The recent global crisis has highlighted the need to protect the poor and people vulnerable to adverse shocks. Many countries have implemented various programmes to protect social spending and help poor people during periods of financial crisis. This paper uses the most comprehensive database on social spending compiled thus far, and the unique cross-country database on poverty to explore the poverty-reducing role of social protection during financial crises. Using advanced panel data techniques to deal with endogeneity issues, we find that financial crises are associated with slower reductions in the poverty headcount and the poverty gap. Crises lead to 526,400-555,000 additional poor people and to an increase of 4.7-10.6 percentage points in the poverty gap in the medium to long term. These devastating effects of crises on poverty are relatively lower--by 11 and 20 percentage points for each percentage point increase in social spending for the poverty headcount and the poverty gap, respectively--in countries with higher social spending, suggesting the importance of social protection for poverty reduction in times of crisis and potential gains from policy intervention.
