The global crisis has several inter-related components, and has reached practically all regions and sectors. In a globalized, interdependent world, countries face a confluence of shocks, both immediate and longer term. Immediate issues to deal with include a strong cyclical downturn triggered by massive global imbalances, a deep financial crisis with the associated liquidity and credit crunch, and an unprecedented commodity price roller-coaster. The crisis-induced recession–which will cause world output to fall this year for the first time in 50 years–is being rapidly transmitted to the mostly small, open economies that comprise the Europe and CIS region, calling for immediate policy action. Meanwhile, the world faces crucial long-term challenges as well, notably extreme income inequality, seismic demographic shifts, and global climate change. These challenges also require a prompt response, in order to avoid rapidly escalating social and economic costs. The social impact of the crisis seems likely to be large, lasting, and unequal.

Falling incomes, disappearing capital inflows, and binding budgetary constraints are set to reverse a decade of progress towards meeting the Millennium Development Goals. Past experience shows that it takes considerable time for employment and real wages to recover after large macroeconomic shocks, especially if several come hand in hand. The crisis also hits the poor the hardest, since they have limited abilities to adjust and cope. They tend to have no accumulated savings or assets, and are the first to lose access to credit. Moreover, poor households predominantly supply unskilled labour, often in the informal sector where job losses are most immediate and severe given the lack of employment protection. The downturns can also push poor households into a vicious cycle. Coping by eating less, postponing spending on health and education, or withdrawing children from school reinforces poverty by undermining future income-earning potential.  Such conditions may also lead to rising crime rates.

In formulating policy responses, the urgent must not be allowed to squeeze out the important. Horizons typically shorten dramatically in a crisis, but policymakers do not have the luxury of delaying decisions on longer-term challenges, because any action with a reasonable chance of success typically has a long time lag. The crisis is also an opportunity for getting things right. Vested interests that have blocked much-needed reforms have been weakened. Minds are concentrated, and society’s desire for decisive action grows, opening the door for policy change.





This unemployed man in Georgia is but one example of how the economic crisis is swelling the ranks of the poor in the region.
© Yuri Mechitov/World Bank

The best policy response to the crisis combines elements addressing its individual components. The fiscal stimulus to support sagging demand, for example, should aim to raise employment, strengthen the financial system, and also support the introduction and expansion of low-carbon technologies. Improved targeting of social transfers is needed to ensure that inequality can be held in check within the available budgetary envelope. Pension, health, and immigration reforms are needed to address the expected consequences of demographic challenges (such as a rising dependency ratio, and growing health expenditures). Action is also needed outside of the budget. Better regulation of monopolies and financial institutions, improved governance and public-sector transparency, together with avoidance of self-defeating beggar-thy-neighbor trade policies would provide a very useful impetus to improved functioning of the market. Legal empowerment of the poor can help improve lives and alleviate extreme inequality.
 
Policy inaction would imply higher socio-economic costs. These would accrue over a longer period, and would affect other countries as well. If domestic demand plummets owing to surging unemployment, other countries see their export markets melt away. The permanent and substantial loss in human capital associated with reemerging poverty would lower the entire path of future incomes. Crime may rise, adding to the list of factors with cross-border repercussions, including a greater likelihood of conflicts. But as mentioned, other factors are also at work. Global climate change threatens not only the livelihoods, but even the continued presence of millions of people in their current homes. Without effective policy responses to strengthen social safety nets and address global warming, a tidal wave of economic migration may occur from poorer countries. This strengthens the already compelling humanitarian case for international donor support for the hardest-hit countries.

Two leading examples of requisite comprehensive policy action are efforts to widen the tax base, and coordinated action to alleviate climate change.

• In many European and CIS countries, the very rich largely avoid paying taxes. But the crisis makes greater equity in burden sharing essential, and is eroding social tolerance for tax evasion. A key governance test in the weeks and months ahead will be whether countries manage to widen the tax base, or see vital public services go unfunded.

• Global warming necessitates coordinated increases in taxes on greenhouse gas emissions, to end the mispricing of carbon that contributes to global warming. Without appropriate pricing to force final users to internalize the costs of their energy use, private incentives and the public good will remain misaligned, and the likelihood of sufficient progress towards alleviating global warming will remain low. Governments should therefore be willing to use the fiscal space created by newly imposed greenhouse taxes to reduce or eliminate the most distortive taxes, thus helping to create employment and strengthen social safety nets. This requires cooperation and coordination across countries–which is itself a direct consequence of the globalization that has created a world where domestic policies have immediate and considerable international repercussions.

Multilateral and bilateral donors need to coordinate more closely, each focusing on areas of comparative advantage. Enhanced coordination promises not only more efficient use of scarce development resources, but also welcome reductions in the strain on thinly stretched governments that deal with many different donors. UNDP, in particular, has a natural role to play in coordinating the actions of UN agencies. It also has a comparative advantage in providing policy advice at the central and local government levels, in advocacy work, in project implementation in remote regions, and in working with disadvantaged groups. In this way, UNDP can help ensure micro-level traction of other international organizations that focus more on central government and macroeconomic assistance.

Balázs Horváth is Poverty Reduction Practice Leader at the UNDP Bratislava Regional Centre.