DRAFT FOR COMMENT TOWARDS AN EAST ASIAN SOCIAL PROTECTION STRATEGY

Transcription

1 DRAFT FOR COMMENT TOWARDS AN EAST ASIAN SOCIAL PROTECTION STRATEGY Human Development Unit East Asia and Pacific Region September 1999

2 This report was prepared by Jill Armstrong (Senior Economist, East Asia Human Development Sector Unit) with a team including Louis-Charles Viossat, Senior Public Sector Management Specialist and Kerry Flanagan, Social Protection Specialist. Robert Holzmann, Yvonne Sin and Ian MacArthur (HDNSP) provided a background paper on pensions; Teck Ghee Lim (EASES) wrote a background note on informal safety nets. The report will be discussed internally within the East Asia Region as a white cover in September and considered by the Regional Operations Committee in early October. Valuable comments and suggestions were received from. ii

3 TABLE OF CONTENTS 1. INTRODUCTION SETTING THE STAGE...4 A. WELFARE ACHIEVEMENTS...5 B. LIMITS TO THE MIRACLE...6 C. CHALLENGES FOR THE 21 ST CENTURY COUNTRY CONTEXT...12 A. EMERGING MARKET ECONOMIES...12 B. THE TRANSITION ECONOMIES...15 C. PACIFIC ISLAND ECONOMIES SOCIAL PROTECTION POLICY...20 A. INTEGRATED SOCIAL PROTECTION...20 B. SOCIAL SAFETY NETS...22 C. LABOR MARKETS POLICIES...29 D. OLD AGE SECURITY: PENSIONS IN EAST ASIA EAP SOCIAL PROTECTION ACTIVITIES...47 A. OVERVIEW...47 B. PORTFOLIO...48 C. ANALYTICAL WORK...50 D. ORGANIZATION OF SP WORK TOWARDS A SOCIAL PROTECTION STRATEGY: NEXT STEPS...52 A. BUILDING A STRATEGIC FRAMEWORK...52 B. PROSPECTS AND PRIORITIES...52 Labor Markets...52 Safety Nets...53 Pensions...54 C. MOVING BEYOND THE FRAMEWORK...57 Country Applications...57 D. ROUNDING OUT THE STRATEGY...58 Forging strategies across the HD sector...58 Collaborating beyond the HD sector...58 E. NEXT STEPS...59 i

4 TABLES 1. Basic Indicators, Selected Countries, Various Years Social Impact of the Crisis and Coping Responses Safety Net Programs in the Emerging Economies Key Labor Market Indicators Pension Scheme Coverage (Publicly Mandated & Government Schemes) Adjustment Lending in East Asia, Strategies and Actions, by social policy area Countries of Emphasis...57 FIGURES 1. Poverty Reduction in East Asia, Old Age Dependency Ratios, regions Thailand Population Structure, 1995 and BOXES 1 Migrant Workers in a Global Economy Social Protection and the Handicapped Equity Considerations in Social Protection the case of Thailand Monitoring Poverty in East Asia Safety Net Programs: Stylized Facts Scaling up? easier said than done Child Labor in East Asia Options for Formal East Asian Pension Systems Integrated Social Protection: The Case of Korea...48 ANNEXES Annex I: Statistical tables...60 Annex II: Impact of the crisis and coping responses...71 Annex III: EAP Social Protection Activities...79 Annex IV: Country Demographic Projections...84 Annex V: Bibliography...90 ii

5 EXECUTIVE SUMMARY In many East Asia and Pacific countries, rapid growth during the 1980s and early 1990s was the primary safety net, provider of jobs and old age security; family ties were an important part of the social safety net. During this period, governments had little incentive to plan for downside risks; hence formal provision of social protection remained much less common in the region than in other countries at similar income levels. Governments reluctance to establish strong public safety nets is also associated with the perception that they create dependency and substitute family-based measures, thus undermining the strong cultural values attached to family responsibility. Instead, widespread public provision of basic education and health services were the foundation for much of remarkable achievements in living standards. The recent experience of macroeconomic crisis in the region, however, exposed some weaknesses in social protection arrangements, while managing the transition to market economies has revealed other social protection challenges for the transition economies. And, it has brought to the fore several shortcomings of the East Asian social success story that were evident even before crisis: pockets of poverty within countries with signs of rising inequality; significant vulnerable groups; and outmoded industrial relation policies and institutions. Finally, structural trends demographic, economic and political will have a strong impact on the need for improved social protection arrangements in the region. Aging, urbanization and increased formalization of the labor force are likely to place strains on informal family based arrangements for social protection. Globalization, while increasing the opportunities for growth, will also expose countries to increased risk of future macroeconomic shocks. And, increased democratization and participation of civil society will continue to place demands on governments to assume more responsibility for the unemployed, sick, destitute and the elderly. As financial and economic health begins to return to the region, the main challenge for social policy is to move beyond crisis-management to strengthening social protection systems by considering longer-term policies and institutional structures to help households manage the risks of future income shocks. The objective of this regional strategy paper, therefore, is to identify strategic issues and provide the framework for a more integrated and operational approach to social protection. Social protection, as defined within the Bank group, refers to a group of social policy interventions in three specific, but closely interrelated, areas: social safety nets (including social funds); labor market policies (including child labor); and pensions. Integrated social protection framework. Considering safety nets, labor markets and pensions together is important from a policy and operational angle, given obvious linkages and tradeoffs. Policy decisions taken in one of the three social protection areas can have important implications in the other areas. And, because many of the social protection instruments, especially in pension and labor market areas, do not significantly iii

