccrises,with themostrecentcrisesbeingthefinancialcrisesof 2008. Muchattentionhasbeenconcentratedin global financialplayers,marketsandmajorcausesof thecrises.However,to unfoldtheunprecedentedmagnitudeandscopeof economiccrises,wehaveto turnour attentionto theimplicationof thecrisesof thepeople,especiallythepoor,andtheselivingin poorcountries.Whetherthecrisesarisefrom economicmeltdown like theKorean meltdownof 1998 oras a resultof naturaldisasterssuchas earthquakes,itis thepoorandthedisempowered that bearthegreatestbrunt of thecrises.Theeconomiccrisesthrowthelivesof thepooroff thebalanceandrenderthem powerlessto recoverfasterfrom thecrises.Criticalanalysiso theadverseimpactsof economiccriseson thepoorwill be imperativein promptinggovernmentsto provideadequateshockcushionsto thepoor.

1.0Introduction

Economiccrisesare predicamentsexperiencedby economiesof variouscountries,wheretheeconomytakesa sudden,unprecedenteddownturn due to financialcrises.Among themostprevalenttypesof financialcrisesincludethebankingcrises,thecurrencycrises,thespeculativebubblesandcrashes,theinternationalfinancialcrisesandthewidereconomiccrises.Thebankingcrisesarisesfrom a situationwherebythebanksufferssuddenrushof withdrawalsby thedepositorsat a fasterratethan deposits(GlobalEconomics Crisis Resource Center, 2010). Theincidence,referredto as bankrun,is responsibleforsuchcrisessuchas therunon theBank of theUnited States in 1931 aswell as theNorthern Rock Bankon 2007.Currencycrisesoccurwhentheexchangereservesexceedits meanswhilethespeculativebubblesandcrashesexistsin eventsof sustainedoverpricing of assets. Theinternationalfinancialcrisesoccurwhena countryis forcedto devalueits currencydue to accruingcurrentaccount.Economiccrisesare theextremeformof financialcrises,with adversitiesof thefinancialcriseslastingfora prolongedperiod.Someof thenotablecharacteristicsof an economyexperiencingeconomiccrisesincludefallingGDP growth,risingorfallingpricesof commoditiesdue to inflationordeflation, as wellas drying of theliquidity valueof theeconomy.Economiccrisesmay taketheformof a recessionordepression,with depressionbeingthesevereformof recession(United Nations, 2009).Economiccriseshavesignificantadverseimpactson thepopulace,mostof which areborneby thepoorandtheeconomically deprivedpersons.In addition,thepoortakelongertimesto recoverfrom thecrises,a factthatincreasestheadversitiesof thecrises.Thisresearch will exemplifythevariousimpactsof financialcriseson thepoorandtheeconomically deprivedpersons.Understandingtheimpactsof theeconomiccrisesamong thepoorwill promptgovernmentsandpolicymakersto takeappropriatemeasuresto cushion thepooragainst economiccrises.

2.0Literature Review

2.1Short term effects

Accordingto Kleinand Shabbir (2007), economiccrisesleadto thebankruptcyof industriesleadingto massiveunemployment’especiallyamong thepoor,whoforma significantportionof workers.Theremainingindustriesare forcedto layoffsomeworkers,at thesametimereducingthewagesof theremainingworkforce. Further,firms will cutdownstophiringmoreworkers,leadingto massiveunemploymentamong thealreadypoorpopulace.Additionally, producershikepricesof their produceto coverforreducedpurchasinglevels among thepopulace,subjectingtheeconomyto inflation.Thehighcommoditypricesandlowincomesreducethepeople’spurchasingpowerspredisposingthem to morepoverty.Thereducedpurchasingpowerreducestheabilityof thepoorto accessbasiccommodities,as wellas thebasicservicessuchas medicalservices,educationandsanitation(Savona,Kirton &amp Oldani, 2011). Thereducedincomesreducetheabilityof thepoorto paytheir rents henceare forcedout of their homes,renderingthem homeless.Theyare forcedto buildalternative housingcheapmaterialreadingto thecreationof slumswith poorsanitation,predisposingthem to communicablediseases.Despite theincreasedrateof diseases,thepoorunableto accessvitalhealthservices,leadingto massivedeaths(GlobalEconomics Crisis Resource Center, 2010). Accordingto Moreau and Ulasiuk (2011), reducedeconomicprowesspredisposesthepoorto socialevilssuchas crimesandprostitutionas an alternative meanof payingtheir bills.In mostcases,thepoorswitch to abusingdrugsas ameanof relievingstress,therebypredisposingthemselves to drug-related maladies.In its extremes,economiccrisespredisposethepoorto psychologicaldisorderssuchas depression,leadingto increasedsuicides(Klein&amp Shabbir, 2007).

