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Emil D TESLIUC The World Bank Washington, DC May 13, 2010 Sofia

Emil D TESLIUC The World Bank Washington, DC May 13, 2010 Sofia. Economic and Social Impacts of the Crisis in Eastern Europe and Central Asia. The slowdown is sharpest in ECA. GDP growth (annual percent change). The impact of the crisis has varied across countries in ECA.

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Emil D TESLIUC The World Bank Washington, DC May 13, 2010 Sofia

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  1. Emil D TESLIUC The World Bank Washington, DC May 13, 2010 Sofia Economic and Social Impacts of the Crisis in Eastern Europe and Central Asia

  2. The slowdown is sharpest in ECA GDP growth (annual percent change)

  3. The impact of the crisis has varied across countries in ECA GDP Growth Rates in ECA

  4. Recession conditions (example: unemployment) will continue for several years

  5. Households are affected by the crisis in multiple ways and at different times

  6. Unemployment The recent surge in unemployment caused by an adverse demand shock hit the labor markets hard. Between June 2008 and June 2009, in 27 ECA countries to 11.354 million, or around 34 percent.

  7. But these unemployment rates don’t tell the whole story • Lags in impacts and data: • Crisis is moving in waves with some countries hit before others • Labor market effects often lag • Data do not keep up with what is happening • Shifts in work status • Administrative leave (in Russia, 1.1 million in QI 2009) • Reduced working hours (in Ukraine, 1.2 million in QI 2009) • Job sharing • Increasing informality • Wage arrears (at the end of Q1), accumulated wage arrears doubled and tripled in Ukraine and Russia respectively

  8. Registered unemployment rates don’t tell the whole story Unemployment, Part-time Work, Workers on Administrative Leave, and Workers having Wage Arrears First and Second Quarter of 2009 Unemployment, and Part-time Work in Belarus and in Latvia in the First and Second Quarter of 2009

  9. A contraction in remittances will have both macro and household impacts Remittances as a share of GDP, 2007 (%)

  10. Forecasts of remittance flows for 2009 show a steep decline of 15% in ECA

  11. Micro-simulations show an increase in poverty

  12. Fiscal constraints have to led strategic and not so strategic social sector responses • Not Strategic • Reduce spending across the board • Cut spending on critical inputs (operations and maintenance) to protect salaries • Postpone expansion of early childhood and preschool education and cut health prevention programs • Adjust second pillar contribution rates to raise revenue • Strategic • Achieve efficiency gains through structural reforms in social sectors (e.g. formula funding in general education – Latvia, Lithuania, Romania, Bulgaria; school consolidation – Serbia) • Prepare workers for economic revival (Latvia, Russia, Bulgaria) • Expand safety nets for those without social insurance (Latvia) • Change indexation/minimum and base pension (Hungary, Serbia, Bulgaria)

  13. ECA countries have adjusted labor market policies and social protection programs to respond to the crisis

  14. Response to Crisis: Unemployment Insurance and Social Assistance Benefits • 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 starting to respond only recently • 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)

  15. Reflections • The aggregate shocks fed through multiple channels: labor market; remittances; credit; supply of health and education services; social protection. • The policy responses to the crisis depend on: • depth and persistence of crisis • fiscal space today and magnitude of fiscal adjustment necessary in next years • transmission mechanism to households • availability of instruments that help households cope with the shock • adjustments at the household level (destructive for longer-term human development?) • Public policies that protect households from poverty are important. • Public policies that prepare households for post-crisis key for longer term human capital formation and development. • Public policies that protect jobs and create jobs to be handled with care if labor demand remains sluggish because fiscal costs are high

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