6 benefit families who do not work in the formal labor market, the resource allocation decisions across the three program areas have important equity consequences. This is particularly important as the share of the formal sector labor force in many countries in the region is quite low. Given limited public resources available for social protection, an integrated approach permits programmatic tradeoffs to be considered when deciding budgets for pensions, safety nets and labor market interventions. Social protection strategies, however, are not only adopted by governments. Individuals and households respond through self-protection, drawing on household assets, savings and close inter-personal relationships. Market institutions (such as banks and insurance companies) also provide instruments for managing income risks (e.g. insurance, savings, lending). As noted, informal family and community support mechanisms are very important in the region; a threshold issue in designing effective social protection arrangements in this region will be to find the appropriate balance between informal and formal arrangements, especially for safety nets and old age security. Labor market issues. The importance of labor markets and labor market policies in the region is likely to increase for several reasons. First, many countries in the region face significant labor market reform issues, in particular, China and the other transition countries. Second, for the emerging market economies, the skill base of the work force and labor competitiveness issues and hence, demand driven vocational and education training--will take on increased importance as growth resumes. Third, there is a growing pressure both inside and outside the region on several labor issues, in particular child labor, workers rights, the situation of vulnerable groups, including migrants and women, and income maintenance. Pension challenges. The sharp deterioration in the old-age dependency ratio in the coming decades will emerge as one of the region s most significant areas of social policy concern, especially for countries in which the demographic transition is well advanced, such as China and Thailand. The low level of those covered by formal pension schemes, the predominance of retirement schemes still in evolution, and the existence of funded provisions in many countries provides ample opportunity for alternative system design or reform. However, these opportunities are best seized early while many schemes are still young and before the proportion of elderly increases dramatically. Safety nets provision. While the reduction in the numbers of poor in the region has been spectacular, the risk of becoming poor, either temporarily or permanently, will continue as a result of aging populations, natural disaster, civil conflict, economic downturn or transition. While to date, informal arrangements, supplemented by modest formal programs, have provided the main safety net, it will be important to ensure that they are effective and responsive to future challenges. Governments are likely to be called upong to assume more responsibility in ensuring that adequate safety nets are in place and/or can be scaled up quickly. Country issues. Given the enormous diversity of countries in East Asia and the Pacific, the paper divides the region into a tri-partite country typology: emerging market economies (the East Asia Crisis-5), the transition economies (China, Vietnam, Mongolia, iv

7 Lao PDR, Cambodia) and the small market economies (Papua New Guinea and the Pacific Islands). Among the emerging market economies, the major social protection challenge is to continue dealing with the social impact of the crisis, while moving from the current short-term focus on safety nets to consider a longer-term social protection framework (i.e. including labor markets and pensions). The recent financial crisis in the emerging economies has highlighted the downside risks of globalization and the shortcomings of relying on economic growth and informal mechanisms to achieve reasonable levels of social protection for everyone. Better planning by governments for future shocks and strengthening informal family and community based networks will be items on the agenda for social protection as growth resumes in these countries. In that respect emerging economies need first to design and agree upon a framework that builds on their cultural values regarding informal mechanisms, fosters inclusive growth and fits the new post-crisis environment characterized by fast globalization, more macro-economic unpredictability, increasing industrialization, swift urbanization and rapid aging. For the transition economies, the largest social protection issue is the labor dislocation brought about by the reform of the SOE system (especially in China and Vietnam). Smoothing the transition for redundant workers who stand to loose social security coverage (including pensions) provided by the enterprise, re-absorbing them elsewhere in the labor market (through training or job placement centers), or considering safety net provisions in the event they are not re-employed, are major challenges. In others, the role of formal safety net is critical, particularly in supporting vulnerable groups such as amputees and children. In terms of emerging challenges, the most significant in terms of impact may well be the demographic aging being faced by China where its old age dependency ratio will increase from about 10% now to over 30% in The Pacific Islands are grappling with putting in place appropriate labor market policies (especially for youth), dealing with major systemic shocks--both natural and economic, and addressing governance and corruption consequences of the strong traditional informal arrangements. Social Protection Activities in EAP. The total number of operations in the social protection sector are small, but growing, led by increased demand by governments to help respond to the social impact of the crisis. Thirty-nine ongoing projects with major social protection components include: 7 social investment funds; 3 safety net operations; 28 labor/employment support loans; and one pension loan. Bank-funded analytical work for social protection in the region has been limited, but the Bank s own work has been supplemented enormously by major funding from the European Union s Asian Financial Crisis Response Fund (ASEM Trust Fund). In the area of social protection, fourteen ASEM grants totaling over US$8.5 million have been approved, with an additional US$1.8 million support in PHRD grants. As of January 1, 1999, Social Protection was placed within the regional HD Sector Unit to take advantage of synergies in health and education; this setup reflects the v

