Policy Implications

5.1 Job-Rich Public Spending Programs

A recent assessment of the estimated employment effects of fiscal measures has revealed that “the greater the employment orientation of the measure, the stronger the stimulus for the real economy” (ILO 2009e). In particular, public spending on employment-intensive areas tends to have a high multiplier. Public investment in infrastructure is a major opportunity to both generate employment and address some development challenges.

In those economies where the fiscal stimulus focuses on investment in infrastructure and maintenance, a significant share of the new jobs will be in construction. Employment creation in construction is a positive outcome, as the economic crisis has hit the construction sector hard in many economies. Further positive employment effects can be generated if resources are allocated to rural areas. Decent job opportunities in the countryside were scarce prior to the crisis, and they are likely to become even scarcer as urban workers leave factories and cities and return to their home villages. Therefore, infrastructure investment directed to rural areas has great potential for poverty alleviation as this will generate employment. To effectively improve employment and productivity, however, infrastructure projects need to focus on critical development bottlenecks and use existing domestic supplies and skills.

Most new employment opportunities in construction are likely to be taken up by unskilled and semi-skilled workers. Infrastructure works may have a gendered effect on job creation, as they traditionally attract mainly male workers, while most of the retrenched workers in export-oriented industries like electronics, textiles, and garments are young women. Therefore, policy makers need to pay attention not only to the employment intensity of stimulus measures, but also to the composition of the jobs they are likely to create, if they want to succeed in spreading employment creation as widely as possible across categories of workers.

Spreading public spending and job creation broadly can contribute to rebalancing some economies, shifting away from a heavy reliance on export-oriented growth to development based on both export growth and domestic demand. In this respect, investments in free education, affordable health care, and pension systems are essential, as they provide basic economic and social security to citizens, encouraging them to consume more and thereby boosting demand in the domestic economy. This will not only support the recovery of national economies but also help millions to overcome poverty.¹⁶ Beyond infrastructure, increased investment is equally critical in other labor-intensive social services like child care and, in ageing societies such as the PRC, Singapore, and Thailand, support for the elderly.

5.2 Speed of Implementation

Packages must be implemented quickly because the need for action is urgent. This calls for actions that can be rolled out rapidly and have significant employment impacts almost immediately. Front-loading packages with public spending on projects that are already approved—especially in infrastructure, housing, maintenance, health, and education—tends to have immediate and strong multiplier effects. Scaling up existing social transfers to protect the poor and most vulnerable, and increasing other welfare payments to low-income families, can all be implemented quickly. Government purchases of goods and services can be introduced rapidly, but there may be delays before the impact of increased spending benefits labor.

5.3 Coordinated Approach to Crisis Response

Fiscal stimulus packages aimed at promoting aggregate demand in individual economies can have regional and international spillover effects through trade and investment. This is particularly the case for the more open Asian economies with high propensities to import. Such spillovers suggest the importance of coordinated global and regional approaches to fiscal stimulus packages to address individual country concerns on import leakage and to foster greater cost effectiveness in measures. In addition, trade and investment have significant influence on employment in individual economies, suggesting the need for greater global and regional policy coordination on employment and social protection policies in addition to fiscal policies. With regard to regional approaches, Asia and the Pacific has a range of regional collaboration approaches, including the Chiang Mai Initiative, upon which the region can draw.

5.4 Efficiency and Coverage of Social Protection: a Social Floor

As the crisis unfolds, the risks that people face are exacerbated by limited social protection. Supporting workers and their families through well-designed social policies should be a key component of stimulating the economy and averting a social crisis. Many governments recognize the importance of social protection and have stepped up their efforts in their overall policy response. However, measures have often failed to reach the groups worst affected by the present crisis: the nearly poor who recently escaped poverty and who now face the prospect of slipping below the poverty line as they lose their jobs in export-oriented industries.

To help them, unemployment insurance is an automatic stabilizer that can cushion the impact of the economic shock on workers in the formal economy and help maintain aggregate demand. Evidence suggests that automatic stabilizers have a more prompt and consistent countercyclical effect than do discretionary policies (IMF 2008), and that their fiscal cost automatically declines when the number of beneficiaries falls back. Unemployment insurance can slow the transmission of the crisis from urban to rural areas, especially where large numbers of rural migrants have lost jobs in export-oriented industries.

However, very few countries in the region have a proper unemployment insurance system, and even higher-income economies such as Malaysia and Singapore are not exceptions (Source: Authors. Table A.2 [ PDF 19.1KB | 1 page ]). Another reason for the limited role of unemployment insurance in developing Asia is that wage employees in the formal economy are a relatively small segment of workers. In Viet Nam, where unemployment benefits were recently introduced, wage-earning workers account for less than 22% of total employment (Ministry of Labor, Invalids, and Social Affairs 2007).

