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Financial Crises and Poverty in Emerging Market Economies - Working Paper 8

6/1/02
William Cline
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This study examines the impact of the principal financial crises in emerging markets in recent years on the incidence of poverty in the countries in question. The growth impact is first identified by comparing average per capita growth in the two years prior to the crisis to that in the crisis year and the following year. The poverty impact is then measured by applying the elasticity of poverty with respect to growth. Alternative estimates consider results of surveys in the relevant periods, where available.The central estimate is that some 40 to 60 million people were placed in poverty by the financial crises affecting Mexico (1995), Thailand and Indonesia (1997), Korea and Russia (1998), Brazil (1999), and Argentina and Turkey (2001), compared with total population of 800 million in these eight countries. By far the largest impact was in Indonesia, because of the severe income decline and the large base population in poverty. Those economies with relatively better crisis management (Mexico, Thailand, Korea, Brazil, Turkey) are found as a group to have experienced considerably milder growth and poverty shocks than those with unsuccessful management (Indonesia, Russia, and Argentina). These results underscore the importance of appropriate crisis resolution for both national and international policymakers.A technical appendix examines the elasticity of poverty with respect to growth on the basis of the underlying income distribution forms, for both the Pareto and lognormal distributions. The analysis establishes for the Pareto and confirms for the lognormal that the absolute magnitude of this elasticity is positively related to the ratio of average per capita income to the poverty line threshold, and negatively related to the degree of inequality as measured by the Gini coefficient.