8 HD network structure. Activities (both analytical and lending) in the Social Protection area, however, are spread widely across almost all sectoral units, in headquarters and the field, as well as in the HD and other networks. Sharing information, integrating the analysis and optimizing the design of social protection work has been made difficult given this fragmentation and/or shared responsibility across units. As the Social Protection sector matures within the EAP Region, coordination of the social protection agenda should be improved to take advantage of the skills and knowledge that are lodged across organizational units. Next Steps. The paper is but one of a number of steps in building a regional social protection strategy. It is not a blueprint, nor a comprehensive and detailed strategy in each of the three core social protection areas for individual countries. Indeed, next steps include identifying priority countries and then developing more detailed country strategies. Countries in which social protection issues are likely to feature prominently on the policy agenda include: Korea, Thailand, Vietnam and China. Obviously, country strategies will depend on specific issues facing them and their priorities in addressing them. Local government capacity, development of labor and financial markets, cultural and political factors will all play a role in shaping these strategies. Within the Bank, moving the social protection agenda forward at the country level will require initiating dialogue and strengthening our analytical understanding of the important linkages both within social protection, across the Human Development family, and extending into other key sectors such as PREM, ESSD, Rural, Financial and Private Sectors. Social protection strategies, especially for key countries, should be articulated at the country level through CASs and Comprehensive Development Frameworks (where they are being piloted). Assessing and developing the social protection agenda should be based on inclusive consultations with governments, the private sector, civil society and other development partners. The introductory chapter defines social protection, gives an overview of the sector in the region and lays out the objectives of the paper. Chapter 2 looks at the achievements and limits of the East Asian miracle and outlines structural changes in the coming century. Chapter 3 presents a typology of countries in the region and highlights the particular social protection challenges facing them. Chapter 4 looks at the core areas of safety nets, labor market policies and pensions and stresses the need for an integrated treatment. Chapter 5 presents the Bank s current social protection portfolio and analytical work in East Asia. The concluding Chapter examines prospects and priorities and focuses on the need for country specific approaches. vi

9 1. INTRODUCTION 1.1 Two years after the onset of the financial and economic crisis in the East Asia, the economies in the region are beginning to recover. Among those most hard hit Thailand, Korea, Malaysia, Indonesia and the Philippines output is expanding and it is clear that the recession had bottomed out by the end of While the short-term outlook is positive, 1 the crisis had significant social costs, the welfare effects of which are still unfolding. Coping responses by households, communities and governments helped to cushion the impact. 1.2 Other countries in the region, while initially insulated, were not immune to the effects of the crisis either. Pre-existing challenges (e.g. the transition to market economies) were compounded, as exports and foreign direct investments fell, and demand contracted. Social effects of the crisis rippled across other countries such as Cambodia, Lao PDR and several Pacific island economies, and depended on the degree to which households were involved in the cash economy or relied on imported goods As financial and economic health begins to return to the region, several lessons have emerged from the crisis. First, continuing to rely on growth by itself as the primary safety net-- a principle feature of the East Asian miracle--is not enough to ensure sustained poverty reduction. Second, the crisis caught most policy makers off guard. Designing policies and interventions quickly--and in the context of severe information gaps, rapid change, stringent financial constraints, and limited institutional capacity--points to the need to have appropriate safety nets ready before a crisis. Third, informal coping mechanisms were important, but it is unclear how sustainable such responses would have been had the crisis been prolonged or how robust they will be in the event of future such shocks. 1.4 Now, the main challenge for social policy is to move beyond crisis-management to strengthening social protection systems by considering longer-term policies and institutional structures to help households manage the risks of future income shocks--that inevitably will result from increased globalization, economic transition and industrialization and aging populations. 1.5 The remainder of this chapter defines social protection, gives an overview of the sector in the region and lays out the objectives of the paper. Chapter 2 looks at the achievements and limits of the East Asian miracle and outlines structural changes in the coming century. Chapter 1 See Severino, Jean Michel, Is Asia Rising? An update, July 1999 and Newfarmer, R. et al. Update: Recovery in East Asia, August Okonjo-Iweala, N. et al. Impact of Asia s Financial Crisis on Cambodia and the Lao PDR, Finance and Development, September 1999.

