Social impact of the financial crisis
                  on small states




                         Naren Prasad
        ...
Economic growth
    16

    14

    12
                                         Berlin wall 1989
    10   Oil             ...
-12
                             -10
                                   -8
                                              -...
Small states different
             More services compared to agriculture or industry
        70                          ...
Contribution of tourism to employment & GDP,
                   Small states and the world

    30

    25

    20
       ...
Crisis: What went wrong
•   Financial sector                        •   Global imbalances
     – Lack of regulation       ...
Crisis & the real economy
        Asset-price crash
                                 Wealth/collateral
                   ...
Impact on developing countries
                                                                                    Economi...
Social impact
                                  GDP decline
                                                          Fall...
GDP decline

                                         20 million more
   1% decline           inequality,         people i...
Social progress threatened
 • extreme poverty decreased by 320 million since
   2000, child mortality decreased by 3 milli...
Current impact….
• Increases in unemployment, poverty and hunger
• Economic growth negative & economic contraction
• Negat...
Global Unemployment

     Additional 29-59 unemployed in 2009
               Increase by 2-3%
1.2 billion working poor, 93...
14




                      Unemployment Rate
                             (in percent)
                                 ...
Unemployment in past crises
    25



    20

                                                   increase by 2.7% average
...
Unemployment in small states:
      Current and projected levels
30


25
      5 years for unemployment to fall to previou...
Post-crisis estimated increase
           in poverty
                         Selected poverty estimates,
                ...
Poverty: Past crises
    55

    50
    45
                                                    7.4% average increase
    4...
Poverty in small states:
         Current and projected levels
    70
    60
    50                  From 28 to 35%
    40...
Inequality to increase
                                    Gini coefficient

70
60
50
40
30
20
10
 0
     VUT VCT MHL ATG ...
What are countries doing?
• Rescuing the banking & financial sector
• Reviving the economy through stimulus
  packages
• M...
G20 Declaration
• The G20 Communiqué of 2 April 2009
  recognized:
  – “that the current crisis has a disproportionate
   ...
United Nations
• Expert Commission of the President
• UN Conference on the World Financial and
  Economic Crisis and Its I...
ILO
• Global Jobs Pact
  – Accelerating employment creation, jobs
    recovery & sustaining enterprises
  – Building socia...
Conclusion: What works
• Prevent poverty -> maintaining income for households
• Evidence shows…
   – Minimum old age pensi...
Conclusion: Towards a New Deal
         of development model
• Social policy & economic policy goes hand in
  hand
• Unive...
Development Path 1950-2006
         10


