In 2015, I wrote a paper titled Macroeconomic Stability, Consolidated Public Social Spending and Its Effects on Poverty, examining anti-poverty measures in Argentina. Given today’s social and economic climate, the implications of this paper are once again as relevant as they were back then.
In this article, I employed an IMF designed macroeconomic performance indicator called the Economy Performance Index (EPI) (Khramov & Lee, 2013), which I compared against trends in poverty rates and public social spending. Assuming that public spending reduces poverty, and that macroeconomic mismanagement increases it, the objective was to determine which effect predominated.
As five years have passed since this publication, I thought it would be interesting to update the database to include 2020 figures in order to see if the trends I reported in the 2015 paper have continued in subsequent years.
The database spans 41 years, from 1980 to 2020. During this 41-year period (and in interannual terms), poverty increased in 22 years compared to the prior year, the EPI dropped in 22 years compared to the previous year, and trends coincided in 17 years. That is, years in which the national macroeconomy became less stable, poverty increased. More specifically, there is a 77% probability that poverty increased when the macroeconomy worsened with respect to the previous year and a 73% probability that poverty moved in the opposite direction of the EPI. In both the original database and the extended one discussed here, the effect of an unstable macroeconomy predominated over the effect of social spending.
The results of this research show that public spending is both not enough and, in certain circumstances, can be part of the problem. If the financing of spending generates macroeconomic imbalances, which often disproportionately affect the poor, public spending will ultimately lead to a decline in economic health, thus, an increase in poverty. At the same time, looking back at history, one can see that the best years for poverty reduction took place during times of economic stability. As such, we can likely deduce that macroeconomic stability is a much more effective tool than public spending for lowering poverty levels in a sustainable fashion.
Argentina Currency flickr photo by theglobalpanorama shared under a Creative Commons (BY-SA) license
References
Khramov, M. V., & Lee, M. J. R. (2013). The Economic Performance Index (EPI): an intuitive indicator for assessing a country’s economic performance dynamics in an historical perspective (No. 13-214). International Monetary Fund.
Marcarián, L. (2015). La estabilidad macroeconómica, el gasto público social consolidado y sus efectos en la pobreza año 2015. Actualidad Económica, 25(87), 9-35.
