Giovanna Prennushi

Protecting the Poor from Macroeconomic Shocks

Many developing countries faced macroeconomic shocks in the 1980s and 1990s. The impact of the shocks on welfare depended on the nature of the shock, on initial household and community conditions, and on policy responses. To avoid severe and lasting losses to poor and vulnerable groups, governments and civil society need to be prepared for a flexible response well ahead of the crisis. A key component of a flexibly responsive system is an effective permanent safety net, which will typically combine a work-fare program with targeted transfers and credit. Once a crisis has happened, several things should be done: 1) Macroeconomic policies should aim to achieve stabilization goals at the least cost to the poor. Typically, a temporary reduction in aggregate demand is inevitable but as soon as a sustainable external balance has been reached and inflationary pressures have been contained, macroeconomic policy should be eased (interest rates reduced and efficient public spending restored, to help offset the worst effects of the recession on the poor). A fiscal stimulus directed at labor-intensiveactivities (such as building rural roads) can combine the benefits of growth with those of income support for poor groups, for example. 2) Key areas of public spending should be protected, especially investments in health care, education, rural infrastructure, urban sanitation, and micro-finance. 3) Efforts should be made to preserve the social fabric and build social capital. 4) Sound information should be generated on the welfare impacts of the crisis.

SPATIAL DIMENSIONS OF INCOME INEQUALITY IN NEPAL

This paper investigates spatial dimensions of income inequality in Nepal using unit record data from the Living Standards Measurement (LSM) survey of 1995/96. The Gini, Atkinson and generalized entropy indices are used to measure income inequality. The results reveal that per capita income inequality in Nepal is quite high. The decomposition analyses based on ecological and geographical groupings reveal that the contribution of between-region inequality component to aggregate income inequality is less than 10 per cent. Since the poor regions have aligned with social and political conflicts, the policies to reduce inter-regional income inequality should be given far higher priority than what the statistical decomposition analyses suggest. The geographical sub-division is more salient than the ecological sub-division for the understanding of inequality. The growth of income in all the geographical rural regions, except the Eastern Terai, should reduce aggregate income disparity in Nepal.