Aggregate Shocks, Poor Households and Children: Transmission Channels and Policy Responses

Abstract

The global financial crisis that erupted in 2008 coupled with food and fuel price volatility are likely to affect developing countries, and within them the vast majority of the world's poor population in profound ways. This paper maps the different channels through which their effects could be transmitted to the developing world, and it illustrates a basic framework of shock transmission to a developing country from the macro- to the micro-levels-considering also possible adverse feedback effects. Aggregate shocks are going to be an increasingly common feature of the global economic landscape; and these shocks could result in poverty traps, generating effects that harm not just present, but also succeeding generations. Social budgeting and social protection will be critical in order to shield poor households and vulnerable children from the worst effects of these shocks. There is a strong moral imperative to advance children's rights and take prompt action in these areas. Policy experience and empirical evidence also suggest that investments in children and policy interventions to protect them during periods of economic volatility and crises are eminently affordable and provide strong social and economic returns. In responding to the presently unfolding financial crisis as well as future ones, continuing and further strengthening investments in children, and in addition, protecting them from the adverse impact of these crises (so that these investments will not be eroded) will be critical, not just in breaking the cycle of poverty, but also in safeguarding countries' future economic growth and human development.