the great recession - world...

Human Development Economics, Europe and Central Asia Region

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


GDP growth (annual percent change)

Growth fell more than in other emerging regions

3

The slowdown is sharpest in ECA

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

LAC CEE Easia MENA South Asia SSA

2009 2010


4

The impact of the crisis has varied across

countries

-19

-14

-9

-4

1

6

11

16

2009 2010

GDP Growth Rates in ECA


55

Before the crisis, ECA enjoyed rapid growth and

poverty reduction

(in millions)103

48

173

135

202

294

1998-99 2005-06

Non-Poor: Above

$5.00 a Day

Vulnerable:

$2.50 to $5.00 a

DayPoor: Below

$2.50 a Day

0

1

2

3

4

5

6

7

8

9

10

2000 2001 2002 2003 2004 2005 2006 2007

ECA: Real GDP Growth(% change)

ECA EE &Baltics CIS


6

Labor Market

Surge in unemployment caused by an adverse demand shock


Contraction in remittances have both macro and

household impacts

Remittances as a share of GDP, 2008 (%)

7

50

3128

1512 11

96 5 5 4 3 3 3

0

10

20

30

40

50

60


Forecasts of remittance flows for 2009 showed a

steep decline of 15% in ECA

8

-20%

-10%

0%

10%

20%

30%

40%

50%

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


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

Tools for measuring the impact on households

9


ArmeniaSimulations suggest reversals of the gains in poverty reduction…

…with extreme poverty projected to increase by a substantially

larger margin and reaching level not seen since the early 2000s10

34.6

29.8

26.524.9

22.7

30.3

04 05 06 07 08p 09p

Overall Poverty (%)

6.4

4.64.1

3.83.2

10.2

04 05 06 07 08p 09p

Extreme Poverty(%)


Unemployment rate tells only part of the storyImpact was mainly through reduction in wages and hours, and the reduction

greater for lower educated groups

Percentage of workers affected due to crisis

Percentage of workers affected by education level

2.6

5.8

8.3

5.4 5.2

7.9

11.5

17.8

22.6

0

5

10

15

20

25

Montenegro Romania Turkey-Urban

Jobloss Hour loss

Salary loss

0

5

10

15

20

25

30

Job

loss

Ho

ur

loss

Sala

ry lo

ss

Job

loss

Ho

ur

loss

Sala

ry lo

ss

Job

loss

Ho

ur

loss

Sala

ry lo

ss

Montenegro Romania Turkey-Urban

Upto Primary/Midlle

Secondary

Post-Secondary


Discouraged workers (% of working age population) Distribution of workers by sectors

5.5

4.7

5.9

6.4

7.5

4

5

6

7

8

Q1 Q2 Q3 Q4 Q2

2008 2009

Quarters

39

37

39

35

44

8

6

7

6

5

7

10

10

9

6

46

47

44

51

45

0 20 40 60 80 100

Q1

Q2

Q3

Q4

Q2

20

08

20

09

Qu

arte

rs

Agriculture Manufacturing

Construction Services

ArmeniaShare of discouraged workers have gone up; share of agriculture in

workforce increased


TurkeyThe poorest were among the hardest hit by reductions in

wage and self-employment income

9%

24%

44%

24%

91%

74%

52%

74%

0%

20%

40%

60%

80%

100%

Poorest 20% Middle 20% Richest 20% Total

% o

f h

ou

se

ho

lds

Asset Quintile

Q : "Which of the following appropriately describes your income situation in the past 1 year? "

Our income was adequate

Our income has decreased, and we had to spend from savings

Our income has increased

13


Household Coping Strategies


ArmeniaCheaper goods, reduced visits to healthcare and reduced consumption to cope

with the crisis

15

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


Montenegro Delayed purchase of durables is one of the main coping

mechanisms

16

0 10 20 30 40 50 60 70

delayed intended purchase of consumer durables

made less use of communication services (mobile phone)

