47048 DIRECTIONS in Urban Development IMPACTS OF FINANCIAL, FOOD, AND FUEL CRISIS ON THE URBAN POOR Judy L. Baker total household consumption that the poor spend on fuel is Summary approximately 10% overall, and tends to be higher in urban • The urban poor are particularly vulnerable in times areas. Higher prices may also cause households to move of crisis due to their heavy reliance on the cash down the ladder of fuels which can have negative conse- economy, job losses and wage reductions in urban quences such as indoor air pollution with increased use of based industries, and no agricultural production to biomass, and deforestation through collection of food (e.g. fall back on. in peri-urban areas). • Prioritizing investments in cities can help to miti- The financial crisis will affect developing countries and gate impacts in the short run and reduce risks in the the urban poor through direct effects from a worsening future. economy and job losses in cities, as well indirect effects • Well targeted safety nets, workfare programs, and from reduced remittances, and the potential for reduced urban agriculture can play an important role in aid from donors. Countries will also face lower commod- cushioning the impacts for the urban poor during ity prices, and may face a reduction in private investment difficult times. flows, making weak economies even less able to cope with internal vulnerabilities and development needs such as Introduction infrastructure investments. The financial crises in East Asia and Mexico showed that urban households felt the impacts The effects of the recent financial crisis are only begin- disproportionately. In Mexico’s 1994/5 “peso crisis�, urban ning to be felt in many developing countries, but economic households with workers in financial services and construc- activity is declining rapidly with far reaching impacts. tion suffered the greatest income declines (48% and 35% This crisis comes at a time when most countries are still respectively). struggling with the impacts of rising food and fuel prices. Those countries that have thus far been hit the hard- Though global food and fuel prices have softened somewhat est are those with large current account deficits, and for in recent months from the highs earlier in 2008, there has those that showed signs of overheating and unsustainable been much volatility and they are anticipated to remain rapid credit growth prior to the intensification of the finan- high over the medium term. It is estimated that the high cial crisis. Of the developing countries whose economies food and fuel prices alone have increased the number of have been hard hit, seven are in Europe and Central Asia, extremely poor in the world by at least 100 million.1 and eight from Latin America.3 It is anticipated that all While impacts of the crises affect both urban and rural countries will somehow be affected, though those whose populations, the urban poor have been hit hardest in this economies are less integrated in the global economy will be recent food and fuel crisis, and in previous financial crises, somewhat less affected. given their heavy reliance on the cash economy, no agri- cultural production to fall back on, and wage reductions and employment losses at urban based industries. This has Impacts on the Urban Poor resulted in social unrest in a number of cities earlier in 2008 Poverty all over the developing world. The impacts on the urban poor are felt through a num- The existing evidence shows that the impacts on poverty ber of channels. With regard to food prices, the high costs from the food and fuel crises have been significant. The rise directly hit the household consumption budgets of the poor in food prices between 2007 and early 2008 were estimated as they are almost all net consumers. Higher energy prices to have increased the share of the population in East Asia, result in higher production costs for a range of goods and the Middle East, and South Asia living in extreme poverty services which use fuel such as manufactured goods, food, by at least 1 percentage point. The impact on the urban and transportation services though this impact is difficult to quantify.2 The high costs also directly hit the urban poor Judy L. Baker is a Lead Economist in the Urban through the extra cost of purchasing fuel. The proportion of Development Unit with the World Bank. THE WORLD BANK URBAN DEVELOPMENT UNIT | DECEMBER 2008 DIRECTIONS IN URBAN DEVELOPMENT poor was particularly acute, increasing the incidence of about the implications for social stability. The official urban poverty by more than 1.5 percentage points in East unemployment rate is expected to rise from around 4.0% Asia, the Middle East, South Asia and Sub-Saharan