Social impact of the financial crisison small states

Naren Prasad International Institute for Labour Studies, ILO

London 6 July 2009Commonwealth Meeting: Sustainable development in small states in a turbulent

global economy

Economic growth

-6

-4

-2

0

2

4

6

8

10

12

14

16

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

%

EAP

OECD

LAC

WLD

Oil shock-1973 Debt crisis 1981

Berlin wall 1989

Japan, Nordic, S&L US 1991-93

Mexico 1994

Asian-Russia 1997-98

Argentina, Turkey, 9/11, dotcom

Growth 2009

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

2000-08 2009*

0.5% in 2009

Small states differentMore services compared to agriculture or industry

0

10

20

30

40

50

60

70

Agricullture Industry Services%

of e

mpl

oym

ent

small states others

0

10

20

30

40

50

60

70

Agricullture Industry Manufacture Services

% G

DP

small states others

In terms of percentage of GDP And employment

Contribution of tourism to employment & GDP, Small states and the world

0

5

10

15

20

25

30

Direct Employment Indirect and directemploymnet

Direct GDP Indirect and direct GDP

%

Small states (average) World (average)

2009 growth -6.8 & -3.5

Crisis: What went wrong• Financial sector

– Lack of regulation– Excessive risk taking– Inefficient remuneration

• Global imbalances– Excessive saving in some

countries, high debt in others…

•Increased inequality–Income inequality–Share of wages declining

Crisis & the real economy

Asset-price crash

lending

spending

output

Bank failure

GNP=C+I+G+X

Wealth/collateral

Income uncertainty

Few banks cautious

Firms/consumers can’t finance spending

recessionRecession: fall in bank revenue, loan default

Unemployment

Impact on developing countries

tradeCapital flows remittance aid

Economic & financial integration,

structure of economy,

policy

Economic/social structure-taxes, transfers

Institutions/policies,

Asset, prices, investments,

employmentGrowth, investment, employment

Inequality, poverty

debt

Eco. Policies to manage shocks (fiscal, monetary, financial)

Social policies

Growth & development policies

Global crisisglobal

National impact

Macro impact

Policy response

GDP decline

unemployment

Loss/decline of income

education health nutrition crime

women

youth

Fall in government revenueDecreased social spending

increasing poverty & inequality

Fall in remittances

Social impact

gender inequality

low skilled

GDP decline

1% decline in GDP growth

inequality, social policy

20 million more people in poverty

1% decline in GDP social policy

0.3-0.8 % more

infant deaths

4% GDP growthneeded Labour force increase

by 45 million

Keep reduce

unemployment

Social progress threatened

• extreme poverty decreased by 320 million since 2000, child mortality decreased by 3 million and children’s school attendance increased by 28 million

• economic and social progress achieved during recent years, achievement MDGs is now threatened (UN)

Current impact…. • Increases in unemployment, poverty and hunger• Economic growth negative & economic contraction• Negative effects on trade balances and balance of

payments• Decrease in FDI, capital, Remittance, tourism• Exchange rates volatility• budget deficits, decrease in tax revenues• Decrease of global trade• Commodity price decline and volatility• Decline in access to credit• Decline in confidence• Lack of resources for social security

and public social services • Increased infant and maternal mortality• Collapse of housing markets

Global Unemployment

Additional 29-59 unemployed in 2009Increase by 2-3%

1.2 billion working poor, 93-203 added in 2009

14

2

4

6

8

10

12

2006 2007 2008 2009 2010

U.K.U.K.

U.S.U.S.

JapanJapan

Euro areaEuro area

Unemployment RateUnemployment Rate((in percent)in percent)

Unemployment in past crises

increase by 2.7% average

0

5

10

15

20

25

Argentina Indonesia Korea Malaysia Thailand Mexico Turkey Average

%

5 years prior to crisis crisis year 5 years after crisis

increase by 2.7% average

Unemployment in small states: Current and projected levels

0

5

10

15

20

25

30

VUTPNG

CYPFJ

I

WSM

TON

SYCM

LTTT

OATG

MUS

BRBJA

MDM

ABLZ

GUY

Avera

geSUR

MDV

GRDSTP VCT

COMLC

ACPV

current

projected

5 years for unemployment to fall to previous level

12.3 to 14.8

Post-crisis estimated increase in poverty

Selected poverty estimates, Change in millions

0

20

40

60

80

100

2009 2009 2010 2011

Global - World Bank

Asia and the Pacific- ADB

Asia and the Pacific- ADB

Latin America- IDB

0

5

10

15

20

25

30

35

40

45

50

55

Mexico Argentina Turkey Indonesia Thailand Korea Malaysia Average

%

before crisis (nearest available data) after crisis current levels (2007)

