How Financial Crisis Effects the Poor

The financial crisis that began in industrial countries has affected developing countries through higher interest rates, sharp swings in commodity prices, and declines in investment, trade, migration, and remittances, according to a new working paper by Justin Yifu Lin and Will Martin. 

For developing countries, mostly get low-income, shocks affecting food prices or wage rates for unskilled workers seem likely to have the biggest impact on poverty: lower food prices associated with the crisis help reduce poverty, while declining trade, investment and remittance flows hurt the poor.

Policies addressing the crisis must include measures to deal with problems in the financial sector, the resulting drop in aggregate demand and the particular vulnerabilities of poor people. Given the complex impact of financial crises and commodity price shocks, there is a strong case for developing better social safety net policies, which can offset the negative impact of different shocks on poor people without creating costly market distortions.