1. The Budgetary Response to the Crisis in the Region Economic Crisis Responses from a Governance Perspective Regional Policy Roundtable, July 6-7, 2010 Balázs Horváth UNDP, Bratislava Regional Center, Poverty Practice

2. Outline, Sources of Information, Caveats I. Background—the Big Picture A multifaceted crisis in a globalized world Extrapolating from Past Crises: HD after the Crisis II. The Role of Fiscal Policy in the CIS & Georgia Policies can affect outcomes—better this time around Some thoughts to ponder

3. I.A. Globalized, interdependent world hit by a confluence of shocks All require policy action now But “cocktail” of remedies has side-effects deleveraging  recession or soaring public debt tight budget  rising poverty/inequality energy price volatility undermines climate change action sequence of bubbles: tech stocks, housing, financial sector; public debt, … Short-term: cyclical downturn, financial deleveraging, commodity price volatility Long-term: income inequality, demographic shifts, climate change

4. I.B. Looking forward in the rear-view mirror: The Human Development Impact of the Crisis in Central, Eastern and Southern Europe, & the CIS Balázs Horváth, Andrey Ivanov, Mihail Peleah Panel estimate: income elasticities 29 ECIS countries, 12 HD indicators, 1989-2008 Then: projecting Human Development Indicators Key take-away points: Global crisis  setback in progress toward HD indicators Unfolding cumulative impact over coming years: substantial; lasting even if economic growth resumes; disproportionately hitting the poor Policy response required: addressing (i) all crisis layers; (ii) underlying structural problems that crisis exposed (re-build better) Approach assumes: future is like past. But policy response differed—return to this.

5. Model-based projections Life expectancy at birth, total two weeks lost for each percentage point fall in income growth Male life expectancy at birth More sensitive to income change

6. Model-based projections 2 Under-five mortality rate one per 1000 higher for 5 percentage point drop in income growth STD in population aged 15-19 Triple elasticity for the young age-group compared with full population

7. Model-based projections 3 Homicides counter-cyclical; loss not recovered by 2014 Poverty under $5/day Similarly: massive long-term impact

8. II. Zooming in to a narrower focus: Fiscal Policy in CIS & Georgia Fiscal policy response better than in earlier crises Unlike previous crises: social protection NOT squeezed Large Keynesian deficits No quasifiscal tricks Unorthodox funding sources available: Souvereign Wealth Funds, large-scale external donor support But critical issues remain Social safety net has huge holes; needs to change Rapid fall in net public assets is unsustainable

9. Heterogeneous Region: Large Government in Ukraine, Belarus, Moldova & Russia

14. Issues to Ponder 1: Are Global Policies Appropriate? Pessimistic view: No. Trying to avert a recession sows seeds of intractable problems Politicians’ horizon too short given policies’ net cost profile Global solutions required by global problems not forthcoming Optimistic view: Needs work, but broadly adequate. We saw largest-ever coordinated fiscal and financial sector rescue that avoided a replay of the 1930s Securing social & international peace: worth policy effort & costs Copenhagen follow-up will produce results.

15. Issues to Ponder 2: Rebalancing the Roles of the State and the Private Sector for Sustainable Growth Government: Create Conducive Environment Contain economic imbalances & social tensions, move to sustainable deficits Social safety nets: improve targeting but avoid exclusion error Enhance human capital: education, health, food security Regulate sparingly but evenly (financial sector, monopolies) Ensure access to law/property rights, especially for the vulnerable Private Sector: Engine of (Inclusive) Growth Create broad-based, inclusive growth in employment Provide affordable goods & services to all

16. Leaving You with Some More Thoughts to Ponder… Why do countries show huge governance gains prior to EU entry, little thereafter? What should be done? Optimizing at national level is not always enough When global problems require global solutions (CC); When marginal gain far more in other country (poverty); When complementarities/externalities exist (water in CA). Are fixed exchange rate countries providing a global public good? (allow few to devalue with effect).

17. Thank you for Your Attention