Asindicated by Savona,Kirton &amp Oldani (2011) economiccriseshavesignificantimpactson thesocialsetupsof thepoorcitizenry. In mostcases,theinabilityto accessbasiccommoditiessuchas foodlowersthebirthrate.Theinabilityto accessqualitymedicalservicesleadsto increaseddeathsandhigherchildmortalityrate,hencereducesthetotalpopulation.Adversitiesof thecrisesforceallmembersof thefamily,includingthechildrento searchforemploymentensurethesurvivalof their families.Thismakestheschoolgoingchildrenfrom poorfamiliesdropout of schoolandhelptheir parentsto providefortheir families.Economistshaverecognizedthattheseshort-run impactsof economiccriseshavelong-term impactsespeciallyon thepoor,whoare unableto recoverfrom economiccrises.Forinstance,unemploymentleadsto fallingincomesforcesfamiliesto forego highereducationfortheir children.Thedepressedconsumerspending andthefrozencreditmarketsinhibitthecreationof thevibrantsmall-scale businessesthrough thescarring effects(Savona,Kirton &amp Oldani, 2011).

2.2Long Term Impacts: Economic scarring

Traditionalanalysisof fiscalstimuluslooksat theshort-run impactsof thefiscalpolicyon jobcreationandtheGDP after theoccurrenceof economicimpacts.However,economiststracethelong-termimpactsof economiccrisesthrough theeconomicscarring process.Accordingto Moreau and Ulasiuk (2011), economiccriseshave significantlong-term impactson education,which arethentranslatedto othersectorsof theeconomy.In mostcases,educationdepends on thefunding abilityof theparents,with childrenfrom thepoorfamiliesbeingforcedto dropout of schoolsdue to lackof schoolfees.In theeventof economiccrises,thepoorare renderedpoorer,reducingtheir abilityto payschoolfees,forcingtheir childrendropout of school.Further,educationis affectedby otherfactorsthat are outside theschoolsetting,suchas availability of healthyfoodas wellas theavailability of healthservices.During economiccrises,thepurchasing powerof thepooris significantly reduced,which reducesaccessibilityto healthyfoods.Thispredisposestheir familiesto nutritiondeficiencydiseases,which makesthechildrenfrom poorfamiliesdropout of schools(Savona,Kirton &amp Oldani, 2011). In addition,unavailability of healthyfoodsamong thepoorreduceschildrencognitive abilities,which significantly affectstheir understandingandconcentrationin schools.Conversely, theinabilityto accessadequatehealthservicesamong thepoorwhich isamplifiedby theimpactsof economiccrisescreatesbarriersto attainingeducationamong thepoor.Otherfactorsthat suchas forcedhousingdislocationandhomelessness as a resultof economiccrisesforceschildrenof thepoorto dropout of schools,creatingbarriersto accesseducation.Barriersto accessappropriateeducationamong thepoortrapthem in theviciouscycleof poverty,wherethechildrenof thepoorremainpoorevenafter recoveringfrom theeconomiccrises(Moreau &amp Ulasiuk 2011).

Asindicated by Savona,Kirton &amp Oldani (2011), thereducedpersonalincomescoupledwith increasedpricesof goodsreducepersonalsavings,therebyreducinginvestments.Assuch,poorerfamiliesworsen theeconomicoutcomesof their childrensince theydonot investfortheir future.Theeconomicdownturns impactthefutureprospectsof thepoorfamilies,includingtheir families,significantly affectingtheir economicprowessforyearsto follow.Researchers attest thattheadverseeconomicpredicamentsare passedon to successivegenerationsthrough economicmobility.Througheconomicmobility,childrenof thepoorremainpoorerevenafter recoveringfrom economiccrises,in mostcasesendingup workingforthewealthymembersof thesociety,hencetheincreasingwealthgapbetween therichandthepoor.Accordingto Moreau and Ulasiuk (2011), the government is likelyto intervenein events of economic crisis, usingthefiscalorthemonetarypoliciesto resolvethesituation.In mostcases,governmentsincreasetheir spending, providingthebasicgoodsandservices.Tofinancetheincreased&nbspgovernmentspending,governmentsresultin increasedtaxation,furtherreducingtheprofitmarginsof theexistingfirms. Thisreducestheresourcesthat otherwisewould bedevotedto infrastructural andtechnological development.However,itshould be notedthatthere is reducedgovernmentrevenuesthrough taxationduring economiccrises.Thereducedtaxrevenuesarisefrom thereducedcorporate taxas industriesmakelesserprofitsandthereducedincometax(Klein&ampShabbir, 2007).

2.3Research questions

  • What are the short-run impacts of economic crises among the poor?

  • What are the long-run impacts of economic crises among the poor?

2.4Methodology

Lackof real-time data, there is a challengeof measuringtheimpactof economiccriseson thepoorandespeciallythosein thedeveloping countries.Assuch,theresearchwill usethemicrosimulation approachto assessingthepovertyanddistributional effectsof economiccrises.Giventhehouseholddatarequiredto measuretheimpactsin realtimeare unavailable in mostcountries,theresearchwill usetheex-ante methodsto extrapolate theimpactsof economiccrisesfrom theavailablepre-crises data. Theresearchwill buildon a modeldescribedin Ferreira etal.(2008), to makecomparisonsbetween pre andpostcrisesscenariosorscenarioswithout thecrisesandwith thecrisesforthesameyear.

Theresearchwill takethecasestudyof Mexico, Philippines andBangladesh. Theresearchwill usethemicro-simulation approachto estimatinghowmacroeconomic impactsaretranslatedinto lowerincomesforthepoorhouseholds.Themacro-simulation processhas a numberof limitationsfirst, thesamplecountrymay not representtheglobal impactsof economiccrisesitmay not fullycapturethecountriesthat largelydepend on commoditymarkets.Secondly,themicrosimulations are based on pastdata reflectingmarketstructuresthat are assumedto existevenafter thecrises.

References

Ferreira,F., P. Leite, L. Pereira da Silva, and P. Picchetti. 2008. “Can theDistributional Impacts of Macroeconomic Shocks Be Predicted? AComparison on Top-Down Macro-Micro Models with Historical Data forBrazil.” In TheImpact of Macroeconomic Policies on Poverty and IncomeDistribution,ed.F. Bourguignon, M. Bussolo, and L. Pereira da Silva, 119–75.Washington DC: World Bank

GlobalEconomics Crisis Resource Center. (2010). Globaleconomic watch: Impact on business ethics, government and society.Mason, Ohio: South-Western Cengage Learning.

Klein,L. R., &amp Shabbir, T. (2007). RecentFinancial Crises: Analysis, Challenges and Implications.Cheltenham: Edward Elgar Pub.

Moreau,M.-A., &amp Ulasiuk, I. (2011). Beforeand after the economic crisis: What implications for the `Europeansocial model`?.Cheltenham: Edward Elgar.

Savona,P., Kirton, J. J., &amp Oldani, C. (2011). Globalfinancial crisis: Global impact and solutions.Farnham, Surrey: Ashgate.

UnitedNations. (2009). Reportof the Conference on the World Financial and Economic Crisis and ItsImpact on Development, New York, 24-30 June 2009.New York: United Nations.