employment and labour market policies in times of economic
TRANSCRIPT
Employment and Labour Market Policies in Times of Economic Crisis
Published by:
Employment and Labour Market Policies in Times of Economic CrisisPrepared on behalf of the sector project
“Employment Promotion in Development Cooperation”*
Dr. Annette Mummert
March 2014**, ***
* The study commissioned by the sector project “Employment Promotion in Development Cooperation” presents only the personal opinion of the author, which does not necessarily coincide with the opinions of GIZ and BMZ.
** The contents of this edition correspond to the status of June 2012 (1st German Edition).
*** Translated by KERN AG, Sprachendienste, Frankfurt am Main
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Content
Table of Figures 4
Table of Boxes 5
List of Abbreviations 6
Summary 8
1 Introduction 17
2 Labour market and employment policy in the context of economic crisis management 19
2.1 Overview of labour market and employment policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.1.1 Labour market policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.1.2 Employment policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.2 Features and practical conditions of political crisis management . . . . . . . . . . . . . . . . . . . . 21
2.2.1 The relevance of economic crises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.2.2 Key economic policy elements for managing crises . . . . . . . . . . . . . . . . . . . . . 24
2.2.3 Major framework conditions for labour market and
employment policies in economic crisis management . . . . . . . . . . . . . . . . . . . . 25
3 Range of labour market and employment policies in response to economic crises 28
3.1 Key data on the effects of the global financial and economic crisis since 2008 . . . . . . . . . . . . 28
3.2 Economic policy responses to a crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4 General labour market and employment policy options during crisis management 38
4.1 Policy options for immediate reactions to an economic crisis . . . . . . . . . . . . . . . . . . . . . . 38
4.1.1 Regulatory policy options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.1.2 Employment policy options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.1.3 Active labour market policy options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
4.1.4 Passive labour market policy options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
4.2 Shaping the transition in times of fiscal consolidation. . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.2.1 How to determine the time of consolidation . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.2.2 Information on existing policy packages. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
4 3 Medium- to long-term improvements of labour market and employment policy packages 54
4.3.1 Conceptual orientation of reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.3.2 Quality of the reform processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3
5 Innovative labour market and employment policy approaches for the management of crises in a
country context 59
5.1 Reform of public employment services in emerging nations . . . . . . . . . . . . . . . . . . . . . . . 59
5.2 Protection of workers in developing countries with medium per capita income . . . . . . . . . . . 60
5.2.1 Adjusting unemployment insurance to a developing country context . . . . . . . . . . . 60
5.2.2 Configuration aspects of public works programmes (PWPs) . . . . . . . . . . . . . . . . 61
6 Conclusions for development cooperation 64
References 66
Annex 1: Explanation of country categories 76
Annex 2: Types, causes and consequences of financial crises 79
Annex 3: Determining factors, common features and differences of
LMP and EP in a country context 88
Annex 4: The role of social dialogue in times of crisis 116
Annex 5: Global Jobs Pact Country Scans of the ILO 119
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Table of Figures
Figure 1: Overview of labour market and employment policies 22
Figure 2: Change in unemployment rates of industrial and developing countries
in the course of the GFEC 29
Figure 3: Composition of discretionary economic stimulus programmes in G20 countries 34
Figure 4: Labour market policy responses to the GFEC 36
Figure 5: Overview of analysed adjustment policy instruments 39
Figure 6: Four-tier world 76
Figure 7: The G20 countries 77
Figure 8: Multiple transmission paths of financial crises 86
Figure 9: GDP composition by industry and country category, 1990–1999 90
Figure 10: Development of world trade volume, 1950–2010 91
Figure 11: Distribution of exports of industrial goods by developing countries 92
Figure 13: Annual growth rates of world trade and world economy 93
Figure 14: Employment protection index in 2003 96
Figure 15: Scope of application of the ILO core labour standards 2010 98
Figure 16: Unionisation rate of workers/employees in OECD countries, 1999 and 2008 100
Figure 17: Composition of active labour market policies in OECD countries, 1985–2002
Total expenses of active labour market policies in percent of the GDP 106
Figure 18: Total expenses for adjustment-oriented labour market policies
in OECD countries, 1985–2005 109
Figure 19: Proportion of unemployed with benefits from unemployment insurance 111
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Table of Boxes
Box 1: Economic consequences of the terrorist attacks on 9/11 81
Box 2: Significance of capital controls for the formation of and combat against financial crises 83
Box 3: Impact of the Brazilian crisis in 1998 on the Argentinian economy 85
Box 4: The Danish labour market model from a historical perspective 94
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List of Abbreviations
ADB Asian Development Bank
AGETIP Agence d’Exécution des Travaux d’Intérêt Public contre le sous-emploi
(A)LMP (Active) labour market policy
BDA Confederation of German Employer Organisations
BDS Business Development Services
CCTs Conditional cash-transfers
CPAR Country Procurement Assessment Report
CTP Cash transfer programmes (social transfers)
DANIDA Danish International Development Agency
DFID Department for International Development
DGB German Confederation of Trade Unions
DWCPs Decent Work Country Programmes
EBRD European Bank for Reconstruction and Development
ECLAC Economic Commission for Latin America and the Caribbean
EP Employment policy
EPRI Economic Policy Research Institute
ERRA Ethiopian Rural Roads Authority
EU European Union
FDI Foreign Direct Investment
GDP Gross domestic product
GFEC Global financial and economic crisis
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit
GNI Gross national income
GTZ Deutsche Gesellschaft für Technische Zusammenarbeit
HIC High-income countries (or economies)
ICT Information and communications technology
IDB Inter-American Development Bank
ILO International Labour Organization
IMF International Monetary Fund
LIC Low-income countries (or economies)
7
LMIC Lower-middle-income countries (or economies)
MAPS Methodology for Assessing Procurement Systems
MIC Middle-income countries (or economies)
M&E Monitoring and evaluation
ODI Overseas Development Institute
OECD Organisation for Economic Cooperation and Development
PES Public Employment Services
PEFA Public Expenditures and Financial Accountability
PMU Project Management Unit
PRS(P) Poverty Reduction Strategy (Papers)
PWPs Public works programmes
Sida Swedish International Development Cooperation Agency
SME Small and medium-sized enterprises
UIB Unemployment insurance benefits
UISAs Unemployment insurance savings accounts
UMIC Upper middle-income countries (or economies)
UNCTAD United Nations Conference on Trade and Development
UN-DESA United Nations Department of Economic and Social Affairs
UNDP United Nations Development Programme
US United States
WAPES World Association of Public Employment Services
8
Summary
economy, and which should not? What does this
mean for the existing labour market and employ-
ment policy? These are the questions we want to
answer in this study.
The role of labour market and employment policy
in the management of economic crises
After an overview of the various instruments of
labour market and employment policy (LMP and
EP), we will identify and classify the political man-
agement of economic crises (crisis management) in
the overall economic context. The management of
crises can be subdivided into three stages with each
of them involving different intervention aspects.
1. The first stage aims at mitigating the foreseeable
adjustment effects of the economy (e.g. lay-offs,
decline in consumption and investments, etc.)
through short-term, fast-acting measures. The
focus in the first stage of an economic crisis usu-
ally is on measures to stimulate the economy.
This includes monetary policy as well as meas-
ures involving an expansionary fiscal policy (e.g.
automatic stabilisers such as unemployment
insurance and discretionary economic recovery
programmes). Labour market policy usually is a
major pillar of the short-term management of
an economic crisis. Furthermore, employment
policy aspects may also play a major role in the
context of discretionary economic recovery
programmes. Especially infrastructure expenses
and types of subsidisation of companies (e.g. tax
exemptions, credit schemes) are seen to have an
impact on the employment situation.
2. The second stage is the transition from a short-
term mitigation of the crisis to the medium- to
long-term impact on economic framework con-
ditions (stage 3). Economic recovery programmes
are usually intentionally limited to the period of
The global financial and economic crisis, with its
origin in highly developed economies, has brought
the crisis impacts to the centre of attention of eco-
nomic policy. Despite signs of an economic recov-
ery, it is still too early to return to business-as-usu-
al. Several factors need to be taken into account:
First of all, labour markets tend to react with a
considerable delay. Secondly, the debt problem and
the concomitant necessity of budget consolidation
pose a significant risk to the sustainability of recov-
ery. Hence, the tender recovery trend which is no-
ticeable in the severely affected industrial nations
such as the US and Europe, might reverse. It is a
potential scenario that these major players in world
trade might not show much further development
over the next decade, similar to Japan in the 1990s.
This scenario would also severely affect those de-
veloping countries whose economic growth, due to
their low level of involvement in the international
financial market and trade, has so far been mostly
unaffected by the global crisis.
Due to the fact that the labour markets in most
industrial and developing countries already suf-
fered from significant deficits before the crisis (e.g.
high youth and long-term unemployment, un-
deremployment and informal employment with
a high share of precarious employment), political
decision-makers are facing a necessary but difficult
decision: In the light of limited fiscal scope or even
necessary budget consolidations, they have to de-
cide on how to integrate their employment- and
labour policy-related measures that were decided
on at the beginning of the crisis, into their general
employment and labour market policies. This pro-
cess will eventually put the entire policy package
to the test. Which of the emergency measures were
and still are actually effective? Which of the actions
taken to directly combat lay-offs and income losses
should be maintained until a full recovery of the
9
time required for mitigating adjustment reac-
tions. The budget deficit created by the economic
crisis and by the fiscal policy and the associated
debt problem cannot remain permanent but
needs to be reduced.
3. Any economic crisis has a lasting effect on the
framework conditions of economic activity. Even
if economic growth returns to the pre-crisis lev-
el, the underlying economic and labour market
structures are no longer the same. Accordingly,
it is not sufficient to just discontinue the discre-
tionary economic recovery programmes. Instead,
the policy packages used before the crisis (i.e.
during normal circumstances) must be reviewed
and reforms with long-term effects must be
aimed at as required.
In reality there are significant differences in the
type and extent of crisis management between dif-
ferent countries. The reason is that the actual con-
figuration of the management of an economic crisis
and the role of LMP and Employment policy (EP) in
this context depend on different factors. These fac-
tors include, first of all, the extent of the economic
crisis which is also reflected in the labour market
situation, and margins for manoeuvre available
for mitigating the negative effects of the economic
crisis (e.g. fiscal scope of the government). Further,
there are also fundamental application problems
for the management of a crisis that limit the actual
economic options. Fundamental application prob-
lems are (a) problems caused by lack of knowledge,
(b) problems caused by time delays, and (c) policy
failures.
In summary, it can be said that, even if there is
room for manoeuvre with regard to fiscal poli-
cy and high pressure from the crisis, there really
is no “free” choice between labour market and
employment policy measures in the first crisis
management stage. Instead, the configuration of
an expansionary fiscal policy mainly depends on
the policy packages already in place. Hence, labour
market and employment policies as elements of
crisis management cannot be discussed separately
from the national labour market and the existing
employment policies.
Range of labour market and employment policy
responses to economic crises
The global financial and economic crisis serves as
an “example” for illustrating the crisis management
measures used worldwide in the initial crisis man-
agement stage. That is, the above-described hall-
marks of crisis management and their framework
conditions will be specified using the experiences
made during the recent crisis.
Based on key data of the global financial and eco-
nomic crisis, the following rough picture of labour
and employment policy responses to the crises in
industrial and developing countries can be out-
lined.
On average, economic recovery programmes focus
on the public expenditure side. With regard to the
employment-related aspects of economic recovery
programmes, attention must be paid to the high
rate of subsidies and tax exemptions for small and
medium-sized enterprises (SMEs). Discretionary
economic recovery programmes, whether in in-
dustrial or developing countries (and most of all in
emerging economies such as Argentina, China and
the Asian Tigers), mostly consist of infrastructure
measures. However, many infrastructure measures
are not explicitly aimed at promoting employment.
Also, they are often not tailored to the requirements
of rural areas (see Green et al. (2010), p. 38).
In the G20 countries, labour market policies
amount to less than 5% of the economic recovery
programmes. However, the extent of automatic
stabilisers needs to be taken into account, as well.
Passive labour market policies actually do have
more weight in the economic policies of industrial
and transition countries than shown by the results
of this survey. This is because economic recovery
10
programmes cover not the basic expenditures of
e.g. unemployment insurance, but only specific
additional expenses. With respect to active labour
market policies, according to a survey, additional
expenses for active labour market policies amount
to only 2.5% of the overall expenses of the eco-
nomic recovery programme, which is a relatively
low rate. Industrial and developing countries
show significant differences in how they are using
various labour market policy instruments in the
context of their discretionary economic recovery
programmes (see also ILO (2010), p. 29 et seqq.,
World Bank (2009c), Green et al (2010), IDB (2009a)).
According to these sources, upskilling measures
were the most widely used instruments in indus-
trial countries, followed by short-time working
models, salary and wage subsidies and expenses for
public employment services and their key function
as a placement service. Despite the fact that train-
ing measures were also in the focus in developing
countries, enormous differences were identified
with regard to public works programmes and SME
support. While these measures rank at the end of
the list in industrial countries, they constitute an
integral part of discretionary labour market policies
in developing countries with a per capita income in
the middle range. Finally, low-income countries in
general only use very few discretionary labour mar-
ket policy instruments for combating the crisis. If
applicable at all, their focus is on additional training
measures and SME support.
The significantly higher importance of public
works programmes (PWPs) in developing coun-
tries is also explained by their insufficient social
protection systems. This instrument has also been
widely used by transforming economies. In the G20
countries, social protection measures amounted
to approximately one fifth of the overall expenses
for discretionary economic recovery programmes.
Additional social protection measures were also
taken by developing countries. According to the
International Labour Organization (ILO), the share
of discretionary social protection measures in de-
veloping countries such as Argentina, Indonesia,
Mexico, and Turkey, however, was usually signifi-
cantly lower (less than 10% of the overall economic
stimulus package (see ILO (2010a), p. 7). Individual
country analyses (e.g. for Bolivia, Indonesia, Cam-
bodia, Bangladesh, Uganda, Kenya) provide little
evidence of a significant expansion of social pro-
grammes in favour of the poorest (see Te Velde et al.
