ARMENIA:Social Impact of the Global Economic Crisis

Gohar GyulumyanThe World Bank

AIPRG Conference

YerevanJune 7, 2009

Outline

• Social Impact of the Global Economic Crisis on Armenia

• International Experience on Crisis Responses – OECD experience– Middle income country experience

• Policy Options for Armenia– Existing social protection programs – Leverages to mitigate crisis implications

Main Channels of Transmission

• Labor Market and Migration (unemployment, remittances)

• Product and services markets (deceleration of growth, decline in trade/tourism)

• Capital market (decrease in FDI and bank borrowing, contraction of

fiscal space)

Social Impacts of the crisis

• Poverty and unemployment (ARMENIA: Implications of the Global Economic Crisis for Poverty

WB Report No. 47770-AM)

• Social divergence, One-factory towns

• Deterioration in accessibility of health and education services for poor and vulnerable

Budget cuts, less remittances/OOP payments

Overall poverty: Reversals of the gains in poverty reduction?

Extreme poverty could increase by a substantially larger margin and reaches level not seen since the early 2000s

What is driving the increases in poverty?

Labor market measures in the stimulus packages of OECD countries ...

Many OECD countries have announced large economic recovery packages with measures that will create (or preserve) jobs, for example:

Overall funds

% of total funds

United States $787 billion 3.1 Extension of max duration of UBs

5.0 Subsidies to offer job losers access to health insurance

0.5 ALMPs (especially training)

United Kingdoma £20 billion Hiring subsidies

< 10 Additional training places

Business start-up counselling and financial support

Work-focused volunteering options

Germany €30+50 billion; 2009-10Reduction in employers’ SS contributions by 1/2 for short-time workers; full reduction if short-time work is used for training/upskilling

3.0Subsidy to the employment services for training/upskilling purposes; special subsidy for training of temporary agency workers.

Hiring of 5000 additional staff for the public employment services

France € 26 billionEmployer contributions reduced/eliminated for employees hired up to 1.6 MW by firms of <=10 employees

1.9 Extra spending on ALMPs

2.9Advanced payment to future beneficiaries of the Revenue de Solidarité Active (RSA)

a. £1.8 billion are allocated to the Dept. of Work and Pensions over 2009-10, through Jobcentre Plus and private and voluntary providers.

Labour market programmes

8

Country Responses to Current Economic Crisis

Bulgaria ALMP targeted at the newly unemployed Temporary wage subsidies to workers placed on short working hours Increased unemployment benefit size

Romania Increased duration of unemployment benefits Exemptions from paying contributions during the partial paid leave Subsidies to enterprises for hiring new employees and new employees

coming from long-term unemployment

Latvia Increase duration of unemployment insurance Increase the adsorptive capacity of ALMPs by including part-time workers in

training

Kazakhstan

Public works: construction and maintenance of pipe water, electricity and gas, and sewage facilities, schools, hospitals, highways and local roads , etc.

Extension of unemployment benefits (to be funded from social insurance fund)

Training

Social safety net and labor market interventions in low/ middle income economies

Country Responses to Current Economic CrisisUSA Food Stamp Program

Additional budget ; Increase benefit levels Ease restrictions and time limits for jobless adults

BrazilBolsa Família Program (CCT)

Expanding budget for program for 2009 Expanding coverage Raising eligibility threshold

Mexico Programfor Returning Migrants

New employment for returning migrants Border towns Wage levels to cover basic food, health and transportation costs

Responses to Past Economic CrisisArgentina Demand driven public works program, supplemented by a cash transfer

for those who cannot work

Thailand Public works with skill differentiation, supplemented by expansion of pre-existing safety net programs

Korea • Public works with institutional structures quickly established at regional locations where the unemployed registered• PW according to skill levels (semi-skilled, skilled, etc)

Mexico Progresa (CCT)

Conditional cash transfer program, supplemented by public works program

Responding through existing social safety net programs

What are the options for Armenia?

Relatively well targeted social safety net program Family Benefit program ALMPs and Public Works Job earning possibilities Job training/job matching/ job fairs /job clubs Community demand driven public works projects SMEs

Unemployment benefits Large number of job seekers and unemployed remain unregistered Coverage is low Expect longer unemployment spells Could be linked with active labor market programs

Public spending on health and education Increase efficiency of Basic Benefit Package in health Allocation of State order in higher education

Make the stimulus work for all Incorporation of social responsibilities into economic stimulus packages

While the Family Benefit was fairly well targeted at family level, its performance grew weaker over time…

2006

…FB’s coverage of the poorest quintile also worsened

Increase FB budget

Increase benefit size

Expand coverage to include the “new poor”

Raise the eligibility threshold

Better integration of the existing data, screening of applicants with readily available filters and categories

Upgrade the MIS into a live database, introducing cross-checks and stepping up electronic data verification.

Consider a regression-based Proxy Means Test, which can address the underreporting of income (but transition

has to be gradual)

Outreach campaigns targeted to poor communities

Simplify the application process and annual re-certification

Responding

through

the existingsocial safety net program

Responding

through

the existingsocial safety net program

FB can be an effective instrument to delivery support to the poor and increase domestic demand, but further improvements in targeting will be key

Public Works Current status

AMD 700 million (no increase over 2008 allocation) and only funds part of the community designed projects

Priority to: first time applicants, marzs with more job seekers and high poverty

Short duration (3 months) Recommended measures to enhance crisis response

Expand the public works program (absorptive capacity exists) Increase duration of PW projects Ensure poor communities with weak capacity are not left out Set PW wage less than market wage not draw labor away from other

productive uses Eligibility Criteria (e.g., one person per family?)

Education: Ensure increasing completion rate Introduce innovative funds for universities, move from merit-based to needs-based public funding for students in

Universities

Health Public provision for full costs of services in BBP, Budget allocation for co-payment for poor and vulnerable,

Health and Education

Concluding Remarks

The global economic crisis has serious social implications and could reverse the precious gains made in the 2000s

Job losses/earnings and loss of other incomes are the main channels of transmission of the crisis

Policy response options using existing programs: Protect funding for core social spending for poor and vulnerable, better targeting of the Family Benefit, Temporary expansion of unemployment benefit Increased efficiency of Public works program

Combinations of different programs effective at reaching different segments of the population affected by the crisis (CSR)

Pay attention to risks of difficult-to-reverse consequences: School attendance, healthcare utilization, nutrition, heating, etc