5

**Public coping strategies** : Financial crises also affect the state’s ability to expand spending to counter the adverse impacts of crises on people and interrupt the provision of essential public goods and services that further reduce long-run growth. Tax revenues decline as economic activity weakens and, combined with realization of contingent liabilities from bank recapitalization and restructuring or deposit guarantees, result in a weaker fiscal position. Hampered access to international financial markets, accompanied with the need to implement austerity measures and restore market confidence, could further reduce governments’ ability to continue spending on infrastructure and supporting social protection programs at a time when populations need such support the most. Previous work notes the pro-cyclicality of social expenditures.<sup>9</sup> For example, health expenditures fell in Indonesia, Malaysia, and Thailand during the East-Asian crisis. The government cut spending on education by 15 percent during the 1994 Mexican peso crisis,<sup>10</sup> and public investment in education fell by 50 percent during 1987-1990 in Peru. Significant cuts in infrastructure investment were observed in Latin American countries in the 1980s and 1990s.<sup>11</sup> In developing countries, one common practice has been to reduce the investment portion of government social sector budgets.<sup>12</sup>

**Private coping strategies:** Individuals’ responses to crisis situations enhance the deterioration of social well-being during and after financial crises. Faced with a loss of employment and income and reduced social support from the government, individuals may adopt costly coping strategies, including selling productive assets such as land and livestock; drawing on other assets—social, physical, natural, or financial; reducing the quality of food intake; economizing on health care; taking children out of school; reducing own consumption to protect young children; or borrowing.<sup>13</sup> In Indonesia, the use of health facilities dropped sharply during the 1997 crisis,<sup>14</sup> and Family Life Survey recorded a fall in school enrollment and a rise in dropouts during the crisis.<sup>15</sup> During the Argentina (1995) and Venezuela (1994) crises, daily protein intake dropped by 4 percent and 3 percent, respectively. In some cases, employees worked extra hours or in additional jobs to compensate for loss of income, but with smaller benefits and remuneration—as in Cambodia’s tourism sector.<sup>16</sup> These coping strategies can have long-term consequences for individuals and make it difficult to escape poverty traps. Education and nutrition during early childhood provide a window of opportunity to shape a generation’s future health, human capital, productivity, and earning potential, and enhance the ability to cope in crisis times.<sup>17</sup>

Past financial crises provide ample evidence of marked short- and long-term deterioration in social well-being indicators as they work through these transmission channels. Poverty (those who live under $1.25 a day) rose in virtually all financial crises as a result of a combination of 9 Ravallion (2008).

10 Feyen (2009).

> 11 Easterly and Servén 2003.

> 12 Calvo 2013 and World Bank 2009.

> 13 Dercon 2011, Glewwe and Hall 1998, Fiszbein and others 2003, Goh and others 2005, Lokhsin and Yemstov 2001, and So and others 2010.

> 14 Waters and others 2003.

15 In other cases, however, mixed strategies were observed, including higher school enrollment in Peru in the 1990s and in Argentina in 2001.

16 Overseas Development Institute 2009.

17 Dercon 2011; Brinkman, de Pee, Sanogo, Subran, and Bloem 2010; Alderman, Hoddinott, and Kinsey 2006, Overseas Development Institute 2009.