Transcript Socio-Economic Impact, Political Economy of Response

Financial crisis: Socioeconomic impact,
political economy of
response
Ben Slay
Senior economist
UNDP Bureau for Europe and CIS
7 July 2009
Who’s the worst hit
region? We are . . .
10%
9.8%
8.6%
5.4%
5.7%
6.3%
6.2%
2.5%
2.0%
3.3%
0%
-1.5%
-3.7%
-5.1%
-10%
CIS
SEE/NMS
Latin
America
Regional GDP
growth trends
Africa
Middle
East
Source: IMF World Economic Outlook, April 2009
2007
2009
Asia
IMF forecasts for Caucasus,
neighbouring economies
23.4%
25%
13.8%
8.1%
5.6%
11.6%
7.8%
4.5%
6.8%
4.7%
2.0%
1.1%
0%
1.0%
-6.0%
-5.1%
Russia
Turkey
2.5%
3.2%
-5.0%
2007
-25%
12.4%
Armenia
2008
2009
Georgia
Azerbaijan
Source: IMF World Economic Outlook, April 2009
Iran
How bad is it? GDP
reductions in 2009:Q1
0%
-6% -6%
-7% -6%
-10%
-5%
-2.5%
-4.5%
-9%
-12%
-15%-14%
-20%
-25%
-19%
UKR LAT EST TUR LIT RUS SLO MOL ARM GEO SVK HUN EU
Change relative to 2008:Q1. Sources: Eurostat, CIS Statistical
Committee, national statistical offices, JPMorgan, press reports.
US
Why so bad? Trade shock:
Russian, EU import trends
50%
43%
38%
27%
9%
7%
Russia's CIS imports
EU27 external imports
4%
0%
-13%
-6%
-15%
“Crisis hits home”
-50%
2008:Q1
2008:Q2
2008:Q3
2008:Q4
-45%
2009:Q1
Year-on-year changes in imports, in value terms. Sources: Roskomstat, Eurostat.
Unemployment: Baltics,
Cyprus hard hit . . .
400
Numbers of unemployed
(LFS data), June 2008 = 100
Lithuania
300
Estonia
Latvia
EU-12*
Cyprus
200
EU-27
* Romania
not included
m
04
20
09
m
02
20
09
m
12
20
08
m
10
20
08
m
08
08
20
20
08
m
06
100
Source: Eurostat
. . . As are Moldova,
Russia, Turkey
250
Moldova
Russia
Turkey
Croatia
Numbers of unemployed
(LFS data), June 2008 = 100
200
Source: National
statistical offices, EIU
150
03
02
m
Source:
Eurostat
20
09
m
20
09
01
m
20
09
12
m
20
08
11
m
20
08
10
m
20
08
09
m
20
08
08
m
20
08
07
m
20
08
20
08
m
06
100
Crisis impact on Armenia
40%
24%
32%
7%
7%
0%
-1%
-14%
-40%
GDP
-11%
2008
2009
-34%
Trade turnover Monthly wage
Registered
($)
unemployment
2009 data are for January-May. Sources: National Statistical Service, UNDP calculations.
What is to be done? Shortterm macro policy response

G-20 countries:
– Coordinated fiscal, monetary expansion

Longer-term inflationary impact?
– Keep global markets open, resist protectionism


Fate of Doha Round?
IMF, World Bank:
– Preventing global financial contagion
– Focus on Europe, Central Asia

Coordination with EC, bilateral donors (including
Russia)
Actual policy responses in
Europe, Central Asia

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

Domestic policy: What can be done?
– Better regulation of financial systems, to:


Reduce capital outflows
Prevent further demonetisation, dollarisation
– Strengthen social policies, via:


Increase share of GDP for social protection
Better targeting of social protection
Do social safety nets
protect the poor?
Social protection capacity
5.0%
100%
Social protection (% of GDP)
4.5%
% of poor covered
4.0%
90%
80%
Source: World Bank. Social insurance
(e.g., pensions) not included
3.5%
70%
40%
1.5%
30%
1.0%
20%
0.5%
10%
0.0%
0%
P
A
G
E
TA
LI
T
S
R
B
C
R
O
LA
T
R
O
M
B
EL
R
U
S
H
U
N
2.0%
Z
50%
O
L
B
iH
K
O
S
A
LB
K
FY AZ
R
O
M
M
O
L
B
U
L
A
R
M
K
YR
U
K
R
U
ZB
E
ST
2.5%
O
60%
J
3.0%
Social policy reform
implications
% of GDP devoted to social protection
% of poor
covered by
social
protection
Below
average
Above
average
Below average
Above average
Weakest ability to
protect:
Biggest pay-offs to
social policy
reform:
Albania, Armenia,
Bulgaria, Georgia,
Kazakhstan, Kyrgyzstan,
Kosovo, Poland, Tajikistan
BiH, FYR Macedonia,
Ukraine, Uzbekistan
Good at targeting; more
resources needed:
Best performers:
Azerbaijan, Belarus, Latvia,
Lithuania, Romania, Russia,
Serbia
Croatia,
Hungary
National crisis responses:
Political economy issues

Policy weaknesses:
– Recognition lags
– Implementation lags
– Uncertain implementation capacity

Policy fault lines:
– Whom to protect?



Key sectors and firms?
Middle class?
Most vulnerable?
– Increase social benefits, or public works?
Policy lags:
Causes, implications

Recognition lags:
– Economics: Different points of business cycle

Technical issue: Forecasts have been too optimistic
– Politics: Electoral cycles, other factors

Implementation lags:
– Exchange rate policy:


Devaluation works fastest . . .
. . . But is not an option for many non-CIS countries
– Monetary policy effectiveness limited by:


Fixed exchange rates/euro adoption
Deleveraging, dollarisation, demonetisation
– Fiscal policy: Windows of opportunity?


2009 budget revisions—now
2010 budget formulation—2009:Q3 key
Longer-term: Counter-cyclical
responses to development challenges

Environmental sustainability:
– Climate change: Pricing energy correctly

Tax carbon, not employment or value added
– “Green jobs”: Alternative energy public works
– Poverty and Environment Initiative (UNDP-UNEP)

Food security:
– Global food prices have bottomed out well above January
2007 levels, and are now rising again
– Development opportunities for poor farmers?

Demographics and migration:
– Keep migration routes open; redress demographic
imbalances in Russia, Europe, USA
– Subject of UNDP’s 2009 Human Development Report
Conclusion: Crisis
implications for the region


Break in economic growth: Stagnation or
recession for most CIS economies
Increases in:
– Income poverty, inequality
– Other dimensions of poverty


Much development progress could be lost
When growth resumes:
– How strong will it be?
– Will it be driven by:



“Recovery” growth?
Favourable external conditions?
Reforms?