Africa.4 now to 4.5% by year-end, with the overall situation wors- Many more people who are already poor are falling even ening into the first quarter� (November, 2008).9 In Ukraine, more deeply into poverty. Recent back-of- the- envelope there are reports of major layoffs of steel workers, real estate analysis using micro data for 72 countries estimates the agents, and those in the banking industry (October, 2008).10 impact of the rising food prices on urban poverty, and to From Russia, “There are no hard numbers for how many what extent this is attributed to new poor, and to those have lost jobs since the country's finances began shredding that are already poor and become poorer.5 These estimates this summer….Russian news media are filled daily with consider three alternative scenarios for food relative to reports of layoffs. One poll released Monday (October) by price changes of 10%, 20%, and 30% during the 2005-2008 the All-Russia Opinion Research Center found that 35 per- period. The analysis indicates that a 20% increase in food cent of Russians personally know people who have lost their prices results in a 5.8% average increase in the urban pov- jobs, with 10 percent saying they know of many� (October, erty rate, using the US$2.50 per day poverty line (which is 2008).11 In Turkey, the automotive industry - one of the arguably more appropriate in urban areas than US$1.25 per country’s largest exports - has been hit hard as a result of day line), for the twenty most affected countries in the data a reduction in European demand with a number of plants set. The cost, estimated as the change in the poverty deficit, cutting production (November, 2008). In India, there are is on average 3.1 percent of GDP with close to 95 percent of projections of major job losses as a result of the crisis par- this coming from income losses of those that were already ticularly in construction, real estate, financial services, and poor before the price shock rather than those that are the auto sector (November, 2008). “newly� poor. Of those countries in the data set identified as most affected, eleven were in Africa, also included were Remittances and Migration the large South Asian countries and a few in Eastern Europe Remittances are a major source of income for many and Central Asia. countries and play an important role in poverty reduc- tion. For example in Nicaragua, remittances reduce poverty Vulnerable Groups incidence by four percentage points on average, and five Those who are already poor who fall into extreme pov- percentage points in urban areas. Remittance flows from erty are particularly vulnerable given that they have no host to developing countries began slowing in the second reserves to fall back on if faced with further resource depri- half of 2008 and are projected to drop sharply in 2009. All vation. Among this group, children are at highest risk of regions are expected to be affected. Latin America and the suffering irreversible damage to their health and education Caribbean are highly dependent on remittances from the due to malnutrition, and dropping out of school to look for U.S. and are likely to be hit hard. In 2007, India, Mexico work.6 Extensive research on both malnutrition and low and China were the top three recipients of remittances. educational attainment show lasting impacts. Poor nutri- And in some countries, such as Tajikistan, Moldova, Kyrgyz tion early in life retards child growth, cognitive and learn- Republic and Honduras, remittances account for more than ing ability, educational attainment and eventually earnings 25 percent of the countries GDP.12 in adulthood.7 Reverse migration is to be expected both from urban to There is also substantial evidence that poor women rural areas, and from developed to developing countries as and girls are particularly vulnerable during difficult times. workers cannot find employment. Reversals of rural-urban Within households, there is gender disparity as, “mothers migration patterns were observed in Indonesia and Thailand forgo meals and in many countries boys get preference over during the East Asian Crisis and for countries of the for- girls.