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    Protecting the poor: How?

    Fatih Özatay, PhD29 November 2009 - Okunma Sayısı: 885


    Global financial crisis has underlined once more an important fact: Credit flows from financial to real sector moves to a large extent along with the volume of economic activity. When the economy is growing rapidly, credit volume expands rapidly due to the prevalent optimistic climate as both appetite of banks to extend credits and credit demand by corporate sector and consumers increase. On the other hand, when the economy is in rapid contraction, credit volume also falls down. In macroeconomic terms, credits come to a halt exactly when they are needed to stimulate demand.

    Parallelism with cyclical movements is not unique to the credit market. Budget transfers to the poor have the same fate in most of the developing countries. In periods of crisis, such transfers must rise as the mentioned sector is most severely affected by the crisis. However, in crisis periods, means of budget tighten; for instance tax revenues drop down and it becomes more difficult to make such transfers.

    In my last commentary, I called attention to a new finding that households in low income group in Turkey are affected severely by the global financial crisis. The findings were given in a survey study conducted by TEPAV, the World Bank and UNICEF and introduced in September 2009. Majority of the workers, especially those in informal jobs and in self-employment, stated that they experienced a drop in their income. Even if you put aside the sense of justice and egalitarian point of view and see the issue solely with a macroeconomic lens, you would identify immediately that transfers to those sectors are of high importance in terms of overcoming the crisis. First of all, these sectors have high propensity to consume. Second, these sectors have limited access to credit; they cannot borrow to consume. Third, these sectors mainly tend to spend on domestically produced goods.

    First, there is no doubt that these poor sectors must be protected primarily in periods they are severely in need of assistance. For the sake of whom limited budget means must be allocated? For instance, for whose benefit was the tax reduction implemented in March; for that of poor people? Second, you must have budget means even limited. If you are one of the countries with lowest tax revenues among developed and emerging market economies, you budget means cannot be sufficient. Is this the fate? What can you do to reverse this? Third, you must establish an 'automatic stabilizer' budget system that protects poor sectors. In periods where income level falls down and unemployment rises, such mechanism must step in without requiring any other decision or authorization.

    'Conditioned cash transfers' is one of the economic policies devised for poor sectors. Under the system, poor households are provided with budget support upon the fulfillment of some conditions. Most common one is the systems that provide support to households on the condition that they enroll their children to school. A similar system is implemented in Argentina, Bangladesh, Morocco, Mexico, and Chile and surprisingly in New York. Another one is the 'employment programs' as examples are seen all around the world. The system was brought up to agenda also in Turkey in relation with the crisis and some certain decisions were made in this respect. I am not sure to what extent it was successful or whether or not it was implemented. However, some countries implement such programs not only in crisis periods but permanently. For instance, India has a system known as 'employment guarantee system'. Under this system, employers in agricultural regions in need of labor are provided with 100 days of unskilled labor. Those willing to work in such a work are paid minimum wage. Therefore, the problem is not only facilitating the access to unemployment benefits or expanding the quantity and term of these payments.

    These are also necessary; but the system must also process those who did not lose their jobs but encountered falls in income or who were always unemployed. The prerequisite for the realization of such systems is widening budget resources. There is a need for a medium term structural reform which will reduce the weight of informal economy and increase tax revenues as well as the number of tax-payers.


    This commentary was published in Radikal daily on 29.11.2009