The Great Recession: Economic and Social Impact in Eastern Europe and Central Asia Lire Ersado Human Development Sector Unit Europe and Central Asia Region PREM Learning Week April 30, 2010
Outline of the Presentation The Impact of the Great Recession Household Coping Strategies Government Policy Responses Reflections for post-crisis
The slowdown is sharpest in ECA Growth fell more than in other emerging regions 8.0 GDP growth (annual percent change) 6.0 4.0 2009 2010 2.0 0.0 LAC CEE Easia MENA South Asia SSA -2.0-4.0-6.0 3
The impact of the crisis has varied across countries GDP Growth Rates in ECA 2009 2010 16 11 6 1-4 -9-14 -19 4
Before the crisis, ECA enjoyed rapid growth and poverty reduction ECA: Real GDP Growth (% change) 10 9 8 7 6 5 4 3 2 202 173 294 135 Non-Poor: Above $5.00 a Day Vulnerable: $2.50 to $5.00 a Day Poor: Below $2.50 a Day 1 0 2000 2001 2002 2003 2004 2005 2006 2007 103 48 (in millions) ECA EE &Baltics CIS 1998-99 2005-06 5
Labor Market Surge in unemployment caused by an adverse demand shock 6
Contraction in remittances have both macro and household impacts 60 Remittances as a share of GDP, 2008 (%) 50 50 40 30 31 28 20 10 15 12 11 9 6 5 5 4 3 3 3 0 7
Forecasts of remittance flows for 2009 showed a steep decline of 15% in ECA 50% 40% 30% 20% 10% 0% -10% 2006 2007 2008e 2009f 2010f East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle-East and North Africa South Asia Sub-Saharan Africa -20% 8
Tools for measuring the impact on households Micro-simulations of poverty and social impact Labor market monitoring(administrative data, LFS) Social benefits monitoring (administrative data on employment and social assistance programs) Crisis monitoring survey (CMS) To supplement administrative data in informing policy responses To understand main transmission channels To measure the poverty and social impact To assess effectiveness of policy measures and household coping strategies 9
Armenia Simulations suggest reversals of the gains in poverty reduction Overall Poverty (%) Extreme Poverty(%) 34.6 10.2 29.8 30.3 26.5 24.9 22.7 6.4 4.6 4.1 3.8 3.2 04 05 06 07 08p 09p 04 05 06 07 08p 09p with extreme poverty projected to increase by a substantially larger margin and reaching level not seen since the early 2000s 10
Jobloss Hour loss Salary loss Jobloss Hour loss Salary loss Jobloss Hour loss Salary loss Human Development Economics, Europe and Central Asia Region Unemployment rate tells only part of the story Impact was mainly through reduction in wages and hours, and the reduction greater for lower educated groups 25 20 Percentage of workers affected due to crisis Jobloss Salary loss Hour loss 17.8 22.6 30 25 20 Percentage of workers affected by education level Upto Primary/Midlle Secondary Post-Secondary 15 11.5 15 10 10 5 2.6 5.4 5.8 5.2 8.3 7.9 5 0 0 Montenegro Romania Turkey-Urban Montenegro Romania Turkey-Urban
Quarters 2008 2009 Human Development Economics, Europe and Central Asia Region Armenia Share of discouraged workers have gone up; share of agriculture in workforce increased Discouraged workers (% of working age population) Distribution of workers by sectors 8 7.5 Agriculture Construction Manufacturing Services 7 6.4 Q2 44 5 6 45 6 5.5 5.9 Q4 35 6 9 51 5 4.7 Q3 39 7 10 44 4 Q2 37 6 10 47 Q1 Q2 Q3 Q4 Q2 Q1 39 8 7 46 2008 2009 Quarters 0 20 40 60 80 100
% of households Human Development Economics, Europe and Central Asia Region Turkey The poorest were among the hardest hit by reductions in wage and self-employment income Q : "Which of the following appropriately describes your income situation in the past 1 year? " 100% 80% 60% 40% 20% 0% 91% 74% 74% 52% 44% 24% 24% 9% Poorest 20% Middle 20% Richest 20% Total Asset Quintile Our income was adequate Our income has decreased, and we had to spend from savings Our income has increased 13
Household Coping Strategies
