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Macroeconomic policy, external shocks and social protection

Nicaragua highlights

Nicaragua must be ready to react to external conditions

The most important external shocks for the Nicaraguan economy are an increase in global oil prices, a fall in capital inflows, and a fall in remittances from abroad. A higher oil price has a large effect on private consumption, poverty, health care expenditures, and government outlays. The fall in capital inflows affects mainly health care expenditures, private fixed capital formation, and to a lesser extent poverty and private consumption. A simulated 50% fall in incoming remittances has a large effect on private consumption, poverty, and income distribution. This simulated shock also proved to be the most significant for poverty given the importance of this income source for the Nicaraguan households.

External shocks have a large effect on poverty rates

Poverty is measured as a share of total population. The vertical axis measures the yearly changes, in percentage points from the baseline model results. Please see the full country study for a definition of the simulated scenarios.


Social policies are effective, but carry a large cost

Simulations of policy responses to external shocks found that:

  • The negative effect of higher oil prices on poverty and consumption can be mitigated through transfer policies to poor households, in particular a small education grant and a senior citizens grant.
  • The negative effect of smaller capital inflows can be similarly mitigated, but with smaller education and senior grants. However, the negative effect of the external shocks on domestic investment cannot be mitigated with any of the simulated policy responses. 
  • With respect to the fall in remittances, there are few alternatives given the size of the simulated shock. The best alternative seems to be to wait out the shock. A smaller and more realistic shock can be mitigated with transfer policies (education and senior grants).  

Counter-cyclical spending policies (constant real spending levels in social security, healthcare and/or education) were found to be effective without adding to fiscal pressure.

Social policies also affect poverty rates, but are costly

Poverty is measured as a share of total population. Fiscal balance is measured as a share of total GDP. The vertical axis measures the yearly changes, in percentage points from the baseline model results. Please see the full country study for a definition of the simulated scenarios.

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The book "Financing Human Development in Africa, Asia and the Middle East" is forthcoming in the fourthquarter of 2012.

The book's quantitative assessments, conclusions drawn, and policy recommendation are prepared based on the country studies of the project "Realizing the Millennium Development Goals through socially inclusive macroeconomic policies".

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