(2009), p. 29 et seqq.). Instead, the employees of the
formal sector (mainly public employees) seem to be
the main beneficiaries of such measures.
A close relationship between labour market policies
in the context of discretionary economic stimulus
programmes and wage policy can be seen especially
in government-supported company agreements
for the temporary reduction of wage costs. This
includes, among others, the temporary discontin-
uation of previously agreed salary increases, job
sharing and the reduction of work hours according
to the German “short-time work model” (see ILO
(2009a), p. 28 et seqq.).
Labour market and employment policy options
for the management of crises
This study focuses on analysing the options of
labour market- and employment-related policies
for managing a crisis. This is done based on pre-
vious experiences with LMP and EP, the goals of
and interactions between the instruments and the
availability of effectiveness analyses. The following
options are available in the three stages of crisis
management.
Stage 1: Options for an immediate response to an
economic crisis
Regulatory policy is generally an instrument with
a long-term effect and therefore less suited for ad
hoc measures in the first stage of a crisis. However,
regulatory measures are of utmost importance in
the third stage of crisis management. In this stage,
everything is about strengthening the economy
11
to withstand the consequences of external shocks.
This can only be achieved through medium- to
long-term reforms of economic framework con-
ditions. This leads to the recommendation for the
initial stage of crisis management, that the success
of long-term reform programmes (usually with a
high degree of regulatory measures) should not be
counteracted by short-term crisis measures.
In the context of employment policy, we will look
in particular at infrastructure measures and SME
support as elements of discretionary economic
stimulus measures during the first crisis manage-
ment stage.
While infrastructure measures are among the
“traditional” instruments of an expansionary fiscal
policy, their effectiveness in terms of employment
depends very much on the specific implementation
conditions in a country. This is true, for example,
for measures which are to be implemented via the
national procurement systems (e.g. certain SME
ratios for public tenders (see ILO (2010a), p. 68) or
for labour-intensive investments (see ILO (2009a),
p. 2527, see also ILO (2009a), p. 23 et seqq.). Due to
the absence of systematic checks (e.g. due to the
weakness of the supreme procurement authorities,
limited controls by supreme audit institutions, little
parliamentary control) it has so far been impossible
to determine the effectiveness of such approaches.
Despite their huge potential for increasing the de-
mand for labour, SMEs measures are also frequent-
ly characterized by insolvencies with a correspond-
ing release of labour (see, among others Balkenhol
(2011), p. 6 et seqq.; ADB (2009), p. 24 et seqq.). This
strong creative as well as destructive dynamism has
two major negative effects on the labour market:
Firstly, it increases frictional unemployment. Sec-
ondly, the job uncertainty creates problems with
regard to vocational training and further educa-
tion in companies. It should also be noted that the
self-employment of small and micro-entrepreneurs
often is a survival strategy as a result of a lack of
employment opportunities in the private economy
(see also the ILO positions). Accordingly, it seems
to make little sense to integrate a workforce, that is
released mainly by “formal” companies of the ex-
porting sector during an economic crisis, through
start-up programmes into the labour market. On
the contrary, to avoid increasing the pressure on
the profit situation of the informal sector, broad-
based support measures should be preferred to
further expansion measures such as subsidies for
micro-financing. Where this is not possible through
unemployment benefits, so-called cash transfer pro-
grammes (CTPs) can be taken into consideration. As
large companies pay relatively high wages and offer
relatively better jobs, SME programmes constitute
a promising approach if they are designed to help
companies with market potentials overcome exist-
ing expansion barriers. Therefore, an expansion of
existing SME support programmes in times of eco-
nomic crisis is mostly recommended for those in-
dustries that are affected the most by the economic
crisis (usually the exporting sector).
In the industrial countries, active labour market
policy is an integral element of a stability- and
growth-oriented economic policy. But, what can
additional active labour market measures contrib-
ute in times of crisis (beginning with the initial
stage)? Historically speaking, active labour market
policy has developed from combating crises. And,
despite its general flexibility, the potential effects
of such measures should not be overestimated be-
cause the characteristic feature of all active labour
market instruments, i.e. to facilitate the transition
from one job to the next, limits the scope of ap-
plication options of active labour market policy.
Active labour market policy instruments are hardly
suited to solve general labour market problems (or
they would be too expensive as compared to other
approaches). For example, in the case of a perma-
nently low demand for labour, the problem can-
not be solved by replacing the lacking demand by
public works programmes. Rather, the causes need
12
to be tackled, e.g. via the development of a private
sector, by competitive policy and macro-policy.
The same applies to deficits in the supply of labour.
Measures of further vocational education and train-
ing are not suited for remedying a systematic deficit
in workforce qualification as a result of primary and
secondary education. This is a matter of education-
al policy. And, while a qualification requirement
– particularly with regard to further vocational
education and training – always applies, no further
education programme in the context of an active
labour market policy could sufficiently balance the
shortcomings of primary and secondary education.
For this reason, active labour market policies should
generally be considered as complementary tools to
employment policy (see also Calmfors (1994)).
In addition, the specific extent and configuration
of additional active labour market programmes in
times of crisis must also be seen in relation to the
passive labour market policy. Because, in situa-
tions potentially involving massive job losses, social
security systems and especially unemployment
insurance have a very important role to play: Wage
replacement payments enable workers and em-
ployees to continue to actively offer their acquired
qualifications in the market. Hence, the necessity
of a compensation of the collapsing demand for
labour by additional active labour market policies
depends very much on the social security systems.
A country with a functioning unemployment
insurance providing a fall-back position for the
unemployed does not require broad-based tempo-
rary security measures in the form of public works
programmes. Instead, additional active labour mar-
ket policy measures can focus on supporting those
who, due to their or profile, are relatively likely to
not find another equivalent job, even after an eco-
nomic recovery.
This includes, first of all, measures for professional
qualification. Despite the fact that measures for
further vocational training and education play a
decisive role across all countries in “normal” times
as well as in times of crisis, effectiveness analyses
regularly come to a mixed conclusion. In view of
the poor results, the further education of large
numbers of previously laid-off people appears to
make little sense. It is also questionable whether the
labour market administration and the system for
further vocational education and training are able
to adjust quickly enough to such requirements and
provide sufficient capacities. In terms of further
education, it is recommended to focus on the inte-
gration of young people. Positive examples can be
found in this regard, also in developing countries;
they are all based on the principle of a combined
approach (education measures, income replace-
ment/social security, consulting and placement
services) and are clearly tailored to the needs of
specific target groups (see e.g. World Bank (2009c),
p. 71 et seqq.; Sanchez Puerta (2010), p. 17 et seqq.).
Combined youth programmes in particular, e.g.
the Jóvenes programme implemented in the 1990s
in Argentina, Peru, Chile, and Uruguay, have pro-
duced positive employment and income effects (see
Sanchez Puerta (2010), p. 18; see also World Bank
(2009c), p. 71 et seqq.). The positive effect of these
programmes is mainly achieved by the combina-
tion of different active labour market policies. This
approach is quite demanding with regard to the
content of the qualification measures (e.g. align-
ment with the current qualification requirements
of companies, combination of on-the-job training
and further schooling). The combination of dif-
ferent approaches also increases the requirements
with regard to the management of public finances
and coordination with the private sector (see also
Godfrey (2003), p. 39 et seqq.).
13
Wage and salary subsidies have also been used as
an instrument of maintaining jobs in the context
of the global financial and economic crisis (GFEC),
particularly in industrial countries. But, because
wage and salary subsidies are usually viewed crit-
ically in effectiveness analyses (high free-rider
effect, no sustainable effect on employment), their
unspecific use in the context of crisis management
is advised against.
The benefit of the instrument of wage and salary
subsidies depends very much on the actual con-
figuration of the model and its implementation
conditions: The model used on a large scale in Ger-
many in the context of the GFEC and considered
as successful is “Kurzarbeit” (short-time work) (see
e.g. Broyer/Brunner (2009), ILO (2010e), p. 58). The
success story is largely attributable to the presence
of the following framework conditions: a mostly
only short-term drop in demand with an other-
wise highly productive economy, no full income
compensation (reduces moral hazard), presence of
an efficient public labour market administration
and longstanding experience with the instrument,
a stable social dialogue, fiscal room for manoeuvre,
etc. Therefore, the success of this instrument de-
pends on preconditions relatively difficult to reach,
that cannot be met by most developing countries.
Therefore, the wider use of this instrument in times
of crisis is often impossible (see also a similar view
by World Bank (2009c), p. 70). However, to maintain
hard-won gains, e.g. in competitive export indus-
tries, also during an externally generated economic
crisis, it is particularly worthwhile, especially for
emerging economies, to establish the necessary
preconditions for the successful use of this crisis
management tool in the long term.
When assessing the effectiveness of public works
programmes for combating economic crises, the
different aspirations of PWPs of industrial and
developing countries must be taken into consider-
ation. Public works programmes as an instrument
of active labour market policy play a less and less
important role in industrial countries. This is main-
ly due to the generally poor results in terms of a
lasting impact on employment and the presence of
social security mechanisms. In developing coun-
tries, however, these instruments are used regularly.
The widespread use of PWPs as a crisis manage-
ment tool in middle-income countries (MIC)
reflects the attempt to mitigate the negative con-
sequences of the economic crisis for the poor
population in the absence of alternative options.
Correspondingly, the analysis of the option of pub-
lic works programmes in this study looks mainly at
the social security aspect of these programmes.
In addition to these target-group-specific recom-
mendations for an active labour market policy,
the further expansion of integrated approaches
of active and passive labour market policy is rec-
ommended. Expanding the capacity of public
employment services can, for example, increase
the effectiveness of other labour market policies.
And, while synergy effects are mainly created in
countries with already functioning public employ-
ment services, the expansion and/or restructuring
of public employment services for bundling crisis
management measures should be considered as the
preferred option, even under significantly worse
framework conditions.
In the industrial countries, passive labour market
policy in the form of unemployment insurance
has been the most important contribution of
labour market policy to combating the crisis. De-
spite its great relevance, developing countries are
faced with significant problems when it comes to
introducing an unemployment insurance system
in times of crisis. De facto, no country has so far
introduced an unemployment insurance in the
first stage of managing a crisis. In the long term,
i.e. in stage 3 of crisis management, the introduc-
tion of an unemployment insurance tailored to
the needs of developing countries should be taken
14
into consideration (see also section 5.2.1). But also
the options for adjusting existing unemployment
insurance systems in developing and transition
countries are limited: Due to a high percentage of
informal employment and limited finances, en-
titlements to unemployment benefits are usually
restricted to the employees of the formal sector. At
the same time, a costly monitoring process is nec-
essary to verify compliance with the requirements
to avoid misuse (see also Vodopivec (2009)). In this
situation, a further expansion of unemployment
insurance could most probably be achieved by in-
creasing the level of wage replacement payments.
This would, however, lead to considerable regres-
sive distribution effects without actually producing
a noteworthy increase in demand (as the number of
entitled workers and employees is relatively small).
Irrespective of distribution aspects, much more sig-
nificant income effects can be achieved by extend-
ing the circle of beneficiaries. However, this would
require a substantial change in unemployment
insurance parameters and implementation struc-
tures. The extent to which such structural changes
can be financed and implemented relatively quickly
depends very much on the previous configuration
of unemployment insurance and on available ad-
ministrative capacities (not to mention financing
options via the national budget). This decision must
be taken in a country context and alternatives to
unemployment insurance should also be consid-
ered (see EPRI (2011), p. 13 et seqq.). Such alterna-
tives may be public procurement programmes and
social transfers, as both are adequate instruments
for an overall mitigation of the worst poverty con-
sequences during crises. However, implementation
obstacles are to be taken into consideration for
public works programmes as alternative security
mechanisms in times of crisis.
Stage 2: Options for managing the transition
during fiscal consolidation
Because of information deficits, the best time
for reducing discretionary economic stimulus
measures is always difficult to determine and –
due to financial constraints (debt crisis) – cannot
be chosen freely. Empirical studies suggest
that measures for restoring the public finances
and, hence, the government’s ability to act,
have absolute priority. As a general principle,
those discretionary policy measures should be
discontinued that create the least “withdrawal
symptoms” for the economy. With regard to
labour market- and employment-related policy
approaches, the focus should now be narrowed
down even more – if not already done so in the
context of defining additional measures during the
initial stage – to target groups that will profit the
least from the onset of an economic recovery (e.g.
the long-term unemployed, low-skilled workers,
etc.) (see also Ernst et al. (2010), p. 77).
Hence, the additional measures taken with view
to the employment situation, should now be inte-
grated into the regular LMP and EP policy package.
However, information on previous policy packages
and their effects are necessary for a systematic in-
tegration. Significant deficits are found in this area,
especially in poorer developing countries. Relatively
little public steering and managing capacities in
conjunction with often poorly coordinated donor
contributions provide a situation where little sys-
tematic know-how is available on the actual effects
of policy packages. Also the Global Jobs Pact de-
veloped by ILO does little to change this situation.
Its current format in the form of Global Jobs Pact
Country Scans is not sufficiently meaningful to serve
as a basis for the national political dialogue and im-
plementation process (see ILO (2010b), p. 8). To this
end, it is recommended to further develop the anal-
ysis format to include information on the content of
policies and on governance aspects of LMPs and EPs.
15
Stage 3: Options for medium- to long-term im-
provements in labour market and employment
policy packages.
Crises increase reform pressure thereby giving
societies the opportunity to overcome political
resistances based on distribution considerations
(winners vs. losers of reforms), giving preference to
short-term solutions, and problems with collective
action (see OECD (2006a), p. 194, see also Alesina
(2010), p. 9). Therefore, the best time for reforms
is immediately after a recession (see ibid., p. 200).
