Policy Initiatives in Latin America

to Address the Financial Crisis

Andrés Marinakis, ILO

Washington, 20 May 2009

Presentation Structure

Part I The crisis and its probable impact

Part II Six recommendations for tackling the crisis

Final thoughts on employment policies

First ideas about the crisis

• Some countries imagined they were protected against the crisis.

• It was also believed that the more dynamic developing economies could “break free” and serve as the engine of the global economy (China, India).

• Developing countries are better prepared to meet the crisis (lower debt levels, fiscal balance, higher reserves, lower unemployment, etc).

• Few considered the adoption of fiscal policies to counteract cyclical effects during the boom years (except for Chile, with its structural surplus rule).

Probable impact of the crisis • It is now clear that the crisis will have an impact on the region,

although not all the countries will necessarily face recessions.

• The impact of crisis in the region was first felt in the last quarter of 2008, with a rapid fall in economic growth.

• Even without a recession, it is clearly impossible for Latin America’s economies to continue creating jobs at the rate they had been doing in the past.

• The delay between the start of the crisis and its greatest impact on the job market has allowed a certain margin for preparing policy responses.

• Even if in 2009 the product stabilizes , the impact on the labor market will last beyond 2010.

The economic deceleration already promises increased unemployment

• In October 2008, the ILO warned that there could be 20 million new unemployed in the world in 2009.

• The 2009 Global Employment Trends Report adjusted that figure to 50 million.

• January's Labour Overview predicted a worst-case scenario increase in Latin America from 7.3% in 2008 to 7.9% or 8.3% in 2009. That means between 1.5 and 2.4 million new unemployed.

• An April update of that estimate gave a figure of between 2.3 and 3.2 million.

• Typical profile of these newly unemployed workers: male, breadwinners.

However, the magnitude of the impact will depend on how the

following react: • People

– Participation rates– Young people and education

• Companies– New hires, adjustments to hours worked, advances on vacation time – Dismissals– Negotiations with workers to protect jobs

• Governments– Countercyclical fiscal and monetary policies– Expanded social protection programs– Employment policies– Wage policies

Importance of social dialogue and international coordination

• Avoid overreacting, which would make the crisis a self-fulfilling prophecy.

• Encouraging an attitude of collaboration. – Example: guarantees for deposits of different countries

depending on the stability of the financial sector.

• The same applies to the job market and its impact on consumption.

• Framework guidance agreements are needed among sector leaders; within industries or companies, actions must be taken through collective bargaining.

Crisis transmission vectors • Financial

– Restrictions on international credit (higher costs)

• Economic – Reduced exports – Falling commodity prices– Reduced remittances by emigrants from central

countries – Reductions in private investment (foreign and

domestic)

Second round • Increased unemployment and reduced incomes

undermine consumption

Keys to economic activity

• Unlike earlier crises, this one will not be solved by increased exports.

• Avoid protectionist import policies. • Reduced private investment (domestic and foreign) can

only be partially offset by increased public investment.• A key role will be played in this crisis by the

protection of domestic consumption, which means protecting jobs, the purchasing power of wages, and income levels.

Part II: Recommendations

• Covering both economic policy and labor and employment policies in the strictest sense.

• These are general recommendations that will have to be adapted and developed in greater detail according to each country’s specific situation.

Recommendation 1

Anticyclical fiscal and monetary policies

• Now is not the time to tighten our belts: launch stimulus packages wherever possible, placing priority on areas for spending and investment with a high impact on employment.

• However, fiscal space varies from one country to the next.

• More expansive monetary policy: in general, inflationary pressures are relaxing.

Recommendation 1

Anticyclical fiscal and monetary policies

• Widespread acceptance of the need for anticyclical policies and state intervention during this crisis, in industrialized and developing countries alike.

• However, not all anticyclical policies have the same impact on employment:– reduction of the value added tax rate– public infrastructure works with intensive machinery use – credits for purchases of vehicles and consumer appliances – promotion for popular housing programs through large construction

firms or medium-sized companies– emergency employment programs

• Delay in execution, importance of territorial distribution

Recommendation 2

Specific support for MSMEs

• Reduced credit access at times of economic contraction is a danger for companies that need funds for their medium- and long-term development.

• Consequently, lines of credit should be created and/or strengthened.

Recommendation 2

Specific support for MSMEs • In contrast to the USA and Europe, where the financial

system is undergoing a process of adjustment, Latin America’s banks are sound.

• In general, however, the requirements for granting credit have been stiffened, along with credit costs, as a “preventive” measure.

