Fiscal policies, inequality and climate change: How they make or break the rich-poor divide
Do fiscal policies respond appropriately to reduce vulnerabilities, or actually widen the pre-existing inequality that is exacerbated during disasters?
Most recent analysis of climate models tells us that a 2–4°C increase in global temperatures could have severe repercussions to economic activities of both the poor and the non-poor.
By and large, the poor are especially vulnerable, as they mostly live in low-lying coastal areas exposed to rising sea levels and storm surges, and slums or squatter settlements in urban areas highly susceptible to increasing severity and frequency of flooding due to poorly constructed homes in unplanned areas. Poor communities also have limited access to basic and emergency services, making the impacts of extreme weather events disproportionate for them. These events not only disrupt their livelihoods—through loss of assets—but also reduce their already limited access to basic social services, undermining their capacity to adapt to environmental shocks. The impacts of calamities and disasters are more intense if combined with pre-existing inequalities, making the poor especially vulnerable. When Typhoon Haiyan ravaged and literally wiped off parts of Eastern Visayas in the Philippines in 2013, it did not respect places, big or small, nor discriminate against people, poor or non-poor. Hence, a transformative policy mix is needed to reduce the vulnerabilities for both. Governments today typically design and implement fiscal policies that promote economic growth and reduce inequality directly, and/or strengthen people’s adaptive capacity indirectly. But are these policies responding appropriately to reduce vulnerabilities, or do they actually widen the pre-existing inequality that exacerbates during disasters? Current fiscal policies that aim to reduce inequality and strengthen the poor’s adaptive capacity are highly skewed in favor of the non-poor. There is overwhelming evidence that much of the effort is geared more toward growth that create opportunities to increase people’s assets, and less on making these opportunities broadly accessible especially for the poor. An International Monetary Fund study reveals that addressing inequality has been very modest in terms of results.
On the tax side, revenue levels are very low in many developing economies–most revenue comes from indirect taxes, such as VAT, which tend to be regressive, unlike direct taxes such as income tax. This low level of revenue severely constrains governments from increasing their redistributive expenditures, particularly when it comes to social protection programs that aim to strengthen the poor’s adaptive capacity.
A huge number of health and education programs are also poorly designed and not well-targeted. The same IMF study indicates that in many developing economies, the poorest 40% receive less than 40% of total benefits from these programs, which contributes to unequal opportunities and low intergenerational mobility. The main reason often cited is lack of access to these services by the poor, many of whom live in rural areas while services are concentrated in urban areas.Moreover, public subsidy schemes intended to help the poor often lead to unintended impact by helping the rich disproportionately more, thereby worsening inequality. Fuel subsidy is a good case in point. A recent ADB Independent Evaluation Department study, Indonesia: Country Partnership Strategy Final Review Validation, shows that reducing fuel subsidies is associated with a decrease in inequality. The study estimates that a 30% increase in gasoline prices reduced the Gini index by 0.15%, as richer households disproportionately benefited from these subsidies in Indonesia. When subsidies are removed, the absolute income difference is reduced between the poor and the non-poor households – with the larger loss of welfare for the richer households.
Climate change is a global development challenge that threatens to reverse decades of development efforts, and it can widen the pre-existing divide between the poor and the non-poor. Climate-smart interventions carefully linked with broader fiscal policies that promote economic growth and reduce inequality are indispensable. In the short term, social protection and emergency assistance programs can respond to natural calamities or food or fuel price volatilities that directly benefit the poor. However, long-term strategies such as properly designed and well-targeted health and education programs that improve capacities—especially of the poor—to broaden their access to participate in and benefit from economic opportunities should be designed and implemented. They must, likewise, provide social safety nets to prevent extreme deprivation among the poor, and make them more adaptive to the adverse impacts of climate change.
The World Food Program–supported Enhancing Resilience project in the low-lying coastal plains of southern Bangladesh is a good example for helping communities cope with the adverse impacts of climate change. As cyclones, flooding, saltwater intrusion into agricultural land and river erosion are recurring events and expected to become more frequent and severe in the future, the project aims to provide training and cash-for-work to build and renovate community assets. Community members will raise the foundation of their houses above the potential flood level, and rehabilitate ponds and canals that can be used to support fish farming, their major livelihood source. The Bangladeshi government spearheads the project and community members receive rations of rice, oil and small cash payments along with training on disaster preparedness. Since the project was launched in 2011, at least 80,000 individuals now enjoy stabilized incomes, more secure access to food, and are better prepared for disasters.
Another good example is Cash for Assets, another WFP-supported program in northern Ghana, where agricultural communities suffer from long dry spells and inconsistent rainfall. Through the government’s leadership, the program aims to build dugouts in several communities to store water from the rainy season for use during the rest of the year. Cash-for-work allows beneficiaries to participate in building and renovating community assets such as village dams, which they mainly use for their livelihoods. Under the WFP program, the majority of community members who received cash have reinvested the money into agricultural production (seedlings and farming materials) and other economic activities, which have helped boost their incomes. Climate change is here, and its impacts are real. But what is more real is that inequality pushes the poor beyond their capacity to respond to these impacts. The threats of climate impacts force us to develop fiscal policies that will allow us to design and implement climate adaptation and mitigation programs and projects that not only promote economic growth, but also reduce inequality. When inequality declines, the disproportionate impacts of climate change on the poor will follow suit.