Introducing unemployment insurance schemes is, despite their initially limited reach, an important step toward both protecting workers and supporting domestic demand during the crisis. Moreover, improving the responsiveness of existing unemployment benefit systems can improve the effectiveness of policy response to the downturn. This can be done, for example, by extending the length of, or relaxing the qualifying requirements for, unemployment insurance benefits, as was recently seen in Japan and a few other economies. Another example is the use of unemployment insurance to subsidize retraining programs in companies in Hubei Province of the PRC, as an alternative to retrenchment, and to reward enterprises that have paid insurance premiums for more than 2 consecutive years without layoffs (Lee 2009).

Traditional social transfer programs targeting the poor and vulnerable vary in their design, ranging from food provision to subsidized utilities and cash transfers. The effectiveness of these measures depends on how well they target needy households and on their capability to minimize administration costs and leakage to the non-poor. Experience shows that across-the-board food and utility subsidies often come at a significant fiscal and economic cost. They are not easily reversed and have often have only a modest impact on poverty (World Bank Development Research Group 2008). Further, many schemes are unresponsive to changes in the beneficiaries’ need for assistance (Ravallion 2008). A promising approach to address these deficiencies is to strengthen the self-targeting component of existing programs, a move that encourage beneficiaries to enroll when in need and drop out when better opportunities arise.¹⁷ One such example is India’s National Rural Employment Guarantee Scheme, which offers 100 days of work per family in rural areas at the minimum wage for agriculture and is complemented by a social security scheme in the informal economy and a national health insurance scheme for unorganized workers. Introducing employment-guarantee programs in urban areas can provide safety for urban informal sector workers affected by the crisis.

Supporting poor households to keep their children in school must be part of the policy response in low-income economies. Lower school fees can keep children in school, while support to family health can further mitigate the potentially long-term impact of the crisis. Also important are extending school meal programs (food for education) and reducing such indirect costs of education as transportation, textbooks, and uniforms (ILO-IPEC 2008). Scholarships targeting poor families can also be effective. Thailand pursues a more ambitious strategy by allocating a significant share of its stimulus package to providing free education to children up to the age of 15, plus health care in rural areas. Public–private partnerships that support the education of children in poor households have a role to play.¹⁸

The most effective programs are those that combine measures to lower educational costs with incentives for parents to keep children in school and undertake regular medical checks. Indonesia has implemented this kind of conditional cash transfer since 2007 and will strengthen the program as part of its crisis policy response. There is evidence from impact evaluations that conditional cost transfers bring real benefits to poor households in terms of both current and future income through increased investment in child schooling and health care (Ravallion 2008; Das, Do, and Ozler 2004).

The crisis provides opportunities in health-care reforms. The PRC recently introduced a 3 year, US$125 billion plan to reform its health-care system. The plan aims to provide universal basic health care and extend coverage to the uninsured. It will boost investment in health infrastructure and enhance the monitoring of water and food safety and workplace safety. If well implemented, these measures will have a number of positive impacts beyond the health-care system. Public investment should spur growth and create jobs that can hasten crisis recovery. In the medium and long term, it will also help to reduce the need for high household savings and boost domestic consumption. Altogether, this will help to rebalance PRC economic growth toward domestic markets.

The current crisis presents an opportunity for some developing countries in the region to improve their poverty-reduction programs with the aim of gradually developing an effective social floor. Such a social floor could include improved access to jobs; basic health care; protection and education for children, the elderly, and people with disabilities; social assistance for the poor or unemployed; and other features that vary according need and stage of development.

5.5 Credit-constrained Businesses and Industrial Adjustment

The employment effect of fiscal stimulus measures aimed at enterprises depends on the policy tools used and the characteristics of the targeted sectors. Japan and Korea have introduced wage-subsidy schemes for particular groups and sectors, while Singapore has established across-the-board subsidized employment to encourage businesses to preserve workplaces in the downturn.¹⁹ Other governments reduced unemployment insurance contributions and other payroll taxes.²⁰ All these measures can reduce the costs of employment for firms without reducing employment or workers’ take-home pay, thereby providing incentives for work and maintaining consumption. They may be appropriate when the crisis is short lived or a particular industry and enterprises is able to recover quickly. But, in the longer run, they may not be fiscally sustainable, and their role in developing Asia is limited by the relatively small formal economy.

When considering support to specific industries, a critical aspect of the policy choice should be the employment intensity of a sector, as fiscal stimulus measures aimed at labor-intensive industries have larger employment effects. In addition, incentives that target sectors that are less import intensive are likely to lead to a larger relative increase in domestic demand and employment than similar incentives provided to more import-intensive sectors.

Support for small and medium-sized enterprises (SMEs) needs to be a key component of most stimulus packages in the region, partly because the crisis has hit SMEs disproportionately relative to larger companies and because small firms account for a large share of total employment in most economies. Access to credit is particularly critical for viable small firms. The main reason for government-backed credit guarantees is that, while cash injections to banks may help alleviate the overall credit crunch, lending to SMEs may not improve unless policies are directed specifically toward their needs. This has affected those small firms that primarily rely on bank credit to meet their operating costs, including numerous SMEs that work for supply chains and global production networks.

Government assistance to enterprises that face particularly difficult problems that could lead to closure or large employment reductions should also be considered. However, public subsidies to enterprises should be linked to restructuring plans that preserve employment and result from social dialogue between management and trade unions (ILO 2008e).