• This procyclical behavior has posed particular obstacles to MSMEs.

• Role of state banks and development institutions in backing credits.

• Provide greater transparency on the cost of different types of credit through increased information (Brazil).

Recommendation 3 Strengthen social protection against the crisis

• Unemployment insurance (contributions): – review benefit access conditions to attain

greater coverage– assess the need for additional contributions to

maintain financial sustainability with fewer contributors and more beneficiaries

• Noncontribution programs without insurance and to protect unemployed informal economy workers.

Recommendation 3

Strengthen social protection against the crisis

• Chile has modified its unemployment insurance by increasing its coverage and benefits.

• At times of high unemployment, benefit payments are extended by an additional two months.

• Brazil increased the coverage of its Bolsa Família program by raising the qualification cap on family income.

• 1.3 million families were added to the existing total of 11 million.

Recommendation 4 Introduce emergency employment programs

• At times of crisis, with rapidly rising unemployment, the introduction of direct programs on a massive scale can be justified in order to:

(a) halt the increase in the unemployment rate and

(b) provide needy households with income • Change the targeting focus, from groups that are

difficult to incorporate (for example, young people) to breadwinners and heads of households.

Recommendation 4 Introduce emergency employment programs

• Extensive previous experience in the region– Argentina: Breadwinners and heads of households– Chile: PROEMPLEO– Mexico: Temporary Employment Program

• Contingency fund in Chile: activated when the unemployment rate exceeds 10%.

• Keeping young people in the formal education system and in the technical training system.

Recommendation 5 Moderate wage increases, ensuring that

purchasing power is maintained

• Moderate minimum wage recovery policies, maintaining its real value.

• Monitoring observance of the minimum wage.• Collective bargaining that includes moderation

of current wages; should also consider how the benefits of future growth will be distributed.

• Include contingency clauses in wage negotiations.

Recommendation 5 Moderate wage increases, ensuring that

purchasing power is maintained

• Remember that inflation in 2009 is, in most countries, going to be lower than in 2008.

• Recent adjustments: – Colombia and Mexico: practically equal to past inflation – Spain: 4% (1.5 percentage points over 2008 inflation)– Brazil: readjustment of 12% (6 pp over 2008 inflation) – China: 2008 MW adjustment of 15%, frozen in November – Paraguay: increase of 5% in MW (accumulated CPI 10%)

• The last wage negotiation round in Uruguay took place at a time of uncertainty, and so a contingency clause was included for if the crisis should affect the main economic variables.

Recommendation 6 Fundamental rights and social dialogue

• Protect workers’ right to be heard.

• Encourage dialogue at all levels to avoid dismissals whenever possible:– adjustments to working days and wages – both the cost of the crisis and the benefits of

recovery should be shared equally – support from public programs to offset, in part, lost

earnings (unemployment insurance), training

• Institutionalization of social dialogue at the national level.

Recommendation 6 Fundamental rights and dialogue social

• Mexico, “National Agreement on behalf of families’ economy and employment”: includes emergency jobs, subsidies to avoid dismissals, Social Security coverage for the unemployed, credit access for small companies, etc. (01-2009).

• Argentina, oil sector agreement: postpones wage negotiations for 6 months pending a better understanding of the impact of the crisis on the sector (11-2008).

• Chile, Sodimac: job conservation and cost adjustments, salary cuts for all executive positions (300 people, out of 15,000 workers).

Final thoughts on employment policies

Existing policies and institutions

• The development of policies that already exist in some countries allows for adjustments following a course that has already been set out.

• Other countries require the ad hoc design of emergency measures.

• In some countries, solid institutions allow the programs and policies to reach the beneficiaries; in others specific structures need to be created.

Final thoughts on employment policies

Learning and institutional development • Important for supports to target breadwinners and heads of

households.

• Increase public investment with a major impact on employment and geographical distribution in critical areas.

• Implement massive emergency employment programs with the subsequent transition to productive jobs (attention to geographical distribution).

• Develop unemployment insurance programs and adapt their requirements and benefits at times of crisis, expanding the effective coverage and duration of those benefits.

• Assist workers in retaining their jobs with public policies (including unemployment insurance and training).

Final thoughts on employment policies

Learning and institutional development

• Make use of increased awareness of programs for new-hire subsidies for when the recession bottoms out.

• Encourage young people to stay in school and in technical training.

• Develop a nationwide network of employment offices to provide less qualified workers with more effective labor intermediation.

• Incorporate contingency funds for active policies at times of rising unemployment (anticyclical).