restricted vacations

started meeting with friends less

changed means of transportation (started walking or using …

reduced playing sports/exercising

a household member who did not work before, decides to …

left or postponed intended training courses (computers,

cancelled paying car insurance

moved in with relatives to save money

cancelled paying life insurance

Effected Not effected


RomaniaPurchase of cheaper food and in smaller amounts than before the

crisis

17

0 10 20 30 40 50 60 70

Buy cheaper food

Buy the same food, but in smaller amounts

Deferred buying durable goods

Buy cheaper or second-hand non-food products

Reduced his holidays

Renounced celebrating aniverseries

Used the household savings

Defered utility payments

Changing the means of transport

Stopped practicing some hobbies

Renounced the extra-school activities for children

Gone working abroad

Called for relatives from aboard support

A unemployed member got a full-time job

Started courses / trainings in order to acquire new …

a unemployedmember got a seasonal/ part-time

Effected Not Effected


TurkeySubstituting into cheaper goods is one of the main coping

mechanisms

18

0 10 20 30 40 50 60 70 80

Replaced the purchase of expensive non-food …

Decreased your amount of food consumption

Started meeting with friends less

Stopped buying some non-food products

Increased the production of food products for your …

Changed means of transportation (increased use of …

Reduced the use of health services

Reduced visits to the doctor for preventive medical …

Started to buy second hand items

Sent a member of household to work elsewhere as …

Cancelled health insurance

Transferred children from private to public school

Effected Not Effected


Armenia:While all had to adjust, the crisis presented more severe challenges to the poor

and the vulnerable…

…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

10

20

30

40

50

60

70

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

Q1 Q2 Q3 Q4 Q5


Affected households may jeopardize their future welfare by adopting coping strategies harmful in the long-run

20

0.2

.4.6

Pr(H

armf

ul Co

ping S

trateg

y)

8.5 9 9.5 10 10.5 11log of per capita income

Affected

Not affected

Armenia

0.2

.4.6

Pr(H

armf

ul Co

ping S

trateg

y)

-2 -1 0 1 2Asset Index

Affected

Not affected

Montenegro

0.2

.4.6

Pr(H

armf

ul Co

ping S

trateg

y)

5 5.5 6 6.5 7log of per capita expenditure

Affected

Not Affected

Romania

0.2

.4.6

Pr(H

armf

ul Co

ping S

trateg

y)

-2 -1 0 1 2Asset Index

Affected

Not Affected

Turkey-Urban


Public Policy Responses


Facing severe fiscal constraints, governments

took different measures to provide protection

against the crisis

22

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)


Social benefit program response to crisis

23

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)


Social Benefit program responses: Summary Table (Admin data)

Country Unemployment Benefit

Main LRSA Child Allowance Other

Armenia

Bulgaria

Croatia ?

Georgia NA ?

Latvia

Macedonia

Montenegro

Romania

Serbia

Turkey

Ukraine

24: : Ranking from “good” to “negative” response


TurkeyIn the absence of adequate formal safety nets, households depend on

informal networks (1-in-5 households in the poorest quintile have no safety

net)

272 349 454

188 120

302

641

785

904 1,047

-

200

400

600

800

1,000

1,200

Q1 Q2 Q3 Q4 Q5

TL in

pa

st 3

0 d

ays

Size of Average Support from various sources, by Asset Quintile in Past Month (TL)

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 beneficiaries25


Policy measures in the labor market

•Public works; public investment program (e.g., KZRoadmap; 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

Create jobs

• Short term compensation (Russia, Turkey)

•Wage subsidies, social security tax reduction

•Retraining, preventative training (Bulgaria, Russia)Protect jobs

•Unemployment benefit/duration increases (several)

• Social assistance (including public works) -- several

Provide income support

• 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)

Enhance employability


Employment policy responsesin 18 ECA countries

27

create jobs30% (13

countries)

protect jobs15% (8

countries)

enhance employability

36% (16 countries)

income support19% (10

countries)

Create jobs

Protect jobs

Enhance employability

Provide income support


ArmeniaMost households consider support from the government as more important

than their own coping options or help from other sources

0

5

10

15

20

25

30

35

40

45

50

Govt support Borrowing from relative/friends

Help from relatives/friends

other supports Borrowing from banks

Withdrawing savings

Sale of assets

28


ArmeniaEarlier projections did not materialize, as both public policy responses and

households’ own coping strategies helped mitigate the impact (also true for other countries)

29

30.3

22.7

7.6

24.621.7

2.9

-4.7-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

09 08 Diff 09Q1:Q3 08Q1:Q3 Diff

Projected Actual Potential Increase Avoided


Reflections from the ECA crisis monitoring work

30

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 post-

crisis key

The poverty impact of the crisis may continue well after

recovery; policies that provide protection to the poor and

vulnerable important


Thank You!

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