1. Social impact of the financial crisis
on small states
Naren Prasad
International Institute for Labour Studies, ILO
London 6 July 2009
Commonwealth Meeting: Sustainable development in small states in a turbulent
3. -12
-10
-8
-6
-4
-2
0
2
4
6
8
10
AT
G
BR
B
BL
Z
CP
V
CO
M
CY
P
DM
A
FJ
I
GR
D
GU
Y
JA
M
KI
R
M
DV
M
LT
M
HL
M
US
2000-08
FS
M
PL
2009* W
PN
G
W
SM
ST
P
SY
C
Growth 2009
SL
B
KN
A
LC
A
VC
T
SU
R
TO
N
TT
O
VU
Av T
er
ag
e
0.5% in 2009
4. Small states different
More services compared to agriculture or industry
70 70
60 60
50 50
40 40
% of employment
% GDP
30 30
20 20
10 10
0 0
Agricullture Industry Manufacture Services Agricullture Industry Services
small states others
small states others
In terms of percentage of GDP And employment
5. Contribution of tourism to employment & GDP,
Small states and the world
30
25
20
2009 growth -6.8 & -3.5
15
%
10
5
0
Direct Employment Indirect and direct Direct GDP Indirect and direct GDP
employmnet
Small states (average) World (average)
6. Crisis: What went wrong
• Financial sector • Global imbalances
– Lack of regulation – Excessive saving in some
– Excessive risk taking countries, high debt in others…
– Inefficient remuneration
•Increased inequality
–Income inequality
–Share of wages declining
7. Crisis & the real economy
Asset-price crash
Wealth/collateral
Bank failure
Few banks
lending cautious
Income
uncertainty Firms/consumers can’t
finance spending
recession spending
Recession: fall in bank
revenue, loan default
output
Unemployment
GNP=C+I+G+X
8. Impact on developing countries
Economic &
global Global crisis financial integration,
structure of
economy,
policy
National Capital
impact trade flows remittance aid Economic/social
structure-taxes,
transfers
Institutions/policies,
Asset, prices,
investments,
Growth, investment, Inequality, employment
debt
Macro employment poverty
impact
Policy Eco. Policies to manage Social Growth & development
shocks (fiscal, monetary,
response financial)
policies policies
9. Social impact
GDP decline
Fall in remittances
Fall in government revenue unemployment
Decreased social spending
women
low skilled
Loss/decline of income youth
gender
inequality
education health nutrition crime
increasing poverty & inequality
10. GDP decline
20 million more
1% decline inequality, people in
in GDP growth social policy poverty
0.3-0.8 % more
1% decline
in GDP social policy infant deaths
4% GDP growth Keep reduce
Labour force increase
needed unemployment
by 45 million
11. Social progress threatened
• extreme poverty decreased by 320 million since
2000, child mortality decreased by 3 million and
children’s school attendance increased by 28
million
• economic and social progress achieved during
recent years, achievement MDGs is now
threatened (UN)
12. Current impact….
• Increases in unemployment, poverty and hunger
• Economic growth negative & economic contraction
• Negative effects on trade balances and balance of
payments
• Decrease in FDI, capital, Remittance, tourism
• Exchange rates volatility
• budget deficits, decrease in tax revenues
• Decrease of global trade
• Commodity price decline and volatility
• Decline in access to credit
• Decline in confidence
• Lack of resources for social security
and public social services
• Increased infant and maternal mortality
• Collapse of housing markets
13. Global Unemployment
Additional 29-59 unemployed in 2009
Increase by 2-3%
1.2 billion working poor, 93-203 added in 2009
14. 14
Unemployment Rate
(in percent)
12
10
Euro area
8
U.K. 6
U.S.
