Bolivia: Impact of Shocks and Poverty Policy on Household Welfare

Abstract

This paper evaluates the short term impacts on poverty of pro-poor expenditure and total social expenditure during the 1998-2002 period of Bolivian economic recession. Observed characteristics of recession are simulated by the combined effects of negative terms of trade shock, reduction in foreign saving flows and low output growth. Evaluation is performed by simulating the impacts of shocks and social expenditures in an environment of low growth: i) on macro aggregates of consumption, income, saving and prices (based on a simple static 1-2-3 model), ii) on household income and consumption levels, and iii) on consumption based poverty indicators. The following were main results from experiments:
The terms of trade shock had greater negative impact on household income then reduction in foreign saving flows. In contrast, reduction in foreign saving flows had greater negative impact on household consumption then the terms of trade shock. The head count ratio has been greater from reduction in foreign saving flows then from the terms of trade shock. Poverty gap and poverty intensity has concentrated in rural areas, being greater from reduction in foreign saving flows then from the terms of trade shock.
The combined positive effects from observed social expenditure policy and effort in an environment of low output growth, did not compensate the combined negative impacts from the experienced terms of trade shock and reduction in foreign saving flows.
These conclusions show that under macroeconomic disequilibrium poverty reduction efforts become policies of poverty containment or safety net programs. Poverty reduction is a long term objective that requires long term commitment for an environment on macroeconomic stability.