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

The slowdown is sharpest in ECA GDP growth (annual percent change) IMF October 2009 data –

The impact of the crisis has varied across countries in ECA GDP Growth Rates in ECA In 2009, GDP is expected to decline by 5.72% (**) for ECA as a whole compared with 2008. (**) Composites are weighted by GDP valued at purchasing power parities (PPPs) as a share of total group GDP. This follows the IMF approach (http://www.imf.org/external/pubs/ft/weo/2009/01/weodata/groups.htm)

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

Households are affected by the crisis in multiple ways and at different times Financial Market Credit Market Shock Product Market Relative Price Shock Labor Market Income/Employment Shock Government Services Education, Health, SP Service Shocks

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.

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

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

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

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

Micro-simulations show an increase in poverty   Most recent poverty estimate Forecasted poverty in 2009 Armenia 23.8 (2007) 29.7 Azerbaijan 10.8 (2008) 11.8 Bulgaria 9.7 11.3 Latvia 19.8 26.9 Romania 5.7 7.4 Russia 13.5 15.5 Tajikistan 53.1 57.9 Turkey 17.4 21.9 Note: Estimates are not comparable across countries

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)

ECA countries have adjusted labor market policies and social protection programs to respond to the crisis Bulgaria Romania Turkey Latvia Kazakhstan Russia Increased duration in unemployment benefits X Increased amount of unemployment benefits Wage subsidies Training Exemptions from paying contributions Public works

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) Examples of SSN responding: Means-tested Child allowances in Ukraine CCT in Turkey (expanding benefits for existing beneficiaries) MOP and Caregivers’ Allowance in Serbia GMI in Latvia

Public policies that protect households from poverty are important. 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 Public policies that protect jobs (subsidies, short-term working arrangements) and create jobs (start-up support, expansion of public employment) to be handled with care if labor demand remains sluggish because fiscal costs are high Public policies that protect households from poverty are important. The chosen instrument should depend on country institutional capacities and fiscal constraints (unemployment insurance extensions, public works, income support, etc.). Public policies that prepare households for post-crisis key for longer term human capital formation and development. Structural changes (moving from protection of jobs to protection of workers – including part-time work legislation, temporary agency work, etc.) and skill-building and other active labor market policies.