10 3 presents a typology of countries in the region and highlights the particular social protection challenges facing them. Chapter 4 looks at the core areas of safety nets, labor market policies and pensions and stresses the need for an integrated treatment. Chapter 5 presents the Bank s current social protection portfolio and analytical work in East Asia. The concluding Chapter examines prospects and priorities and focuses on the need for country specific approaches. Social Protection and The East Asia Region 1.6 Before turning to consider a regional social protection strategy, it is useful to first define the concept. Most narrowly, the term social protection describes a group of social policy interventions in three specific, but closely interrelated, areas: social safety nets (including social funds); labor market policies (including child labor); and pensions. A concept that unifies these three areas of social policy is social risk management, which defines social protection as human capital public interventions to: (i) assist individuals, households and communities better manage risk; and (ii) provide support to the incapacitated poor. 3 Risk management strategies, however, are not only adopted by governments. Individuals and households respond through self-protection, drawing on household assets, savings and close inter-personal relationships. Market institutions (such as banks and insurance companies) also provide instruments for managing income risks (e.g. insurance, savings, lending). 1.7 Four corollaries of this definition of social protection have been proposed by HDNSP. Public interventions in social protection should: (i) (ii) (iii) (iv) be seen as providing a safety net as well as a springboard for the poor to allow those with some capacity to bounce out of poverty and set them on a positive development path; be regarded as investments in human capital rather than costs, e.g., helping the poor keep access to basic social services during shocks fosters their future productive capacity rather than merely giving them a transfer to cope with the shock; focus less on the symptoms and more on the causes of poverty by providing the poor the possibility to engage in higher risk/higher return activities; be realistic. Eliminating the poverty gap through public transfers is beyond the fiscal capacity of most client countries. 1.8 In most East Asia and Pacific (EAP) countries, rapid growth during the 1980s and early 1990s was the primary safety net, provider of jobs and old age security; family ties were an important part of the social safety net. During the period of rapid growth, governments had little incentive to plan for downside risks; hence formal provision of social protection remained much less common in the region than in other countries at similar income levels (Annex I, Table 1). Instead the state provided investments in human capital with widespread public 3 As proposed in Social Protection Sector Strategy Paper, World Bank, HDNSP, Draft, 8/18/99. 2

11 provision of basic education and health services. Moreover, governments reluctance to establish strong public safety nets is associated with the perception that they create dependency and substitute family-based measures, thus undermining the strong cultural values attached to family responsibility. 1.9 The recent experience of macroeconomic crisis in the region, however, has exposed the weaknesses of existing social risk management instruments, while managing the transition to market economies has revealed other challenges in the provision of social protection for the transition economies. In addition, the largely predictable structural changes such as rapid population aging for some countries will add weight to the need to rethink social protection strategies in the region. Regional Social Protection Strategy Paper 1.10 The objective of this regional strategy paper is to identify strategic issues and provide the framework for a more integrated and operational approach to social protection. Its primary audience is internal: the Region by providing a framework for integrated and coordinated future lending and non-lending operations in the area of social protection; and, Bank-wide by providing input for the Social Protection Sector Strategy Paper, currently under preparation by HDNSP. A second audience will be regional clients -- governments, stakeholders and beneficiaries -- by providing analysis of challenges, opportunities and broad options for future directions. The paper has limited ambitions: to initiate an on-going dialogue within and between these audiences on the direction of social protection in specific countries. It is not a blueprint, nor a comprehensive and detailed strategy covering each country in the three core social protection areas. Among the next steps is to develop more detailed country strategies in consultation with countries. 3

12 2. SETTING THE STAGE 2.1 The countries of East Asia and Pacific region are diverse in their social and economic characteristics carrying implications for the design and reform of social protection systems (Table 1). First, population size of the countries differs enormously. On the one hand, there are small countries ranging from a few hundred thousand (Solomon Islands, Samoa) to low-density mid-sized countries containing populations under 5 million (Lao PDR, Mongolia, Papua New Guinea). Several mid-sized countries have populations between 10 and 100 million (Cambodia, Korea, Malaysia, Philippines and Thailand). At the other extreme, China and Indonesia are the largest and the fifth largest countries in the world, respectively, in terms of population. The countries also differ with regard to income level. Measured in pre-crisis income, the region has some of the world s poorest (Cambodia, Lao PDR, Mongolia and Vietnam), while others (Thailand, Malaysia and Korea) have income levels close to or above that of low-income EU countries. Rapid urbanization has taken place from an average level of 18% in 1970 to 33%. Nonetheless, the share of urban population remains diverse, ranging from around 20% in many transition economies and Pacific Islands to around 80% in Korea. In the two most populated countries, the urban population in China and Indonesia accounts for around a third of their populations. In Korea, agriculture has very little importance, but in many others it still employs well over 50% of the workforce (e.g. China, Vietnam, Papua New Guinea and Thailand). Finally, pre-crisis poverty incidence rates varied from well below 10% in Korea, Malaysia and Thailand to over 40% in Mongolia, Lao PDR, Vietnam and Cambodia. These proportions, however, mask the absolute numbers of poor; for example, a 20% poverty rate in China means there are over 250 million people living under a $1 a day in 1985 PPP, while in Papua New Guinea, roughly the same incidence of poverty translates into just a million poor. Country Table 1. Basic Indicators, selected countries, various years Population (million) Urban Population (%) GNP p.c. a Poor (million) Life expectancy at birth Infant Mortality (1000 live births) Primary enrollment (gross) Human Devt Index b Indonesia , Korea , Malaysia , Philippines , Thailand ,740 < China 1, Vietnam Cambodia * Lao PDR Mongolia PN Guinea Solomon Is Fiji , Samoa , Source: WDI For poverty numbers, Everyone s Miracle?, 1997 using US$1 per person per day at 1985 prices. a. Atlas method. b. Human Development Index ranks countries from 1 to