5.6 Short-Term Challenges and Long-Term Priorities

Developing countries that are able to tackle short-term challenges while remaining focused on long-term priorities will likely emerge stronger and take greater advantage of the recovery. Some of the measures that would help in both the short and long term include structural reforms to enhance productivity and labor quality and investment in green growth and green jobs.

Spending on research and development and investing in people can boost the longer-term productivity of the economy. With this aim, Malaysia and Thailand have allocated part of their stimulus spending to training and education. As training costs less during an economic downturn, Singapore looks at the recession as a good opportunity to retrain workers. The Skills Programme for Upgrading and Resilience, a new tripartite umbrella program supported by the fiscal package, helps employers to retrain and develop their workforce rather than simply cut jobs and will boost national productivity and competitiveness over the medium and long term (Singapore Department of Statistics 2009).

Response measures to the current crisis can be opportunities for addressing economic and environmental priorities at the same time.²¹ This can be done by giving national economies the necessary stimulus against global shocks while prompting a transition toward more sustainable development. Measures to increase demand and restore growth should therefore take into consideration environmental concerns and the high potential for investments in environmentally friendly areas to generate future employment and sustainable growth. This is particularly true for developing economies, which can benefit from double dividends by promoting green growth and green jobs while targeting poverty reduction. The scope and potential for green jobs are vast (UNEP 2008).

Some governments are already taking steps toward a green recovery strategy. Korea’s Green New Deal aims to improve the use of the nation’s four major rivers, construct dams and other water-management facilities, develop green transportation networks and clean energy technologies, build 2 million green homes, and create more than a million green jobs. Malaysia has introduced a training program to prepare unemployed graduates for green jobs under the Sarawak Corridor for Renewable Energy, a major project that is expected to generate 1.6 million jobs by 2030 (Prime Minister’s Office of Malaysia 2009).

Crisis recovery, however, also entails large environmental challenges. Large infrastructure projects for railroads, highways, and housing feature prominently in many fiscal packages. If not designed to be environmentally friendly, they can generate widespread environmental damage. It is critical to carry out rapid environmental impact assessments before the work begins. The PRC’s package, for example, allocates RMB350 billion (or 9% of all stimulus resources) to environmental protection and preliminary environmental assessments.

While the potential economic and environmental benefits of these types of investments are great, substantial upfront expenditures and political will are required. Governments in the region must look to the long term if they want to turn the global economic challenge into an opportunity for sustainable growth and development.

5.7 Enabling a Sound Policy Environment

Measures are best implemented through social dialogue, which can help improve the design of the crisis response measures at the enterprise, industry, and national level, as well as provide political support for the fiscal packages and other government policies. However, much depends on national circumstances and the quality of industrial relations. In some economies, the global crisis has intensified existing tensions in labor–management relations, leading to strikes and disrupted production. On the other hand, in economies with more developed and coordinated industrial relations that feature broad-based representation, strong labor institutions, and long-term trust between partners, social dialogue has negotiated solutions that in some instances have become components of the broader national policy response to the crisis. Sharing experiences and building the capacity of social partners to engage in constructive dialogue to address the crisis must be a priority.

As the deep recession could add to pressures undermining workers’ rights, it is essential to ensure that social progress is not reversed. Above all, the crisis should not be taken as an excuse to erode such fundamental labor rights as freedom of association, collective bargaining, and freedom from all forms of forced and compulsory labor, as well as the abolition of child labor and discrimination in employment. Careful monitoring of the impacts of the crisis on labor standards will be essential to preserving social progress and maintaining social stability.

The employment impact of any stimulus package will depend significantly on how rapidly the local economy can respond to any increase in domestic demand. In this regard, policy coherence is essential. The impact of major public investment in infrastructure will depend on whether local construction materials are available and whether local suppliers and contractors, many of them small firms, have the resources and incentives necessary to participate. Similarly, social transfers to poor and low-income households will generate demand for food and other basic consumable goods, many of which are produced by farmers and local SMEs. By helping to ensure that SMEs can sustain their operations now and thereby benefit from the subsequent increase in consumer demand, policies should facilitate a rise in household incomes coordinated with supporting local economic development. Targeting small firm clusters can have particularly beneficial multiplier effects. It is crucial to strengthen administrative and institutional capacity as well as coordination among various agencies to ensure these programs are effective.

Despite wide-ranging policy actions by central banks and policy makers in Asia and around the world, fiscal strains are acute and confidence remains low, dragging down the real economy (IMF 2009). Their integration into the global economy means Asian economies are unlikely to recover fully without a broader recovery in the rest of the world. Further, while economies may bounce back quickly on the strength of their policies and solid underlying fundamentals, recovery in labor markets is likely to lag because of relatively weaker employment and social protection policies. Strong cooperation on economic, labor, and employment policies among Asian economies could help mitigate the impacts of the crisis and promote recovery. Solidarity is critical, as not every economy in the region or globally has the fiscal resources to implement bold measures to counteract the crisis. This is the time for strong and coordinated international policy actions to support recovery and to improve the prospects for decent work for all (ILO 2008c).

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