The Economic Recession: how will it change policy and welfare?

Professor Philip HaynesUniversity of Brighton

The Economic Recession

• Long period of growth• Economic goals above social goals

• ‘Economic Growth is not an end to itself. It is a way to create employment, to banish poverty, hunger and homelessness, to improve the lives of most people.’ Manmohan Singh. Prime Minister of India, 2004

• What were the benefits of GDP growth?– Not uniform– OECD report 2009 Unequal growth: unequal recession

Trends in income inequality: Point changes in the Gini coefficient over different time periods

Source: OECD, 2008 – Growing Unequal, figure 1

CANADA

DENMARK

FINLAND

FRANCE

GERMANY

ITALY

JAPAN

SPAIN

UK

USA

OECD-24

-0.030-0.020

-0.0100.000

0.0100.020

0.0300.040

0.0500.060

0.070

Change Mid-1980s to Mid-2000s

Mid-1990s to Mid-2000s

Mid-1980s to Mid-1990s

Causes of recession

• Global– Large instabilities and extremes,

• Commodity power – i.e.: oil rich countries• Specialisation – i.e.: banking and monetary services• Balance of payment – exporting versus importing models

• National– High debt (UK/USA) Unrealistic demand (UK/USA) Over

Supply (China, India)• National – Global– Slow down in trade, crisis of lending, increased state

intervention

Globalisation

• End of national restrictions on currency and trade• Increased migration, travel, communication• Caused more national specialisation?– UK, services; Taiwan, manufacturing

• Created more global economic instability• Poor countries that cannot compete• Rapidly developed countries vulnerable to market

extremes – currency instability, capital flows

Globalisation

• Large trade and monetary imbalances• Asia– Trade surplus– Individual savings– Corporate investments overseas– Foreign currency reserves

• West– Trade deficit– Corporate and individual debts– Rising Government/State public debt

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

200000

400000

600000

800000

1000000

1200000

Hong KongChinaEuro AreaIndia JapanKoreaMiddle EastTaiwanUnited KingdomUnited States

Total currency reserves US $m Source: IMF 2009

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$-400,000,000,000

$-300,000,000,000

$-200,000,000,000

$-100,000,000,000

$-

$100,000,000,000

$200,000,000,000

$300,000,000,000

$400,000,000,000

AustraliaHong KongChina P. RDenmarkDeveloping AsiaEuropean UnionFinlandFranceGermanyItalyUnited KingdomUnited States

Direction of Trade Surplus, with advanced economies $billion Source: IMF, 2009

The recession and welfare

• Rising unemployment• Declining pension/savings income of older

people• Declines in health and welfare?• Rising internal crime and social conflict• Increase in international conflict, caused by

nationalism and national protectionism

National causes of recession

• National differences, within West and East• Western countries in debt• Extremes of debt (UK) billion– Banks (gross foreign liabilities = £4400/$7040)– Corporate (owes £3,000/ $4,800)– Government (owes £800/ $1280)– Individuals/families (owe £1200/$1900 on home loans)– UK annual economic output is @ £1500/$2400– It is said that the only area of society with no debts is

small businesses

The effect on welfare

1. Unemployment• Rapidly rising in UK• ILO-defined unemployment in May to July was

2.47 million (7.9%) - up by 210,000 unemployed on the quarter and 743,000 from this time last year. (1.72 million in July 2008)

2. Public expenditure cuts– Cuts in public services?

• How to prioritise services?• Protect health and education?

National-Global

• How specific countries relate to the global economy:

UK needs to:– Produce more• Needs an export led recovery

– Reduce debt– Increase savings

Public Expenditure cuts?

• Lessons from previous recessions• Difficulty of cutting Public Expenditure rapidly– Welfare Benefits and pensions– Employment and Training– Health (rising demand and older population)– Administration and bureaucracy

• Cuts by not increasing expenditure– Role of inflation

Welfare changes

• Implications for social welfare?• How do we define social welfare?– Inequality – material provision

• Employment• Parenthood - children• Pensions-income for old age

– Health, longevity– Education– Quality of life – ‘happiness’– Key national differences in welfare performance

OECD Social Change 2003-2007

Society at a Glance 2009: OECD Social Indicators – Table 1.2 OECD © 2009 - ISBN 9789264049383

0.0

5.0

10.0

15.0

20.0

25.0 CAN GER DNK ESP FIN FRA UKIRL JPN KOR NLD NOR SWE USAOECD-14 1980+

Percentage labour force unemployed: OECD selection – 1980-2007

GDP, Asia Pacific ($ per cap)

Australia

Bangladesh

Brunei D

arussa

lam

CambodiaChina

Hong Kong, China

India

IndonesiaJapan

Korea (Rep.)