�8 A final vulnerable group in some countries is the mer Soviet Union after the Russia Crisis. While this will elderly, particularly those living alone, as the financial crisis reduce some of the excess supply of labor in cities, it may could jeopardize the security provided by their pensions and then be offset by migrants returning home from abroad. they may not have a safety net to fall back on. This means not only a loss in remittances, but in some cases additional workers looking for jobs in a slow economy. Job Losses and Reductions in Wages In Mexico City, the Municipal Government predicts that “between 20,000 and 30,000 more immigrants will return With the financial crisis, growth is slowing and exports for good from the United States during the Christmas holi- from developing to developed countries are reported to be day because they cannot find work� (October, 2008).13 declining. This is likely to result in a reduction in wages and employment, particularly in urban areas, some pushing Social Impacts into poverty. In places such as Dhaka, Bangladesh, where many of the garment workers already fall below the poverty Urban areas tend to be more prone to stark inequalities line, job losses or reductions in wages could result in higher and problems of crime and violence. The high food and levels of extreme poverty. fuel prices have resulted in widespread reports of social The recent reports of job losses in developing countries unrest in cities earlier this year in countries as diverse as resulting from the financial crisis are mounting. In China, Haiti, Mexico, Peru, Egypt, Morocco, Afghanistan, Yemen, reduced foreign demand for Chinese goods has caused some Bangladesh, Burkina Faso, Cameroon, Senegal, Mauritania, closure and job losses in cities. “Companies have closed Mozambique, Guinea, and Indonesia. Reports of riots, along the eastern coastal belt, with more failures expected property destruction and even death have prompted a range over coming months, leaving Beijing increasingly concerned of Government responses. 2 DECEMBER 2008 have long term economic benefits and generates employ- Reports of Recent Social Unrest in Urban Areas Due ment. Investments in health and education build human to Rising Prices capital, and will mitigate the potential long term negative consequences of malnutrition and school drop out. Well- Mexico City, Mexico designed, targeted safety nets can cushion the impacts on “In January 2007, the ‘tortilla riots’ broke out in Mexico City. the poor, enable households to maintain a basic standard 70,000 people rioted against increased corn prices.�14 of living, and curtail social unrest. Finally, there is much evidence that urban agriculture can also help to mitigate African Cities the impacts of crises through the production of additional In February of 2008 riots broke out in three major towns in Burkina Faso – Bob, Ouhigouya, and Banfora – in response income and food for households. Implementing such strate- to rising prices of food, clothes, and gasoline. Government gies in urban areas will require a concerted effort and good buildings were destroyed and many injured. Protesters collaboration between national and local Governments. blamed government’s recent crack-down enforcing collection of custom taxes from merchants importing food and the global Maintaining Investments in Cities rising wheat prices.15 Government announced it would lower taxes on basic goods by 30-35%. Riots broke out in Cameroon Lessons from previous crises highlight the importance of a few days later instigated by taxi drivers over fuel prices that safeguarding investments in long term development.21 This escalated into a protest over food prices followed by riots in includes investments in infrastructure as is outlined under Senegal and Mauritania.16 the World Bank Sustainable Infrastructure Action Plan Port-au-Prince, Haiti (SIAP) as well as in human capital. Cities rely on infra- In April, 2008, major riots occurred in Port-au-Prince in structure for economic growth and poverty reduction, and response to increased food prices lasting over a week and on a well-trained, healthy workforce. Within this context, resulting in the resignation of the Prime Minister. The price of rice, beans, and fruit, among other staples, increased by targeting investments for the poor during times of crisis, 50% in a one year period.17 Food shortages and starvation are and using labor intensive approaches as is done in workfare becoming widespread as residents eat clay mixed with but- programs can help to mitigate impacts in the short run as ter and salt to fight hunger. Haiti implemented a temporary well as reduce risks in the future. Programs such as slum response using international aid money and price reductions upgrading which invest in providing water and sanitation, by importers to cut the price of a sack of sugar by 15%.18 electricity and roads to the urban poor, and investments in Mahalla El-Kobra, Egypt basic education, health and nutrition in low income urban Riots broke out in the Egyptian industrial city in the Nile- areas, have demonstrated long term benefits for the poor. Delta, Mahalla El-Kobra, for two days in April 2008 with riot- ers protested high food prices and low wages. As an imme- Social Safety Nets for the Urban