This research initiative is expected to increase our understanding of the macro environment as it affects households across the distribution of incomes, and provide policy recommendations on how policies can be tailored to ensure widespread growth. The initiative will help identify the channels through which aggregate shocks affect the poor in the region and the policies that governments need to put in place to reduce the negative impact of these effects. Macroeconomic crises and natural disasters are recurrent problems in Latin America and the Caribbean, and are strongly correlated with increases in poverty in the region. In the last two decades there were more than 40 incidences were GDP per capita fell more than 4 percent in one year and there were as many major natural disasters. The 1995 Mexican peso crisis and the Asian financial crisis of 1997-98, which affected several countries in our region, Hurricane Mitch, and the events associated with El Niño are just some of the recent examples.

Macroeconomic crises have persistent and negative effects on the poor. Given their the lack of access to insurance mechanisms, low-income families adjust to income downturns by drawing on scarce savings, selling assets, lowering consumption, and reducing their demands from health and education services. These strategies may have irreversible impacts on the asset base and productive capacity of poor households. The corrosion of the permanent income of the most vulnerable generates a vicious circle in which crises lead to greater inequality which in turn engenders more vulnerability to prospective crises.

Under this initiative the Poverty and Inequality Unit undertook research on the effects of macroeconomic crises on poverty and the need for social safety nets to mitigate the effect of macroeconomic crises (Crises and the Poor: Socially Responsible Macroeconomics). The Unit will hold a conference in November 2001 on Crises and Disasters: Measurements and Mitigation of Their Human Costs. The conference will present papers on the empirical issues of ex-ante risk minimization, the impact of shocks on poverty and inequality, and public sector responses to aggregate shocks. The conference participants will include academics, policy-makers from Latin America and the Caribbean, researchers, and staff from multilateral institutions.