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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
1020
3040
50U
nem
ploy
men
t gro
wth
Dec
embe
r 20
09 y
oy
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
10
Poverty impact: profile
Poverty rates in 2008-2009
0
5
10
15
20
25
30
35
No chirdren 1 2 3 or more children
Hea
dcou
nt p
over
ty r
ate
(%)
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
0
5
10
15
20
25
30
35
40
45
Bottom 2 3 4 Top
perc
ent
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
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Solidarity tax Health premium Free textbooks
Q2-Q5
D2
D1
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
BE
NL
DE
FI
SP
FR
AT
SE
PT
IE
IT
PL
HU
SK
UK
CZ
CR
percent
Expenditures on labour market programs as % of GDP2007
Passive Active
0 5 10 15 20 25 30
BE
SP
DE
FR
FI
IE
NL
AT
SE
SK
PT
IT
PL
HU
CR
CZ
UK
percent
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!
www.worldbank.hrwww.undp.hr