The answer really depends on how deep and prolong the economic crisis is. Several industrialized nations have responded by passing large scale stimulus packages, the US has approved nearly $800 billion with a portion of that slated for social programs; provision in the package extend unemployment benefits and increase money for food stamps. Various emerging market economies have pushed through stimulus packages of their own,
China will pump $586 billion into its economy (an estimated 14% of GDP for 2009) to fund a variety of projects including some that provide low income housing, healthcare and education.
Brazil has tried to offset its decreasing industrial output by funding infrastructure projects and continuing their conditional cash transfer program Bolsa Familia – a program that rewards families for getting their children vaccinated and making them go to school – which was initially meant to bring down Brazil’s high income inequality but now the program is acting like a social safety net for 11million poor Brazilians. Oxfam
estimates that the total amount spent worldwide on fiscal stimulus and company bailouts is nearing $3 trillion which could be an encouraging indication for how social programs will fare in the crisis.
The response to the current financial crisis appears to signal an ideological shift which is a positive development for social programs. Fiscal stimulus seems to contradict the neo-liberal/ orthodox approach that has dominated development strategy for the past several decades. Milton Freedman and the University of Chicago’s Economics Department were an extremely influential group; they were strong advocates for free market principles like privatization, minimal government intervention and a balanced budget. They were so influential that international institutions like the IMF and World Bank saw their recommendation as almost divine.
In 1998 the IMF responded to the Asian Financial Crisis by forcing counties to privatize state owned corporations, dramatically cut expenditures (reduce the size of government) and balance the budget. In most cases social programs were the first to go. Sometimes these decisions had unintended consequences, budget cuts often resulted in political backlash that exacerbated economic problems by seriously compromising the country’s political stability. Former Indonesian President/ Dictator General Suharto was force to resign after the IMF made him cut food and cooking oil subsidies. These cuts were a huge blow to low income people; it was just the time when those social programs were the most needed. Most people didn’t take the change lightly and filled the streets in protest. Investors saw that the government could not control its people and took their investments out of the country, causing a positive feedback loop that destroyed Indonesia’s economy.
Some could say the current response (fiscal stimulus) is hypocritical, that politically an industrialized county like the US would never follow the prescriptions the IMF gave during previous crises. However, there is some evidence to contradict that, Former US President
Ronald Reagan took somewhat of an orthodox approach in response to the recession in the 1980’s; he lowered taxes and cut government spending across the board – a lot of which was for social programs. The 1980s recession was smaller but I still believe the recent response was a significant ideological swing.
The swing went from Adam Smith’s invisible hand to
Keynesian economics where deficit spending and bigger government became acceptable. This is relatively good for social programs but more importantly it makes good economic sense. Several well respected economists like former Noble-Prize-Winner Paul Krugman and former Clinton White-House-Aid
Jeffrey Sachs advocated for increased government spending. They point out that government spending on social programs will have a higher
multiplier than simply giving tax cuts. In a study by
Mark Zandi, Chief Economist at Moody's Economy.com, Zandi estimates the multiplier for the following US programs: temporarily increasing food stamps (a $1.73 GDP increase per dollar); extending unemployment benefits ($1.63); increasing infrastructure spending ($1.59); this is compared to giving a corporate tax cut which only yield $0.30 to GDP.
With industrialized countries spending so much on domestic programs, development advocates question whether donor countries can and will keep their aid commitments. There is reason to be worried.
September 2000, UN member states set in motion The Millennium Development Goals (MDG) attempting to cut poverty in half by 2015. The MDG are eight specific goals targeting human development, ending poverty and hunger; providing universal education; striving for gender equality; ensuring child and maternal health, combating HIV/AIDS; promoting environmental sustainability; and global partnership. However funding for MDG has not been steady and the goals are not on track to be accomplished by 2015. This is concerning because the MDG were established during “good” economic times. Barak Obama has said the US will keep its commitments but there is no telling what will happen if the crisis is prolonged.
If donor countries no longer contribute, it could have serous consequences; developing counties are fragile and could be vulnerable to collapse without access to IMF or World Bank funds. In the near term needs should be met, recently in London at the G20 conference, donor countries pledged over $1 trillion to the IMF. A positive sign is that
Brazil – an emerging market country and a recipient of IMF funding between 1998 and 2003 – made $10billion available at the G20 conference then recently added an additional 4.5 billion for emergency loans. This shows that successful emerging market economies are willing to step up to the needs of developing countries.
But the IMF is not in the business of funding social programs, they’re probably just less likely to require cuts as a condition for obtaining a loan. Poverty alleviation is generally the job of
The World Bank. The World Bank seems to be doing well and will make an additional $3 billion available (up from $1billion) for healthcare. This was a necessary move to keep health-services unaffected because not only will the financial crisis make more people reliant on government assistance, but exports (a key determinant of the exchange rate) have plummeted in virtually all developing countries. When the value of a country’s currency declines relative to foreign exchange (dollars or euros used to pay for imports) it makes importing pharmaceuticals or other medical necessities more expensive. Joy Phumaphi, World Bank Vice-President for Human Development, urged donor countries to honor their foreign aid commitments, saying, "This financial crisis could unravel many of the hard-fought gains in health over previous decades unless we all hold the line on the flow of development aid and health spending." Estimates are that for every 1% drop in Gross Domestic Product, 20 million more people are pushed into poverty, making it extremely important that leaders from industrialized countries keep their promises.
In the short run a combination of domestic stimulus and donor countries keeping their aid commitments should not result in catastrophic cuts for government sponsored social programs. However, not all social programs are funded by governments and several of the poorest countries – mainly in
Africa – do not have governments that are institutionalized enough to qualify for IMF or World Bank funds. Increasingly Non-Governmental-Organizations (NGOs) are providing social services for the world’s poorest countries.
In the current economic climate,
NGOs are finding it difficult to operate; private donations are down because donors are concerned with their own financial situation. Plummeting stock prices have reduced the size of endowments and government grants could be in jeopardy if the economic crisis continues. Virtually all non-profits are feeling the pinch but AIDS foundations are particularly worried. This may-be because there are legacy costs involved with treating AIDS patients, they must take antiviral medications for the duration of their lives and the effectiveness of those medications can be minimized by taking them on an empty stomach so increased poverty compounds the problem. And this couldn’t have come at a worse time,
AIDS programs have been making considerable progress in recent years. In 2001, there were 2.2million new infections each year in Sub-Saharan Africa but that number decreased to 1.7 million in 2007. There has also been dramatic progress in treatment with widespread access to the antiviral “cocktail” but many experts fear results may reverse.
Disease has ripple effect on development and several of Africa’s poorest countries are plagued by a high rate of malaria and AIDS, this decreases a county’s productive capacity and strains limited government resources. Without international assistance the result could be devastating for economic as well as human development. Julian Schweitzer,
World Bank official, believes that tens of thousands of preventable deaths could occur if countries do not keep funding commitments aimed at the poor.
Globalization has allowed governments, intergovernmental organizations and Non-Governmental Organizations to coordinate extremely effective social programs that reach even the most remote areas of the globe but globalization has also spread the crisis to those same remote areas. The economic downturn is impacting just about everything, in every country. Social programs have and will continue to be affected by the crisis as demand for assistance out-paces supply but this will likely be temporarily, the institutions seem to be resilient and will likely rebound with the broader economy.
