Fiscal Policy for Growth and Social Welfare
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Many governments chose to take specific actions to help the groups most affected in times of crisis, mainly lower-income groups, as a countercyclical policy response. For example, Argentina engaged in higher social spending to allocate more resources to lower-income groups (see box 1.1).
Box 1.1
Social Spending in Argentina in Times of Crisis One problem detected in policy responses during previous crisis periods in Argentina was the procyclicality of social spending items, especially ones targeting the poor. Evidence from the 1980s and 1990s suggests that the elasticity of social spending with respect to total government spending was 2.14, which implies that a 1 percent decrease in total government spending lowers social spending by 2.14 percent (World Bank 2009a). Thus, social spending in Argentina in 2009 was declining when it was most needed to support the poor. By contrast, during the 2002 economic crisis Argentina was able to change the nature of procyclical social spending. According to the World Bank (2009a), although the total government budget contracted by 25 percent, spending on public health expanded by 70 percent in real terms. This policy change could also explain the improvements in child and maternal health outcomes after 2002, suggesting that there were positive longer-lasting effects as well. After the 2002 crisis, GDP grew 8.8 percent on average from 2003 to 2007, and unemployment dropped to 8.5 percent in 2007, from almost 20 percent in 2002. GDP growth for 2008 was 6.8 percent, but it declined to 0.5 percent in 2009 as the global crisis hit Argentina. Unemployment dropped from 8.5 percent in 2007 to 7.9 percent in 2008, increasing to 8.7 percent in 2009. With the strong economic rebound, unemployment fell to 7.7 percent in 2010. The size of the stimulus package was about 5 percent of GDP, and it covered both major structural policies (renationalization of the pension system and a large public works program), and temporary measures to provide relief to specific industries, to maintain higher employment, and to protect lower-income people (ILO 2010a). With the help of employment retention and social protection policies, the government has tried to prevent layoffs, expand cash transfer programs aimed at improving people’s skills and employability, and extend child benefits to vulnerable families. Sources: World Bank 2009a; ILO 2010a.