Armenia Cheaper goods, reduced visits to healthcare and reduced consumption to cope with the crisis 0 10 20 30 40 50 60 70 Started less use of the entertainment Replaced consumption of expensive food items with cheaper Starting meeting with friends less Reduced or stopped visits to healthcare centers Reduced or stopped buying medicines Stopped buying some non-food items Decreased amount of food consumption Increased use public transport or walking Sent a member of household to work elsewhere as easonal Started working odd jobs Withdrew or postponed admission to school, college or Not effected Effected 15
Montenegro Delayed purchase of durables is one of the main coping mechanisms cancelled paying life insurance moved in with relatives to save money cancelled paying car insurance left or postponed intended training courses (computers, a household member who did not work before, decides to reduced playing sports/exercising changed means of transportation (started walking or using started meeting with friends less restricted vacations made less use of communication services (mobile phone) delayed intended purchase of consumer durables 0 10 20 30 40 50 60 70 Effected Not effected 16
Romania Purchase of cheaper food and in smaller amounts than before the crisis a unemployedmember got a seasonal/ part-time Started courses / trainings in order to acquire new A unemployed member got a full-time job Called for relatives from aboard support Gone working abroad Renounced the extra-school activities for children Stopped practicing some hobbies Changing the means of transport Defered utility payments Used the household savings Renounced celebrating aniverseries Reduced his holidays Buy cheaper or second-hand non-food products Deferred buying durable goods Buy the same food, but in smaller amounts Buy cheaper food 0 10 20 30 40 50 60 70 Effected Not Effected 17
Turkey Substituting into cheaper goods is one of the main coping mechanisms Transferred children from private to public school Cancelled health insurance Sent a member of household to work elsewhere as Started to buy second hand items Reduced visits to the doctor for preventive medical Reduced the use of health services Changed means of transportation (increased use of Increased the production of food products for your Stopped buying some non-food products Started meeting with friends less Decreased your amount of food consumption Replaced the purchase of expensive non-food 0 10 20 30 40 50 60 70 80 Effected Not Effected 18
70 Human Development Economics, Europe and Central Asia Region Armenia: While all had to adjust, the crisis presented more severe challenges to the poor and the vulnerable Q1 Q2 Q3 Q4 Q5 60 50 40 30 20 10 0 Cheaper food Without some non-food items Reduced or stopped healthcare Reduced or stopped medicines Public transport or walking Children out of school Withdrew or postponed admission with over 50% of the poorest quintile reporting consuming poorer quality foods, reduced or stopped visits to health centers, and reduced or stopped purchase of medicines.but no significant impact on education
0 0.2.4.6 Pr(Harmful Coping Strategy).2.4.6 0 0.2.4.6 Pr(Harmful Coping Strategy).2.4.6 Human Development Economics, Europe and Central Asia Region Affected households may jeopardize their future welfare by adopting coping strategies harmful in the long-run Armenia Montenegro Affected Not affected Affected Not affected 8.5 9 9.5 10 10.5 11 log of per capita income Romania Affected Not Affected -2-1 0 1 2 Asset Index Turkey-Urban Affected Not Affected 5 5.5 6 6.5 7 log of per capita expenditure -2-1 0 1 2 Asset Index 20
Public Policy Responses
Facing severe fiscal constraints, governments took different measures to provide protection against the crisis Achieve efficiency gains through structural reforms in social sectors (e.g. formula funding in general education Latvia, Lithuania, Romania; school consolidation Serbia) Prepare workers for post crisis period (Latvia, Russia) Expand safety nets for those without social insurance (e.g., Latvia) Protect spending on pro-poor programs (e.g., Armenia) Improved targeting of social safety net programs (e.g., Armenia) Change indexation/minimum and base pension (e.g., Hungary, Serbia) 22
