52679 Social Protection Responses to the Global Economic Crisis in ECA Kathy Lindert and Anita Schwarz 1 health and social protection. The impact on household welfare could include reduced consumption and ability to Besides affecting the private sector, the current global smooth consumption inter-temporally, less food consumption economic downturn will likely have a far-reaching impact on and dietary diversity, and decreased household investments government revenues around the world. As country budgets in child health and nutrition. While the global crisis could are squeezed tight, social programs which directly help poor cause economic losses across the income spectrum and even and vulnerable people will become pressure points for force some families into a new situation of poverty, the reducing government spending. chronic poor are likely to feel the most severe impact. In many countries in Eastern Europe and Central Asia Figure 1: Stylized Transmission Mechanisms 2 (ECA), two years of rising food prices, high energy costs and the global economic downturn have combined with other shocks like natural disasters and political instability. The impacts of these crises could reduce government Global Shocks: Financial/Economic, Food, Fuel revenues and affect social spending and pension systems, even as the need for unemployment and benefits increases. Financial Markets: Product Markets: Labor Markets: · access to credit · growth, prod'n · employment How well-positioned are ECA countries to respond to these · savings ·Changing relative · incomes · value of assets prices · remittances challenges? Are their pension systems safe? Can their social assistance programs be protected and expanded if necessary? The Social Protection Team of ECA at the World Bank Impacts on Social Spending & Impact on Household Welfare prepared a stocktaking Note, "Social Protection and Programs · consumption and ability to smooth · government revenues consumption · contributions to PAYG pension schemes Economic Shocks in ECA: The Social Side of the Global · value of assets in funded-pension schemes ·Risks of school attendance (child labor) · consumption of quality/diverse foods ·pensions deficits Crisis", to examine the situation regionally and ·Fiscal pressures to social spending · household investment in child health and nutrition (irreversible consequences) (education, health, social protection) ·All imply worsening of household welfare, social systematically, and help raise awareness of the current risks ·demands for unemployment insurance, social indicators, and poverty assistance (counter-cyclical pressures) as well as potential for social protection during the crises. 3 Impact of the Crisis on Social Protection and However, social assistance and unemployment programs in Household Welfare ECA can also act as potential crises response mechanisms, The impact of the global financial crisis will likely be felt by by expanding to help low income families to smooth all ECA countries through the: (a) financial markets (reduced consumption and mitigate the adverse impacts of the shocks. access to credit, falling value of savings and assets); (b) Their budgets, along with those for basic education and product markets (lower growth and production, changing health services, should be protected and increased to relative prices); and (c) labor markets (reduced employment, leverage this potential. wages and remittances), as illustrated in Figure 1. Impact on Pension Funds As government revenues fall, these effects will be compounded by pressures to reduce spending on education, The effect on pension systems in the ECA region will vary depending on the type of pension system in place. 1 The authors thanks the Social Protection Team of ECA and other World Bank 2 staff who contributed to the writing of the Note: "Social Protection and All Figures are from the Note: "Social Protection and Economic Shocks in Economic Shocks in ECA: The Social Side of the Global Crisis". ECA: The Social Side of the Global Crisis", November 2008, World Bank. ECA Knowledge Brief March 2009, Volume 1 Public PAYG Systems Most ECA countries, except Kosovo and Kazakhstan, have spent relatively few years contributing to the funded operate some type of pay-as-you-go (PAYG) system. In the system) may be subject to direct financial market risk. The public PAYG systems, the risk comes from the potential rise most immediately affected individuals will be in Kazakhstan, in unemployment due to the crisis, its impact on Hungary and Poland. In other countries, markets could contributions, and consequent decrease in pension system recover at least partially by the time significant waves of revenues. Countries like Serbia and Ukraine already have second pillar