Instead of using “second best” approaches as in the
first stage of crisis management, the goal is now to
configure the economic policy instruments so that
the causes of labour market and employment prob-
lems in a country can be precisely influenced.
A review of economic policies with regard to em-
ployment and income opportunities should focus
on the following:
}Reforms of the financial market (as a preventive
instrument for economic crises caused by
financial crises);
}Support of industrial restructuring;
}SME support based on a systematic, integrated
strategic approach in the context of industrial
policy;
}Education policy, particularly investments in
professional training and further education;
}Improvement of infrastructure deficit;
}Improvement of business and investment
climate;
}Systematic expansion of the social security
system;
}Quality of public administration and
enforcement of rule;
}Improvement of political decision-making
processes.
However, recognising the insufficiency of previous
policy measures and the necessity of a review – as
demonstrated by the crisis – per se is not enough
for successful reforms. More fiscal flexibility,
stress-resistant administrative capacities as well
as step-by-step reforms, and the introduction of
pilot projects to mitigate resistance on a political
level, contribute to increasing the chance of success.
In the same way, the integration of discretionary
emergency measures should be regarded as an
opportunity for reviewing the policy packages for
their effectiveness. Therefore, the step-by-step
creation of a social security system, and the expan-
sion of labour market policies in general, should be
accompanied by a systematic enhancement of the
monitoring and evaluation (M&E) systems. M&E
systems must not just be anchored in the respec-
tive programmes. Furthermore, the relative costs
and contributions of the individual programmes
to national political strategies (e.g. Poverty Reduc-
tion Strategy Papers (PRSPs), national employment
strategies, potential target numbers in the budget,
etc.) should be demonstrated in the context of an
institutionalised M&E system. Even if the initial
quality of effectiveness analyses will still be rather
poor, the creation of a M&E format is worthwhile
as it contributes to making the performance and
financing flows of active and passive labour market
policies more transparent. This know-how is just as
necessary for the integration of active and passive
labour market policies as for the related reforms of
the administrative structures (e.g. the creation of
“one-stop” employment services). Eventually, the
integration of the labour market and employment
policy programmes into the public financial system
is of vital importance for exercising political con-
trol, enabling the parliament, the public, and the so-
cial partners to participate in the decision-making
process. To increase the incentives and possibilities
for the government to actually implement the goals
of employment promotion and protection, the
programmes need to be reflected in the national
16
budgets. Knowledge of the performance and finan-
cial structures of the labour market administration
forms an important basis for being able to detect
obstacles in the management of funds in connec-
tion with the planning, implementation and review
of budgets (see e.g. GTZ (2009), p. 3).
Consequences for the German development
cooperation
What consequences does the analysis of labour
market- and employment-related policy options
in this study have for the German development
cooperation?
The analysis of crisis management processes has
demonstrated that, while the reactions of poli-
cy-makers in times of crisis initially address other
needs than those of a labour market (LMP) and em-
ployment policy (EP) in “normal” times, both policy
areas are closely connected: As soon as a return to
normal circumstances is foreseeable, emergency
measures must be integrated in the regular policy
package. To achieve a long-term development of
the economy and make it more resistant against
economic crises, corresponding reforms of the
employment policy (e.g. SME subsidies, education
policy, social policy) are just as necessary as reforms
of the labour market policy.
It is therefore recommended to systematically
review the products offered in the context of de-
velopment cooperation for compliance with the
above-mentioned crisis management aspects. For
example, the Integrated Approach to Employment
Promotion (see GTZ (2010a)) should be comple-
mented by a passive labour market policy. This also
means that the interfaces between labour market
policy and social policy (in analogy to the already
established relationships to private sector promo-
tion and education policy) must be defined.
Furthermore, it also seems to make sense to iden-
tify potential interfaces with crisis management
in the ongoing development cooperation pro-
grammes in the areas of LMP and EP. This would
make it possible to discuss and review some of the
arguments presented in this analysis in a more
country-specific context.
For the medium and long-term reform of LMP and
EP, it is necessary to review current policy packages.
It is therefore recommended for the German de-
velopment cooperation to develop a more relevant
analysis and evaluation format for labour market
and employment policies based on an international
exchange.
17
1 Introduction
The global financial and economic crisis (GFEC)
that has accompanied us since 2008, has already
been compared to the Great Depression of 1929.
The crisis broke out four years ago and there are
many indicators for an economic recovery and
improvements in the employment situation in
the majority of the initially severely affected econ-
omies. The fact that the real economies of many
countries have quickly regained momentum is also
attributed to a firm economic crisis management
with an expansionary fiscal policy including meas-
ures for job creation and protection. It can indeed
be said that the crisis management of many indus-
trial as well as developing countries was shaped by
previous experiences with crises.
It is, however, too early to return to business- as-
usual. First of all, because labour markets tend to
react with a considerable delay, and secondly, with
view to the debt problem and the concomitant
necessity of budget consolidation, there is a signif-
icant risk that the tender recovery trend noticeable
in the severely affected industrial nations such as
the USA and Europe, will reverse. It is a potential
scenario that – similar to Japan in the 1990s – these
countries which play a major role in world trade
will not show much further development over the
next decade. This scenario would also severely af-
fect those developing countries whose growth, due
to their low level of involvement in the interna-
tional financial market and trade, has so far hardly
been affected by the global crisis in terms of a drop
in the economic growth.
However, labour markets in most industrial and de-
veloping countries already suffered from significant
deficits before the crisis (e.g. high youth and long-
term unemployment, underemployment and in-
formal employment with a high share of precarious
employment). Hence, political decision-makers are
facing a necessary but difficult decision: In the light
of limited fiscal scope or even necessary budget
consolidations, they have to consider how to inte-
grate the employment- and labour policy-related
actions taken at the beginning of the crisis, in their
existing employment and labour market policies.
This will eventually put the entire package of la-
bour market and employment policy instruments
to the test. Which of the emergency measures were
and still are actually effective? Which of the actions
taken to immediately combat labour displacements
and income losses should be maintained until a full
recovery of the economy and which ones should
not? What does this mean for the prior labour mar-
ket and employment policy?
So far, these important questions for policy-makers,
social partners, and citizens but also consultants
in the context of development assistance have not
been satisfactorily answered in the literature:
a. There is a wealth of information on the effec-
tiveness of labour market-related instruments
(cost-benefit analysis). However, due to the un-
derlying complex interdependencies, the mes-
sage of such analyses is usually either very gener-
al or very much context-dependent.
b. It should also be noted that the effects of labour
market instruments are usually analysed under
the assumption of a “normal state of the econo-
my” (see Ernst et al. (2010)). However, objectives,
time horizon and the interactions between the
instruments are often different in times of crisis.
Hence, the mere transfer of statements on effec-
tiveness may lead to wrong conclusions (see also
World Bank (2009c), p. 68).
c. Furthermore, the studies look at the instruments
separately. Interactions with other instruments
18
or questions of the right mix of different meas-
ures are not analysed.
d. While there is a wealth of labour market analyses
for industrial as well as for developing countries,
there is a lack in the systematic presentation of
existing labour market and employment policy
tools, especially for developing countries. Only
via the small number of available effectiveness
analyses of individual instruments from de-
veloping countries can an attempt be made at
drawing conclusions on the existing set of labour
market policies.
In the context of an analysis of labour market and
employment policy responses to economic crises,
it is very important to look at the existing labour
market policies in a country: As an instrument of
combating crises, the measures have to work quick-
ly, i.e. be implemented without delay. Thereby, the
room for manoeuvre is mostly narrowed down
to the existing policy package and/or to already
adopted measures for a labour market reform that
are currently in the pipeline. Against the back-
ground of a necessary consolidation of public budg-
ets, a counter-reaction usually occurs that also re-
fers to the labour market and employment – policy
measures taken to respond to the crisis. In the con-
text of this study, we will therefore not just look at
meaningful emergency measures in a country con-
text, but also analyse which medium- to long-term
modifications to the portfolio of labour market and
employment policies should be recommended. Be-
cause it is already clear from the numerous empiri-
cal research projects on the origins and processes of
financial and economic crises that the next crisis is
most likely already in the making (see e.g. Reinhart/
Rogoff (2009) and (2011)).
This study is structured as follows: To be able to
properly classify the globally observed labour
market and employment policy measures in the
context of managing the crisis, section 2 will first
provide an overview of the range of possible labour
market and employment policies and present the
basics of labour market and employment policies
for managing a crisis. In section 3, we will describe
the range of labour market- and employment-re-
lated responses to the GFEC in more detail. Based
thereon, the possible response options for devel-
oping and emerging nations in the context of crisis
management will be analysed in sections 4 and 5.
Finally, the major conclusions from this analysis
for the German development assistance will be pre-
sented in section 6.
19
2 Labour market and employment policy in the context of economic crisis management
2 1 Overview of labour market and employment policies
Considerable efforts for job protection and crea-
tion are made worldwide. This section presents the
range of applicable labour market and employment
policies.
2.1.1 Labour market policies
The employment situation and the associated in-
come opportunities of a country depend on the
number and quality of jobs offered, on the demand
for labour and on the way in which employment
relationships are established (so-called matching).
Labour market policy (LMP) tries to directly influ-
ence these determining employment parameters
– i.e. by targeted interventions aimed at protecting
existing and creating new jobs.1
Labour market policy is usually (in Germany)
subdivided in regulatory labour market policy and
adjustment-oriented labour market policy (see
Kausch/Trommershäuser (2002), p. 12):
}Regulatory labour market policy provides a le-
gal framework for employers and job-seekers.
Regulatory labour market policy aims at guiding
the negotiation and conclusion of employment
contracts in a certain direction. Labour market
regulations restrict the freedom of contract with
regard to employment contracts and set cer-
tain limits with regard to their stipulations (see
Kausch/Trommershäuser (2002), p. 20). They may,
among others, refer to the recruitment and layoff
of workers and employees (so-called employment
protection legislation), define working conditions
1 For the programmatic goals of LMP and EP strategies see the ILO decent work concept (see e.g. ILO (2007)).
(e.g. maternity protection, rules for occupational
protection and safety) or also limit the working
hours in a certain way. Other frequent types of
labour market regulations for example are stat-
utory regulations for sick pay or maternity leave
(mandated benefits) or minimum wages (see also
Boeri et al. (2008), p. 5). The ILO has set certain in-
ternational minimum standards on fundamental
worker’s rights2 in their list of key labour stand-
ards.
}While regulatory labour market policy influences
the individual decisions of entrepreneurs and
workers by legal provisions, labour market adjust-
ment policy aims at adjusting the labour market
through additional government-initiated services
or monetary benefits. This may include the place-
ment services offered by the public employment
services (PES) as well as salary subsidies to em-
ployers for employing long-term unemployed
persons or the payment of unemployment bene-
fits to the unemployed. In contrast to regulatory
labour market policy where certain behaviours
are excluded by law, labour market adjustment
policy uses incentives, i.e. companies and work-
ers/employees are free to use or not to use the
offer. 3
Thus, regulatory and adjustment policy have dif-
ferent mechanisms of action. Adjustment policy
is usually “softer” than regulatory labour market
policy: They leave the individual stakeholders in the
2 The fundamental worker’s rights implement various basic work principles including the freedom of association, the right of collective bargaining, the abolition of forced labour, the elimi-nation of child labour and the prohibition of discrimination in employment (see ILO (2011e)).
3 It is for example up to the unemployed to claim or not to claim unemployment benefits. This is also the case if previous contri-butions were mandatory and the unemployed would be entitled to claim benefits.
20
labour market their scope of action or even extend
it by providing new options that have the potential
to compensate negative effects of the markets.4
However, as they work with positive incentives,
they are also much more costly for the government
than regulatory policy measures. With view to
their potentially high costs for public budgets, ad-
justment policy measures need to clearly focus on
specific target groups (and not spread the resources
thinly) to be efficient and actually produce the in-
tended effect.
However, regulatory labour market policies may
also be costly – not so much in terms of public
resources which are only required for the admin-
istrative implementation of the provisions, but
rather in terms of losses of economic advantages by
narrowing the freedom of action of the market par-
ticipants (so-called opportunity costs). This means
that entrepreneurs as well as workers and employ-
ees may actually become victims of labour market
regulations which then, in turn, indirectly affect the
government’s room for manoeuvre, e.g., through
more unemployment, higher costs for labour mar-
ket policies, less tax income, etc.
Regulatory labour market instruments may also be
used as an alternative to labour market adjustment
policy: e.g. the adoption of a minimum wage and
dismissal rules to produce certain changes in mar-
ket outcomes (higher wage/salary payments, fewer
layoffs of workers/employees).
Empirical effectiveness analyses of labour market
policies generally do not live up to the high expec-
tations. This is due, among other things, to a lack
of knowledge (the reason for individual decisions
is not recognisable from the outside), a lack of data,
and different analysis methods and analysis quali-
ties, but mostly also lack of knowledge with regard
4 This conclusion on the effects, however, assumes that labour market regulations can be enforced and accordingly guide the actions of the majority of the market participants. This implicit assumption of functioning public enforcement mechanisms does not apply in many developing countries.
to the causal connections (see also Blaschke/Plath
(2002) on the example of further vocational educa-
tion and training) and the inconsistent definition
of the goals and effectiveness of the instruments.
Accordingly, effectiveness analyses of one and the
same instrument often can produce contradictory
results.5
Labour market policy in a stricter sense (here: la-
bour market adjustment policy) usually includes
active and passive instruments (see also Kausch/
Trommershäuser (2002), p. 46 et seqq.).
1. Passive labour market policy
Passive labour market policy aims at securing the
subsistence costs during unemployment. Potential
instruments are all types of wage replacement
payments (e.g. unemployment insurance benefits
(UIB) but also severance payments6).
The wage replacement function aims not so much
at ensuring a functioning labour market but at se-
curing the unemployed.
