Financial crisis: Socio- economic impact, political economy of response Ben Slay Senior economist UNDP Bureau for Europe and CIS 7 July 2009

Whos the worst hit region? We are... Whos the worst hit region? We are... Regional GDP growth trends Source: IMF World Economic Outlook, April 2009

IMF forecasts for Caucasus, neighbouring economies Source: IMF World Economic Outlook, April 2009

How bad is it? GDP reductions in 2009:Q1 Change relative to 2008:Q1. Sources: Eurostat, CIS Statistical Committee, national statistical offices, JPMorgan, press reports.

Why so bad? Trade shock: Russian, EU import trends Crisis hits home Year-on-year changes in imports, in value terms. Sources: Roskomstat, Eurostat.

Unemployment: Baltics, Cyprus hard hit... Numbers of unemployed (LFS data), June 2008 = 100 * Romania not included Source: Eurostat

... As are Moldova, Russia, Turkey Source: Eurostat Numbers of unemployed (LFS data), June 2008 = 100 Source: National statistical offices, EIU

Crisis impact on Armenia 2009 data are for January-May. Sources: National Statistical Service, UNDP calculations.

What is to be done? Short- term macro policy response n G-20 countries: –Coordinated fiscal, monetary expansion n Longer-term inflationary impact? –Keep global markets open, resist protectionism n Fate of Doha Round? n IMF, World Bank: –Preventing global financial contagion –Focus on Europe, Central Asia n Coordination with EC, bilateral donors (including Russia)

Actual policy responses in Europe, Central Asia n Most countries unable to significantly boost domestic demand –Exceptions: Countries with reserve funds (Russia, Kazakhstan, Azerbaijan, Estonia) –Other must wait for trade to recover... and hope protectionism can be avoided n Domestic policy: What can be done? –Better regulation of financial systems, to: n Reduce capital outflows n Prevent further demonetisation, dollarisation –Strengthen social policies, via: n Increase share of GDP for social protection n Better targeting of social protection

Do social safety nets protect the poor? Source: World Bank. Social insurance (e.g., pensions) not included

Social policy reform implications % of GDP devoted to social protection Below average Above average % of poor covered by social protection Below average Weakest ability to protect: Albania, Armenia, Bulgaria, Georgia, Kazakhstan, Kyrgyzstan, Kosovo, Poland, Tajikistan Biggest pay-offs to social policy reform: BiH, FYR Macedonia, Ukraine, Uzbekistan Above average Good at targeting; more resources needed: Azerbaijan, Belarus, Latvia, Lithuania, Romania, Russia, Serbia Best performers: Croatia,Hungary

National crisis responses: Political economy issues n Policy weaknesses: –Recognition lags –Implementation lags –Uncertain implementation capacity n Policy fault lines: –Whom to protect? n Key sectors and firms? n Middle class? n Most vulnerable? –Increase social benefits, or public works?

Policy lags: Causes, implications n Recognition lags: –Economics: Different points of business cycle n Technical issue: Forecasts have been too optimistic –Politics: Electoral cycles, other factors n Implementation lags: –Exchange rate policy: n Devaluation works fastest... n... But is not an option for many non-CIS countries –Monetary policy effectiveness limited by: n Fixed exchange rates/euro adoption n Deleveraging, dollarisation, demonetisation –Fiscal policy: Windows of opportunity? n 2009 budget revisionsnow n 2010 budget formulation2009:Q3 key

Longer-term: Counter-cyclical responses to development challenges n Environmental sustainability: –Climate change: Pricing energy correctly n Tax carbon, not employment or value added –Green jobs: Alternative energy public works –Poverty and Environment Initiative (UNDP-UNEP) n Food security: –Global food prices have bottomed out well above January 2007 levels, and are now rising again –Development opportunities for poor farmers? n Demographics and migration: –Keep migration routes open; redress demographic imbalances in Russia, Europe, USA –Subject of UNDPs 2009 Human Development Report

Conclusion: Crisis implications for the region n Break in economic growth: Stagnation or recession for most CIS economies n Increases in: –Income poverty, inequality –Other dimensions of poverty n Much development progress could be lost n When growth resumes: –How strong will it be? –Will it be driven by: n Recovery growth? n Favourable external conditions? n Reforms?