13 2.2 Given such diversity, this report divides the region into a tri-partite country typology: emerging market economies (i.e. the East Asia Crisis-5), the transition economies (China, Vietnam, Mongolia, Lao PDR, Cambodia) and the small market economies (Papua New Guinea and the Pacific Islands). High income Asian countries (Singapore, Hong Kong, Taiwan (China) and Brunei) will not be covered nor will North Korea and Myanmar. Chapter 3 provides more details on these groups. A. WELFARE ACHIEVEMENTS 2.3 Welfare gains in East Asia and the Pacific have been impressive. Countries in the region have generally relied on high growth (especially non-agricultural labor demand), a stable macro environment, widespread public provision of health and education services, and high household savings and strong informal coping mechanisms as the major form of social protection. Indeed, these policies resulted in unprecedented reduction in poverty, both in numbers and severity (Figure 1) so-called everyone s miracle. Between 1975 and 1995, poverty in the region decreased by two-thirds (based on a headcount index using a $1 a day poverty in 1985 purchasing power parity, or PPP, terms). In 1975 about 6 in 10 East Asian lived in poverty; by 1995, just over 2 in 10 did, with progress led by China and Indonesia. Welfare indicators improved, too, reflecting the heavy investments in human capital. Life expectancy at birth, infant mortality and literacy all improved. The average East Asian now lives to around 70. Only 37 East Asian infants of every 1,000 die before their first birthday, less than half the level in And access to education (measured by primary school enrollment ratios) is close to universal in most countries (Table 1). Figure 1 Poverty Reduction in East Asia, Source: Everyone s Miracle? 5

14 B. LIMITS TO THE MIRACLE 2.4 Even before crisis, though, there were several weaknesses to the East Asian social success story: pockets of poverty within countries with signs of rising inequality; significant vulnerable groups; and outmoded industrial relation policies and institutions. These issues, along with limited formal social protection mechanisms, form the unfinished social agenda in the region. 2.5 Poverty has not disappeared and remains at high levels in several countries including the Philippines, Vietnam, Cambodia, Lao PDR and Mongolia. Indeed, Indochina economies are among the poorest countries worldwide with a number of salient features only found in poor sub-saharan African countries. In high growth countries, vulnerabilities to poverty also remained high given the large numbers of households just above the poverty line. The group most vulnerable to poverty in all countries in the region is still the rural poor, and very often there is a geographical dimension. For example, in Indonesia in 1990, two thirds of the poor lived in Java. In Thailand, the majority of the poor live in the north and northeast. Family size is highly correlated with poverty in all countries in the region. The level of education is a strong correlate of poverty, with those with higher levels of education being much less likely to be poor. This particular factor has also driven some observed rise in inequality in the region, notably China. 2.6 Vulnerable social groups at risk have emerged or increased in East Asian and Pacific labor markets and societies. Their situation was already more precarious than for others before, and has deteriorated further in the wake of, the crisis. Youth and women are a particular cause for concern. Street children living on the street, children involved in armed conflict, disabled children and working children exist in virtually all Asian countries. The number of orphans is increasingly growing, especially because of the spread of HIV/AIDS. Moreover youth, especially in urban areas, as threatened by unemployment and often violence and social disruption, especially in the Pacific island economies and major cities. Women s abundant source of low paid labor was one of the key factors behind the spectacular growth of various sectors in several countries but they did not often get a share in the returns from globalization in the workplace. As social tensions are rise, women face greater probability of domestic violence, bear the burden of securing food for the family and are in many countries faced, when employment is low, with risks of prostitution and trafficking. Migrants either internal (in China, Thailand, Cambodia and increasingly in Pacific islands) or cross-border (from Myanmar, Cambodia, Indonesia, the Philippines and many Pacific Islands) are also a vulnerable and rapidly growing group suffering from social insecurity and too often discrimination and exploitative practices. Refugees (170,000 in Thailand and 300,000 in China according to the latest UNHCR) are also in a vulnerable position. In emerging and transition countries, the rising number of working poor in the formal sector and urban poor is noticeable as well as the number of lower middle-class households hit by the crisis and thrown into social and economic difficulties. The region may have by far the largest number of people with disabilities in the world related to the workplace (work injury) or to other events (invalids, mine victims). And, minimum care and service are, to a large extent, provided in the traditional family and community context. Finally, there are many victims of wars, a group which includes war veterans (400,000 handicapped war veterans in Vietnam), released soldiers and displaced populations. 6