2. Active labour market policy
Active labour market policy aims at “contributing
as foresightedly as possible to a better mutual adjust-
ment of workforce and jobs in the structural change
process of an economy” (Kausch/Trommershäuser
(2002), p. 12). This is mainly done by facilitating the
transition from one job to the next. The follow-
ing approaches are generally taken in the context
of active labour market policies (ALMP) (see also
Kausch/Trommershäuser (2002), p. 47 et seqq.):
}Improvement of labour market transparency for
better matching. This is done through the place-
ment services, through information and career
counselling (including job application training).
5 See also the overview and meta-analyses on active labour mar-ket policy by Dar/Tzannatos (1999), Betcherman et al. (2004), De Koning (2005), Card et al. (2009), Sanchez Puerta (2010).
6 Severance payments are determined by government regulations, i.e. implementation via regulatory labour market policy (see Sanchez Puerta (2010), p. 11 et seqq.).
21
}Support of the adaptation of the qualification of
the workforce to the market requirements. This
is done by supporting professional training and
further education, vocational retraining including
qualification for the self-employed.
}Subsidisation of employment to preserve jobs, to
create jobs (for a limited period of time) or to fa-
cilitate the entry into working life for job-seekers.
This includes e. g. wage/salary subsidies, works
programmes7, (financial) incentives for new en-
trepreneurs, employment subsidies for certain
groups.
While qualification measures focus on labour,
the key focus of job subsidies is to encourage the
demand for labour. Correspondingly, these active
labour market policies are closely linked with poli-
cy areas such as education policy and the develop-
ment of the private sector.
2.1.2 Employment policies
Contrary to labour market policy, employment
policies do not directly address the key determining
factors of the labour markets (demand and supply
of labour, matching). Instead, they affect the la-
bour market by shaping the framework conditions
and/or market outcomes in other markets that are
closely linked to the labour market. Basically, al-
most any action taken in the context of economic
policy has the potential to impact employment.
The extent to which a country’s economic policy
pursues employment policy approaches depends,
among other things, on the importance that a gov-
ernment attaches to employment. Just as relevant,
however, are previous experiences with policies,
problems in the labour market, available policy
7 Public works programmes (PWPs) are usually considered as an element of active labour market policy. In developing countries, however, PWPs often have a major protection function due to the lack of social security through unemployment and social insurances. In this study, PWPs are principally considered as an element of active labour market policy. With view to their pro-tection function, they are also considered as a potential option in the context of passive labour market policies.
packages and institutional planning capacities and
implementation and control of political measures
(see also Kausch/Trommershäuser (2002), p. 11).
Usually, employment policy objectives are consid-
ered in the following economic policies:
1. Sectoral policy areas
Sectoral policy areas include social and educa-
tional policy. Both policy areas can have very close
interactions with the supply of labour. Industrial,
agricultural, regional and SME policies are usually
much more focused on the position of companies
and their demand for labour.
2. Macroeconomic policy areas
The labour market is significantly influenced by
fiscal, monetary and trade policies.
The chart below shows a summary of the major
policy areas of labour market and employment pol-
icy (see Figure 1).
2 2 Features and practical conditions of political crisis management
Based on the previous systematisation of various
LMP and EP approaches, the question now arises as
to the role of these approaches in the management
of an economic crisis. To answer this question,
let us first take a brief look at the significance of
economic crises for a country’s labour market sit-
uation (section 2.2.1). We will then present the key
elements of economic policy crises management
(section 2.2.2) and the main practical conditions for
LMP and EP in times of crisis (section 2.2.3).
2.2.1 The relevance of economic crises
In economic analyses, the term economic crisis is
usually used to describe a stage of economic down-
turn manifested by negative economic growth and
changes in other major macroeconomic parameters
such as prices, interest rates, and production, but
also employment (increase in unemployment and
22
underemployment, drop in income from employ-
ment).
However, economic crises are not solely caused by
“endogenous” cyclical changes in the economic
activities of a market economy that is character-
ised by a high degree of division of labour. Eco-
nomic crises in a country can also be caused by
so-called exogenous shocks. Exogenous in this
context means an unforeseeable impact on supply
and demand in an economy8 originating outside
the private economy sector (e.g. weather, foreign
countries, government). This includes, most of all,
national financial and political crises. Other factors
include shocks originating from outside a country.
These may be, for example, economic crises caused
as a result of drastic increases in the world market
8 With the assumption of exogenous shocks, the attempt at an explanation from the economic context as such (i.e. endogenous) is eventually given up. The focus of explanatory approaches therefore is on modulating the effects of such exogenous shocks but not their proper existence.
prices of major production and imported goods.
Typical examples are the two 1973 and 1979/1980
oil crises that caused a severe recession in many
countries. As shown by the more recent examples
of the Asian crisis in 1997/1998 and the global fi-
nancial and economic crisis since 2008, a country’s
financial crisis can also trigger exogenous shocks
and economic crises in other countries.
According to analyses by Bordo et al. (2001), the
financial crises9 of the last 120 years were accompa-
nied by an economic downturn which on average
9 Financial crises are crises of the financial sector. The financial sector (or synonymous: the financial system) includes in particu-lar the various financial institutions (especially banks, central bank) and the financial markets (such as the foreign exchange market, the stock market, trading in fixed-interest securities) (see Hott (2002), p. 4 et seqq.). There are different types of finan-cial crises. The exact designation of the crisis depends on the respective element of the financial sector undergoing the crisis. Accordingly, the distinction is made between banking crises, currency crises, Boeri and debt crises. Due to interdependencies between the individual elements of the financial sector, differ-ent types of financial crises can arise at the same time (e.g. twin crises with a combination of currency and banking crisis) or as a short sequence (see more information in Annex 2).
Figure 1: Overview of labour market and employment policies
Source: Based on Kausch/Trommershäuser (2002), p. 10.
Regulatory labourmarket policy
Active labourmarket policy
Passive labourmarket policy
Labour market policy
Employment policy
Agricultural policy
Trade policy
Regional policy
SME policy
Industrial policy
Fiscal policy
Education policy
Social policy
Monetary and exchange rate
policy
Wage policy
23
lasted 2–3 years and was associated with average
costs of 5–10% of the gross domestic product (see
ibid., p. 72). As we can see from our more recent
experience with the global financial and economic
crisis since 2008, crises originating in the financial
sector can have enormous negative consequenc-
es for the real economy and the labour market.
Depending on the severity, a financial crisis in a
country first triggers an economic crisis in the same
country. The extent to which it spreads to other
national economies depends on the transmission
channels.
Particularly in times of increasing international
interdependencies of national economies, the fi-
nancial and economic crises in one country con-
stitute a potential danger for other national econ-
omies.10 The transmission channel, in general, is
via the interconnected financial sectors and/or via
the real economies. Depending on the ties between
the financial sector and the real economy, negative
impacts may in any case be felt in other countries.
However, it still depends on the economic situation
and the institutional framework conditions of the
“receiving country” whether an external shock ac-
tually triggers a new crisis. Argentina, for example,
plunged into a deep recession as a consequence of
the crisis in Brazil in 1998/1999. However, with in-
creasing indebtedness and a fixed exchange rate to
the US dollar that did not match the country’s eco-
nomic performance, Argentina had already contin-
uously been moving to the brink of disaster before
(see also Schweickert (2002), p. 170). Hence, there is
much to suggest that a recession was already on its
way. Eventually, Argentina’s financial system col-
lapsed in 2001/2002.
Other crises show both financial sector and real
10 It should, however, be noted that the stage prior to a crisis of-ten goes along with a significant increase of money supply in the subsequent crisis country. Often, especially those national economies profit directly from this situation (by capital inflows) and/or indirectly (by increased export demand), that are later particularly susceptible to the transmission of crises. An isolated analysis of crises does therefore not do justice to the phenome-non of globalisation.
economy-related transmission channels, that may
even spread to an entire region (see also Kaminsky
et al. (2003)). This is true, for example, for the Asian
crisis in 1997/1998, but also for the global financial
and economic crisis (GFEC) since 2008. A particular
risk arises if – as in the case of the GFEC – the crisis
affects countries with close trade connections (so-
called highly synchronized recessions, see IMF (2009),
p. 111 et seqq.). This situation may lead to a severe,
long recession with serious economic and social
consequences for the population. Traditional emer-
gency measures for economic crises remain inef-
fective because the national economies cannot mu-
tually help each other to overcome the recession.
The International Monetary Fund (IMF) analyses
of highly synchronized recessions of the past (1975,
1980 and 1992) showed that the recessions were by
40–45% more severe than crises with a low spread
(simultaneous recession in less than ten industrial
countries). Economic recovery also was much slow-
er with an economic growth that took twice as long
to reach the pre-crisis level (see ibid., p. 112).11
A detailed analysis of the relevance of financial
crises for the economic situation with a more de-
tailed description of the development of the GFEC
until now is provided in Annex 2 (types, causes and
consequences of financial crises). It can be said in
conclusion, that economic crises in the wake of
financial crises constitute a significant danger for
often hard-won successes in the labour market. De-
pending on the degree of severity and the economic
policy options available, they may further increase
the structural problems of the labour market. This
must be avoided by emergency measures in the
field of economic policy.
11 In terms of overcoming the current global financial and eco-nomic crisis, it gives hope to the US and Europe to see that emerging economies (and most of all China) in particular have recovered relatively quickly.
24
2.2.2 Key economic policy elements for managing crises
Policy responses to economic crises (short: crisis
management) can be subdivided into three stages,
in which different intervention measures matter:
Stage 1: Short-term crisis management
The first stage of economic crisis management is
about mitigating upcoming adjustment responses
(e.g. dismissal of workers, decline in consumption
and investments) through short-term, quick-acting
measures. The less workers are dismissed and/or
the less drastic the reduction in salaries the easier it
will be for the companies and for the workforce to
return to the former employment and income situ-
ation when the economy recovers.
The focus of economic crisis management in the
first stage is usually on measures for stimulating
the economy. This includes monetary policy12 and,
most of all, measures involving an expansionary
fiscal policy. During normal recessions, the effects
of so-called “automatic stabilisers” are often suf-
ficient. They refer to items in the public budget
that vary automatically – i.e. without the involve-
ment of parliament or government – in line with
the economic trend. Income tax progression and
unemployment insurance are typical examples
of automatic stabilisers. In addition to automatic
stabilisers, discretionary economic programmes13
are used – particularly during severe crises – for
mitigating the immediate adjustment reactions.
This is done by an additional increase in expenses
beyond the effects of automatic stabilisers (e.g. pub-
lic investments such as infrastructure programmes)
and by lowering public revenues (e.g. through tax
12 Monetary policy can influence the framework conditions for the volume of money in an economy and for money creation. Banks, for example, are able to issue more loans during a recession due to the more generous refinancing options offered by the central bank (expansionary monetary policy).
13 The term “discretionary” stands for a fiscal policy with “ad hoc” measures for directly combating the economic crisis (also called fiscal stimulus packages).
reductions). As both measures negatively affect the
budget, a budget deficit usually occurs. However,
this is an expressly desired effect (so-called deficit
spending) as the lack in demand during a recession
can only be replaced by relatively comprehensive
government measures.
Labour market policies usually are also an impor-
tant element of short-term crisis management
(see also the recommendations by the World Bank
(2011a), p. xxvii). This is particularly true in coun-
tries where the labour force is secured by unem-
ployment insurance. In these cases, the increasing
expenses for unemployment insurance act as
automatic stabilisers. In the context of discretion-
ary programmes for stimulating the economy, the
adjustment of benefits (increase in the security
level provided by the unemployment insurance,
extended eligibility for benefits) is a frequently
chosen option of passive labour market policy as
are additional programmes in the context of active
labour market policy. Furthermore, employment
policy aspects may also play an important role in
discretionary economic stimulus programmes. Em-
ployment-policy related aspects become particular-
ly obvious in infrastructure expenses and types of
subsidies for companies (e.g. tax exemptions, loan
programmes).
Stage 2: Exit strategies for consolidating the
national budget
The second stage is a transition stage from short-
term measures to combat the crisis to a medium- to
long-term leverage of economic framework con-
ditions (stage 3). Economic stimulus programmes
are usually limited to the time period required for
mitigating the adjustment processes. The budget
deficits occurring as a consequence of the economic
crisis and tax policy and the resulting debts cannot
remain a permanent state, they must be reduced.
Budget consolidation and a review of economic
stimulus measures are particularly necessary for
countries that were already highly indebted prior
25
to the crisis. The problem is to choose the right
time, as a premature budget consolidation with a
corresponding end of the economic stimulus pro-
gramme could stifle the recovery.
Stage 3: Medium- to long-term measures for
stabilising and strengthening the economy
Any economic crisis lastingly changes the long-
term framework conditions for the economy. Even
if the economic growth at the end of a crisis reaches
the pre-crisis level again, the underlying economic
and labour market structures will no longer be the
same. Correspondingly, it is not sufficient to just
terminate the discretionary economic stimulus
programmes. Instead, a review of the pre-crisis (i.e.
under normal conditions) policy packages is now
required and reforms must be aimed at. In addition
to the “traditional” goals of a medium- to long-
term economic policy (stability in the form of price
stability and full employment as well as economic
growth) one should be mindful, in the context of
crisis management, that the relevance of economic
crises is systematically considered in an economic
and/or LMP and EP. When considering reforms,
so-called preventive measures should play a role
that will help mitigate the intensity of future eco-
nomic crises. But also the framework conditions of
economic activity and the social security systems
should be reformed while maintaining and/or
strengthening the dynamics of economic processes
to improve the functioning of the labour market
and overcoming the next recession faster.
2.2.3 Major framework conditions for labour market and employment policies in economic crisis management
The outline of crisis management provided in the
previous section constitutes a rough guideline only.
The actual configuration of economic crisis man-
agement and the roles of LMP and EP in this con-
text depend on various factors. They include, first of
all, the extent of the economic crisis as reflected by
the labour market situation. If the negative effects
of an exogenous shock on the labour market are of
a minor intensity only, there is also a minor neces-
sity for action in the first crisis management stage.
