Effective social safety nets are critical for protecting the vulnerable; a looming demographic crisis makes reforms more urgent
WASHINGTON, April 20, 2012 ― The moderate recovery in Emerging Europe and Central Asia (ECA) in 2010-2011 is now threatened by continued uncertainty and recession in the Eurozone, resulting in slowing growth across most of the region in 2012, World Bank officials said at a press briefing during the World Bank/IMF Spring Meetings 2012. Governments need to take actions on the fiscal, financial, and social fronts, with the growing demographic pressures in most countries of the region making these actions even more urgent.
“After a weak recovery in 2010-2011, growth in Emerging Europe and Central Asia is once again slowing, from 5.5 percent in 2011 to a projected 3.4 percent in 2012,” said Philippe Le Houérou, World Bank Vice-President for the Europe and Central Asia Region. “The crisis has left the countries in the region with tighter fiscal space, continuing pressures on banks, and higher levels of unemployment. While expenditures need to be rationalized, it is now critical that countries protect productive spending on human and physical capital and—with unemployment rising and demographic changes pressing—strengthen social safety nets.”
The weakening of the recovery is particularly marked in the Western Balkan and Central European countries that have close trade and financial links with Greece and Italy and depend to a large extent on foreign banks. Growth is also slowing sharply in Turkey, as well as in Ukraine and Belarus. Growth in Russia and other oil exporters has also slowed, but their economies are bolstered by high oil prices. This is helping the poorer Central Asian countries that rely on sizeable remittance inflows, primarily from Russia.
Social safety nets in the ECA region face three important challenges: balancing demographic and social pressures, protecting people in times of crisis, and helping people move from dependency to employability.
Balancing Demographic and Social Pressures
“With an aging population and shrinking labor force, support for the elderly in Emerging Europe and Central Asia will put additional pressure on country budgets,” said Ana Revenga, World Bank Sector Director for Human Development in the Europe and Central Asia region. “Aging is a looming crisis that many countries in the region will not be able to avoid, but action should be taken soon to prevent big pension deficits. Otherwise, with limited resources, countries will be forced into trade-offs between supporting the elderly through financing pension deficits and supporting other vulnerable groups.”
Change in labor force between 2010 and 2050 in ECA
A rapid decline in the working age population is projected in the majority of European countries over the next 40 years. Bulgaria and Belarus will lose about 40 percent of their labor force by 2050.
Shrinking contributions will make pension systems increasingly unsustainable. Without more ambitious reforms, pension deficits alone are projected to reach almost seven percent of GDP by 2050. This is more than twice the size of the Maastricht targets for the overall deficit for countries in the European Union. Moreover, given the increase in informal work since transition, an increasing share of the elderly will rely on social assistance in future, due to inadequate pension contributions and formal work histories.
These pressures will further strain already fragmented safety net systems. Most countries in the region operate dozens of social benefits schemes: 23 in Serbia, an average of 20 per region in Russia with upwards of 40 in Moscow City, 47 in FYR Macedonia, and 57 at the central government level in Romania (pre-2011 reforms). These benefits frequently cover families and children, the disabled and their caregivers, the poor, and the elderly. With many gaps and duplications, these multiple schemes are costly for beneficiaries and inefficient for governments, but they can and should be reformed to create a more efficient and effective social protection system.
Protecting People in Times of Crisis
During the crisis, social safety nets helped cushion poverty impacts by protecting incomes of existing beneficiaries and expanding coverage to new beneficiaries. Generally, social benefits expanded more decisively in countries hit hardest by the crisis, as compared to countries less affected by the global recession. In Lithuania, for example, unemployment insurance rose rapidly at first, but as these ran out, social assistance increased to protect the jobless. However, preparedness was key to the success of the social response.
“Countries that had good safety nets in place were best able to respond to the crisis,” said Revenga. “We are working with the countries today to improve their safety nets so they are ready for the next one. It’s really hard to build the safety net in the middle of a crisis, so it’s important to have them in place in good times so that they are ready for future shocks.”
Not all countries in the region were ready to respond. When the crisis hit, some countries, such as Moldova and Tajikistan, lacked basic systems to operate safety net programs and channel money to the poor. Other countries had to undertake significant reforms to facilitate a crisis response. For example, in Latvia, where financing and implementation of social assistance had been decentralized, local governments were strapped for funds and unable to increase coverage and maintain balanced-budget requirements, causing nearly a year lag in response.
Moving from Dependency to Employability
Policy makers in the ECA region frequently express concerns about high inactivity rates among the working age population, dependency on transfers, and the potential that social assistance benefits provoke work disincentives. The governments seek to help people reduce their reliance on cash transfers and promote their employability and productivity, and this “active inclusion” or “activation” is at the forefront of the social policy in many countries.
Revenga emphasized that, “Part of the solution is to ensure that people who are able to work are working by ensuring they have the right skills and links to jobs. Social safety nets can be designed to provide incentives to help people move out of dependency into employment.”
Addressing these Challenges: Priorities for Action
Addressing these three challenges of the social safety nets cannot wait. To comprehensively manage the challenge, the Bank recommends that governments:
- consolidate social benefits into fewer, complementary programs, with clear objectives, social policy goals, and priorities. Assistance should be focused on those in need.
- improve efficiency of social benefits implementation, with unified application forms and processes, strong information systems, unified payments systems, strengthened checks on error or fraud, and monitoring and evaluation.
- strengthen the links between benefits, employment, and social services to reduce dependency and promote employability.
- communicate actively on social policy reforms. Given social and political sensitivities, building social consensus around the reforms will be key for their success.