Need to rethink future development models

An ILO study, which analyzes the social impact and economic distress inflicted by the financial crisis on the populations of the affected Asian economies, has called for a more socially oriented model of development in these countries. The study advocated, among others, the introduction of unemployment insurance, contending that the costs entailed would be minimal.

by Chakravarthi Raghavan

GENEVA: The sudden unravelling of the South-East and East Asian economic miracle, and the unprecedented severity of the economic shock suffered show that a fundamental rethinking on the social dimensions of economic development is as important as the purely economic and financial issues currently occupying centrestage, according to an International Labour Organization (ILO) publication.

The study, The Asian Financial Crisis, by Eddy Lee, Director of the ILO's Cross-Departmental Analyses and Reports Team, analyzes the social impact of the crisis and its policy implications, and argues for immediate policy measures to relieve current social distress and strengthen the system of social protection.

It calls for the introduction of unemployment insurance, expansion of social assistance and strengthening of active labour market policies, and suggests that these policy issues are of relevance not only to the crisis-hit Asian countries but also to other emerging economies facing similar challenges.

Domestic vs external causes

In looking at the social impact of the crisis and the distress caused to millions of the population, the book (drawing mostly on Western sources and publications) looks at the current debates on the causes of the crisis - the malfunctioning of the international financial markets vs the domestic factors and policy failures.

And like other international organizations, the ILO too finds it ideologically difficult to cite, leave aside acknowledge, that at least one of the Geneva-based UN system organizations (UNCTAD) has been repeatedly predicting and warning about these matters.

And while the logic of the arguments makes Lee lean towards the external factors, he seems unable to give up the latter, arguing that one cannot be morally neutral about crony capitalism, involving as it does corruption, and subversion of democracy and rule of law. Lee uses this moral ground to mount the case for basic labour rights - trade-union and collective bargaining rights - arguing that this neglect contributed to a lack of transparency in economic policies that contributed to the crisis.

While at the outbreak of the crisis in July 1997, initial perceptions greatly underestimated the magnitude of the crisis and its effects on the affected countries, as well as on other emerging markets and industrial economies, the actual turn of events has belied the optimism. Several South-East and East Asian countries have now experienced an economic shock of unprecedented severity, and in the worst affected countries, GDP turnaround is of the order of 10% or more in one year. Of even greater concern are the distributional consequences - unemployment, poverty and severe social and economic hardship and distress. Available data on unemployment understate the economic distress, and national agencies and international organizations are producing indirect estimates of unemployment and how it will evolve.

There are indications that the adverse impact on the labour markets has been more widespread than shown by unemployment figures alone. Apart from open unemployment, numbers of discouraged workers have also increased, and there is a higher level of labour market slack than indicated by the standard unemployment rate. In Indonesia, where the unemployment forecasts range from 7.2 to 14.8%, the difference seems to relate to how many of the displaced workers are estimated to find employment in the informal sector.

But the essential fact to be underscored is that by the end of 1998, the social costs of unemployment in Indonesia would have reached a very high degree, and the material deprivation and psychological costs will be very high.

Deficient social assistance

Such an employment crisis is bound to bring about a corresponding increase in poverty since, apart from South Korea, the most affected countries have neither a system of unemployment benefits nor an adequate level of social assistance for low-paid workers. And while the increase in poverty in South Korea and Thailand will be mainly due to loss of jobs, in Indonesia it will be due to inflation.

Concomitantly, there will be aggravation of social ills - driving the poor to actions that inflict harm on themselves and society at large. The rise in poverty will mean damaging material deprivation. In Indonesia, this has already meant hunger and malnutrition, and increased vulnerability to ill health.

While most of the countries have some "rudimentary" form of social assistance, with the exception of Hong Kong-China, it is confined to those not able to work and is not available to the unemployed. Even in South Korea, it provides for little more than bare subsistence.

And while the IMF has altered its policies to allow for greater fiscal deficits, and the World Bank and the Asian Development Bank have granted large social-sector loans, not all of the increased expenditure made possible by fiscal deficits has gone into social relief.

In Thailand, the social expenditure amounts to only half of the projected fiscal deficit of 3% of GDP, while in Korea it is 62.5%. Only in Indonesia is an amount almost equal to 90% of increased deficit spending devoted to social relief.

There are also considerable differences in the countries on the social relief strategies adopted. In Indonesia, almost three-quarters will be allocated to subsidizing prices of essentials and ensuring sufficient quantities of essential foodstuffs are made available to the market.

This leaves little funds for the other two measures: modest public works programme and grants for school fees. The programmes in Thailand and Korea are more diversified.

In any event, only a small proportion of the unemployed can expect relief through public-employment-creation schemes - 7% in Indonesia, 10% in Thailand and 24% in Korea.

All these raise the issue whether at all these programmes could be called "social safety nets" - the term used by the Bretton Woods Institutions and the governments.

In the industrialized countries, social assistance constitutes a genuine social safety net. In the countries affected, only a fraction of those in need get relief, and this in turn covers only some contingencies such as disrupted access to health care or education, with no basic income support.

"This is more than a semantic quibble... but impinges on the basic issue whether the strategies adopted have been optimal," Lee points out. And in the absence of information on criteria of choice, one cannot help but wonder if some alternative strategy might not have made better sense. For example, a principal alternative in Indonesia and Thailand could have been concentrating resources on providing employment to all who sought it. If it had assured universality of access, and set wages at subsistence level, the scheme would have been self- targeting and avoided the central problem of public assistance - screening out non-genuine claimants. A heavier reliance on passive income support would also have been desirable.

The weaknesses of the existing systems of social protection when the crisis hit, as well as the social programmes introduced to deal with them, are linked in part to the poorly developed labour institutions in the crisis-hit countries, Lee argues, citing available data on the extremely low trade-union density.

Socially oriented development

A two-pronged approach is needed to overcome the current social distress. One is to bring about an economic recovery as quickly as possible, involving priority attention to economic policies and related structural reforms, and the second is to strengthen systems of social protection.

"Just as the Great Depression forged a new social contract in many industrialized countries in the 1930s, so too must the current Asian crisis serve as an impetus to creating a more socially oriented model of development."

In this regard, the book calls for economic and political reforms, right of freedom of association and bargaining to promote equity, and active employment policies. It also advocates introducing unemployment insurance and knocks down the view that these countries cannot afford it.

Studies, it says, show that the burden on enterprises and any market distortion arising from such schemes would not be too high - the required contribution rate ranging from 1-4% of the payroll.

In the case of Thailand, an ILO study shows that a scheme that pays benefits for six months at a level equal to 50% of previous earnings would require a payroll tax of about 2.5% in the first year, falling steadily to reach 0.6% in the seventh year.

The very modest levels of contributions and the effects on labour costs, and thus demand for labour, would be negligible. The empirical evidence in industrial countries for the hypothesis that unemployment benefits have a negative impact on employment is "not particularly compelling," says Lee.

And many of the alleged negative effects of unemployment benefits in the industrialized countries do not apply to the type of scheme advocated for the Asian countries, nor does it involve any forced saving on workers. (Third World Economics No. 199, 16-31 December 1998)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS).