To minimize the harmful impact on poor people of macroeconomic shock, sound policies for dealing with crises, and an adequate public safety net should be in place before a crisis starts.

To minimize the harmful impact on poor people of macroeconomic shocks, sound policies for dealing with crises - and an adequate public safety net - should be in place before a crisis starts. Many developing countries faced macroeconomic shocks in the 1980s and 1990s. The impact of the shocks on welfare depended on the nature of the shock, on initial household and community conditions, and on policy responses.To avoid severe and lasting losses to poor and vulnerable groups, governments and civil society need to be prepared for a flexible response well ahead of the crisis. A key component of a flexibly responsive system is an effective permanent safety net, which will typically combine a workfare program with targeted transfers and credit. Once a crisis has happened, several things should be done:Macroeconomic policies should aim to achieve stabilization goals at the least cost to the poor. Typically, a temporary reduction in aggregate demand is inevitable but as soon as a sustainable external balance has been reached and inflationary pressures have been contained, macroeconomic policy should be eased (interest rates reduced and efficient public spending restored, to help offset the worst effects of the recession on the poor). A fiscal stimulus directed at labor-intensive activities (such as building rural roads) can combine the benefits of growth with those of income support for poor groups, for example.Key areas of public spending should be protected, especially investments in health care, education, rural infrastructure, urban sanitation, and microfinance.Efforts should be made to preserve the social fabric and build social capital.Sound information should be generated on the welfare impacts of the crisis.This paper - a joint product of the Poverty Group, Poverty Reduction and Economic Management Network, and Poverty and Human Resources, Development Research Group - is part of a larger effort in the Bank to inform policy choices aimed at minimizing the social costs of macroeconomic shocks.

This paper attempts to answer the question: Who is most vulnerable to declines in welfare during a macroeconomic shock? After clarifying the difference between poverty and vulnerability, an analytical framework is presented and then applied to household panel data from Peru. Major findings are: (a) households with better educated heads are less vulnerable; (b) female headed households are not more vulnerable to declines than male headed households; (c) households with more children are more vulnerable to macroeconomic shocks; and (d) transfer networks that may assist the poor in relatively stable periods do not appear to protect them during a major shock, with the exception of transfers that originate from outside Peru.

Ending poverty and stabilizing climate change will be two unprecedented global achievements and two major steps toward sustainable development. But the two objectives cannot be considered in isolation: they need to be jointly tackled through an integrated strategy. This report brings together those two objectives and explores how they can more easily be achieved if considered together. It examines the potential impact of climate change and climate policies on poverty reduction. It also provides guidance on how to create a “win-win†? situation so that climate change policies contribute to poverty reduction and poverty-reduction policies contribute to climate change mitigation and resilience building. The key finding of the report is that climate change represents a significant obstacle to the sustained eradication of poverty, but future impacts on poverty are determined by policy choices: rapid, inclusive, and climate-informed development can prevent most short-term impacts whereas immediate pro-poor, emissions-reduction policies can drastically limit long-term ones.

"The importance of distributional issues in policymaking creates a need for empirical tools to assess the social impact of economic shocks and policies. This paper reviews some of the modeling approaches that are currently in use at the World Bank and other international financial institutions. The specification of these models is dictated by the issues at stake, the knowledge about the nature of the process involved, and the availability and reliability of relevant data. Furthermore, shocks and policies have macroeconomic, structural, and distributional implications. This creates interdependence between such policy issues. Finally, the distributional impact of shocks and policies hinges on the heterogeneity of socioeconomic agents with respect to endowments and behavior. In the end, each modeling approach should be judged on how well it handles the interdependence between policy issues and the heterogeneity of the stakeholders, given other constraints. " -- Cover verso.

Poverty remains one of the most pressing issues of our time. Understanding the impact of macroeconomic policy on poverty through growth and distribution of income is of considerable interest and this is what I examine in this dissertation. In Chapter 1, 'The Arithmetic of the Poverty-Growth- Inequality Triangle-Evidence from States of India', I use an arithmetic approach to examine how growth and income distribution matter simultaneously to poverty reduction by separating changes in poverty into a growth and distribution component. The results indicate that the poor benefit more from increasing aggregate growth than reducing inequality. In fact, bulk of the poverty reduction is concentrated in a period which witnessed the steepest increase in inequality since the effect of growth on poverty was large enough to overturn the effect of adverse distributional changes. Also, there is a great deal of heterogeneity in the poverty reduction performances of states, in particular the growth elasticity of poverty. I examine this heterogeneity in Chapter 2, 'The Empirics of the Poverty-Growth-Inequality Triangle: Does High Initial Poverty Matter?- Evidence from Rural India'. The more equal the initial income distribution and the higher the initial level of development, the greater is the growth elasticity of poverty. This empirical analysis also examines the impact of initial poverty on the pace of poverty reduction via its impact on economic growth and growth elasticity of poverty. Initial poverty has no adverse impact on growth; however it may lower the growth elasticity of poverty slightly. Furthermore, I find evidence of poverty convergence. In Chapter 3, 'Fiscal Policy and Macroeconomic Stabilility: Automatic Stabilizers Work, Always and Everywhere', I examine what can be done to protect the poor from macroeconomic shocks and volatility. Developed countries have in place in-built Counter cyclical automatic stabilizers to protect the poor from macroeconomic shocks and volatility and there is a vast literature on their effectiveness in reducing output volatility. Their effectiveness in developing countries has not been empirically validated. Using a sample of 49 countries, we estimate the impact of automatic stabilizers on output volatility and find that they strongly contribute to output stability regardless of the type of economy.

What circumstances or behaviors turn poverty into a cycle that perpetuates across generations? The answer to this question carries especially important implications for the design and evaluation of policies and projects intended to reduce poverty. Yet a major challenge analysts and policymakers face in understanding poverty traps is the sheer number of mechanisms—not just financial, but also environmental, physical, and psychological—that may contribute to the persistence of poverty all over the world. The research in this volume explores the hypothesis that poverty is self-reinforcing because the equilibrium behaviors of the poor perpetuate low standards of living. Contributions explore the dynamic, complex processes by which households accumulate assets and increase their productivity and earnings potential, as well as the conditions under which some individuals, groups, and economies struggle to escape poverty. Investigating the full range of phenomena that combine to generate poverty traps—gleaned from behavioral, health, and resource economics as well as the sociology, psychology, and environmental literatures—chapters in this volume also present new evidence that highlights both the insights and the limits of a poverty trap lens. The framework introduced in this volume provides a robust platform for studying well-being dynamics in developing economies.