Still, it may become necessary to adjust the focus of
LMP and EP in the medium to long term. This may
apply, for example, in the case of slow and possibly
indirect negative effects on the labour market. This
situation can be seen in many African countries in
the context of the GFEC: As a result of lesser capital
injections in conjunction with poorly functioning
capital markets, there are lesser possibilities for
many companies to obtain a bank loan. The result-
ing negative consequences on the labour market
should therefore be mitigated by employment poli-
cy instruments.
Furthermore, the management of and the ability to
absorb the negative effects of a crisis is impacted by
the room for manoeuvre of the public sector and
of the economic players. Let us assume the follow-
ing scenario for a country: high debt ratio, signifi-
cant structural budget deficit, and little economic
diversification with few income opportunities on
average. In this scenario of high debts coupled
with a low level of economic development, neither
the government nor the economic players have
sufficient effective adjustment strategies. A coun-
tercyclical fiscal policy might be just as difficult to
pursue for the government as entrepreneurs and
private households will be able to wait until the
storm has passed by using previously established
reserves.
As a matter of principle, economic crisis manage-
ment is subject to the same fundamental applica-
tion problems that apply to economic policies in
general. These are (a) problems caused by lack of
knowledge, (b) problems caused by time delays, and
(c) policy failures.
26
a. Lack of knowledge
Contrary to the management of “normal” economic
policies, the management of external shocks is usu-
ally not faced with the problem of correctly classi-
fying the economic situation within an economic
cycle. It is not difficult to identify a sudden, po-
tentially exogenous financial and economic crisis.
However, the problem of analysing the economic
context and identifying causes and effects remains.
To be able to select the right instruments and use
them in a targeted manner, detailed data on the
economic situation are required. It should also be
borne in mind that the externally visible trigger of
a crisis, metaphorically speaking, is only the last
nail in the coffin: i.e., the crisis has been building up
over years. The visible trigger therefore is not nec-
essarily the root cause. Irrespective of whether it is
an industrial or a developing country, the necessary
sufficient knowledge of the causes and consequenc-
es cannot be obtained.14 Even rough clues of the
more specific development of an economic crisis,
of adjustment reactions and potential causal chains
are usually only obtained with a significant delay.
They also depend very much on the quality of the
information management systems in a country.
b. Problems caused by time delays
The question is how quickly a government will
be able to reach the desired effect with a specific
action. Generally, this goes along with significant
time delays because, first of all, the problem must
be identified and a decision must be taken in the
context of political decision-making (identification
and decision delay, see Gablers Wirtschaftslex-
ikon (1997), p. 2187, general: Samuelson/Nordhaus
(2010), p. 939 et seqq.). The implementation of an
action takes just as long as it takes for it to have an
effect on the real economy (implementation and
effect delays). Hence, long lags of effects, e.g. in the
14 On the general problem of statements on effects using the ex-ample of active labour market policies see e.g. Blaschke/Plath (2000) and (2002).
case of monetary policies (one to two years) involve
the risk of producing a procyclical rather than a
countercyclical effect.
With regard to the management of a crisis, the
problem of time lags becomes less of a burden:
Unlike during a “normal” recession, all players re-
alise the state of emergency during an exogenous
economic crisis. With regard to political crises,
Bloom (2009) says, for example, that monetary or
fiscal policies remain relatively ineffective after a
political crisis (see ibid., p. 674). This is against the
background that the formation of new, stable ex-
pectations requires a certain time during which the
other players are observed. As long as the “shock” is
still deeply felt, the players are not able to assess the
consequences of economic policies for their indi-
vidual situation. However, the problem of decision
delays, implementation delays and delayed effects
remains. This speaks against introducing new em-
ployment- and labour-market-related approaches
in the first stage of crisis management. Due to the
probable time delays of new measures, it must be
expected that their effects will be too late. With
this in mind, it appears to be appropriate in stage
1 of the management of a crisis, to take recourse
to available political structures and to intensify
and expand them. In addition, the problem of time
delays is reduced by taking recourse to automatic
stabilisers. Proven discussion procedures between
the social partners and the government may also be
helpful with regard to the problem of time delays.
c. Policy failures
The problem of “policy” failures refers to the influ-
ence of policy-makers on the selection, implemen-
tation and control of economic policies. Based on
past experiences, it can be said that this regularly
leads to loss of income (see also explanations in
Annex 3). In real life, for example, the concept of
a countercyclical fiscal policy often fails, because
the restrictive measures (tax increases, expenditure
cuts) are not taken after a crisis has been overcome
27
for fear of losing votes. As a consequence, the flexi-
bility of economic policy is more and more reduced
and the failure to reverse previously taken meas-
ures fuels overheating making an even worse reces-
sion even more likely.
Problems attributable to policy-makers are also to
be expected in connection with the management
of a crisis, particularly with regard to medium- to
long-term measures. The goal of the third crisis
management stage is to implement economic re-
forms to set the course for a lasting development of
income and employment opportunities. Failures by
policy-makers to take the right decisions are most
probably a major contributing factor for failing to
set this course or for not taking sufficient action to
this end. Policy-makers may no longer be in office
when the results of their policy take effect. How-
ever, the costs of the adjustment (e.g. deterioration
of the economic position of individual groups with
resulting political resistance) are usually felt imme-
diately. This fact may negatively affect long-term
reforms aiming at strengthening the system, the
necessity of which has become obvious during the
crisis. But the same is also true for so-called preven-
tive measures: Even if it is recognisable that a new
crisis is about to emerge, responses often remain
inadequate. According to Zingales (2011) this is
also not attributable to a lack of economic exper-
tise among political decision-makers or lack of
information on the possible consequences. Instead,
because the positive sides of preventive actions, i.e.,
to avoid worse developments for the population,
are usually not obvious for the general public while
the costs are, many policy-makers decide to remain
inactive. This is why factors that contributed signif-
icantly to the development of the Asian crisis, again
played a relevant role in fuelling the global financial
and economic crisis. And, while medium- to long-
term approaches to combating crises are essential
for the future development of a country, the long-
term aspect which is usually incompatible with
political cycles, leads to a “shortfall” of economic
policy in this area.
As already explained above, the problem of time
delays in the first stage of crisis management does
not really leave a “freedom” of choice between the
labour market and employment policies presented
in section 2, even with fiscal flexibility and under
intense pressure from the crisis. Instead, The con-
figuration of expansionary fiscal policies signifi-
cantly depends on the policy packages already in
place. The use of automatic stabilisers in conjunc-
tion with adjustments to existing social security
mechanisms are to be preferred to introducing new
measures (see also World Bank (2011a)). New ac-
tions should only be used to complement existing
schemes in countries that are unable to sufficiently
mitigate the crisis through automatic stabilisers
and unemployment insurance. The same applies
to employment policy: Taking recourse to already
existing measures (e.g. SME subsidisation, regional
subsidy programmes) appears to make the most
sense.
Consequently, labour market and employment
policies as elements of crisis management cannot
be discussed separately from the existing national
package of labour market and employment poli-
cies. Therefore, we will examine the management
of crises in country-specific contexts in the further
course of this study. A more detailed presentation
and analysis of the similarities and differences of
LMP and EP between industrial, emerging and de-
veloping countries is provided as additional back-
ground information in Annex 3.
28
3 Range of labour market and employment policies in response to economic crises
So far, we have provided a general outline of LMP
and EP in the context of crisis management. To get
a better impression of practical application aspects,
however, we will use the current global financial
and economic crisis as a “practical example” for
presenting the measures taken worldwide to com-
bat the crisis in the first stage of crisis management.
The GFEC is widely spread and efforts are being
made on an international level (G20, ILO, World
Bank) to improve the understanding of crisis man-
agement. Thus, relatively extensive data have been
gathered (at least with regard to a mere description
of policy reactions), which provides sufficient ref-
erence points for analysing the management of the
crisis in industrial, emerging and developing coun-
tries.
The downside of examining the reactions of poli-
cy-makers using the example of the global finan-
cial and economic crisis, however, is that it is not
over yet. Ernst et al. (2010) say in their studies that
industrial countries need more than six years to
overcome an economic crisis (see ibid., p. 75). As the
GFEC exhibits the pattern of a highly synchronized
recession (see IMF (2009), p. 111 et seqq.), a corre-
spondingly longer and deeper recession is to be
expected. However, this does not necessarily apply
to all national economies. While the real economies
of emerging economies (or upper middle-income
countries (UMIC)) frequently exhibit stronger re-
actions to economic crises, they are often able to
cope faster with their negative effects. Some of the
countries should therefore already have overcome
the crisis and – through their regional integration –
returned to their original growth path.
It might therefore be too early to raise the question
as to the effectiveness of crisis management at this
time. Consequently, we will use prior experiences
with crises (especially the Asian crisis in 1997/1998)
to look at the appropriateness of the political re-
actions, particularly in stages 2 (exit strategy) and
3 and at general studies on the effectiveness of in-
struments.
To better understand employment- and la-
bour-market-related reactions to crises, we will
first present the major impacts that the GFEC has
had on the real economies worldwide (section 3.1).
On this basis, in section 3.2 we will then present
an overview of the worldwide crisis measures. The
analysis in this section will be limited to a mere de-
scription. The discussion and evaluation will then
be the subject matter of the following sections.
3 1 Key data on the effects of the global financial and economic crisis since 2008
Detailed information on the consequences of the
GFEC for the real economy are provided, among
others, by ILO (2009a), ILO (2011d), IMF (2009),
OECD (2010), World Bank (2009a), (2009b) and
(2011a), employing specific data on macroeconomic
parameters and assessments regarding their further
development. However, highly aggregated figures
on slumps of economic growth, increases in un-
employment, etc., are of lesser relevance for this
analysis. General trend statements for different
categories of countries are sufficient to be able to
analyse the labour market- and employment-re-
lated anti-crisis actions taken by industrial and
developing countries. However, due to their level of
aggregation, these statements on trends necessarily
remain at the surface, i.e. they may not always do
29
justice to the individual situation of a country (see
also Annex 1 on country categories).15
The GFEC originated in the United States and – via
various mutually reinforcing transmission chan-
nels – has spread to the global economy (see also
Annex 2) and affected the G7 countries. The indus-
trial countries in particular experienced a severe
collapse of their economies: from 2.3% of growth of
the per capita GDP in 2007–2008 to –3.3% in 2008–
2009 (see ILO (2009a), p. 11). This slump in econom-
ic growth went along with an on average significant
increase in unemployment (see Figure 2).
Figure 2: Change in unemployment rates of indus-trial and developing countries in the course of the GFEC
Source: IMF (2011), p. 3.
However, the extent of transmission to the labour
market depended on the labour market model
and the prevailing labour market policies in the
respective industrial country (see ILO (2009a), p.10).
Germany, for example, (and also Italy, Mexico, and
Japan) only experienced a slight increase in unem-
ployment (less than 1.3 percentage points) despite a
15 See also Green et al. (2010), p. 4. Our presentation of patterns does not claim to be complete and correct. Due to the complex-ity of the fundamental context as is the case when looking at interactions between economy and policy, it is likely that the selective composition of the data for the purpose of explaining trends does not comply with the actually underlying basic pat-tern (so-called problem of induction according to Hume).
2000 2005 2010 20155
6
7
8
9
Une
mpl
oym
ent R
ate
Emerging and developingeconomics
Advancedeconomics
severe slump in GDP (more than 4%), while the US,
Australia and Canada with a relatively moderate
drop in the GDP (below 3%) responded with a rela-
tively high redundancy rate (more than 1.6 percent-
age points). Spain and the UK were hit particularly
severely with a slump of the general economy and
of the labour market (see also OECD (2010), p.31).
Figure 2 also shows that the labour markets of
developing countries (based on the official unem-
ployment rate) responded with a delay and much
less negatively. However, the average is not particu-
larly meaningful because the effects of the GFEC on
the real economy very much depend on the extent
of a country’s integration in international trade and
in the international capital market. As a matter of
principle, only a minority of the developing coun-
tries (so-called emerging economies) are strongly
integrated in international trade (see also Annex
3.1). These are mainly Asian (e.g. Malaysia, Thailand,
India, Indonesia) and Latin American countries
(mainly Mexico, Brazil). Indeed, the growth rate of
the per capita GDP of so-called developing high-in-
come economies (mostly comparable to the World
Bank classification of UMIC) according to ILO cal-
culations dropped from 7.7% in 2007–2008 to –4.2%
in 2008–2009 (see ILO (2009a), p. 11, for emerging
economies see also OECD (2010), p. 103 et seqq.).
While developing medium-income countries (or
lower-middle-income countries (LMIC) according
to the World Bank classification) also had to accept
a decline, their average growth rate was still posi-
tive in 2008–2009 with a growth of 2.4%.
A similar situation can be seen in low-income
countries (according to World Bank classification
LIC) (see ibid.).
Also in transition countries, the slump in eco-
nomic performance is closely linked to the inter-
national integration of a country (see World Bank
(2011a), p. 2 et seqq.): a negative economic growth
applies, for example, for Russia, Ukraine, Slovenia,
Hungary, Croatia, and Bulgaria, while Kazakhstan,
30
Turkmenistan, Uzbekistan, Tajikistan, Kosovo, etc.,
had positive economic growth rates in 2009 (see
ibid., p. 3).
Regional constellations have slightly modified this
general trend regarding the impact of the GFEC on
developing countries (see Green et al. (2010), p. 14
et seqq.): Due to the fact that Brazil and China, for
example, have recovered relatively quickly, positive
effects were provided for their respective regions.
Because of the increasing importance of regional
integration over the past few years, the ability of
emerging economies to resist the shock has spared
their region worse developments. Contrary to this
scenario, the GFEC originating in the US dragged
Mexico into an even deeper recession than other
Latin American countries. The recession was also
felt more by the neighbours of the Republic of
South Africa than by other Sub-Saharan African
countries.
