Social Repercussions of Economic Crisis in Southeast Asia

1. M Ramesh Social Repercussions of Economic Crisis in Southeast Asia Paper presented at Symposium on The Impact of the Global Economic Crisis on Social Development, held at HKU, 12 Nov 209

2. Introduction • I will survey the 1997/98 and 2008/09 economic crises and their social effects in Indonesia, Malaysia, Philippines, Singapore and Thailand. • I will argue that governments are only slightly better prepared now for economic crisis than a decade ago • Only Indonesia has taken genuine steps. • Will further argue that governments need to approach economic crisis the same way as natural disasters. • Preparedness for social protection in the event of economic crisis is not only desirable, it is affordable

3. The Current Economic crisis • The economic crisis that erupted in late 2008 is posing difficult challenges for governments and households in Asia. • Growth has declined, but the patterns are different from 1997/98. • The most affected countries is Singapore (and Taiwan) which largely escaped the 97/98 crisis. • Indonesia is the fastest growing economy in Southeast Asia! • The slowdown has led to job losses, reduced income and increased poverty. • Public revenues have declined at the same time as the need for greater public spending has increased • Yet, governments have launched massive economic rescue packages

4. Indonesia • During the last crisis, safety net programs not launched until late 1998 • A year after onset of economic crisis and damage to social conditions • In October 2004, the National Social Security System Law (SJSN) providing health insurance, pension, employment injury and death benefits was enacted. • Law being implemented in phases • System in place for identifying poor • In late 2008, government announced rescue package worth $6.3 billion, or 1.3 percent of GDP, for the year 2009. • Much of it f or infrastructure projects to create jobs.

5. Malaysia • In 1997/98 • The govt decreased interest rate and increased public spending • No new notable social protection program announced • But public health care and education systems continued to function • In 2008, the government announced two fiscal packages worth $18.4 billion amounting to 10% of GDP • Much of the money is for supporting business • Some money for public housing

6. Philippines • Philippines largely escaped the 1997/98 crisis • No notable new government program launched • The current crisis is in the form of declining exports and reduced remittances • In Feb 2009, the Philippine government allocated $6.8 billion for fiscal rescue • Bulk of the fund is for job creation in infrastructure projects.

7. Singapore • Singapore only slightly affected by 1997/98 crisis • Govt spent $9 billion in response to crisis, • Amount almost entirely for reducing business cost by 15% • During the current crisis, the rescue package is worth $13.6 billion or 8% of GDP. • Will cause budget deficit of10 percent of GDP. • Almost all the money is for either labour market programs or supporting firms. • For households • government contribution to individual pension account • S$ 2.6 billion for public assistance, tax concessions and grants for charities.

8. Thailand • Obsessed with fiscal discipline during the 1997/98 crisis. • Little done for the poor , except for expansion of health care programs. • In 2001-2003, health care insurance made universal • The govt has announced a $3.6 billion (1.1% of GDP) program to deal with current crisis. • Much of the money is for tax cuts and regular govt programs

9. Discussion • Good reasons for government to boost economy and provide social protection • Expand aggregate demand thus halting downward economic spiral. • Enhance poor households’ capacity to cope with the crisis. • Poverty is bad for the individuals as well as the economy and society • Insuring against systemic shocks is beyond the means of a large proportion of households • Inefficient to save large sums even if they can • It is thus both efficient and equitable for the society as a whole to offer social protection to the entire population through the fiscal system.

10. Discussion • Evidence that Southeast Asian governments are taking the current crisis more seriously than during the previous crisis. • Every government has taken measures to address adverse effects of the crisis • Programs announced rather early, unlike the last crisis when programs were not launched for a year • This time, even IMF is supporting expansion of social protection! • However, a close look at the programs launched shows that they are designed to benefit business rather than protect households affected adversely by the crisis • Many supposed social protection programs are tied to participation in the labour market • Ignores that there are fewer jobs during recession

11. Discussion • The only programs to directly benefit the poor include: • SSN in Indonesia: provides healthcare and public assistance to the poor • Universal health care in Thailand • Public schools and hospitals and universal health insurance in Thailand • Public schools and housing in Singapore • Governments need to accept that economic growth and social protection are separate though related issues • They need to deal with them separately, though within an integrated framework

12. Discussion • Incidence and severity of economic crisis rising due to economic globalization • 60 % more crises during the 1990s than in the 1980s • Governments need to establish a regular mechanism for protecting residents against adverse effects of economic crisis. • The mechanism will, ideally, automatically springs into action in the event of widespread decline in income, regardless of cause

13. Discussion • It is simply good governance to prepare for eventualities. • Governments have long prepared for fire and natural disasters. • Economic crises in a globalized world have many features in common with natural disasters • They are unpredictable and are too large in magnitude for households to cope on their own. • The cost of basic social protection against economic (and other) crisis is small • ILO estimates that programs offering basic old age and disability benefits on a universal basis will cost 0.6 -1.5 % of annual GDP • Indeed basic social protection may be provided to all the poor in the world at the cost of < 2 % of global GDP

14. Discussion • Western countries spend 1.2 – 1.5 % of GDP on fire protection • fires are rare and cause less damage than economic crises • The reasons for hesitation towards social protection are • Ideological • Misguided beliefs about international economic competitiveness

15. Discussion • Tendency to blame the victims. • A survey of the literature concluded: “Countries suffering from financial crisis typically exhibit many of the same well-known symptoms: poor or ineffective systems of banking supervision, lack of adequate accounting disclosure and transparency, and ineffective systems of corporate governance, among others” • Every country in the world affected by financial crisis! • Governments already spend a lot on cleaning up after the crisis • The direct cost of bailing out the financial system – the cost of guaranteeing deposits and recapitalizing the banks -- is estimated at 35 % of GDP ($125 billion) in Korea, 42 % in Thailand, and 55 % of GDP in Argentina • Social protection against crisis will cost a lot less