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Emil D TESLIUCThe World Bank

Washington, DC

May 13, 2010

Sofia

Economic and Social Impacts of the Crisis in Eastern Europe and Central

Asia

GDP growth (annual percent change)

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The slowdown is sharpest in ECA

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The impact of the crisis has varied across countries in ECA

GDP Growth Rates in ECA

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Recession conditions (example: unemployment) will continue for several years

Households are affected by the crisis in multiple ways and at different times

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But these unemployment rates don’t tell the whole story

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Lags in impacts and data: Crisis is moving in waves with some countries hit before others Labor market effects often lag Data do not keep up with what is happening

Shifts in work status Administrative leave (in Russia, 1.1 million in QI 2009) Reduced working hours (in Ukraine, 1.2 million in QI 2009) Job sharing Increasing informality

Wage arrears (at the end of Q1), accumulated wage arrears doubled and tripled in Ukraine and Russia respectively

Registered unemployment rates don’t tell the whole story

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Unemployment, Part-time Work, Workers on Administrative Leave, and Workers

having Wage Arrears First and Second Quarter of 2009

Unemployment, and Part-time Work in Belarus and in Latvia

in the First and Second Quarter of 2009

A contraction in remittances will have both macro and household impacts

0%5%

10%15%20%25%30%35%40%45%50% 46%

38%

19%

10% 9% 7% 6% 6% 4% 4% 4% 4%

Remittances as a share of GDP, 2007 (%)

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Forecasts of remittance flows for 2009 show a steep decline of 15% in ECA

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-20%

-10%

0%

10%

20%

30%

40%

50%

2006 2007 2008e 2009f 2010f

East Asia and Pacific

Europe and Central Asia

Latin America and Caribbean

Middle-East and North Africa

South Asia

Sub-Saharan Africa

Micro-simulations show an increase in poverty

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  Most recent poverty estimate   Forecasted poverty in 2009

Armenia 23.8 (2007) 29.7

Azerbaijan 10.8 (2008) 11.8

Bulgaria 9.7 (2007) 11.3

Latvia 19.8 (2008) 26.9

Romania 5.7 (2008) 7.4

Russia 13.5 (2008) 15.5

Tajikistan 53.1 (2008) 57.9

Turkey 17.4 (2008) 21.9

Note: Estimates are not comparable across countries

Fiscal constraints have to led strategic and not so strategic social sector responses

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Not Strategic Reduce spending across the board Cut spending on critical inputs (operations and maintenance) to protect salaries Postpone expansion of early childhood and preschool education and cut health

prevention programs Adjust second pillar contribution rates to raise revenue

Strategic Achieve efficiency gains through structural reforms in social sectors (e.g. formula

funding in general education – Latvia, Lithuania, Romania, Bulgaria; school consolidation – Serbia)

Prepare workers for economic revival (Latvia, Russia, Bulgaria) Expand safety nets for those without social insurance (Latvia) Change indexation/minimum and base pension (Hungary, Serbia, Bulgaria)

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Bulgaria Romania Turkey Latvia Kazakhstan Russia

Increased duration in unemployment benefits

X X X

Increased amount of unemployment benefits

X

Wage subsidies X X X

Training X X X X

Exemptions from paying contributions

X X

Public works X

ECA countries have adjusted labor market policies and social protection programs to respond to the crisis

Response to Crisis: Unemployment Insurance and Social Assistance Benefits

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Unemployment insurance = first response Ukraine, Turkey, Croatia, Serbia, Bulgaria

Safety net benefits protecting existing beneficiaries Helping smooth consumption of those already receiving benefits

Some safety net benefits starting to respond only recently In terms of increasing coverage (new beneficiaries: Croatia, Bulgaria)) And/or topping up benefits (e.g., Latvia, Ukraine, Serbia, Kyrgyz Republic)

Some design features constrain crisis response: Extremely low eligibility thresholds – not reaching those hit by crisis (e.g.,

Bulgaria, Croatia, Ukraine) Additional restrictions: time limits; requiring period of unemployment prior

to registering (Bulgaria)

Reflections

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The aggregate shocks fed through multiple channels: labor market; remittances; credit; supply of health and education services; social protection.

The policy responses to the crisis depend on: • depth and persistence of crisis• fiscal space today and magnitude of fiscal adjustment necessary in next years • transmission mechanism to households• availability of instruments that help households cope with the shock• adjustments at the household level (destructive for longer-term human development?)

Public policies that protect households from poverty are important. Public policies that prepare households for post-crisis key for longer term human capital formation and development. Public policies that protect jobs and create jobs to be handled with care if labor demand remains sluggish because fiscal costs are high