4
Japan
2
2006 2007 2008 2009 2010
15. Unemployment in past crises
25
20
increase by 2.7% average
increase by 2.7% average
15
%
10
5
0
Argentina Indonesia Korea Malaysia Thailand Mexico Turkey Average
5 years prior to crisis crisis year 5 years after crisis
16. Unemployment in small states:
Current and projected levels
30
25
5 years for unemployment to fall to previous level
20
15 12.3 to 14.8 current
projected
10
5
0
A
V
M
YP
M
PV
e
C
SM
Av U Y
T
LT
T
O
G
N
S
Z
D
B
I
G
A
P
R
FJ
ag
M
D
VU
VC
SY
BL
U
LC
AT
JA
ST
O
BR
TO
R
TT
PN
SU
M
C
C
M
G
D
W
M
G
C
er
17. Post-crisis estimated increase
in poverty
Selected poverty estimates,
Change in millions
100
80
60
40
20
0
2009 2009 2010 2011
Global Asia and the Pacific Asia and the Pacific Latin America
- World Bank - ADB - ADB - IDB
18. Poverty: Past crises
55
50
45
7.4% average increase
40
35
30
%
25
20
15
10
5
0
Mexico Argentina Turkey Indonesia Thailand Korea Malaysia Average
before crisis (nearest available data) after crisis current levels (2007)
19. Poverty in small states:
Current and projected levels
70
60
50 From 28 to 35%
40
%
30
20
10
0
I
KIR
Av A
A
M
C
O
T
T
Z
G
Y
N
L
S
M
B
D
A
FJ
ge
DM
MH
BL
VU
VC
KN
SY
LC
GU
AT
MU
FS
BR
TO
TT
GR
WS
era
current projected
20. Inequality to increase
Gini coefficient
70
60
50
40
30
20
10
0
VUT VCT MHL ATG FJI SYC PNG SUR GRD WSM GUY LCA TON FSM BLZ TTO BRB KNA MUS DMA
• Low skilled, temporary and poor workers are
laid off first during economic crisis
• They are also the last to be re-employed after
recovery, implying they will be unemployed
the longest
21. What are countries doing?
• Rescuing the banking & financial sector
• Reviving the economy through stimulus
packages
• Mitigating social impact
22. G20 Declaration
• The G20 Communiqué of 2 April 2009
recognized:
– “that the current crisis has a disproportionate
impact on the vulnerable in the poorest
countries”
– Committed $1.1 trillion
– They recognized the importance of social
protection in mitigating the crisis and
generating the growth by providing $50 billion
to developing countries
23. United Nations
• Expert Commission of the President
• UN Conference on the World Financial and
Economic Crisis and Its Impact on Development
• Our endeavours must be guided by the need to
address the human costs of the crisis
– an increase in number of poor and vulnerable,
particularly women and children, who suffer and die of
hunger, malnutrition and preventable or curable disease;
a rise in unemployment; the reduction in access to
education and health services; and the current
inadequacy of social protection in many countries.
24. ILO
• Global Jobs Pact
– Accelerating employment creation, jobs
recovery & sustaining enterprises
– Building social protection systems &
protecting people
– Strengthening respect for international labour
standards
– Social dialogue: Bargaining collectively,
identifying priorities, stimulating action
25. Conclusion: What works
• Prevent poverty -> maintaining income for households
• Evidence shows…
– Minimum old age pensions and cash transfers to families seem
to have the biggest poverty impact with the lowest transactions
costs
– Employment intensive schemes
• Public infrastructure renewable energy sources, waste
management, low cost housing, sanitation, etc
• Micro, small and medium-sized enterprise support
• Skills development
• Youth employment schemes
• Improved public employment services
• Labour market policies influence consumer behavior
(workers)
26. Conclusion: Towards a New Deal
of development model
• Social policy & economic policy goes hand in
hand
• Universal provision of social security
• Diversification of exports
• Hardest hit countries are those that rely on manufacturing
exports (& tourism)
• Genuine investment in green sector
• Bringing back the State (not market)
• Industrial policy should not be forgotten
• More domestic policy space
27. Development Path 1950-2006
10
Stars Getting richer
BWA
CHN
gdp_growth_1960-06
KOR SGP
HKG
5
VNM MLT
THA KNA CYP
MUS IRL
MYS ATGJPN
IDN POL
CUB
PRT HUN
CPV LCA GRD TUN LKA GRC ESP
EGY DOM BLZ
IND DMA FIN NOR
PAK BRB ISR ITAAUT
CHL
TTO BEL
VCT JOR SYC
BRA PAN
LBN
SYR FRA
NLD SWE
MOZ TUR CRI GAB CAN USA
MAR BGRIRN COL MEX DEU
GBR
DNK
AUS
UGA
PRY FJI
TZA PHL DZA ECU CHE
MWI MRT BGD
BFA
NPL KEN SDN PNG COG GTMSAU URY
ARG NZL
YEM AGO ROM BHRPER ZAF
MLI RWA CMR NGA GUY HND
JAM SLV
GIN TCD TGO
GMB SUR
BEN BOL
BDI SLE GHA NAM
CIV VEN
0
SEN NIC
COM ZWE
GNB
ZMB CAF
MDGHTI
NER
LBR
DJI
Falling behind Loosing momentum
-5
6 7 8 9
logGDP_1950