With regard to regional integration, the significance
of labour migration and concomitant payment
flows (transfer of work income to the family in the
home country, so-called remittances) has increased
over the past few years. With a share of up to almost
50%, remittances play a significant income and fi-
nancing role for some (poor) developing countries
(e.g. Tajikistan, Lesotho, Honduras). Considerable
income from work abroad is also generated in
many emerging and developing countries (e.g. In-
dia, China, Mexico, Philippines, Poland, Bangladesh,
Vietnam) (see UNDP (2009), p. 21 et seqq.). When
major host countries of migration (among others
USA, Russia, Spain, Italy, Malaysia) were significant-
ly affected by the GFEC, remittances to the receiv-
ing countries declined. However, a considerable
exodus of migrant workers to their home countries
was not observed (see ibid., p. 4 et seqq.).
The financial crisis in the industrial countries had
and continues to have a negative impact on the
financial markets of developing countries (e.g.
exodus of capital, less influx of Foreign Direct
Investment (FDI), lower credit lines, higher interest
rates, etc.). With view to the high capital require-
ments of the developing countries and deficits in
the financial sector, these effects will negatively im-
pact their long-term recovery (see e.g. IMF (2009), p.
97 et seqq.). However, contrary to previous crises in
Asia and Latin America, none of the countries expe-
rienced a banking crisis (see Green et al. (2010), p. 14
et seqq.). This is a new development, particularly for
Latin America (see also IDB (2009b)). The absence of
an exogenous financial crisis has therefore mitigat-
ed the impacts of the GFEC in general. Principally,
the relatively high resistance, particularly of emerg-
ing economies in Asia, can also be attributed to the
fact that the transmission channels “financial crisis
to financial crisis” and “economic crisis to econom-
ic crisis” were less intense than in the industrial
countries (see Green et al. (2010), p. 14 et seqq.).16
Under reserve of a generally much poorer data
situation, it can be said that direct effects of the
GFEC on the real economy were not felt in many
poor developing or low-income countries (LIC),
particularly in Sub-Saharan Africa (see Green et al.
(2010), p. 23 et seqq.). Still, the effects of the GFEC
could be significant in individual cases. Significant
price fluctuations in the commodities sector neg-
atively impacted the frequently one-sided export
situation (e.g. minerals such as copper, diamonds)
in many countries. This has also indirectly affected
the public finances as taxes on exports usually play
a significant role in the domestic income genera-
tion. But the consequences of the GFEC for a coun-
try’s real economy also significantly depend on
the economic and fiscal situation at the beginning
of the crisis. Compared to previous crises, we can
see that improved fiscal policy conditions enabled
many poor African countries to better cushion the
negative consequences of the crisis (see Green et al.
(2010), p. 23–28).
16 The latter due to the special role of China in the region (see Green et al. (2010), p. 14).
31
Foreign direct investments in LIC only play a mar-
ginal role as compared to the influx of foreign
capital in emerging economies. But, as observed
by Nunnenkamp (2000), a comparison of abso-
lute numbers in this context is misleading. When
looking at the relation between direct investments
and the gross domestic product of a country, even
smaller and often poorer developing countries
such as Cambodia and Vietnam pooled together
sometimes more direct investments than emerging
economies (see ibid., p. 5).17 Therefore, the scarcity
of capital as a consequence of the banking and debt
crisis may hit the real economies of a LIC just as
hard as the emerging economies (see also Murinde
(2009)). The enormous dependency from develop-
ment aid financing also constitutes an indirect risk:
While, according to international studies, the flow
of development aid has not yet been reduced (see
Te Velde et al. (2009), p. 17), the continuing recession
in the donor countries increases the probability of
a decline in the external financing of development
programmes (see also the argumentation by Green
et al. (2010), p. 28). It appears that the fiscal room
for manoeuvre of LIC has generally been reduced
by the crisis. The resulting financing gap must be
increasingly covered at much higher costs through
the domestic financial market (see Green et al.
(2010), p. 37). And finally, the less readily measurable
effects of the GFEC on the relationship between
formal and informal employment in developing
countries and their poverty situation (see Green
et al. (2010), p. 18 et seqq.; World Bank (2009c), p.
iii–iv) also have to be taken into consideration. The
following typical transmission mechanisms also
manifest themselves in the context of the current
GFEC in the developing countries (see Green et al.
(2010), p. 18 et seqq. and also Te Velde et al. (2009)
based on country studies): Job losses especially
affect export-dependent industries dominated
17 “Even in Sub-Saharan Africa, some countries such as Namibia and Swaziland have attracted a multiple of the average direct invest-ments received by highly developed OECD countries in relation to their gross domestic product.” (Nunnenkamp (2000), p. 5)
by formal employment relationships. Due to the
lack of sufficient safety mechanisms, displacement
effects occur in the informal sector (e.g. street ven-
dors in the vicinity of factories). This significantly
reduces the income and employment opportunities
of many. Due to the lack of social security mech-
anisms, workers in the informal sector are forced
to resort to individual adjustment strategies (e.g.
recourse to family networks, sale of valuables (e.g.
land, livestock), change in diet, child labour instead
of schooling etc.). Apart from individual suffering,
these adjustment reactions have a long-term neg-
ative effect on the ability of the poor population to
maintain their working capacity to generate suffi-
cient income (see also World Bank (2011a), p. 44 et
seqq.). Accordingly, there are fears that the GFEC
has destroyed the successes of previous years on
the road towards reaching the Millennium Devel-
opment Goals on a large scale (see IMF/World Bank
(2011)).
3 2 Economic policy responses to a crisis
The following overview of worldwide economic
policy responses to combat the negative conse-
quences of the GFEC is limited to trend statements.
It can be said in general that major regulatory poli-
cy instruments of job protection and creation such
as labour market regulations and minimum wages,
only played a very subordinate role during the first
stage of crisis management. This means that the
labour-market-related “rules of the game” defined
by the legal framework conditions remained mostly
unchanged in the first stage of crisis management.
The only adjustments made in this context, for ex-
ample, were adjustments with regard to minimum
wages.18 According to analyses, approximately half
of the countries with statutory minimum wages
18 After many years in which the instrument of minimum wages was hardly used – at least in the OECD countries – minimum wages are now being used in the UK, Ireland, and Australia as a targeted measure for determining minimum wages for poorly qualified workers. Minimum wages are also increasingly in the focus of wage policy in emerging economies such as Brazil, China, and South Africa (see ILO (2010e), p. 63 et seqq.).
32
refrained from otherwise scheduled wage increases
in view of the crisis. The majority of the industrial
countries, however, (e.g. the US) chose to increase
minimum wages to avoid a long-term weakening of
the effects of this instrument (see ILO (2010e), p. 65).
With the exception of Brazil, most Latin American
countries only decided to adjust their minimum
wage by the inflation rate (maintenance of the pur-
chase power of the working population).
Next to monetary and financial measures to com-
bat the financial crisis, which will be neglected in
the further context19, the worldwide focus of crisis
management was on fiscal measures (automatic
stabilisers and economic stimulus programmes).
The literature analysing the crisis management
often focuses on discretionary fiscal policies (eco-
nomic stimulus programmes) as a supplement to
automatic stabilisers. This is done against the back-
ground that discretionary fiscal policy measures
were very much criticised in the past. Empirical
analyses of the question whether discretionary
fiscal policy measures contribute to mitigating an
economic slump and accelerating and supporting
the path of growth of an economy come to differ-
ent, sometimes even negative conclusions (see IMF
(2009), p. 113 et seqq.). Before the GFEC, the attitude
with regard to the potential effects of economic
stimulus programmes in general was quite re-
served. The prevailing opinion was that they would
provide very little positive effects (see ibid.).
When discussing economic stimulus programmes
(more details below) one must not forget that,
according to studies, the automatic stabilisers in
industrial and emerging economies have provided
a stronger effect than specially created programmes
for stimulating the economy (see ILO (2009a), p. 20;
ILO (2010a), p. 23). According to OECD studies in 20
19 Trade restrictions have also been issued, particularly with re-gard to the protection of fixed exchange rate regimens (e.g. in Ecuador and in some Sub-Saharan African countries). In general, however, they were used less than in previous crises (see Green et al. (2010), p. 37). For general financial and monetary reactions see e.g. OECD (2009).
OECD countries, automatic stabilisers are respon-
sible for approximately half of the increases in the
budget deficits. Discretionary fiscal policy meas-
ures, on the other hand, contributed to 10% of the
budget deficit only (see OECD (2009), p. 53 et seqq.).
However, there are significant differences in the
extent of automatic stabilisers among the OECD
countries (see ILO (2009a), p. 21): Automatic stabilis-
ers are mostly used in Western countries (e.g. Den-
mark, Sweden, Norway, Italy, Netherlands, France),
and to a much lesser extent in Japan, the US, New
Zealand, and South Korea. This is most probably
due to the different use of passive labour market
policies (particularly unemployment insurance).
In relation to a discretionary fiscal policy it is also
interesting to note that OECD countries that are
using automatic stabilisers to a minor extent only,
tended to be among the countries with major dis-
cretionary economic stimulus programmes and
vice versa (see ILO (2009a), p. 20). The obviously
substitutive relation of automatic stabilisers and
discretionary economic stimulus programmes
must be taken into account when analysing the
fiscal responses of developing countries. Especially
developing countries with a lacking or weak insti-
tutional protection against the risk of unemploy-
ment can hardly rely on automatic stabilisers. They
depend much more on discretionary economic
programmes.
This is most probably also the reason for the
worldwide very different scope of discretionary
economic stimulus programmes reaching from
1% to up to 10% of the GDP (see Tobin/Escudero
(2010), p. 20). According to a study by the United
Nations Department of Economic and Social Affairs
(UN-DESA) with 59 participating industrial and
developing countries, 4.7% of the GDP was spent
on average between the end of 2008 and October
2009 on discretionary fiscal policies (see Green et al.
(2010), p. 37). As mentioned above, the US, Australia,
Japan, and Canada among the OECD countries are
33
leading with a share of 4–6% of the GDP, while Aus-
tria, Norway, Portugal, France, and Switzerland are
at the bottom with between 0% and 2% of the GDP
(see ILO (2009a), p. 20). The substitutive character
of discretionary fiscal policies becomes particularly
evident in the spending behaviour of China, South
Africa20 and Brazil where the share was 3–4% of the
GDP and thus much higher than in other develop-
ing countries (see Liebert (2010)). The region of Asia
is way above the OECD average because countries
such as China (6% of the annual GDP) and South
Korea (estimated approx. 6% of the GDP in 2009,
see ILO (2009a), p. 20) have initiated comprehensive
economic stimulus programmes (see Green et al.
(2010), p. 41). Poorer countries in the region show
significantly lower figures (e.g. Indonesia with 1.4%
of the GDP, see ibid.). In these cases, the different ef-
fects of the GFEC on the real economy and narrow-
er fiscal options were probably counterproductive
to the substitution effect created by a discretionary
fiscal policy.
With view to the regions of Latin America and
Africa it can be said that economic stimulus pro-
grammes of poorer countries are mostly quite
small. However, this constitutes a clear progress
against the background of their previously mostly
procyclical fiscal policy. According to studies of the
Economic Commission for Latin America and the
Caribbean (ECLAC (2010)), the governments in Latin
America have for the first time deployed counter-
cyclical policies to respond to a crisis (see ibid., p.
33 et seqq.). The same applies for Africa, while on a
lower level (see e.g. Ernst et al. (2010), p. 67). Green
et al. (2010) state: “[Responses to the economic crisis
in Africa] are perhaps more notable for what they
have not done, rather than what they have (ibid., p.
46).” At least it can be said for the region of Africa
that the cooperation with the IMF has supported
20 In the case of South Africa with the highest economic stimulus programme of the region, it should be noted that the measures profited from infrastructure projects in the context of the foot-ball world championship in 2010 that were already included in the budget (see Green et al. (2010), p. 47).
the trend for countercyclical responses more than
during past crises. In addition to the financing
aspect, a change in thinking by the IMF may also
have played a role. Contrary to the Asian crisis in
1997/1998, where the IMF often insisted on cuts
in social expenses, fiscal policy options are now
viewed in a different light (see Green et al. (2010), p.
46 et seqq.).21
The following statements on the composition of
discretionary economic stimulus programmes and
the share of labour market and employment poli-
cies are based on an insufficient data base. In the
context of analysing crisis management approach-
es, various data were collected on discretionary
economic stimulus packages. Data with regard to
labour market and employment policies collected
by ILO in 2009 are particularly frequently referred
to (see ILO (2009a)). The problem is, however, that
no explicit differentiation is made between an-
nounced and actually implemented actions. As
critically pointed out by Green et al. (2010), this
tends to overrate economic stimulus measures (see
ibid., p. 39). In reality, many measures are revoked
in the political decision-making process. It can also
be observed, that measures already incorporated
in the draft budget are “re-labelled”. This makes it
more difficult to differentiate between “normal”
stability and growth policies on the one hand and
economic stimulus measures on the other. In ad-
dition, the random samples often refer to different
country clusters and the selection is based on the
availability of data. This over-represents the indus-
trial countries while developing countries are usu-
ally only systematically considered if they are part
of the G20 and/or an emerging nation with better
documentation. This has quite some consequences
for the trend statements: It appears, for example,
that micro-data from individual countries do not
confirm the trend towards an extension of social
21 Regarding criticism of the role of the IMF during the Asian crisis see e.g. Stiglitz (2007); Bello (2007) and for a general analysis of the causes of the Asian crisis see for example Dieter (2000).
34
policy programmes in the context of the GFEC as
depicted by ILO and other organisations (see Green
et al. (2010), p. 39 referring also to a synthesis of
country studies by the Overseas Development Insti-
tute (ODI), see Te Velde et al. (2009)).
The analysis of OECD data and various publications
provides the following average composition of
discretionary economic stimulus programmes for
G20 countries (see Figure 3).
