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Simulating the impact of the 2009 financial crisis on welfare in Latvia

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  • Ajwad, Mohamed Ihsan
  • Haimovich, Francisco
  • Azam, Mehtabul

Abstract

This note details simulations of the distributional impacts of the 2009 financial crisis on households in Latvia. It uses household survey data collected prior to the crisis and simulates the impact of the growth slowdown. The simulations show that Latvia experienced a sharp rise in poverty, widening of the poverty gap, and a rise in income inequality due to the economic contraction in 2009. The 18 percent contraction in gross domestic product (affecting mainly trade hotels and restaurants, construction, and manufacturing) likely led the poverty head count to increase from 14.4 percent in 2008 to 20.2 percent in 2009. The poverty gap, which measures the national poverty deficit, was simulated to increase from 5.9 percent in 2008 to 8.3 percent in 2009. The analysis finds that the results are robust to most assumptions except post-layoff incomes, which substantially mitigated household welfare. The authors also simulate the impact of Latvia's Emergency Social Safety Net components and find that the Safety Net likely mitigated crisis impacts for many beneficiaries. The simulations measure only direct short-run impacts; hence, they do not take into account general equilibrium effects. Post-crisis income data from a different data source suggest that poverty rates increased by 8.0 percentage points between 2008 and 2009. As a result, the authors suggest that their ex-ante simulation performs reasonably well and is a useful tool to identify vulnerable groups during the early stages of a crisis.

Suggested Citation

  • Ajwad, Mohamed Ihsan & Haimovich, Francisco & Azam, Mehtabul, 2012. "Simulating the impact of the 2009 financial crisis on welfare in Latvia," Policy Research Working Paper Series 5960, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5960
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    Cited by:

    1. Nikoloski, Zlatko & Ajwad, Mohamed Ihsan, 2013. "Do economic crises lead to health and nutrition behavior responses ? analysis using longitudinal data from Russia," Policy Research Working Paper Series 6538, The World Bank.
    2. Beatriz Cuadrado-Ballesteros & Noemí Mordán & Isabel-María García-Sánchez, 2014. "Is Local Financial Health Associated with Citizens’ Quality of Life?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 119(2), pages 559-580, November.
    3. Azam, Mehtabul & Ferré, Céline & Ajwad, Mohamed Ihsan, 2012. "Did Latvia's Public Works Program Mitigate the Impact of the 2008-2010 Crisis?," IZA Discussion Papers 6772, Institute of Labor Economics (IZA).
    4. Mehtabul Azam & Céline Ferré & Mohamed Ajwad, 2013. "Can public works programs mitigate the impact of crises in Europe? The case of Latvia," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-21, December.

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