Social Safety-net Note

Social safety-net programs are indispensable for the growing numbers of poor and vulnerable lives
and livelihood is the evidence of an increase in investment in such programs. Safety-net programs
transfer cash and in-kind services to those poor and vulnerable families to protect them from the
impact of economic shocks, natural disasters, and other crises. Most low-income countries still lack
social safety-net coverage. Yet one in five of the world's population is still poor. The poor countries
low benefited from the safety-net programs in concerned of income and consumption, at only 13 per
cent investment. Globally, developing and transition countries spend an average of 1.5 per cent of
GDP on safety-net programs. Social safety-net programs help nations invest in human capital. It
serves as a source of income for the poor. Investing in such programs is a way of improving the
standard of living of poor people. Some 2.5 billion poor people are covered by such programs.

In sum, social safety net programs protect families from the impacts of economic shocks, natural
disasters, and other crises.

Economic Shocks

Economic shocks are events that impact an economy while occurring outside of it and are not
answerable through economics. They are unexpected and unpredictable and typically
dramatically impact supply or demand throughout the markets.

Types of Economic Shocks

Economic shocks may come varieties of forms-

Supply Shocks: due to supply constraints such as the supply of staple commodities. Suppose the
supply of oil may cause price increase resultant to business activities whole macroeconomics.

Currency Devaluation: impact on import and export difficulties.

Technology Shocks: A technology shock results from technological developments that affect
productivity.

Inflation Shocks: Inflationary shocks occur when the prices of commodities go up (either due to a
supply shock, or a decrease in subsidies), and the increase in commodity prices is not followed
immediately by a societal salary adjustment. This can lead to a loss of purchasing power. This can
happen on larger scales, too, as the cost of production falls behind corporate revenues, largely for the
same reason. 

Demand Shocks: Demand shocks happen when there is a sudden and considerable shift in the
patterns of private spending, either in the form of consumer spending from consumers, or investment
spending from businesses. 

Monetary Policy: Monetary policy shocks occur when a central bank departs, without proper
warning, from an established pattern of an interest rate increase or decrease, or money supply
control. 

Fiscal Policy: A fiscal policy shock is an unexpected change in government spending or tax levels. 
These are all macroeconomic shocks, but we also see shocks at the microeconomic level, in
households, which can sometimes be the manifestation of macroeconomic trends in more specific
contexts. These can include health, income, consumption and taxation shocks.

It's worth noting that changes can be positive or negative, too. Macroeconomic modelling is used to
describe how the economy reacts over time to economic shocks from exogenous factors described
above. It is used to measure the reaction of endogenous economic factors—factors within the
economy—like output, consumption, investment and employment, at the time of shock and several
times thereafter.

Similarly, we can describe shocks of natural disasters and other crises through social protection
programs for development programs.  

A good example of a major external shock affecting many countries is a large rise or fall in the
global price of energy. Consider for example the likely effects of an increase in energy prices:

Suppose the rise in energy price, all things being equal, a rise in the global price of energy such as
gas, electricity and other fuels is most likely to---

Macro-Economic Variables Effects of Shocks

Inflation Higher in short term

Economic Growth Lower-negative external shock

Unemployment Higher- as the economy slows down

Balance of trade in goods services Deteriorative- rising import bills

Spare capacity in the economy Income- from weaker growth

Business investment Fall-higher cost hits profit

Government fiscal balances Deterioration- less tax revenue

Macroeconomic policy can often respond to the effects of external shocks. For example, if there is a
deflationary demand-side shock, then a nation's central bank might decide to lower its main policy
interest rates or use some other form of expansionary monetary policy.

The effects of external shocks depend in part on what type of exchange rate system a country has
chosen to use.

Retrieved from https://www.worldbank.org/safetynets last update 2018.