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Social Impact Of The Crisis

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Social Impact Of The Crisis

  1. 1. Social impact of the financial crisis on small states Naren Prasad International Institute for Labour Studies, ILO London 6 July 2009 Commonwealth Meeting: Sustainable development in small states in a turbulent
  2. 2. Economic growth 16 14 12 Berlin wall 1989 10 Oil Asian-Russia 1997-98 shock-1973 Debt crisis 1981 Japan, Nordic, 8 S&L US 1991-93 EAP 6 OECD Argentina, % 4 Mexico 1994 LAC Turkey, 9/11, WLD 2 dotcom 0 1970 1972 1973 1974 1975 1976 1977 1978 1979 1981 1983 1985 1986 1987 1988 1989 1990 1992 1994 1996 1997 1998 1999 2000 2001 2002 2003 2005 2007 2009 1971 1980 1982 1984 1991 1993 1995 2004 2006 2008 -2 -4 -6
  3. 3. -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 AT G BR B BL Z CP V CO M CY P DM A FJ I GR D GU Y JA M KI R M DV M LT M HL M US 2000-08 FS M PL 2009* W PN G W SM ST P SY C Growth 2009 SL B KN A LC A VC T SU R TO N TT O VU Av T er ag e 0.5% in 2009
  4. 4. Small states different More services compared to agriculture or industry 70 70 60 60 50 50 40 40 % of employment % GDP 30 30 20 20 10 10 0 0 Agricullture Industry Manufacture Services Agricullture Industry Services small states others small states others In terms of percentage of GDP And employment
  5. 5. Contribution of tourism to employment & GDP, Small states and the world 30 25 20 2009 growth -6.8 & -3.5 15 % 10 5 0 Direct Employment Indirect and direct Direct GDP Indirect and direct GDP employmnet Small states (average) World (average)
  6. 6. Crisis: What went wrong • Financial sector • Global imbalances – Lack of regulation – Excessive saving in some – Excessive risk taking countries, high debt in others… – Inefficient remuneration •Increased inequality –Income inequality –Share of wages declining
  7. 7. Crisis & the real economy Asset-price crash Wealth/collateral Bank failure Few banks lending cautious Income uncertainty Firms/consumers can’t finance spending recession spending Recession: fall in bank revenue, loan default output Unemployment GNP=C+I+G+X
  8. 8. Impact on developing countries Economic & global Global crisis financial integration, structure of economy, policy National Capital impact trade flows remittance aid Economic/social structure-taxes, transfers Institutions/policies, Asset, prices, investments, Growth, investment, Inequality, employment debt Macro employment poverty impact Policy Eco. Policies to manage Social Growth & development shocks (fiscal, monetary, response financial) policies policies
  9. 9. Social impact GDP decline Fall in remittances Fall in government revenue unemployment Decreased social spending women low skilled Loss/decline of income youth gender inequality education health nutrition crime increasing poverty & inequality
  10. 10. GDP decline 20 million more 1% decline inequality, people in in GDP growth social policy poverty 0.3-0.8 % more 1% decline in GDP social policy infant deaths 4% GDP growth Keep reduce Labour force increase needed unemployment by 45 million
  11. 11. Social progress threatened • extreme poverty decreased by 320 million since 2000, child mortality decreased by 3 million and children’s school attendance increased by 28 million • economic and social progress achieved during recent years, achievement MDGs is now threatened (UN)
  12. 12. Current impact…. • Increases in unemployment, poverty and hunger • Economic growth negative & economic contraction • Negative effects on trade balances and balance of payments • Decrease in FDI, capital, Remittance, tourism • Exchange rates volatility • budget deficits, decrease in tax revenues • Decrease of global trade • Commodity price decline and volatility • Decline in access to credit • Decline in confidence • Lack of resources for social security and public social services • Increased infant and maternal mortality • Collapse of housing markets
  13. 13. Global Unemployment Additional 29-59 unemployed in 2009 Increase by 2-3% 1.2 billion working poor, 93-203 added in 2009
  14. 14. 14 Unemployment Rate (in percent) 12 10 Euro area 8 U.K. 6 U.S. 4 Japan 2 2006 2007 2008 2009 2010
  15. 15. Unemployment in past crises 25 20 increase by 2.7% average increase by 2.7% average 15 % 10 5 0 Argentina Indonesia Korea Malaysia Thailand Mexico Turkey Average 5 years prior to crisis crisis year 5 years after crisis
  16. 16. Unemployment in small states: Current and projected levels 30 25 5 years for unemployment to fall to previous level 20 15 12.3 to 14.8 current projected 10 5 0 A V M YP M PV e C SM Av U Y T LT T O G N S Z D B I G A P R FJ ag M D VU VC SY BL U LC AT JA ST O BR TO R TT PN SU M C C M G D W M G C er
  17. 17. Post-crisis estimated increase in poverty Selected poverty estimates, Change in millions 100 80 60 40 20 0 2009 2009 2010 2011 Global Asia and the Pacific Asia and the Pacific Latin America - World Bank - ADB - ADB - IDB
  18. 18. Poverty: Past crises 55 50 45 7.4% average increase 40 35 30 % 25 20 15 10 5 0 Mexico Argentina Turkey Indonesia Thailand Korea Malaysia Average before crisis (nearest available data) after crisis current levels (2007)
  19. 19. Poverty in small states: Current and projected levels 70 60 50 From 28 to 35% 40 % 30 20 10 0 I KIR Av A A M C O T T Z G Y N L S M B D A FJ ge DM MH BL VU VC KN SY LC GU AT MU FS BR TO TT GR WS era current projected
  20. 20. Inequality to increase Gini coefficient 70 60 50 40 30 20 10 0 VUT VCT MHL ATG FJI SYC PNG SUR GRD WSM GUY LCA TON FSM BLZ TTO BRB KNA MUS DMA • Low skilled, temporary and poor workers are laid off first during economic crisis • They are also the last to be re-employed after recovery, implying they will be unemployed the longest
  21. 21. What are countries doing? • Rescuing the banking & financial sector • Reviving the economy through stimulus packages • Mitigating social impact
  22. 22. G20 Declaration • The G20 Communiqué of 2 April 2009 recognized: – “that the current crisis has a disproportionate impact on the vulnerable in the poorest countries” – Committed $1.1 trillion – They recognized the importance of social protection in mitigating the crisis and generating the growth by providing $50 billion to developing countries
  23. 23. United Nations • Expert Commission of the President • UN Conference on the World Financial and Economic Crisis and Its Impact on Development • Our endeavours must be guided by the need to address the human costs of the crisis – an increase in number of poor and vulnerable, particularly women and children, who suffer and die of hunger, malnutrition and preventable or curable disease; a rise in unemployment; the reduction in access to education and health services; and the current inadequacy of social protection in many countries.
  24. 24. ILO • Global Jobs Pact – Accelerating employment creation, jobs recovery & sustaining enterprises – Building social protection systems & protecting people – Strengthening respect for international labour standards – Social dialogue: Bargaining collectively, identifying priorities, stimulating action
  25. 25. Conclusion: What works • Prevent poverty -> maintaining income for households • Evidence shows… – Minimum old age pensions and cash transfers to families seem to have the biggest poverty impact with the lowest transactions costs – Employment intensive schemes • Public infrastructure renewable energy sources, waste management, low cost housing, sanitation, etc • Micro, small and medium-sized enterprise support • Skills development • Youth employment schemes • Improved public employment services • Labour market policies influence consumer behavior (workers)
  26. 26. Conclusion: Towards a New Deal of development model • Social policy & economic policy goes hand in hand • Universal provision of social security • Diversification of exports • Hardest hit countries are those that rely on manufacturing exports (& tourism) • Genuine investment in green sector • Bringing back the State (not market) • Industrial policy should not be forgotten • More domestic policy space
  27. 27. Development Path 1950-2006 10 Stars Getting richer BWA CHN gdp_growth_1960-06 KOR SGP HKG 5 VNM MLT THA KNA CYP MUS IRL MYS ATGJPN IDN POL CUB PRT HUN CPV LCA GRD TUN LKA GRC ESP EGY DOM BLZ IND DMA FIN NOR PAK BRB ISR ITAAUT CHL TTO BEL VCT JOR SYC BRA PAN LBN SYR FRA NLD SWE MOZ TUR CRI GAB CAN USA MAR BGRIRN COL MEX DEU GBR DNK AUS UGA PRY FJI TZA PHL DZA ECU CHE MWI MRT BGD BFA NPL KEN SDN PNG COG GTMSAU URY ARG NZL YEM AGO ROM BHRPER ZAF MLI RWA CMR NGA GUY HND JAM SLV GIN TCD TGO GMB SUR BEN BOL BDI SLE GHA NAM CIV VEN 0 SEN NIC COM ZWE GNB ZMB CAF MDGHTI NER LBR DJI Falling behind Loosing momentum -5 6 7 8 9 logGDP_1950

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