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).