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COVID-19 Impact on Poverty in Pacific Island Countries : A Macro-Micro Simulation Approach

Llovet Montanes, Ruth and Nakamura, Shohei (2022): COVID-19 Impact on Poverty in Pacific Island Countries : A Macro-Micro Simulation Approach. Published in: World Bank Equitable Growth, Finance and Institutions Insight (8 November 2022)

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This note presents the distributional impacts of the COVID-19 shock estimated for four Pacific Island countries (PICs) where recent pre-pandemic household income and expenditure surveys (HIES) are available: Fiji, Kiribati, the Marshall Islands, and Vanuatu. While these countries did not experience community transmission of COVID-19 in 2020, gross domestic product (GDP) fell sharply in most of them because of border closures. By translating aggregate output and employment changes to individual and household-level income changes, the approach simulates household welfare and poverty in 2020 under two scenarios: with and without the COVID-19 shock—the differences between them indicating the distributional impacts of such shock. The simulated poverty impacts represent upper bound estimates; they do not consider any support provided by the government to mitigate the shock. Thus, this note additionally analyzes the potential decline in poverty resulting from several key social protection programs implemented in 2020. The model also captures the impacts of other shocks that occurred during the period under analysis, such as Cyclone Harold, which severely hit several PICs in 2020. Given the limited data availability in the PICs, we also use this methodology to back-cast poverty and study its trends. Key findings are summarized as follows. • Backed by GDP growth, poverty rates are estimated to have gradually declined in most Pacific Island countries between 2016 and 2019. • In the absence of government mitigation measures, COVID-19 and climate-related shocks would have substantially increased poverty in the PICs during 2020. When comparing scenarios with and without these shocks, poverty rates during the first year of the crisis are estimated to have increased by as much as 8.7 percentage points based on the lower-middle-income international poverty line (US$3.2 per capita per day in 2011 purchasing power parity [PPP] terms). This is equivalent to losing four years of gains in poverty reduction. • The tourism sector was severely hit by the COVID-19 pandemic: while only representing less than 10 percent of employment, it drove a quarter to half of the poverty increase between 2019 and 2020 in Fiji, Kiribati, and Vanuatu. • Although mitigation policies, such as expansions of existing social protection programs, provided support to households to cope with the COVID-19 shock, they were estimated to be insufficient to undo the increases in poverty in most of the analyzed countries. The mitigation effects appear to have been minimal in the Marshall Islands and Vanuatu, while poverty impacts are likely to have been more than halved thanks to the social protection programs implemented in Fiji. Kiribati is an exception, with its social programs dramatically reducing the poverty impacts of the COVID-19 shock.

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