15 2.7 Industrial relations systems and labor market institutions, while diverse, are generally weak, based on outmoded guidelines. Most countries in the region sought to maintain relatively unfettered labor markets during the early stages of economic development. Fundamental labor rights ( core labor standards ) are neither guaranteed nor adequately enforced in several countries (Annex I, Table 2). On average, East Asian countries have ratified only 10 ILO conventions, considerably low. Interventions of governments towards unions have been often repressive and many countries of the region have allowed only one union or forbidden unions in particular export sectors, such as electronics in Malaysia. In transition economies, trade unions remain very committed to political parties. Furthermore working conditions are poor and often alarming. Safety and health standards, where they exist, are often weakly enforced, particularly in the small and medium-size enterprises typical of the region. In 1993, a fire in a factory in Thailand killed 188 and injured 469 workers, mainly female. Unsurprisingly, social dialogue is weak and difficult and tripartism has not played a large role in the region. 2.8 Formal social risk management instruments are less developed in East Asia than in other regions. Government expenditure on social security and welfare is lower than most other regions. In 1990, countries in East Asia spent 1.0% of total government spending on social security and welfare compared with 12.7% in OECD countries, 3.6% in Latin America and 2.2% in South Asia. There have not been significant changes to this figure over the last fifteen years. As noted earlier, governments have instead committed large sums to the public provision of basic education and health services (4% of total government spending in 1990). There is however significant variation across countries. Korea, an OECD member, has the largest array of social protection instruments. At the other side of the spectrum, Pacific Islands countries are generally characterized by rudimentary formal risk management instruments. Instead, informal, but highly organized, arrangements, such as the wantok and maitai systems, are the backbone of risk management. In between, the former centrally planned economies are characterized by comprehensive cradle-to-grave social protection systems for state workers, which unlike FSU countries, are the responsibility of state enterprises. Generally, formal social protection schemes cover small portions of the population, such as state workers in China, employees of large firms in Korea, civil servants in Cambodia and Vietnam and participants in state provident funds in Malaysia. Not surprisingly, income redistribution through social protection mechanisms has been moderate. C. CHALLENGES FOR THE 21 ST CENTURY 2.9 Structural trends demographic, economic and political will have a strong impact on the need for, and redesign of social risk management in the region. Aging, urbanization and increased formalization of the labor force are likely to place strains on informal family based arrangements for social protection. Globalization, while increasing the opportunities for growth, will also expose countries to increased risk of future macroeconomic shocks. And, increased democratization and participation of civil society will continue to place demands on governments to assume more responsibility for the unemployed, sick, destitute and the elderly. Demographic Trends 2.10 Most countries in the region have rapidly aging populations, resulting from falling fertility and rising life expectancy at all ages. As a result, the region has one of the most 7

16 pronounced aging patterns in the world (Figure 2). The old age dependency ratio 4 is still relatively low, ranging mostly between 5-8%, with the main exception being China (9.5%). Figure 2: Old Age Dependency Ratios in East Asia and Other Regions, EAP ECA LAC MENA SAsia SSAfrica However, it is projected to double in 30 years the same level of rich OECD economies in and triple in 40 years, reaching 27% by 2040, almost the level in Europe and Central Asia (ECA) and well above other developing regions. This aging is extremely rapid by historical comparisons; it took France 140 years and Sweden 86 years for its elderly population to double An important determinant of population aging is the fact that the elderly will, on average, live longer. Life expectancy at age 65 currently ranges from 11.2 years to 16.2 years for men and 12.2 years to 19.7 years for women. The expected increase in life expectancy in the next 40 years is between 2 to 4 years. This has important aggregate implications for old age security, including pensions and health care. At the same time, the youth dependency ratio 5 is projected to fall from about 41% now to 31% by This aging of the population is evident, for example in the case of Thailand, as the population pyramid becomes more rectangular (Figure 3). Changes in fertility and life expectancy are not homogeneous, however, for all countries in the region. For example, the projected old-age dependency ratio in 2040 in Lao PDR is only 7.8% and in Cambodia 11.3%, while it will be close to 40% in Korea. This 4 The old age dependency ratio is defined as: population aged 65 and above to the population aged 15 to The youth dependency ratio is defined as: population aged 0-14 to the population aged 15 to 64. 8