participants begin to retire. But, if the crisis is significant deficits in their pension systems and are more prolonged and assets do not recover quickly, more people likely to face constraints. Russia, Georgia and Kosovo, with will approach retirement with low assets. A more immediate their relatively modest pension systems, may find higher issue is the potential for panic by inexperienced investors as numbers of pensioners in poverty as pension increases they see their portfolios fall in value; this may result in calls remain modest while inflation raises the cost of living. for reversals in pension reforms. A sensible strategy for countries with these schemes is to avoid hasty action and let Funded Pension Systems markets recover, although some countries should reform Thirteen ECA countries have adopted fully-funded, defined their pension systems. contribution schemes, usually privately managed, as an integral part of their mandatory pension systems. They are Voluntary Pension Systems directly vulnerable to the financial market crisis because the Voluntary pension savings schemes may take a strong hit-- drop in financial markets could lead to a sharp decrease in especially defined benefit schemes in Russia and other the value of assets in their specialized private pension countries, and defined contribution funds with their wider savings funds. Moreover, those retiring at the time of the exposure to equity. This may cause a decline in the crisis will end up annuitizing these low pension balances popularity of voluntary schemes which governments rely on and, therefore, receive low pensions throughout their to help cut spending on public pension programs (necessary retirement period. because of the aging populations in many countries). However, there are some mitigating factors to dampen these Safety Nets: Potential for Rapid Crisis Response impacts. First, in most ECA countries the pension system is a mix between public and private schemes, usually heavily Safety nets mitigate the impact of economic shocks by weighted toward the public PAYG scheme. Figure 2 shows protecting incomes and helping families smooth the proportions of total pension contributions going to the consumption, avoiding irreversible losses of physical assets funded systems. Only Kazakhstan and Kosovo have 100 and human capital, maintaining political and social stability, percent of the contributions going into the funded private and acting to some extent as counter-cyclical stabilizers pensions. Second, pension reforms in many countries (with permanent programs `automatically' expanding with typically kept the oldest workers in public PAYG systems crises and contracting with restoration of growth). The and only allowed younger workers to switch to the mixed ability of countries to leverage social safety nets in response systems. These younger workers have not yet reached to crises depends critically on their capacity to effectively retirement age so only a portion of the older individuals (who target and implement such programs in advance of a crisis. Figure 2: Funded Pension Schemes Operate in 13 ECA Countries Country % Wage to Proportion of Total Year Funded Participation in Funded Year Funded Participants Retire Funded Contributions to Funded Started Bulgaria 5% 21.7% 2002 Mandatory <42 Full cohorts in 2023 Croatia 5% 25.0% 2002 Mandatory <40, Partial cohorts of women by 2012 and of men by 2017; Voluntary 40-50 full cohorts of women by 2022 and of men by 2027 Estonia 6% 20.0% 2002 Voluntary Partial cohorts by 2012 Hungary 8% 23.9% 1998 Mandatory new entrants; Partial cohorts by 2008; full cohorts by 2035 voluntary for all others Kazakhstan 10% 100.0% 1998 Mandatory for all Full cohorts by 1999 but acquired rights in old system in addition Kosovo 10% 100.0% 2002 Mandatory for <55 Full cohorts by 2012 Latvia 8% 24.0% 2001 Mandatory <30, Partial cohorts by 2013; full cohorts by 2033 Voluntary 30-50 Lithuania 5.5% 22.0% 2004 Voluntary Partial cohorts by 2014 Macedonia 7.42% 35.0% 2006 Mandatory for new Partial cohorts by 2016; full cohorts of women by 2043 entrants and of men by 2045 Poland 7.3% 26.1% 1999 Mandatory <30; Partial cohorts of women by 2009 and of men by 2014; Voluntary 30-50 full cohorts of women by 2029 and of men by 2034 Romania 2%, increasing 6.7% in 2008 2008 Mandatory <35; Partial cohorts of women by 2023 and of men by 2028; to 6% voluntary 36-45 full cohorts of women by 2033 and of men by 2038 Russia 6% 30.0% 2002 Mandatory for <35 Full cohorts of women by 2022 and of men by 2027 Slovak Republic 9% 31.3% 2005 Voluntary for all Partial cohorts by 2015 ECA Knowledge Brief March 2009, Volume 1 Overview of (Pre-Crisis) Safety Nets in ECA Reforming safety nets by eliminating, reducing, or