Figure 3: Composition of discretionary economic stimulus programmes in G20 countries (share of programme in percent)
Source: Ernst et al. (2010), p. 61
Economic stimulus packages generally focus on
the spending side (see Figure 3). This means that
measures taking effect via the income side of the
public budget (tax exemptions) are usually used by
one third of the countries. But significant differenc-
es also exist between OECD countries with regard
to the use of tax exemptions: Some countries such
as Austria, the UK., the Netherlands, Finland, New
Zealand, and Canada focus on the income side (see
ILO (2009a), p. 20), while other countries such as
South Korea, Japan, Australia, Denmark, Portugal,
Social security19.0%
Infrastructureexpenses 31.6%
Passive labourmarket policy2.1%
Active labourmarket policy2.5%
Tax measures27.8%
Other expenses16.9%
France, and Switzerland are mainly using the
spending side in the context of their discretionary
economic stimulus programmes.
With view to the employment policy-related
effects of the economic stimulus programmes,
the high share of subsidies and tax exemptions for
SME should be noted. Almost 80% of the coun-
tries included in the ILO survey indicated that this
instrument was intended to mitigate some of the
negative consequences of the GFEC for the SMEs
(see ILO (2009a), p. 16). Additional loan programmes
for SMEs were used just as frequently.22 Also almost
one third of the countries participating in the ILO
survey were striving for reductions in social se-
curity contributions. These will provide relief for
companies – if jointly financed by employers and
workers/employees.
Infrastructure measures make the largest part of
discretionary economic stimulus programmes (see
Figure 3). The focus on infrastructure measures is
also evident in developing countries: According to
Green et al. (2010), Argentina, China, and the Asian
Tigers are relying on infrastructure expenses (see
ibid., p. 37 et seqq.; 42). South Africa also shows a
big share of infrastructure expenses. In the case of
public works programmes, infrastructure expenses
and/or labour market policy are closely related. Due
to different classification approaches, however, it
is difficult to determine the exact share of employ-
ment promotion in the expenses that are officially
declared as expenses for infrastructure measures.
Green et al. (2010) conclude that many infrastruc-
ture measures in general are not explicitly focused
on promoting employment and aligned with the
needs of rural areas (e.g. via PWPs, use of labour-in-
tensive methods, etc.) (see Green et al. (2010), p. 38).
22 Loan guarantee schemes, direct loan schemes and interest subsi-dies are among the most frequently chosen instruments of SME financing instruments (in “normal” times) (see Balkenhol (2011), p. 15).
35
With hardly 5% of the economic stimulus package,
the share of labour market policies in the G20
countries is relatively small (see Figure 3). Against
the background of existing automatic stabilisers
it can be said that passive labour market policy in
industrial and transition countries plays a more
important role in the overall expenditures of their
economic stimulus policies than shown by the 2.1%
figure of the survey. With only 2.5% of the overall
expenses, expenses for active labour market poli-
cies are also relatively modest (see Figure 3). In the
context of an analysis of labour market policies, the
share of additional expenses in the overall expenses
for active labour market policy is also important.
Based on the answers to the question of intended
expenses, the ILO (2009a) survey provides a mixed
picture in this regard: Almost half of the countries
provide for an expense increase to up to 10% (de-
termined based on the overall expenses for active
labour market policies in 2007) only (see ibid., p.
22). At the same time, Japan, Mexico, Poland and
Portugal stand out with a considerable increase
in expenses (60% and more). General shifts in the
context of labour market reforms are mentioned
as possible explanations (see ibid., p. 22). In general,
however, active labour market policies seem to only
play a very limited role in the context of economic
stimulus policies.
Industrial and developing countries show signifi-
cant differences in the use of different labour mar-
ket policy instruments in the context of discretion-
ary economic stimulus programmes (see, among
others ILO (2010), p. 29 et seqq., World Bank (2009c),
Green et al (2010), IDB (2009a)). Figure 4 shows the
responses in terms of labour market policies to the
2008–2009 GFEC for the different country catego-
ries (World Bank classification in HIC, MIC, LIC, see
also Annex 1).
According to this analysis, professional qualifica-
tion measures were mostly used in high-income
countries (HIC), followed by short-time working
arrangements, wage and salary subsidies and ex-
penses for the public employment services and
their key function, job search assistance. While
training measures were also chosen by most of the
MIC, there were enormous differences with regard
to the public works programmes and SME subsi-
dies. These two instruments that are among the
least chosen strategies in HIC, are an integral ele-
ment of discretionary active labour market policies
in developing countries with a medium per-capita
income. Figure 4 also clearly shows the low par-
ticipation of LIC in discretionary labour market
policies for combating the crisis. If applicable at all,
the focus according to this analysis is on additional
training measures and SME promotion.
The relatively higher importance of SME devel-
opment measures in MIC and LIC is explained by
the negative impact of the GFEC on access to loans
and the generally higher share of small companies
– usually in the informal sector – in these countries
(described in the above section 3.1).
Better access to loans for SMEs, the stipulation of
a participation ratio of SMEs in public tenders, tax
exemptions etc., were frequently chosen instru-
ments in Asia and Latin America (see e.g. World
Bank (2009c), Green et al. (2010), p. 51; see also ILO
(2009a), p. 27).
Due to their weak social security systems, public
works programmes (PWPs) play a bigger role in
MIC and LIC than in industrial countries.23 Their
much greater importance for developing countries
also seems to have become even more obvious in
the crisis management context. In addition to top-
ping-up already existing PWPs, new emergency
PWPs were created in East Asia. This contributed to
achieving labour force participation rates of 2.2%
in Indonesia, 2.6% in South Korea and 5.2% in Thai-
land (see Green et al. (2010)). The instrument was
23 Particularly in industrial countries, they are now seen as a sup-plement to active labour market strategies. See also the general explanations provided in Annex 3.
36
also increasingly used by emerging economies such
as Armenia, Kazakhstan, Lithuania and Russia (see
World Bank (2011a), p. xxvi). In the case of Armenia
and Lithuania, the PWPs were new programmes
(see ibid.).
The identified differences concerning adjustments
to unemployment insurance benefits (UIB) (high
in HIC, medium in MIC, low in LIC) are relatively
easily explained by the different use and scope of
this instrument. In industrial countries, a max-
imum of 50% of the unemployed is covered by
unemployment insurance (see ILO (2010a), p. 18).
In MIC (e.g. Argentina, Brazil, China, South Africa
and Turkey) it covers 7–13%. These numbers are
still significantly lower in many transition coun-
tries with existing unemployment insurances (see
World Bank (2011a), p. 60). The small percentage of
formal employment and strict eligibility criteria
are identified as causes (see also the presentation of
coverage by unemployment insurance according to
regions in Annex 3). Adjustments to the unemploy-
ment insurance were often also made in transition
countries, but some of the countries (e.g. Ukraine,
Hungary, Estonia, Czech Republic) were unable
to finance the effects of the automatic stabilisers
and reduced the entitlement conditions for unem-
ployment insurance accordingly (see World Bank
(2011a), p. xxv).
As shown in Figure 3, social protection measures
amounted to approximately one fifth of the overall
expenses of discretionary economic stimulus pro-
grammes. Additional social protection measures
were also taken by developing countries. According
to ILO however, the share of discretionary social
protection measures in developing countries such
as Argentina, Indonesia, Mexico and Turkey, was
usually much smaller (less than 10% of the total
economic stimulus programme (see ILO (2010a),
p. 7)). Individual country analyses (e.g. Bolivia, In-
donesia, Cambodia, Bangladesh, Uganda, Kenya)
provide little indication of a massive expansion of
existing social programmes in favour of the poorest
(see Te Velde et al. (2009), p. 29 et seqq.). It appears
instead, that the employees of the formal sector
(mainly public employees) are the main beneficiar-
ies of the measures.
Figure 4: Labour market policy responses to the GFEC
Source: Cazes et al. (2009), p. 10.
0
5
10
15
20
25
30
Public works
SME incentiv
es
Changes to UB
Job/wage subsid
ies
Job search
assista
nce/PES
Reduction in
working hours
Training
HIC MIC LIC
37
For the poorer developing countries in particular, it
is generally difficult to identify a trend towards the
use of social protection measures and to come up
with a final assessment. First of all, the category of
“social protection measures” includes many differ-
ent measures that differ very much in terms of ef-
fect and target group definition. In Zambia, for ex-
ample, 75% of the adopted expenses for social pro-
tection were intended as subsidies to the pension
fund of public employees (see Green et al. (2010), p.
39). In addition, it is increasingly difficult to iden-
tify actual additional measures in cases where a
mainly discretionary social policy is also pursued
in “normal” times (e.g. subsidies for consumption,
social transfers). And finally, reductions in major
income-generating areas that produce a coun-
ter-effect must also be considered when looking
at the expansion of social policy measures. Ghana,
for example, but also Nigeria have reduced public
spending on education and health in the course of
the GFEC (see Te Velde et al. (2009), p. 30).
In addition to an expansion of consumption
subsidies (e.g. for food, fuel, transportation and
electricity) in Asia, many developing countries in
Latin America have also expanded existing cash
transfer programmes (CTPs) (see Green et al. (2010),
p. 52). The latter constitute a frequently used in-
strument in the region. The major firmly anchored
programmes in Brazil (Bolsa Familia) and Mexico
could be used as a lever for discretionary measures.
In 2009, a new CTP was introduced in Argentina
where payments go to an account. The money in
this account can be used upon producing evidence
of schooling for children and participation in vacci-
nation programmes (see ILO (2010a), p. 11). Despite
significant differences in the volume and compo-
sition of the discretionary measures for social pro-
tection, a general change in the respective system is
not recognisable.
Close connections exist between labour market-re-
lated measures in the context of discretionary
economic stimulus programmes and wage policy,
particularly in the case of public subsidies for com-
pany agreements for the temporary reduction of
companies’ wage costs. This includes, for example,
the temporary discontinuation of previously agreed
wage and salary increases, job sharing and a reduc-
tion of working hours with public compensation
payments (e.g. the German short-time working ar-
rangement) (see ILO (2009a), p. 28 et seqq.). In gen-
eral, many countries responded to the crisis with
wage and salary cuts, particularly in the public sec-
tor. Depending on the significance of collective and
company agreements, similar adjustments were
also observed in the private sector (see ILO (2009a),
p. 28 et seqq.).
38
4 General labour market and employment policy options during crisis management
The focus of the following analysis of labour market
and employment policy options in the context of
crisis management is on developing and transition
countries. There are very big differences within this
category of countries with regard to their level of
development and labour market situation, suscep-
tibility to external shocks and existing LMP and
EP policy packages. For the purpose of coming to
useful recommendations for overcoming crises in
the context of LMP and EP despite the complexity
of the country context, a two-tier analysis approach
is used: In this section we will first develop general
recommendations for crisis management actions.
This will be done against the background of past
experience with LMP and EP, the goals and interac-
tions of the instruments and available analyses as
to their effects. The resulting insights, however, will
be relatively abstract. Therefore, the previous results
of our analyses will be supplemented in section 5
using examples of innovative recommendations for
actions in a country context. The general delibera-
tions on LMP and EP in times of crisis are structured
according to the three crisis management stages.
4 1 Policy options for immediate reactions to an economic crisis
The analysis of different policy options for imme-
diate reactions to an economic crisis is structured
as follows: First, we will take a closer look at regu-
latory policy measures. The focus of the analysis,
however, will be on adjustment policy measures.
Therefore, selected instruments will be analysed
in more detail, looking first at employment policy,
then at active and passive labour market policy,
with regard to their applicability in a crisis manage-
ment context (see also the overview table provided
in Figure 5).
4.1.1 Regulatory policy options
For the following reasons, regulatory policy
responses (e.g. with regard to labour market reg-
ulations) should not be used in the first crisis management stage:
}Regulatory policies serve to guide the framework
conditions of economic activity, i.e. they set the
“rules of the game” by excluding or restricting
certain actions by law (e.g. in the context of dis-
missal rules). To be able to maintain the advantag-
es provided by division of labour and specialisa-
tion in a market economy, these rules should not
be subject to frequent changes.24
}It should be noted with regard to the labour
market regulations that the actually observed
level of regulation of the labour markets is also
the result of legal traditions (civil law vs. common
law), of the control systems that have developed
in a country over decades (judiciary and public
administration) and of political framework con-
ditions. The short-term modification of a certain
variable may not make sense in the context of a
general regulatory tradition.
}The general risk with this type of tool is its sig-
nificant time delay (particularly delays between
decision processes and taking effect), i.e. they
bear the inherent risk that their effects will come
too late. According to IMF studies, the effects of
labour market deregulations, for example, will
manifest themselves no earlier than two years
after changing the labour market regulations. (see
OECD (2006a), p. 194). It also takes several years
24 This guideline is based on the regulatory policy concept of Walter Euckens and is also called the “principle of consistency of economic policy” (see Eucken (1952), p. 254 et seqq. and the overview provided by Hax (2004)).
39
until economic acteurs have adjusted to the mod-
ified framework conditions.
}The central goal during the first stage of crisis
management is to create support mechanisms
to counteract the (temporary) drop in demand,
production and investments triggered by the eco-
nomic crisis. Adjustment policy instruments are
much better suited to achieve this goal than reg-
ulatory instruments. As explained in section 2.1.1,
process-related instruments directly influence the
market results, e.g. the income positions of the
economic players.
}It should also be observed that the effectiveness
of regulations very much depends on the quality
of a country’s enforcement mechanisms. While
labour markets in developing countries are often
characterised by comprehensive labour market
regulations (see also the explanations provided
in Annex 3), the often high share of informal
employment and poor enforcement of the rules
result in a situation where the rules de facto only
apply to a minority of the players in an economy
(often in the formal sector). Hence, an instrument
that so far has had no broad impact in terms of
adjustment flexibility, does not necessarily have
to be the object of crisis management.
The abovementioned restrictions also apply to the
instrument of minimum wages. While fixed mini-
mum wages could prove to be a problem, especially
for SME, in times of crisis, literature gives no clear
empirical evidence of negative employment effects
of minimum wages (e.g. more job losses through
fixed low wages). Accordingly, there is also no rea-
son to abandon this instrument in times of crisis
and/or discontinue long-term reforms of remuner-
ation structures (see also ILO (2010e)).