Poor diate response, Government is giving bonuses of 30-days of wages to workers.19 In response to increased prices in what, The type of safety nets available in urban areas varies Egypt subsidizes its bread – however lines for subsidized bread substantially from country to country and even city to city, are increasing and corrupt bakers try to sell subsidized flour with some operated through national level programs, and on black market for higher prices. As a response to the short- age of subsidized bread, the Egyptian military is being put to others operated more locally. While it is difficult to quan- work to bake bread. tify whether there is an urban or rural bias in these pro- grams, in many places the proportion of poor is often higher Dhaka, Bangladesh in rural areas and thus programs are oriented accordingly. On April 28, 2008, 20,000 textile workers protested rising It can also be difficult to reach the urban poor as they often food prices in the outskirts of Dhaka. Bangladeshi offi- cials launched a rural employment program for the poor in live in informal settlements and tend to be more transient response.20 than rural populations. Among the more popular safety net programs are Conditional Cash Transfers (CCTs), workfare programs, fee waivers, and targeted cash or in-kind transfer schemes (e.g. food distribution, food stamps, or vouchers) Responses to the Crises, an Urban Perspective all of which could be scaled up in urban areas during times The approach to the crises adopted by the World Bank of crisis.22 It is naturally easier to scale up an existing safety has been to substantially increase financial support for net program than to design a new one, but some countries developing countries that will protect the poorest and most have been able to use a crisis as an opportunity to eliminate vulnerable from harm, support countries facing big budget ineffective programs and replace them with better designed short-falls, and help sustain long-term investments upon programs. which recovery and long-term development can be built. Conditional cash transfers are particular relevant in times These include productive investments in infrastructure, of financial crisis when poor families may deem it necessary health and education, and in social safety nets for the most to withdraw children from school to seek employment. By vulnerable. Many countries have responded to high food providing some incentive to keep children in school and and fuel prices through tax reductions to offset higher prices provide a transfer to households, there is substantial evi- and increased spending on subsidies and income support. dence that the CCT approach results in short term as well as These programs, however, are regressive, expensive, and long term benefits from the additional schooling and health very difficult to remove once in place. care. CCT program design in urban areas must face chal- The principles for designing policies and programs for lenges different from rural areas in targeting due to more addressing shocks do not differ for the rural and urban heterogeneous neighborhoods, informality of jobs and hous- poor. Public investment in infrastructure has shown to ing, and feasibility of using banks for transfers. 3 DIRECTIONS IN URBAN DEVELOPMENT Workfare programs or labor intensive public works ensuring safe production to mitigate health and sanita- projects can also be particularly effective in urban areas to tion problems caused by wastewater, the use of chemical provide income support and employment, provide some fertilizers and waste from animals. It also requires some on-the-job training for unskilled workers, and construct or oversight that urban agriculture is located on appropriate rehabilitate public infrastructure. A well known workfare lands and does not interfere with land and housing markets. project is Trabajar in Argentina which was set up following The World Bank and donors can help by providing techni- the peso crisis (1999) and invested in small scale community cal assistance, and necessary infrastructure investments projects. The program targeted poor households by use of a through our urban and other relevant projects. low wage rate, supplemented by a project selection process that geographically targeted poor areas to receive projects. Endnotes The basic principles of the workfare programs do not differ 1 World Bank, 2008, Global Financial Crisis and Implications for substantially from some of the urban upgrading or com- Developing Countries, G-20 Finance Minister’s Meeting. munity development projects. The Urban Poverty Project 2 Simler, K., 2008, “Assessing the poverty and distributional impacts of in Indonesia was originally set up following the 1997 finan- higher fuel prices�, draft, mimeo. 