17 suggests that aging is closely related to current income level, with notable exceptions: China has an income level below but an aging level above the average; the reverse seems true for Malaysia. The demographic projections for many countries in the region shows that there will be fewer working age people supporting a growing proportion of elderly (Annex IV). Figure 3: Thailand Population Structure, 1995 and 2030 Thailand: Female and Male age groups, 1995 Thailand: Female and Male age groups, year age groups, ages year age groups, ages Females and Males, in '000s Females and Males, in '000s Source: SIMA. Urbanization 2.12 In 1960, all countries in the region still had largely agrarian populations, with less than one-third of the total living in urban areas. Major societal changes have occurred in the last 40 years, and the percentage of the urban population has increased. The rise was most dramatic in countries with market orientation and rapid industrialization (e.g. Korea s urban population rose from less than 30% in 1960 to over 80% in 1995) and less pronounced in most countries that relied, or still rely, on planning mechanisms (from 15% in 1960 to only 20% in 1995 in Vietnam). During the next 30 years, a continued and often dramatic move toward residence in urban areas is projected. By 2030, there will be only a few countries in which the share of urban population is expected to be less than 50% (Thailand, Vietnam, Cambodia, Lao PDR and Papua New Guinea). In many other countries, such as Malaysia and the Philippines, it is expected to reach 70% or more. Urban population growth rates in the Pacific islands are also at increasingly high level which has created strong pressure on infrastructure and social fabric Increased urbanization may weaken traditional support and coping mechanisms. In predominantly agrarian societies with large families, informal arrangements, such as intergenerational income support for the elderly, have worked well. The cultural traditions in Asian societies, emphasizing strong family values, has helped preserve this system to a large degree, even in the face of urbanization. For example, many of the elderly now co-reside with an adult child; in the Philippines, Thailand and Vietnam of over 70% for parents age 60 or older and more than two-thirds in Malaysia. However, in Korea there have been large declines in co- 9

18 residence from 78% in 1984 to 49% in 1994, likely related to rapid urbanization. With such rapid urbanization combined with falling fertility rates (per women) and overall increases in old age dependency ratios, the informal, family- and community-based income support systems are bound to come under greater pressure, and the number of vulnerable may well increase. Economic structure 2.14 Projected urbanization tends to go hand in hand with economic transformation, evident in changes in the contribution of the three economic sectors (agriculture, industry and services) to GDP and employment. In 1996, the agriculture sector still accounted for a significant share of GDP and an even higher share of employment in many countries, reaching 70% and above in China and other transition economies (Annex I, Table 3). However, with industrialization and market liberalization, the share of agricultural employment is likely to drop quickly. Projections are that more workers will be part of the formal labor market in both market economies and those in transition. An increase in non-agricultural employment (particularly in service industries), and substantial increases in the formal sector not only bring a greater need for more formal mechanisms for social protection, but a greater opportunity to provide them. In large part, the forms of social protection systems necessary in a modern economy should grow with the economy and become part of it. Globalization 2.15 Recent trends in the evolution of trade, technology and political systems have led to an increasingly integrated global order. Sustained and expanding engagement with the world economy is widely held to have been an essential ingredient in the East Asian miracle, even though analysts sometimes differ as to the nature of the benefits of integration and the channels through which they were derived Globalization will continue to give new opportunities to the emerging markets, transition economies and Pacific economies of the region. For the latter for instance, globalization creates a new environment where creative national policies and incentive structures can remove the handicap of remoteness and distance from markets, creating opportunities for growth especially in the service sector Nonetheless, globalization has its downsides and has posed, and will pose, challenges to East Asian countries. Globalization also increases the variability of outcomes, as evidenced by the crisis. Moreover, there is no guarantee that benefits of increased global and regional integration will be widely shared across individuals, households, ethnic groups, communities and countries. Globalization is likely to increase opportunities, but also the vulnerability, of major groups in the population (Box 1). [to be inserted Box 1: Migrant Workers in a Global Economy] 2.18 The impact of globalization is particularly severe and widespread in transition economies, especially Indochina. Globalization puts in danger and requires changes of the whole existing social systems and social protection arrangements, including labor market, social insurance and social safety nets. It is likely that greater exposure to the dynamics of 10

19 global commerce will produce fundamental changes in the socio-cultural environment over the long term. Democratization 2.19 A characteristic of the East Asian miracle model was the combination of state provided investments in human capital, with growth and families providing the social safety nets. The recent break in the growth path and the political transition towards greater democracy and participation has already had an impact on key social protection areas. Increased demands for greater government role in protecting the poor, the unemployed, the disabled and other social groups resulted in new public interventions, as most evident in Indonesia and Korea. Demands for greater accountability of the use of public resources has highlighted the importance of targeting those programs. For the private sector, labor unions are demanding that industrial relations be redefined to both protect their workers during times of hardship and to ensure that the benefits of restored, but reduced growth scenario are more equally shared. 11

