Recap
There is no known way of successfully preventing future global economic crises and their negative impacts. Last week I concluded the discussion of the first lesson to be learnt from coping with the present crisis, which might help alleviate future ones. That lesson has to do with the use of stimulus packages as an economic policy tool. Three observations I made in that discussion are key to appreciating the tremendous significance of the second lesson, which I shall begin to discuss today.
First, as I earlier indicated, over the past few decades in poor countries, led by the IMF, World Bank, and neoliberal capitals of the rich industrialised countries, the accepted orthodoxy was to pursue pro-cyclical policies when facing economic shocks. These were aimed at making the country consume less and in particular to curtail government expenditure. Coming out of the present crisis there is now far greater acceptance by these same economic agencies that this old orthodoxy should go and poor countries, if they can, should do what rich governments have always done. That is, raise their spending when a global crisis negatively impacts their economy. Stimulus packages represent this new orientation towards counter-cyclical action.
Second, I also indicated that a stimulus package could only stimulate an economy if there was a net increase in the gap between government spending and taxation/receipts. Being in deficit, or for that matter surplus, was not enough to determine the expansionary impact of a budget. For this, it is necessary to compare the present budget position with that which immediately preceded it.
Thirdly, I advanced four guidelines for maximising the stimulative/expansionary effect of any stimulus package. These are 1) the presence of idle resources 2) that efficient cost-benefit (project evaluation) criteria should be applied to all government programmes/projects coming under the stimulus package 3) that the implementation of the stimulus package should be speedy and, 4) clean, transparent, accountable governance should prevail.
Provide cash to the poor
The second lesson, which I begin to address today examines the linkage between stimulus packages and the types and channels of government spending, which could prove most effective. A good example of this is the recent use in developed countries of government programmes to buy back from the public motorized vehicles which are ‘gas guzzlers,’ if they are traded in for new more efficient vehicles. Many readers would no doubt be aware of the recent ‘cash for clunkers’ scheme, as part of the Obama administration’s stimulus package aimed at stimulating spending on motor cars in the US.
At the time of our great flood in 2005, I had suggested in these columns that the best way to compensate those poor households badly affected by the floods would be to give them cash grants. These could have been given in exchange for their local contributions to mitigating the flood effects in the environs and local communities, in which they were based.
During that period a few development agencies and experts were already touting such conditional cash grants/transfers as an innovative way to cope with sudden catastrophic distress befalling poor households. As events have since turned out such conditional cash transfers have been found to be among the most successful innovations in the practice of social protection schemes for the poorest of the poor in poor countries.
Conditional cash transfers are conceived as part of welfare programmes contingent on agreed actions by the recipient of these transfers. To illustrate what I mean, a government or community faced with serious school absences, late arrivals, and drop-outs from poor households could offer cash payments to those household heads that ensure their children attend school on time for an agreed-to number of days in order to qualify for the cash payment.
Over the years, the ‘conditional’ element of the transfer has changed both its nature and terminology. Today, the politically correct term is ‘co-responsibility.’ Operators of these schemes wish to distance themselves from the neo-liberal connotation of conditionalities attached to the IMF and World Bank adjustment programmes. For them a social compact between the provider of cash and the beneficiaries has been made.
As we shall see, when I come to evaluate the pros and cons of these mechanisms next week, a significant number of developing countries, particularly in Latin America and the Caribbean (LAC) and Africa have these schemes. The best known examples in the LAC region are the pioneering ones in Brazil and Mexico. In Caricom there is one: the Programme of Advancement Through Health and Education (PATH), which is administered through the Jamaican government’s Ministry of Labour and Social Security.
Practice in rich vs poor countries
In rich industrialized countries when events force a downturn in the economy and persons are thrown out of work, all the jobless are automatically entitled to compensation payments over a stipulated period. In many rich countries these have been extended during the present global economic crisis as part of stimulus packages. Generally, however, income transfers to the jobless are standard budgetary practice. These payments can therefore be characterized as built-in automatic stabilizers for the economy. They increase when the economy declines and sheds jobs. The jobless, by having access to these unemployment benefits are given a boost to their incomes. This helps to maintain spending since empirical studies show that as a rule consumers’ expenditure is mainly a function of the income they receive.
In poor countries there are usually no automatic unemployment benefits provided by the state. The great hope is that these conditional cash (income) transfers, if they become an integral part of government’s expenditure at times of economic downturn in poor countries, could similarly act as automatic stabilizers, which are biased to protecting the incomes of the poorest of the poor.
Next week I shall continue this discussion by seeking to evaluate the pros and cons of conditional cash transfers as an innovative social welfare (protection) mechanism. During the current crisis they have been revealed to have had exceptional salience.