3 World Bank, 2008, Global Financial Crisis: Responding Today, cial crisis and was designed to improve basic infrastructure Securing Tomorrow, Background Paper for the G-20 Finance Minister’s in poor urban neighborhoods and to promote sustainable Meeting. income generation for poor urban residents who had been 4 Ibid affected by the economic crisis. It was not exclusively set 5 Dessus, S., Herrera, S. and R. de Hoyos, “The Impact of Food Inflation up as a workfare program but the infrastructure grants com- on Urban Poverty and Its Monetary Cost: Some Back-of-the-Envelope Calculations�, forthcoming, Ag. Ec.The micro data are part of the ponent had similar objectives and outcomes. The program Global Income Distribution Dynamics (GIDD) model. The welfare was seen to have achieved its goals and has continued with indicator is expressed in 2005 PPP dollars for consistency with the an expanded and longer term approach to addressing urban US$1.25 and $2.5 dollars per day poverty lines developed by Ravallion poverty through community interventions. Similarly, cur- and Chen (2008). 6 World Bank, “Rising Food and Fuel Prices: Addressing the Risks to rent and planned slum upgrading programs can be designed Future Generations� October, 2008, Human Development Network, to achieve short term income transfers through labor inten- Poverty Reduction and Economic Management Network. sive works, and longer term investments in community 7 Ferreira and Schady, 2008, and Alderman, Hoddinott, Kinsey, 2006. 8 World Bank, “Rising Food and Fuel Prices: Addressing the Risks to infrastructure. Future Generations� October, 2008, Human Development Network, Poverty Reduction and Economic Management Network. Scaling up Urban Agriculture 9 Associated Press 10 Oxford Analytica, November, 2008, Urban Agriculture can be a very important source of 11Forbes Magazine, October, 29, 2008. additional income and food for households. It can reduce 12 World Bank, 2007 Remittances Report. 13 Associated Press consumption of more expensive imported food products, 14 Dawson, Ashley “Resisting the Globalization of Food� December 20, reduce transport costs, provide products that are highly 2007 CounterPunch. Petrolia, CA. perishable, generate income and employment, and have 15 IRIN. (Feb 22, 2008) “Burkina Faso: Food Riots Shut Down Main important impacts on environmental sustainability. It is Towns� IRIN, Humanitarian News and Analysis, Ouagadougou, 16 Walt, Vivenne. (February 27, 2008) “The World’s Growing Food- estimated that some 15% of the world’s food is produced in urban areas and this could be scaled up even further, with Price Crisis.� TIME Magazine. USA. 17 BBC (April 5, 2008) “Food Riots turn deadly in Haiti.� BBC News. huge potential benefits for the poor. More recent estimates London, UK for West Africa, for example, suggest that at least 20 mil- 18 Lacey, Marc (April 17, 2008) “Hunger in Haiti increasing rapidly� lion people—of an urban population of 100 million—live International Herald Tribute Port-Au-Prince, Haiti. 19 USA Today, “Egypt tries to ease unrest over food� USA Today April, in urban households engaged in different forms of urban 8, 2008, Mahalla El-Kobra, Egypt agriculture. In many cities they produce 60% to 100% of the 20 Watts, Jonathan, “Food riots of the 21st century� Mail & Guardian consumed perishable vegetables. Many of the subsistence Online. Johannesburg, South Africa. January 4, 2008 21 G-20 Paper. farmers are women, operating garden plots that often are in 22 See Guidance for Responses from the Human Development Sector low-density, illegal or informal settlements.23 to Rising Food and Fuel Prices, 2008, and Grosh, Del Ninno, Tesliuc, There are currently a number of initiatives to scale and Ouerghi, 2008, For Protection and Promotion : The Design and up urban agriculture in countries as diverse as Sri Lanka, Implementation of Effective Safety Nets. 23 Drechsel, P., Graefe S., Sonou M., and Cofie O.O. 2006. Informal Argentina, Brazil, Mexico, Sierra Leone, South Africa and China. This requires investments by municipalities in Irrigation in Urban West Africa: An Overview. Research Report 102. Colombo: International Water Management Institute. Contact the World Bank Urban Development Unit Urban Development Copies of this Note are available at: Urban Development Unit, The World Bank DIRECTIONS in Telephone: 202-473-0409, Fax: 202-522-3232 http://www.worldbank.org/urban urbanhelp@worldbank.org If you are interested in submitting an article for consideration, please contact us at the email address above. The views expressed in DIRECTIONS in Urban Development are those of the authors and do not necessarily reflect those of the World Bank. 4