20 3. COUNTRY CONTEXT Emerging economies characteristics A. EMERGING MARKET ECONOMIES 3.1 With a total population of 400 million, the emerging market economies (Indonesia, Korea, Malaysia, Thailand and the Philippines) were those most affected by the 1997 regional economic crisis. They share many economic, demographic and historical features. Along with Hong Kong, Taiwan (China) and Singapore, they belong to the group of economies that generated the East Asian miracle. Accordingly, they have higher levels of GDP per capita than other borrowing countries in the region. Their international openness is also a striking feature. In 1997, trade amounted to 90% of GDP in Malaysia, 45% in Korea and around 30% in the Philippines and Thailand. Foreign direct investments, as a share of GDP, are also high: in 1997, it amounted to 290% in Malaysia, 117% in Korea, 102% in Thailand, 69% in Indonesia and 55% in the Philippines. As far as social indicators are concerned, they share a higher level of urbanization than the other countries and, generally, a lower poverty incidence (around 10% in 1995) and better human development indicators. 3.2 However emerging market economies are not a homogeneous group. In demographic terms, Indonesia with 200 million people, the second largest country in the region, dominates and represents around 50% of the group s population. At the opposite side of the spectrum, Malaysia has a population of less than 22 million, or 11% of Indonesia s population. The Philippines, Thailand and Korea are in between with populations in the range of million. 3.3 Korea is the only one to be an OECD member. In many respects, Korea resembles more Hong Kong, Taiwan (China) and Singapore than the four other crisis countries, and it shares many features and issues of highly-developed western economies. Korea s GDP per capita (pre-crisis $10,550) is 8 to 9 times higher, respectively, than Indonesia s and Philippines, 4 times higher than Thailand s and twice as high as Malaysia s. Korea graduated from borrowing from IBRD, but resumed borrowing in 1997 after the crisis. Malaysia had stopped borrowing from the Bank in 1994 (?) after a period of tremendous growth and poverty reduction; it too re-opened policy dialogue with the Bank and began to borrow after the crisis. 3.4 Emerging economies also differ by several other standards. Indonesia and Thailand are still highly rural (despite their megacities), whereas Malaysia and the Philippines have more than 50% and Korea more than 80% of the population living in cities. As for their social indicators, Korea ranks 30 th in the 1998 UNDP Human Development Index (Table 1), just below Hong-Kong China (25 th ) and Singapore (28 th ) and before an EU country such as Portugal (33 rd ). According to UNDP ranking, it is followed by Thailand (59 th ) and Malaysia (60 th ). Indonesia with a poverty incidence of 11% in 1997, a life expectancy at birth of only 65 years, an infant mortality rate of 47 per 1,000 live births and an adult illiteracy rate of 15% in 1997, ranks 96 th. Philippines lags behind (98 th ), due to its modest growth performance compared to its neighbors. 12

21 The social impact of the crisis 3.5 The financial crisis ended the long period of rapid growth which brought large reductions in poverty and major improvements in living standards, the so-called miracle. Just over two years ago, emerging economies accomplishments were celebrated by the development community worldwide. The economic recession which followed the baht crisis in July 1997 was particularly severe in four of the five most affected countries in the region, while the Philippines has survived with a relatively minor contraction in 1998 (Table 2). Negative growth rates were observed in all countries during The economic and social reverberations of the crisis in these economies is a powerful manifestation of the downside risks of integrated global financial and capital markets. 3.6 The social impact of the crisis was swift, deep and very complex; much remains to be done to restore the social fabric and social indicators in these countries. Households were hard hit by falling labor demand, sharp price shifts, and initial cuts in public expenditure for key social services. The value of savings and personal wealth took hefty direct hits from tumbling financial markets, and indirectly as households drew down remaining stocks to smooth consumption. Finally, a severe drought added to economic dislocation and its social impact on the poor. Annex II gives an in-depth picture of the social impact of and responses to the East Asian crisis by these countries. 3.7 The most visible effect of the crisis was the reversal of the impressive reductions in poverty levels. Using national poverty lines, the number of poor in Indonesia increased by nearly 10 percentage points, or about 20 million people. The percentage of poor households in Korea nearly tripled while increases in Thailand, Malaysia and the Philippines were in the range of 2-5 points. The other noticeable feature is that the social impact of the crisis was more heterogeneous than expected across income groups and geographically. 3.8 The effects on poverty and welfare levels were transmitted through a variety of channels. Increases in open unemployment, which tripled in percentage terms in Thailand and Korea between 1997 and 1998, tended to be concentrated in cities and urban areas, and affected the lower skilled and less educated and those working in small and medium sized firms. Wage flexibility produced much lower open unemployment rates than expected, with real wages falling for instance by 35% in Indonesia in Because many of the poor could not afford to be unemployed, there was also a shift towards underemployment and informal employment, often at lower remuneration. Falling household incomes also had to contend with relative price changes (the impact of inflation has been particularly significant in Indonesia). Finally, in 1998, public expenditures in the social sectors were initially cut especially in the education sector, as governments tightened fiscal stances (although these were subsequently restored, see Annex I, Table 4). 13