The Lingering Global Crisis and the New Poor

02/28/2012 09:48 am ET | Updated Apr 29, 2012
  • Marcelo Giugale Senior Economic Adviser at the World Bank - Fellow of the National Academy of Public Administration - Author of "Economic Development: What Everyone Needs To Know".

You were a civil servant. You had four-week vacations, free health care and job security. You looked forward to retiring at fifty-something. And, like the rest of your countrymen, your family enjoyed services that were heavily subsidized -- from electricity to transport to college, you never paid the real cost of what you consumed. Life was good. You were squarely middle-class, and never really asked who paid for it all.

Suddenly, your government runs out of money and of lenders, and teeters towards bankruptcy. In a rush towards austerity, the public sector begins to shed workers and raise prices, and parts of it are sold to private investors who shed even more workers and raise even more prices. You get fired, and thrown into a labor market where there are no jobs on offer. Your house is now worth half what you paid for it, and anyway you borrowed to buy it. You begin to tap your savings, assuming, of course, that the bank where you have your deposits has not gone bust. You realized that you need to adjust your standard of living -- downwards, big time. How soon before you fall beneath the "poverty line"? And once you have fallen, who will help you back up? Your broke government? Other countries'? Charities? The World Bank? What will they really be able to do for you?

You see, helping the ex-middle-class or, rather, the "new poor" is not easy. Most social assistance systems are -- for good reason -- designed to help those who have always been poor, those economists call "the structurally poor." The typical social program deals with things like basic health, primary education and nutrition. That is of little use to educated, middle-age adults who suddenly lose their income and their assets. The lingering global crisis, especially its European victims, is forcing us to rethink the objectives and the tools of social policy. Past meltdowns in Asia, Eastern Europe and Latin-America provide us with some good hints on what to expect and how to respond.

Start with the fact that the new poor are easier to identify -- they have IDs and property titles. They are more likely to live in cities, than to be dispersed out in remote villages. Any help you give them should be easier to target, monitor and evaluate. The first life-line is typically unemployment insurance, if such a thing exists. If it doesn't, your best bet is to extend the direct cash or food transfers that you make to the "old poor" and cover their newly-minted peers. If you don't have those transfers, then it is down to temporary employment in public works, right? Not quite. It will take a long period of pain before a former middle-classer will accept to go out to paint schools or dig water lines. And that assumes that the government can afford "to make work" in the first place.

Second, you don't need to build the human capital of newly-poor families -- you need to protect it. They will ditch private medical insurance and will show up at public hospitals, but only when it is too late -- they really don't want to go there if they can avoid it. Ditto for private education: public schools' roasters will balloon. The hardest-hit may pull their teenagers from high-school altogether and send them to work in the informal economy -- few of those kids ever go back to studying. To make matters worse, the evidence shows that the poorer the country, the more likely school drop-outs are. [Interesting: school enrollment actually increased in the U.S. during the Great Depression, but nose-dived in almost every African country that went through serious economic malaise.] So you may need to give grants to "at-risk" students just to keep them in class.

Third, those that fall from the middle-class during crises usually have solid basic skills. They may need some retraining, but not much. What they don't have is information on where and in which industry the new jobs are -- and are not. So anything that you can do to put employers and employees together is doubly valuable. This is the time to invest in government-subsidized employment centers.

Fourth, you should help people get rid of their houses when they can no longer afford them, rather than using public money to refinance their mortgages. Why? Because a house means being stuck in one place where there may or may not be jobs -- the huge differences in unemployment levels among American cities is a testament to that. At times of crisis, mobility is crucial.

Finally, don't expect much help from donors -- public or private. The reason is simple: there is less sympathy for the fallen middle-class. There are no malnourished babies with blunted stomachs in the evening news. No refugee camps. No raging epidemics. These are people who may still dress and look like, well, yourself. They just happened to have lost their livelihood and their lifestyle. This makes it difficult to convince tax-payers and philanthropists to give more money to United Nations agencies, international development banks, or NGOs to assist poor people who don't (yet) seem poor. And even if they give you the money, those institutions may not have the know-how or the capacity to move quickly enough.

But moving quickly is exactly what they may have to do. Free-falls down the social ladder are no academic curiosity. More than one in ten Mexicans fell under the "poverty line" in the year that followed the country's 1994 financial crisis. Fifteen percent of Indonesians suffered the same fate in 1997. So did one in six Russians in 1998. The numbers are even worse for Argentines: A fifth of them were ejected from the middle-class and into poverty during the 12 months that followed their economy's melt-down of 2001. Today, a fourth of all Spaniards are said to be "at risk" of falling into poverty because of the Euro crisis. This kind of social impact is enough to cause major political turmoil, and is not easy to turn back. [To give you an idea, it is said that, in "normal times," it takes steady, annual economic growth of five percent or more to reduce the poverty rate by one percentage point each year.] The longer the global crisis lingers on, the more urgent it is to line up the tools, the policies and the institutions that will deal with the "new poor."