Poverty: Past crises

7.4% average increase

Poverty in small states: Current and projected levels

0

10

20

30

40

50

60

70

%

current projected

From 28 to 35%

Inequality to increase

• Low skilled, temporary and poor workers are laid off first during economic crisis

• They are also the last to be re-employed after recovery, implying they will be unemployed the longest

Gini coefficient

010

2030

4050

6070

VUT VCT MHL ATG FJI SYC PNG SUR GRD WSM GUY LCA TON FSM BLZ TTO BRB KNA MUS DMA

What are countries doing?

• Rescuing the banking & financial sector

• Reviving the economy through stimulus packages

• Mitigating social impact

G20 Declaration

• The G20 Communiqué of 2 April 2009 recognized:– “that the current crisis has a disproportionate

impact on the vulnerable in the poorest countries”

– Committed $1.1 trillion– They recognized the importance of social

protection in mitigating the crisis and generating the growth by providing $50 billion to developing countries

United Nations

• Expert Commission of the President• UN Conference on the World Financial and

Economic Crisis and Its Impact on Development• Our endeavours must be guided by the need to

address the human costs of the crisis– an increase in number of poor and vulnerable,

particularly women and children, who suffer and die of hunger, malnutrition and preventable or curable disease; a rise in unemployment; the reduction in access to education and health services; and the current inadequacy of social protection in many countries.

ILO

• Global Jobs Pact– Accelerating employment creation, jobs

recovery & sustaining enterprises

– Building social protection systems & protecting people

– Strengthening respect for international labour standards

– Social dialogue: Bargaining collectively, identifying priorities, stimulating action

Conclusion: What works

• Prevent poverty -> maintaining income for households• Evidence shows…

– Minimum old age pensions and cash transfers to families seem to have the biggest poverty impact with the lowest transactions costs

– Employment intensive schemes• Public infrastructure renewable energy sources, waste

management, low cost housing, sanitation, etc• Micro, small and medium-sized enterprise support• Skills development• Youth employment schemes• Improved public employment services

• Labour market policies influence consumer behavior (workers)

Conclusion: Towards a New Deal of development model

• Social policy & economic policy goes hand in hand

• Universal provision of social security • Diversification of exports

• Hardest hit countries are those that rely on manufacturing exports (& tourism)

• Genuine investment in green sector• Bringing back the State (not market)• Industrial policy should not be forgotten• More domestic policy space

Development Path 1950-2006

AGOARG

ATG

AUS

AUT

BDI

BEL

BEN

BFA BGD

BGR

BHR

BLZ

BOL

BRA

BRB

BWA

CAF

CAN

CHE

CHL

CHN

CIV

CMRCOG

COL

COM

CPV

CRI

CUB

CYP

DEU

DJI

DMA

DNK

DOM

DZA ECU

EGYESP

FIN

FJI

FRAGAB GBR

GHAGIN GMB

GNB

GRCGRD

GTMGUY

HKG

HND

HTI

HUNIDN

IND

IRL

IRN

ISR ITA

JAM

JOR

JPN

KEN

KNA

KOR

LBN

LBR

LCALKA

MAR

MDG

MEX

MLI

MLT

MOZ

MRT

MUS

MWI

MYS

NAM

NER

NGA

NIC

NLD

NOR

NPL NZL

PAK

PAN

PER

PHLPNG

POLPRT

PRYROM

RWASAUSDN

SEN

SGP

SLE

SLVSUR

SWESYC SYR

TCD TGO

THA

TTO

TUN

TUR

TZA

UGA

URY

USAVCT

VEN

VNM

YEM ZAF

ZMB

ZWE

-50

510

gd

p_

gro

wth

_19

60

-06

6 7 8 9logGDP_1950

Stars

Loosing momentum

Getting richer

Falling behind