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Overview

Beyond recovery: addressing the social crisis

Over the period 2008-2009, the world suffered the worst financial and economic crisis since the Great Depression of the 1930s. The rapid global economic downturn severely disrupted economic growth worldwide and caused significant setbacks in the progress made towards achieving the Millennium Development Goals and the other internationally agreed development goals. According to United Nations estimates, the annual growth rate in global output fell from about 4 per cent during the period 2006-2007 to 1.6 per cent in 2008; the rate of growth in output dropped even further in 2009, to -2 per cent, when ninety-five countries experienced declines in average per capita income. Unemployment rose sharply to 205 million people in 2009 from 178 million in 2007. According to the latest estimates by the International Labour Organization (2011), global unemployment remained high and unchanged in 2010. Increased unemployment has been the dominant social impact of the crisis in developed economies, but the employment situation in developing countries has been less obvious. While the informal economy and peasant agricultural sector have absorbed much of the impact of formal sector job losses, much larger numbers of workers are now subject to more vulnerable employment in developing countries.

The loss of jobs means not only loss of incomes but also an increase in vulnerability, especially in developing countries without comprehensive social protection. Various estimates suggest that between 47 million and 84 million more people fell into, or were trapped in, extreme poverty because of the global crisis (United Nations, 2010b, table I.3).1 The global financial crisis came immediately after food and fuel prices had risen sharply. As a result, the number of people living in hunger in the world rose to over a billion in 2009, the highest on record. Although the financial crisis did not originate in the developing countries, their economies, especially those more integrated into international financial markets, were not immune to the financial turmoil. They were hurt through a variety of channels, including collapsing trade and commodity prices, capital flow reversals, higher costs of borrowing, declining remittance incomes and strains on official development assistance. The countries were affected to different degrees depending on their economic structure and vulnerability to shocks.

The impact of the crisis was further influenced by the capacity of Govern­ments to cope with and counteract its consequences, which has depended on the efficiency and strength of their counter-cyclical macroeconomic policy mechanisms, social protection systems, regulatory frameworks, governance structures and political stability. These factors in turn influenced how different social groups have been affected by the crisis. The poorest countries have become the most vulnerable to the vicissitudes of the global economy and are generally heavily dependent on external finance, including aid, and trade. Their foreign-exchange earnings and government revenue tend to rely on only a few commodities, and with little fiscal space, they have weak social protection systems. A key conclusion of the present Report is that countries need to be able to pursue counter-cyclical policies in a consistent manner. Such policy space should be enabled by changing the fundamental orientation and nature of policy prescriptions that international organizations impose on countries as conditions for assistance. International financial institutions—despite having declared changes in their policy prescriptions—continue to attach pro-cyclical conditions to the financial assistance packages they extend to countries in need and have paid insufficient attention to the social implications of such policies.

The relative success of some Asian and Latin American Governments in mitigating the economic and social impacts of the recent crisis strongly underscores the need for Governments to be consistently counter-cyclical and the wisdom of conserving fiscal resources during boom periods to support counter-cyclical measures in times of need. In fact, universal social protection systems and active labour market programmes should become permanent measures, not merely temporary components of national crisis response. It is essential that Governments take into account the likely social implications of their economic policies. It has been shown, time and again, that economic policies considered in isolation from their social consequences can have dire consequences for nutrition, health and education, which, in turn, adversely affect long-term economic growth. The disconnect between economic policies and their social consequences can create a vicious circle of slow growth and poor social progress.

The continuing social crisis

The full impact of the financial and economic crisis on social progress in areas such as education and health are not immediately discernible and will only become fully evident over time. However, initial estimates show that the effects have been sharp, widespread and deep. Given the fragility of the economic recovery and uneven progress in major economies, social conditions are only expected to recover slowly. The increased levels of poverty, hunger and unemployment due to the global crisis will continue to affect billions of people in many developed and developing countries for years to come.

Meanwhile, austerity measures in response to high government debt in some advanced economies, such as Greece and Spain, are not only threatening public sector employment and social expenditure, but are also making the recovery more uncertain and fragile. Increased pressure for fiscal consolidation and new pressures in response to such debt have severely limited fiscal and policy space in developed economies, restricting their options as the crisis continues. Many developing countries, especially those under IMF programmes, are also coming under pressure to cut public expenditure and undertake austerity measures. Although the massive stimulus packages adopted by major economies were able to halt the downslide and thus prevent a prolonged recession, in many cases, the recovery has been job poor, with unemployment and underemployment remaining at unacceptably high levels. Evidence from recent recessions suggests that the lag between output and employment recovery has grown. The longer-term adverse employment consequences of the current crisis are already visible and, in most countries, youth unemployment has reached alarming levels. In developed as well as developing countries, unemployment and underemployment rates are very high among young people 15 to 24 years of age: at the end of 2009, there were an estimated 79 million unemployed young people, and the rate of youth unemployment stood at 13.0 per cent globally.

The share of long-term unemployment has increased significantly in most developed countries since 2007. For example, the share of workers unemployed for 27 weeks or more in the United States rose at an alarming pace during 2010; about half the workers without jobs have been unemployed for at least half a year. The unemployment situation is equally worrisome in many European countries. In developing countries, most job losses have occurred in the dynamic export sectors. Of great concern has been the rise in vulnerable employment and the number of working poor, as people who lost their jobs in the formal economy have increasingly moved to the informal economy where jobs are poorly paid and offer little or no protection.

