policy initiatives in latin america to address the financial crisis andrés marinakis, ilo...

Policy Initiatives in Latin America

to Address the Financial Crisis

Andrés Marinakis, ILO

Washington, 20 May 2009

Presentation Structure

Part I The crisis and its probable impact

Part II Six recommendations for tackling the crisis

Final thoughts on employment policies

First ideas about the crisis

• Some countries imagined they were protected against the crisis.

• It was also believed that the more dynamic developing economies could “break free” and serve as the engine of the global economy (China, India).

• Developing countries are better prepared to meet the crisis (lower debt levels, fiscal balance, higher reserves, lower unemployment, etc).

• Few considered the adoption of fiscal policies to counteract cyclical effects during the boom years (except for Chile, with its structural surplus rule).

Probable impact of the crisis • It is now clear that the crisis will have an impact on the region,

although not all the countries will necessarily face recessions.

• The impact of crisis in the region was first felt in the last quarter of 2008, with a rapid fall in economic growth.

• Even without a recession, it is clearly impossible for Latin America’s economies to continue creating jobs at the rate they had been doing in the past.

• The delay between the start of the crisis and its greatest impact on the job market has allowed a certain margin for preparing policy responses.

• Even if in 2009 the product stabilizes , the impact on the labor market will last beyond 2010.

The economic deceleration already promises increased unemployment

• In October 2008, the ILO warned that there could be 20 million new unemployed in the world in 2009.

• The 2009 Global Employment Trends Report adjusted that figure to 50 million.

• January's Labour Overview predicted a worst-case scenario increase in Latin America from 7.3% in 2008 to 7.9% or 8.3% in 2009. That means between 1.5 and 2.4 million new unemployed.

• An April update of that estimate gave a figure of between 2.3 and 3.2 million.

• Typical profile of these newly unemployed workers: male, breadwinners.

However, the magnitude of the impact will depend on how the

following react: • People

– Participation rates– Young people and education

• Companies– New hires, adjustments to hours worked, advances on vacation time – Dismissals– Negotiations with workers to protect jobs

• Governments– Countercyclical fiscal and monetary policies– Expanded social protection programs– Employment policies– Wage policies

Importance of social dialogue and international coordination

• Avoid overreacting, which would make the crisis a self-fulfilling prophecy.

• Encouraging an attitude of collaboration. – Example: guarantees for deposits of different countries

depending on the stability of the financial sector.

• The same applies to the job market and its impact on consumption.

• Framework guidance agreements are needed among sector leaders; within industries or companies, actions must be taken through collective bargaining.

Crisis transmission vectors • Financial

– Restrictions on international credit (higher costs)

• Economic – Reduced exports – Falling commodity prices– Reduced remittances by emigrants from central

countries – Reductions in private investment (foreign and

domestic)

Second round • Increased unemployment and reduced incomes

undermine consumption

Keys to economic activity

• Unlike earlier crises, this one will not be solved by increased exports.

• Avoid protectionist import policies. • Reduced private investment (domestic and foreign) can

only be partially offset by increased public investment.• A key role will be played in this crisis by the

protection of domestic consumption, which means protecting jobs, the purchasing power of wages, and income levels.

Part II: Recommendations

• Covering both economic policy and labor and employment policies in the strictest sense.

• These are general recommendations that will have to be adapted and developed in greater detail according to each country’s specific situation.

Recommendation 1

Anticyclical fiscal and monetary policies

• Now is not the time to tighten our belts: launch stimulus packages wherever possible, placing priority on areas for spending and investment with a high impact on employment.

• However, fiscal space varies from one country to the next.

• More expansive monetary policy: in general, inflationary pressures are relaxing.

Recommendation 1

Anticyclical fiscal and monetary policies

• Widespread acceptance of the need for anticyclical policies and state intervention during this crisis, in industrialized and developing countries alike.

• However, not all anticyclical policies have the same impact on employment:– reduction of the value added tax rate– public infrastructure works with intensive machinery use – credits for purchases of vehicles and consumer appliances – promotion for popular housing programs through large construction

firms or medium-sized companies– emergency employment programs

• Delay in execution, importance of territorial distribution

Recommendation 2

Specific support for MSMEs

• Reduced credit access at times of economic contraction is a danger for companies that need funds for their medium- and long-term development.

• Consequently, lines of credit should be created and/or strengthened.

Recommendation 2

Specific support for MSMEs • In contrast to the USA and Europe, where the financial

system is undergoing a process of adjustment, Latin America’s banks are sound.

• In general, however, the requirements for granting credit have been stiffened, along with credit costs, as a “preventive” measure.