maintaining nominal values of untargeted benefits, ECA countries devote an average of 1.7 percent of GDP to removing automatic indexing of benefits to wages, and safety net programs, with another 8.3 percent for pensions consolidating benefits into fewer well-targeted schemes. and other forms of social insurance (Figure 3). Most countries operate a mix of programs, usually in the form of The initial option should usually be on expanding existing cash transfers, with an emphasis on family allowances (child safety nets that have proven track records, such as well- allowances, birth grants, etc.), social pensions, heating and targeted social assistance programs or unemployment housing allowances, and targeted anti-poverty `last-resort' insurance. When countries do not have such programs, they programs. In many countries, the programs are multiple and have the option of introducing new ones. However, it takes fragmented, leading to duplication of benefits. 10-18 months (longer for fragile countries) to develop basic targeting, registry and safety net systems. This is too long for Figure 3: Spending on Social Assistance Across ECA rapid crisis response. Nonetheless, there could still be value Public Spending on Social Assistance, % of GDP in using the crisis as a pretext for introducing new, well- Croatia targeted programs (as Turkey did in 2001 with the BosniaHerzegovina Hungary introduction of its conditional cash transfer scheme). Ukraine OECD Uzbekistan Macedonia Russia Crises can also be an opportunity to push the reform agenda Moldova Armenia forward. In addition to short-term measures, medium-term Latvia Estonia reforms for strengthening safety nets could include: (a) Belarus Lithuania improved targeting and eligibility mechanisms such as Bulgaria Kyrgyzstan Kosovo Hybrid Means Testing; (b) improved household registries Serbia Romania and management information systems; (c) strengthened Kazakhstan Albania payments, monitoring, and oversight mechanisms; and (d) Poland Georgia Turkey overhauling and consolidation of weak safety nets. Azerbaijan Tajikistan 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 Are Existing ECA Safety Nets Prepared for Rapid Response? Coverage of the poor by social assistance is not always correlated with fiscal effort as benefits are not usually Countries were classified into three categories (A, B and C) targeted effectively. Often, less than 40 percent of the poor by asking the simple question: `Does the country already are covered and in some countries, like Tajikistan, less than possess at least one well-targeted program that could be a third of those in the poorest quintile are covered. scaled up to channel resources to the poor in a cost-effective manner in a crisis situation?' Most ECA countries can Targeting of overall social assistance is impressive in a few leverage existing targeted programs for crisis response, cases (Georgia, Serbia, Romania, Armenia, and Lithuania). although some need significant reforms to effectively target the poor and vulnerable (Figure 4). But, in many countries, the non-poor receive substantial social benefits from larger universal schemes with objectives Figure 4: Preparation Levels of ECA Safety Nets for other than poverty alleviation--child allowances, birth grants, Rapid Crisis Response to Impacts of Global Crisis3 restitution for war veterans and victims, and assistance to the disabled. Potential to Build on Lack Well-Targeted Program, Policy Options for Crisis Response via Safety Nets Existing Programs SSN Needs Major Improvements Usually have at least one fairly Higher spending, Crisis response mechanisms will vary across ECA according well-targeted program, Low spending, though often with low benefit weak programs (targeting, weak programs values & coverage coverage of poor) to the severity and manifestation of the impending impacts (Type A) (Type B) (Type C) on incomes, wages, jobs, migrant workers, remittances, etc., LICs / Lower MICs ·Albania (NE Program) and the capacity and components of the existing safety nets. ·Armenia (FPB) LICs / Lower MICs LICs ·Azerbaijan (TSA) ·Moldova The best-prepared countries will likely be best-positioned to ·Georgia (TSA) ·Kyrgyz (UMB, MSB) ·Bosnia ·Tajikistan respond. The available policy options include: ·Macedonia (SB with reforms) ·Ukraine (Ext. Poor program) MICs/Upper MICs Leveraging existing programs by expanding proven ·Bulgaria (GMI) MICs ·Croatia (Support Allowance) MICs interventions or protecting their budgets. ·Estonia (GMI + FA) ·Russia n.a. ·Latvia (GMI + TFA) ·Hungary (Type A-B) ·Romania (GMI) ·Kazakhstan Introducing new programs like Direct Cash Transfers, ·Serbia (MOP) ·Turkey (CCT, Green Card) 15 Conditional Cash Transfers and Public Works Schemes. ECA