Bolivia: Impact of shocks and poverty policy on household welfare

This paper evaluates the short term impacts on poverty of pro-poor expenditure and total social expenditure during the 1999-2002 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 built with 1998 data as the base year), ii) on household income and consumption levels by quintiles and areas, and iii) on consumption based poverty indicators by areas. 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. Poverty measured by the head count ratio has been greater from reduction in foreign saving flows then from the terms of trade shock. Poverty measured by the 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. Under macroeconomic stability (no shocks and 1998 macro conditions) social expenditure policy for poverty reduction would have had an important positive impact on household income and consumption levels (more so in income then consumption), in reducing the number of poor (more in urban then rural areas), and in reducing poverty gap and poverty intensity (more so in rural areas). However, social expenditure policy does not promote the production of tradables. 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.