Croatia

Social Impact of the Crisis and Building Resilience

World Bank and UNDP

Zagreb, June 30, 2010

To determine the impact of the crisis on labor markets and poverty

To assess the effectiveness of employment and social safety net policies in response to the current crisis

To present options the enhance the efficiency of social protection system and to build resilience against future demand shocks

Objectives

The impact of the crisis substantial, despite the fact the unemployment increased somewhat less than in other countries

Large fall in formal employment led to a significant increase in the poverty rate, although cushioned by the increase in informal employment

Policy response to the crisis was limited◦ Reliance on automatic stabilizers: unemployment benefit and

means-tested social welfare allowance◦ Little adjustment in employment policies

Substantial room to enhance the efficiency of the social protection system within the existing resource envelope

Main Findings

1. Summary of main results◦Labor market impact◦Poverty impact

2. Assessment of the policy response to the crisis

3. Building resilience: options for the reforms of the social protection system

Outline

1. Crisis’ impact on labor markets and

povertySummary of main results

Background: 6% fall in GDP Formal employment: 6% fall high elasticity

◦ Crisis or delayed restructuring? Total employment (LFS): 2.4% elasticity within the regional

range Wage moderation: 3% fall limited the adverse

employment effect Substantial growth in registered unemployment: 25% higher But modest increase in unemployment rate (LFS): 1.1 pp (less

than EU average) However, coupled with fall in labor force participation Result: fall in employment/population ratio

◦ 57% well below EU average raising it should be top policy priority Recently: inflows into unemployment dropped close to pre-crisis

level end of the crisis?

Labor market impact: employment

Manufacture, trade, tourism and construction industries suffered the most

Industrialized, low unemployment regions were hit hardest equalization of labor market conditions

New unemployed: prime age skilled blue-collar male workers differ from “old” unemployed

Labor market impact: profile

Low unemployment regions were affected by the crisis more than high unemployment regions

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0 10 20 30 40Unemployment rate March 2008

Crisis has undone gains in social welfare achieved during the years of fast economic growth before the crisis◦ Assuming baseline poverty rate of 10%,

simulation results suggest that the poverty rate increased by 3.5 pp.

◦ Employment status, age, education, family size important poverty correlates

The lower middle-income class was hit hardest by consumption decline

Poverty increased faster in richer urban areas than in poorer rural areas

Poverty impact

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Poverty impact: profile

Poverty rates in 2008-2009

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No chirdren 1 2 3 or more children

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2008 2009Average rate 2008 Average rate 2009

“New poor” are economically active, better educated and younger than the “old poor”

Better chances to escape poverty Child poverty is set to rise, especially among multi-children

families

2. Policy response to the crisis

An assessment

Provide income support to individuals who lost their jobs, and families which fell into poverty

Prevent short-term unemployment to turn into long-term unemployment, and transient poverty to turn into chronic poverty

Given fiscal strain, balance the needs of short-term unemployed and new poor with those of long-term unemployed and chronic poor

Policy challenges in the face of a recession

1. Income support◦ Reliance on existing instruments: unemployment

benefit and social welfare allowance◦ Many new unemployed and new poor were not

eligible and were not covered

2. Prevention of long-term unemployment and chronic poverty: active labor market programs

◦ Run on a small scale and further scaled down during the crisis for fiscal reasons

◦ Little impact on job prospects of the new unemployed

Limited policy response to the crisis

3. Policy focus: new vs. old unemployed and poor◦ Minimal adjustment of existing policy mix to the crisis

conditions focus on the old poor rather than on the new poor or those at risk of poverty

◦ No additional instruments to provide income support to workers affected by the crisis but not eligible to UB or social welfare allowance coverage gaps

◦ ALMP mix only partly adjusted to tackle unemployment resulting from the fall in labor demand Short-time work subsidy -- new instrument designed to

prevent lay-offs – had no impact due to a very low take-up rate caused by its design features

Limited policy response to the crisis

Income support policies: unemployment benefit

Unemployment benefit is received mostly by the poor and lifts them out of poverty

Majority of the new unemployed not eligible

Received mostly by the poor

Lifts recipients out of poverty

Effective income support instrument for those covered, but coverage limited

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Bottom 2 3 4 Top

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Incidence of unemployment benefit by consumption quinile2008

Before transfer

After transfer

Social welfare allowance◦ Well targeted◦ Low coverage due to low poverty threshold◦ Unlimited duration labor supply disincentives◦ Take-up rate did not increase during the crisis (new poor

not poor enough to qualify?)◦ Program’s role may increase after a time lag◦ Poverty threshold should be raised to enhance

program’s impact Categorical benefits

◦ Numerous and absorb considerable resources◦ Poorly targeted◦ Not effective in mitigating the effects of economic

downturns

Income support policies:social assistance

Social spending remains comparatively high even w/o war vet pensions.