• This procyclical behavior has posed particular obstacles to MSMEs.

• Role of state banks and development institutions in backing credits.

• Provide greater transparency on the cost of different types of credit through increased information (Brazil).

Recommendation 3 Strengthen social protection against the crisis

• Unemployment insurance (contributions): – review benefit access conditions to attain

greater coverage– assess the need for additional contributions to

maintain financial sustainability with fewer contributors and more beneficiaries

• Noncontribution programs without insurance and to protect unemployed informal economy workers.

Recommendation 3

Strengthen social protection against the crisis

• Chile has modified its unemployment insurance by increasing its coverage and benefits.

• At times of high unemployment, benefit payments are extended by an additional two months.

• Brazil increased the coverage of its Bolsa Família program by raising the qualification cap on family income.

• 1.3 million families were added to the existing total of 11 million.

Recommendation 4 Introduce emergency employment programs

• At times of crisis, with rapidly rising unemployment, the introduction of direct programs on a massive scale can be justified in order to:

(a) halt the increase in the unemployment rate and

(b) provide needy households with income • Change the targeting focus, from groups that are

difficult to incorporate (for example, young people) to breadwinners and heads of households.

Recommendation 4 Introduce emergency employment programs

• Extensive previous experience in the region– Argentina: Breadwinners and heads of households– Chile: PROEMPLEO– Mexico: Temporary Employment Program

• Contingency fund in Chile: activated when the unemployment rate exceeds 10%.

• Keeping young people in the formal education system and in the technical training system.

Recommendation 5 Moderate wage increases, ensuring that

purchasing power is maintained

• Moderate minimum wage recovery policies, maintaining its real value.

• Monitoring observance of the minimum wage.• Collective bargaining that includes moderation

of current wages; should also consider how the benefits of future growth will be distributed.

• Include contingency clauses in wage negotiations.

Recommendation 5 Moderate wage increases, ensuring that

purchasing power is maintained

• Remember that inflation in 2009 is, in most countries, going to be lower than in 2008.

• Recent adjustments: – Colombia and Mexico: practically equal to past inflation – Spain: 4% (1.5 percentage points over 2008 inflation)– Brazil: readjustment of 12% (6 pp over 2008 inflation) – China: 2008 MW adjustment of 15%, frozen in November – Paraguay: increase of 5% in MW (accumulated CPI 10%)

• The last wage negotiation round in Uruguay took place at a time of uncertainty, and so a contingency clause was included for if the crisis should affect the main economic variables.

Recommendation 6 Fundamental rights and social dialogue

• Protect workers’ right to be heard.

• Encourage dialogue at all levels to avoid dismissals whenever possible:– adjustments to working days and wages – both the cost of the crisis and the benefits of

recovery should be shared equally – support from public programs to offset, in part, lost

earnings (unemployment insurance), training

• Institutionalization of social dialogue at the national level.

Recommendation 6 Fundamental rights and dialogue social

• Mexico, “National Agreement on behalf of families’ economy and employment”: includes emergency jobs, subsidies to avoid dismissals, Social Security coverage for the unemployed, credit access for small companies, etc. (01-2009).

• Argentina, oil sector agreement: postpones wage negotiations for 6 months pending a better understanding of the impact of the crisis on the sector (11-2008).

• Chile, Sodimac: job conservation and cost adjustments, salary cuts for all executive positions (300 people, out of 15,000 workers).

Final thoughts on employment policies

Existing policies and institutions

• The development of policies that already exist in some countries allows for adjustments following a course that has already been set out.

• Other countries require the ad hoc design of emergency measures.

• In some countries, solid institutions allow the programs and policies to reach the beneficiaries; in others specific structures need to be created.

Final thoughts on employment policies

Learning and institutional development • Important for supports to target breadwinners and heads of

households.

• Increase public investment with a major impact on employment and geographical distribution in critical areas.

• Implement massive emergency employment programs with the subsequent transition to productive jobs (attention to geographical distribution).

• Develop unemployment insurance programs and adapt their requirements and benefits at times of crisis, expanding the effective coverage and duration of those benefits.

• Assist workers in retaining their jobs with public policies (including unemployment insurance and training).

Final thoughts on employment policies

Learning and institutional development

• Make use of increased awareness of programs for new-hire subsidies for when the recession bottoms out.

• Encourage young people to stay in school and in technical training.

• Develop a nationwide network of employment offices to provide less qualified workers with more effective labor intermediation.

• Incorporate contingency funds for active policies at times of rising unemployment (anticyclical).