The Economic Crisis, Its Human Development Consequences, and the Policy Response in the Region Presentation at the CDLR/LGI International Conference “Local Government: Responses to Recession Across Europe” October 2010, Strasbourg, Council of Europe Mihail Peleah, UNDP, Bratislava Regional Center, Poverty Reduction Practice

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

A confluence of shocks Globalized, interdependent world  a confluence of shocks: Short-term/high frequency Cyclical downturn triggered by massive global imbalances; Financial crisis and associated liquidity and credit crunch; An unprecedented roller-coaster of commodity prices. Long-term/low frequency—impact later, action needed now Extreme income inequality; Seismic demographic shifts; and Global climate change.

The Policy Response “Cocktail” to address various aspects implies interactions, e.g., synergies Spending on public works, social protection supports demand when needed Raising carbon tax helps fiscal consolidation but there are also trade-offs & side-effects Fiscal costs of addressing problems does not fit with Keynesian fiscal profile: –Fiscal stimulus  public debt –Tight budget  rising poverty/inequality –Deleveraging  recession or prolonged slow growth; public debt Energy price volatility undermines climate change action

The Human Development Impact of the Crisis Balázs Horváth, Andrey Ivanov, Mihail Peleah Panel estimate: income elasticities 29 ECIS countries, 12 HD indicators, Then: projecting Human Development Indicators using IMF GDP projections 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 must address –all crisis layers (short term/long term); –underlying structural problems that crisis exposed (re-build better) Approach assumes: future is like past, including policy response

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

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

Zooming in: fiscal response Fiscal policy response better than in earlier crises –Unlike previous crises: social protection NOT squeezed Yes in first stage: 2009 and 2010 budget Not in second stage: 2010 execution –Large Keynesian deficits, fewer off-budget 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 …quality and availability of public finance data!

Quality and availability of public finance data National / ConsolidatedSub-national 2009 executed2010 budget2009 executed2010 budget Armenia Only general lines Azerbaijan Only general lines Belarus Only general linesOnly transfers Georgia Only transfers Kazakhstan Kyrgyzstan Moldova Russia Only transfers Tajikistan Turkey Ukraine Uzbekistan

Heterogeneous Region Large Government in Ukraine, Belarus, Moldova, and Russia

Budget!

Again, budgeted, not executed!

Issues to Ponder Rebalancing the Roles of the State and the Private Sector for Sustainable Growth Government: Create Conducive Environment –Contain economic imbalances and 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 –Social Enterprises –Provide affordable goods & services to all

Issues to Ponder Local government: Potentially huge role to play –Informational advantage: know their places better than central government –Heterogeneity: one size does not fit all –  some tasks of Central Government could be executed by Local Government but –Capacity gaps: lack of people, lack of skills –Legacy of overcentralization: limited resources, limited data

What UNDP is doing? We cannot and do not want to do: –broad harmonization and institution-building efforts (EU) –macroeconomic policy advice and implementation (WB and IMF) What we can and do: –enhance the micro-level traction for all these macro- level interventions –providing workable solutions for engaging the poor and socially excluded parts of the population –making local level budget spending more efficient and build local level capacities –helping address corruption issues –effectively involving civil society –involving the private sector in creating sustainable jobs

Thank you for Your Attention Questions Welcome