Labour market conditions in developing countries are expected to remain a challenge for at least two reasons. First, most of the 47 million new workers who enter labour markets worldwide each year are searching for jobs in developing countries. According to the United Nations (2010b), an estimated 51 million additional jobs will be needed in Asia alone to absorb the growing labour force during the period 2010-2011. Second, as in developed countries, employment creation in the formal and industrial sectors in developing countries is also expected to lag behind output recovery. For example, in the aftermath of the 1997-1998 Asian financial crisis, job recovery took at least three years to complete. In view of the global nature of the current crisis, job recovery may take even longer.

The global economic downturn has had wide-ranging negative social outcomes for individuals, families, communities and societies. Poverty and unemployment have been linked to crime, gender-based violence, substance abuse and mental illness, including depression and suicide. During times of financial and economic crisis households often adopt coping strategies, such as making changes in household expenditure patterns; however, these can negatively influence education, health and nutrition outcomes, which may lead to lifelong deficits for the children affected and thus perpetuate intergenerational poverty. The impact of volatile and high food prices, diminishing incomes and rising unemployment are slowing progress towards reducing hunger and improving nutrition. The sharp rise in global food and energy prices in 2007 and 2008 further undermined the welfare of the world’s poor, forcing more families to rely on underfunded public food assistance programmes, skip meals, consume less or substitute nutritious foods with cheaper, less healthful alternatives. Food-importing countries saw their import bills increase as a result of higher prices and higher transport energy costs passed on to consumers (Mittal, 2009).

Food prices started rising once again in 2009, primarily because of persistent problems with global food production and supply (Johnston and Bargawi, 2010), exacerbated by the demand for bio-fuel production and greater speculation in commodity futures and options markets. The continuing food crisis has serious implications for political and social stability in poor food-importing countries. Outbreaks of food riots have been related to the continued impacts of high food prices on the poor and other vulnerable groups. The Food and Agriculture Organization of the United Nations (FAO) recently warned of a “worrying rise” in food prices which would affect millions of people following unexpected shortfalls in major cereals caused by bad weather, floods and fires in 2010.

Key Points

How have the global crises affected social progress?

Over the period 2008-2009, the world experienced its worst financial and economic crisis since the Great Depression of the 1930s. In 2009 global output contracted by 2 per cent. Since then, the global economy has bounced back, due mainly to unprecedented coordinated actions by leading economies with fiscal and monetary measures. But this recovery has been uneven and still remains fragile, with ongoing adverse social consequences.

The crises have hampered progress towards attaining the MDGs

• Global unemployment rose sharply from 178 million persons in 2007 to 205 million in 2009. The rapid rise in unemployment has triggered an increase in vulnerability, especially in developing countries without comprehensive social protection. Estimates suggest that between 47 million and 84 million more people fell into, or remained trapped in, extreme poverty because of the global crisis.
• The economic crisis exacerbated the effects of the food and fuel price hikes in 2007 and 2008. According to the FAO, the number of people living in hunger in the world peaked at over a billion in 2009, the highest on record. In the wake of the recession, food and fuel prices are again on the rise. These multiple crises have set back the progress many countries have made towards achieving the internationally agreed development goals, including the Millennium Development Goals.
• During times of financial and economic crisis, households often adopt coping strategies, such as making changes in household expenditure patterns; however, these can negatively influence education, health and nutrition, which may lead to lifelong deficits, especially for children, and thus perpetuate the intergenerational transmission of poverty.
• The impact on social progress in areas such as education and health will only become fully evident over time. Given the fragility of the economic recovery and the uneven progress in major economies, social conditions are only expected to recover slowly. The increased levels of poverty, hunger and unemployment will continue to affect billions of people for years to come.
• Meanwhile, austerity measures in response to high government debt in some advanced economies are also making the recovery more uncertain and fragile. Increased pressure for fiscal consolidation and new pressures in response to such debt have severely limited fiscal and policy space in developed economies, and many countries are also under pressure to cut public expenditure, undertake austerity measures, reduce the scope of government action and further liberalize labour markets.

What does this mean for policymakers?

• Countries need to be able to pursue countercyclical policies in a consistent manner. Such policy space should be enabled by changing the fundamental orientation and nature of policy prescriptions that international organizations impose on countries as conditions for assistance.
• It is essential that Governments take into account the likely social implications of their economic policies. It has been shown, time and again, that economic policies considered in isolation from their social consequences can have dire consequences for poverty, employment, nutrition, health and education, which, in turn, adversely affect long-term sustainable development.
• The relative success of some Asian and Latin American Governments in mitigating the economic and social impacts of the recent crisis strongly underscores the need for Governments to be consistently countercyclical and the wisdom of conserving fiscal resources during boom periods to support expansionary measures in times of need.
• Universal social protection systems and active employment generation programmes should become permanent measures, not merely temporary components of national crisis response measures.
• Social investments should be accorded priority in recovery strategies and development policies. Increasing expenditures to expand social protection and improve access to education and health services will help ensure more inclusive development with stronger domestic demand and a more solid foundation for future growth.

As challenging as it may be, the crisis offers an opportunity for achieving social progress by making universal social protection a reality, revisiting the social impacts of globalization, and ensuring more inclusive and sustained growth.