Knowledge Brief March 2009, Volume 1 `A' Countries: Potential to Build on Existing Programs suffers from implementation and design challenges. Significant reforms are generally needed in these countries Most of these countries do possess at least one fairly well- to consolidate programs, refocus design and eligibility targeted program that can be scaled up in times of crisis. criteria, develop and apply targeting tools, improve Interestingly, this potential is not limited to m idle income implementation, and strengthen oversight, monitoring and countries (MICs). evaluation. Several lower-income countries have developed some `C' Countries: Inadequate Resources and Programs elements of effective safety nets, typically a single well- targeted program focused on poor families--such as the Tajikistan operates a few ineffective programs with very low Unified Monthly Benefit in Kyrgyz, the Ndhima Ekonimike funding (0.5 percent of GDP). However, within this budget, program in Albania, the Targeted Social Assistance it does not optimize design and implementation, spending programs in Azerbaijan and Georgia, the Family Benefit mostly on utility subsidies that do not reach the poor. In Program in Armenia. The targeting accuracy of these contrast Azerbaijan category A country operates better programs is reasonable to high. Depending on the country, safety nets on a similar budget (about 0.5 percent of GDP) further improvements could come from introducing and effective conditional cash transfer programs elsewhere geographic targeting with poverty maps, verification of (Brazil, Mexico) use as much of a share of their GDPs, with income-testing with hybrid proxies, and strengthened much higher impacts. implementation, registry, administration and oversight. Coverage is typically low and could be expanded with The Role of the World Bank increased fiscal effort (possibly coming from consolidating In the short run, ECA countries may call on the World Bank other legacy `privileges') and improved outreach to the poor. to provide financial or technical support to help with the immediate impacts of the crises. Rapid support could Several MICs and higher MICs also operate effectively include: (a) helping countries finance temporary scaling-up targeted `last resort' programs. Eligibility for the programs is of well-targeted safety nets, either in beneficiary coverage or determined by means testing and targeting outcomes range with a topping-up of benefits values; and (b) supporting from reasonable to strong. Coverage is usually low but the actions to protect the budgets of well-targeted programs and poor also benefit from other universal social schemes. Many other crucial spending on education and health. of these MICs need to further strengthen their safety nets by improving benefits, coverage, implementation, and The Bank may also be called on to support ECA countries in administration. reforming their safety nets. This may generally involve: (a) protecting budgets of well-targeted programs; (b) `B' Countries: Adequate Spenders, Inadequate Programs eliminating or reducing spending on untargeted programs These countries do allocate adequate resources to social such as privileges; and (c) removing automatic indexing of assistance but have been unable to reduce poverty in a cost- benefits to wage inflation. In the medium-term, the Bank can effective manner due to weak targeting and implementation. help countries: (a) develop targeting mechanisms (such as Moldova spends about 1.7 percent of its GDP on about 15 hybrid means-testing tools); (b) strengthen the registration untargeted programs; Bosnia spends 4 percent of GDP on a process; (c) unify, automate and strengthen beneficiary number of untargeted, categorical benefits for civilians and registry; (d) improve oversight, controls, monitoring, and war veterans; and Russia spends 1.7 percent of GDP on evaluation mechanisms; and (e) consolidate benefits and/or categorical benefits and weakly means-tested subsidies but introduce new better-targeted schemes. ____________________________ 3 Governments and the Bank need to be prepared to respond SSN: Social Safety Nets; MIC: Middle Income Countries; LIC: Lower Income Countries; NE: Ndihme Ekonomika Program; FPB: Family Poverty Benefit; TSA: more adeptly in the future; safety nets are important not only Targeted Social Assistance; UMB: Unified Monthly Benefit; MSB: Monthly Social in times of crises but, in the long-run, they help to protect the Benefit; SB: Social Benefit; GMI: Guaranteed Minimum Income Program; CCT: poor and allow governments to avoid other, more costly or Conditional Cash Transfer; MOP: Material Support to Families Program inefficient policies. 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