Child tax allowance absorbs additional 1% of GDP, but favours only medium- and high-income groups.

Income support policies: social spending effectiveness

2004 2005 2006 2007 2008 2009

Programs for war veterans (disability and survivors) 1.59 1.60 1.63 1.72 1.76 1.75 of which pensions 1.11 1.11 1.19 1.33 1.39 1.38

Programs for families with children 0.77 0.81 0.75 0.87 0.81 0.81 of which child allowances 0.61 0.54 0.47 0.60 0.55 0.52

Programs for (civilian) disabled, cash or services 0.07 0.07 0.06 0.06 0.06 0.07 Programs for vulnerable children, adults or frail elderly 0.24 0.26 0.24 0.22 0.22 0.22 Programs for low-income households 0.33 0.33 0.30 0.26 0.23 0.27 Programs operated by local governments (estimated) 0.50 0.50 0.50 0.50 0.50 0.50 Total 3.51 3.57 3.49 3.64 3.58 3.61 GDP 100.0 100.0 100.0 100.0 100.0 100.0

Income-tested programs:% in GDP 0.95 0.87 0.77 0.86 0.77 0.79 % in Non-contributory social assistance programs 27.0 24.4 22.2 23.6 21.6 21.8

Plus an estimated 1% of GDP on child tax allowances!

Social assistance remains the best targeted program in Croatia, but continues to have a very low coverage rate.

Child allowance has an ‘elite capture’ problem.

Income support policies: social spending effectiveness

Simulation of policy changes w/ significant distributional impact (solidarity tax; the rise in supplemental health insurance premium; the elimination of free textbooks) shows significant distributional impact

Income support policies: fiscal restraint measures protected the vulnerable

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Solidarity tax Health premium Free textbooks

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Impact assessment of selected policies

• However, their impact on the poor has been partially mitigated by a policy of waivers or exemptions for lower income households.

Short-time work subsidy – additional anti-crisis measure◦ Strict eligibility criteria◦ Limited benefit amount weak incentives◦ Few firms benefitted virtually no impact

Active labor market programs (training, subsidized employment, etc.)◦ Low coverage◦ Expenditures reduced and programs scaled down during the

crisis◦ Program mix only partially adjusted to the demand shock

(public works)◦ Focus on training not effective during downturns when few

vacancies◦ Regional allocation: capacity rather than needs, or effectiveness

based◦ Little impact due to small scale

Active labor market programs

Limited role of active labor market programs

Low spending Low coverage

0 0.5 1 1.5 2 2.5 3 3.5

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Expenditures on labour market programs as % of GDP2007

Passive Active

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Partcipants in Labor Market Programs as % of labor force2007

Passive Active

3. Building resilienceOptions for social protection reforms

Outcomes of social protection policies could be strengthened within the existing resource envelope:◦ Improved program mix◦ Higher coverage◦ Better targeting: reduced errors of exclusion and

inclusion◦ Higher impact: lower unemployment and less

poverty Administrative simplification at central and

local levels

Crisis as an opportunity for reforms: building resilience

Temporarily extending coverage of unemployment benefit by relaxing eligibility criteria

Developing activation policies to reintegrate the long-term unemployed welfare recipients into the labor market (workfare approach)

Increasing the coverage of well targeted means-tested income support programs by adjusting the income threshold (by scaling down poorly targeted categorical benefit programs)

Realigning the targeting rules across programs Improving the cost-effectiveness of pro-birth

policies by reallocating towards families with more children.

Building resilience: reforming income support policies

Scaling up effective interventions so that ALMP have a detectable impact on employment

Adjusting program mix to changing labor market conditions◦ Downturn: scale up programs that compensate for weak

labor demand◦ Upturn: scale up programs that address structural issues

(skills mismatch) Adjusting regional allocation of ALMP funds to the

changing regional needs◦ From capacity based to needs and effectiveness based

allocation rule◦ Improve implementation capacity in regions facing an

increase in unemployment

Building resilience: reforming active labor market programs

Achieving better outcomes requires strengthening institutional capacity to design, monitor, implement and evaluate social protection policies

Addressing institutional fragmentation of the social safety net system at central and local levels Merging relevant functions under fewer ministries and offices at

local levels to ease access to social assistance and integrate social policy with efforts to address low labor force participation)

Simplifying the design and administration of benefits: a single, unified welfare benefit administered by one central agency/ministry and provided through one-stop shop

Upgrading the social assistance information system beyond the planned MIS in CWS - reduce the errors of exclusion and inclusion and costs for clients

Building resilience: reforming administrative capacity

Thank you for your attention!

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