Social benefit program response to crisis Unemployment insurance --first response Ukraine, Turkey, Croatia, Serbia, Bulgaria Safety net benefits protecting existing beneficiaries Helping smooth consumption of those already receiving benefits Some safety net benefits responded with delay In terms of increasing coverage (new beneficiaries: Croatia, Bulgaria)) And/or topping up benefits (e.g., Latvia, Ukraine, Serbia, Kyrgyz Republic) Some design features constrain crisis response: Extremely low eligibility thresholds not reaching those hit by crisis (e.g., Bulgaria, Croatia, Ukraine) Additional restrictions: time limits; requiring period of unemployment prior to registering (Bulgaria) Expect increasing demand for SSN benefits As unemployment benefits run out (time limits) 23
Social Benefit program responses: Summary Table (Admin data) Country Armenia Bulgaria Unemployment Benefit Main LRSA Child Allowance Other Croatia? Georgia NA? Latvia Macedonia Montenegro Romania Serbia Turkey Ukraine : : Ranking from good to negative response 24
TL in past 30 days Human Development Economics, Europe and Central Asia Region Turkey In the absence of adequate formal safety nets, households depend on informal networks (1-in-5 households in the poorest quintile have no safety net) Size of Average Support from various sources, by Asset Quintile in Past Month (TL) 1,200 1,000 800 600 400 200-785 641 904 1,047 302 272 349 454 188 120 Q1 Q2 Q3 Q4 Q5 Formal/public support Informal support Own resources, savings, bank credit Formal support: 23 TL per month for poorest quintile ~ 1 % of income on average for quintile, ~ 7 % of income for beneficiaries 25
Policy measures in the labor market Create jobs Protect jobs Enhance employability Provide income support Public works; public investment program (e.g., KZ Roadmap; Turkey; Russia; Latvia) Wage subsidies (for new entrants) / social security tax reductions (Turkey, Russia, Estonia) Start up support; business tax reduction (Bulgaria, Estonia, Poland, Turkey, Russia) Making labor regulation more flexible Short term compensation (Russia, Turkey) Wage subsidies, social security tax reduction Retraining, preventative training (Bulgaria, Russia) Job search assistance (Latvia, Slovenia) Training/retraining (w or w/o stipends) (almost all!) Apprenticeship, internships (Turkey, KZ, Estonia, Bulgaria) Income tax reduction, work credit, restructuring unemployment benefit (Latvia, Poland) Mobility allowances (Russia) Unemployment benefit/duration increases (several) Social assistance (including public works) -- several
Employment policy responses in 18 ECA countries Create jobs Protect jobs Enhance employability income support 19% (10 countries) enhance employability 36% (16 countries) create jobs 30% (13 countries) protect jobs 15% (8 countries) Provide income support 27
Armenia Most households consider support from the government as more important than their own coping options or help from other sources 50 45 40 35 30 25 20 15 10 5 0 Govt support Borrowing from Help from relative/friends relatives/friends other supports Borrowing from banks Withdrawing savings Sale of assets 28
Armenia Earlier projections did not materialize, as both public policy responses and households own coping strategies helped mitigate the impact (also true for other countries) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0 30.3 22.7 24.6 21.7 7.6 2.9 09 08 Diff 09Q1:Q3 08Q1:Q3 Diff -4.7 Projected Actual Potential Increase Avoided 29
Reflections from the ECA crisis monitoring work Macro indicators of vulnerability to the crisis tell only part of the story Aggregate shocks transmitted to households mainly through labor market and earnings and remittance flows Poor households may resort to coping strategies harmful in the long-run; policies that prepare households for postcrisis key The poverty impact of the crisis may continue well after recovery; policies that provide protection to the poor and vulnerable important 30
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