Korea (Dem. R

ep.)La

os

Macao, C

hina

Malaysia

Mongolia

MyanmarNepal

New Zealand

Pakistan

Philippines

Singapore

Sri Lanka

Taiwan

Thailand

Viet Nam

Asia-23

OECD-300

5,000

10,000

15,000

20,000

25,000

30,000

1990 1995

2000 2005

2006

Source: OECD 2009, Society at a Glance: Asia/Pacific

2001 2002 2003 2004 2005 2006 20070.0

2.0

4.0

6.0

8.0

10.0

12.0

AustraliaChinaHong Kong, ChinaIndonesiaJapanKoreaMalaysiaMongoliaNew ZealandPakistanPhilippinesSingaporeTaiwanViet NamAsia-12OECD-30

Source: OECD 2009, Society at a Glance: Asia/Pacific

Unemployment, Asia

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

12.0

16.0

20.0

24.0

28.0

32.0

36.0

40.0

44.0

Public social spending as a percentage of National Income, OECD

Denmark Finland NetherlandsSpain United Kingdom United States

Source: OECD, 2008

Public social spending as percentage of national income, Asia-Pacific, OCED 2004-5

Laos

Cambodia

Pakistan

Indonesia

Philippines

Nepal

MalaysiaIndia

Viet Nam

China

Asia-16

Bangladesh

Sri Lanka

Korea

Mongolia

Taiwan

Japan

Australia

New Zealand

OECD-300

5

10

15

20

25

1.3 1.4 1.6 1.9 2.2 2.3

3.9 4.0 4.14.6

5.1 5.3 5.7

7.5

9.810.7

16.0

17.1

18.5

20.5

Source: OECD 2009, Society at a Glance: Asia/Pacific

The recession and welfare

• Some opportunities• Challenge material values, excessive consumption

– Waste and pollution– Amount of goods discarded – 30% of food wasted in UK– Short term purchases – long term investment and purchases– Prevention rather than cure – diet, exercise, community life– Move to quality over quantity– Strengthen local markets and production, small businesses- Create more secure and stable market place

• Strengthen social capital– Community and neighbourhood– Family

National differences in public social expenditure

Some of the biggest national differences are in income support/pensions for older people

Privatising pensions – i.e.: UK/USA

Encouraging older people to stay in work, encouraging employer based provision.

Importance of public expenditure to generate jobs in recession.

Increasing ratio of public debt in western countries:

Profile of countries with high levels of public debtAbility to sustain high levels of debt?

JapanItaly

Italy (29.7)Austria (32.1)France (33.2)Poland (25.1)

Germany (31.1)Greece (23.6)

Portugal (28.2)Hungary (28.4)

Japan (22.9)Belgium (31)

Luxembourg (32.2)Finland (30.5)

Spain (25.5)Czech Republic (25.5)

Sweden (33.6)OECD-30 (24.4)

Slovak Republic (21.3)Switzerland (22.2)

United States (18.1)Denmark (31.5)

Turkey (11)United Kingdom (23.3)

Netherlands (24.3)New Zealand (23.5)

Norway (24.6)Canada (19.3)Ireland (22.5)

Australia (21.2)Iceland (19.9)

Korea (8)Mexico (7.9)

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

Percentage of public-social expenditure spent on pensions, OECD, 2008

Percentage change in male labour force exit, retirement age, 2002-2007, (OECD 2008)

Japan

France

Slovak Republic

Spain

USA

Italy

Finland

Luxembourg

Austria

Iceland

Mexico

Switzerland

Denmark

-2 -1.8-1.6-1.4-1.2 -1 -0.8-0.6-0.4-0.2 0Korea

New ZealandSwedenHungray

GermanyAustraliaBelgium

TurkeyPortugal

NetherlandsNorwayPolandIreland

OECDUK

CanadaCzech Republic

Greece

0 0.5 1 1.5 2 2.5 3 3.5

Earlier and younger exitLater and older exit

Policy• Employment and training

– Young people– Older people

• Small and local business• Promote environmental innovation and green business• Encourage savings, long term pension provision, regulate debt• Increase taxes during up-turn, don’t promote unstable, unequal

development. Avoid assert bubbles• Needs better regulation of the economy• Avoid cutting health, as populations of developed countries getting

older• Innovation in public services, use of voluntary sector, community self

help