However, this does not mean that regulatory pol-
icy approaches in the context of employment and
labour market policy would be irrelevant for man-
aging a crisis. On the contrary, regulatory policies
are of major importance, particularly in crisis
management stage 3. As explained above, this stage
serves to strengthen the ability of an economy to
resist the consequences of external shocks. This is
only successfully done through medium to long-
term reforms of the economic framework condi-
tions. The resulting recommendation for the first
stage of crisis management is to not jeopardize the
Figure 5: Overview of analysed adjustment policy instruments
Employment policy Infrastructure measures
SME development
Labour market policy Active LMP Public employment services
Further vocational education and training
Wage and salary subsidies
Public works programmes (PWPs)
Passive LMP Adjustments to unemployment insurance
Alternative protection mechanisms: Regulations for redundancy payments
Unemployment insurance savings accounts (UISAs)
Public works programmes (PWPs)
Social transfers (CTP)
Source: Own presentation
40
success of long-term reforms (usually including a
high rate of regulatory policy measures) through
short-term emergency actions.
4.1.2 Employment policy options
Before looking more closely at the use of labour
market-related policy instruments for crisis man-
agement during the first stage, let’s first address
some fundamental thoughts on employment pol-
icies using the example of infrastructure measures
and SME development (overlapping with industrial,
trade and regional policy). As explained above, the
two areas play an important practical role in the
context of economic stimulus programmes.
Infrastructure measures
As explained above, it is difficult to determine the
exact impact on employment of additional infra-
structure investments in connection with econom-
ic stimulus programmes. Even the effectiveness of
investments that are explicitly declared to consti-
tute emergency measures and linked with employ-
ment policy goals must be seriously doubted with
regard to their actual effectiveness. This is true, in
particular, for measures that are supposed to be im-
plemented via the national procurement systems
(e.g. certain ratios in public tenders for SME (see
ILO (2010a), p. 68) or labour-intensive investments
(see ILO (2009a), p. 25 et seqq., see also ILO (2009a),
p. 23e t seqq.). In view of the significant deficits of
public procurement systems in developing coun-
tries (see also Annex 3.2), that are relatively well
documented by standardised external assessments
for some of the developing countries25, it can be
expected that these ratios will only be implemented
in part. And, as this is not just about tender pro-
cesses but about a desired income effect that is only
25 See also, for example, OECD (2006), analyses in the context of the Public Expenditure Financial Accountability Program (PEFA), the World Bank analysis format CPAR (Country Procurement Assessment Report), the OECD MAPS (Methodo logy for Assess-ing Procurement System) analysis, and analyses by the European Bank for Reconstruction and Development (EBRD), etc.
achieved when the funds are paid to the workers
or small companies, the wide-spread problems in
connection with the administration of public fi-
nances also play a role. The usually late payment of
the money cannot be cushioned by the participants,
while they could be absorbed by larger companies
with a higher liquidity. Against this background, the
mere instruction to the procurement bodies to im-
mediately pay invoices from SMEs (as has happened
for example in India in the context of the GFEC, see
ILO (2009a), p. 19), must be viewed rather critically.
Due to the lack of systematic follow-ups (e.g. as a
result of weak supreme procurement offices, little
parliamentary control) it has not been possible to
date to retrospectively determine the effectiveness
of such approaches.
SME development
In “normal times” SME development is a central
element of a supply-oriented growth policy and of
the sectoral policy areas of industrial, agricultural,
and trade policy26. Due to its cross-sectional charac-
ter, SME development is very popular. While SME
development programmes are among the standard
instruments of economic policies, a systematic re-
view of their effects with regard to the actual goal
of improving employment and income opportu-
nities is not part of the standard approach (see e.g.
Castel-Branco (2003); ADB (2009), p. 40 et seqq.)27.
Therefore, the following deliberations can be of a
general nature only.
The frequently diffuse goals of SME development
programmes reveal that the relationships between
the goals (in the case of several goals) are not
26 Accordingly, SME development also constitutes a major cross-sectional issue within the German development coopera-tion approach for promoting the private economy (see Kausch/Mummert (2006), p. 16 et seqq.).
27 Regarding the potential reasons for the lack of informative effectiveness analyses see e.g. ADB (2009), p. 40 et seqq. (among others, the problem of SME definition in a country context, multiple goals of SME development that are strongly influenced by the interests of individual players, considerable deficits in the execution of the programmes).
41
sufficiently defined. SME development (and, hence,
an intentional discrimination against large compa-
nies) is intended to serve a specific purpose, i.e. to
improve income and employment in the national
economy as a whole. Therefore, SME development
first and foremost constitutes a means to an end.
And indeed, SME in the form of mid-tier businesses
in industrial countries or of the small companies
sector in developing countries are at the interface
to the informal sector and matter as providers of
employment. However, empirical studies in de-
veloping and emerging economies suggest that
while new jobs are created, there are just as many
insolvencies with corresponding redundancies (see,
among others Balkenhol (2011), p. 6 et seqq.; ADB
(2009), p. 24 et seqq.).
The strong creative and destructive potential has
two main negative consequences on the labour
market: Frictional unemployment increases and job
insecurity constitutes a problem for professional
training and further education in the companies.
It should also be noted that the independency of
smallest and small entrepreneurs in developing
countries often is a survival strategy due to lacking
employment opportunities in the private econo-
my (see also positions by ILO). I.e., many SME in
developing countries have a very low productivity,
are poorly managed and have no growth strategy
(see ADB (2009), p. 25 et seqq.). Even with support,
such companies would stand very little chances
of proving themselves in the market. Hence, SME
development programmes without the system-
atic consideration of market potentials run the
risk of not reaching their goals. Furthermore, a
critical analysis of the support of micro-financing
institutions reveals more potential downsides of
unspecific SME support (see Bateman/Chang (2009)
and (2012)). The more companies are released into
independence through the availability of loans, the
higher the price pressure on the offered goods or
services. The “ruinous competition” which is fuelled
by this type of credit support, results in the impov-
erishment of the borrowers as they end up failing
with their businesses and having high debts. In the
same way, the planned structural transformation of
the industry to a stress-resistant private economy
does not happen.
Accordingly, it seems to be making little sense to
integrate workers laid off during an economic crisis
mainly by the formal companies of the exporting
sector into the labour market via business start-up
credit schemes28. On the contrary, to avoid increas-
ing the pressure on the profits of companies in the
informal sector, support measures with a broad
impact should be preferred to an expansion of mi-
cro-financing. Where this is not possible through
unemployment payments, CTPs may be considered.
Because large companies pay relatively higher
wages and offer better jobs, support for SMEs is
most promising if it helps companies with a market
potential to overcome expansion barriers. Con-
sequently, an expansion of existing SME devel-
opment schemes in times of crisis is particularly
recommendable for SME in the sectors that are
affected the most by the economic crisis (usually
the exporting sector). They should focus on remov-
ing specific expansion barriers created by the crisis.
General expansion barriers such as infrastructure,
business and investment environment, financing,
etc. cannot and should not be the subject matter of
discretionary policy measures during the first crisis
management stage.
28 Business start-up schemes in general play a relatively subordi-nate role in active labour market policy. The results of analyses of business start-up schemes in industrial countries are often negative (see e.g. Betcherman et al. (2004)). Positive employment effects can only be identified for older and better qualified employees. The costs of such programmes are generally quite high and their effectiveness is limited. Analyses of correspond-ing schemes in developing countries where they are only used sporadically provide a similar picture (see Godfrey (2003), p. 29 et seqq.). Schemes that were originally intended to support the young and disadvantaged groups were eventually used by better qualified participants. Hence, business start-up schemes are usually quite costly as compared to other measures; they reach only a few and usually not those who would urgently need to be integrated in the labour market.
42
4.1.3 Active labour market policy options
What contribution can active labour market pol-
icies make in times of economic crisis? Sudden
and major redundancies in certain sectors are to be
expected in the course of an economic crisis. How-
ever, as with a “normal” recession, these adjustment
responses will be of a temporary nature, i.e. it can
be expected that many of the laid-off workers and
employees will be re-employed in the short to me-
dium term. However, workers with an already poor
employability before the crisis run the risk of not
getting back into the labour market once the eco-
nomic recovery sets in (or if they do, at much worse
terms only). Also for groups of persons (e.g. the
young, disabled, older workers or employees, wom-
en), who were already unemployed and/or under-
employed before the crisis, the crisis often means a
further deterioration of their income opportunities
through unemployment, precarious employment
and underemployment. This means that – despite a
recovery – it must be expected that previously ex-
isting structural problems in the labour market are
reinforced by the crisis in the medium to long term.
To what extent active labour market policies are
suitable in the first crisis management stage, de-
pends on whether their goals are also relevant for
the situation of an exogenous and potentially se-
vere employment crisis. Active labour market pol-
icies aim at facilitating the transition from one job
to the next (see section 2.1.1). The transition from
one job to the next is facilitated by new business
start-up schemes, wage and salary subsidies and
public works programmes, i.e. by creating new em-
ployment opportunities, while employment servic-
es and further vocational education and training
measures, in contrast, improve the transition from
one job to the next when there is a demand for la-
bour (see Vandenberg (2008), p. 9).
This leads to two conclusions: First of all, meas-
ures aiming at the (temporary) creation of new
demand for labour, regardless of their potential
costs and implementation issues, appear to be
particularly suited as crisis management measures
(see also similar conclusions by De Koning (2005),
Betcherman et al. (1999), Betcherman et al. (2004)).
As mentioned above, this includes in principle pub-
lic works programmes, wage and salary subsidies
and business start-up schemes. The latter, however,
have a relatively low potential for combating crises
(see above). Employment services which could fulfil
an important function in “normal” times can do lit-
tle in the case of a broad-scale slump in the demand
for labour. Further education measures also are of
lesser relevance for most of those who have lost
their jobs as the reason for their redundancy is the
difficult profit situation of companies and not the
professional qualification of the workforce. Hence,
an unspecific expansion of measures to improve
further vocational education and training in times
of crisis is not useful. Additional training meas-
ures can however be considered to prevent certain
groups of persons from loosing touch with the la-
bour market (see below). This applies in particular
to structurally disadvantaged groups of workers/
employees such as the young.
Second, the characteristic feature of all active
labour market instruments, i.e. to facilitate the
transition from one job to the next, limits the field
of application of active labour market policy. In-
struments of active labour market policy are hardly
suited to solve general labour market problems
(or they would be too costly as compared to other
policy strategies). In the case of a permanently low
demand for labour, the solution to the problem is
not to fill the gap by subsidies and public works
programmes. Rather, the root causes need to be
tackled by developing the private economy, by a
competitive policy and by macroeconomic pol-
icies. The same is true for deficits with regard to
the supply of labour. Further vocational education
and training measures cannot remedy a systematic
lack in the qualification of workers and employees
resulting from primary and secondary schooling.
43
This is a matter of education policy. While a qual-
ification requirement, particularly with regard to
further vocational edcuation and training always
applies, education programmes in the context of
active labour market policy cannot sufficiently
balance the failures of primary and secondary edu-
cation. Therefore, active labour market policies are
usually considered as complementary approaches
to passive labour market policy and to employment
policy in general (see also Calmfors (1994)).
The question is to what extent additional active
labour market policy measures are necessary in
order to keep as many of the laid-off workers/
employees as possible in the labour market. The
general rule should be that the scope of additional
measures depends on the extent of the negative
effects created by the economic crisis with regard
to the labour market on the one hand and on the
adjustment responses of companies (e.g. wage/
salary cuts for a limited period of time, job sharing,
forced leave, short-time working arrangements,
etc.) on the other. The more workers/employees
are laid off, the more incentive mechanisms should
be introduced by active labour market policy (e.g.
public works programmes) to compensate for the
lack in the demand for labour in the short term. In
this situation, social security systems – and most of
all unemployment insurance – play an important
role: The wage/salary replacement payments enable
laid-off workers/employees to continue to actively
offer their acquired qualifications in the market.
I.e. the necessity of compensating the collapse in
the demand for labour by additional active labour
market policies depends very much on the social
security systems.
If a country has a functioning unemployment in-
surance to which laid-off workers and employees in
the sectors affected by the crisis can take recourse,
the broad temporary support of the unemployed
through public works programmes is not required.
This explains why active labour market policies in
developing countries are mainly used for combat-
ing crises (see Islam (2003), p. 27). The use of active
labour market policies in a crisis context leads to a
shift in the focus of the instruments used as com-
pared to the “normal” use of active labour market
policy: As shown by the above analysis, the focus
should be on measures directly leading to the crea-
tion of jobs and not so much on placement services
and further vocational education and training.
However, the complementary role of active labour
market policy (addressing cyclical unemployment,
high relevance of protection through passive labour
market policies) remains also in times of crisis. It
follows from the above that the actual requirement
for active labour market policies must first be de-
fined before deciding on expanding the scope of
specific active labour market policies in connection
with an economic stimulus programme. The target
groups eligible for such measures may be individu-
als who (1) were laid off in the wake of the negative
effects created by the crisis (as discretionary emer-
gency measures are not intended to solve structural
problems), (2) are not covered by social security sys-
tems, and (3) due to their profile are relatively likely
to not make the transition to a new (equivalent) job
even after an economic recovery.
The efficient usage of discretionary labour market
policies therefore does not just require to systemat-
ically compare the advantages and disadvantages of
different instruments (see also further below). In-
stead, the effectiveness of active labour market pol-
icies also very much depends on the ability to limit
the measures to the above target groups. If signifi-
cant information is not available, for example, and/
or if the quality of the available information is poor
(as is often the case in developing countries), in-
creased free-rider effects and a lack of attention to
the relevant persons must be expected. In addition,
the possibility to focus on target groups is further
restricted by the fact that significant information
44
cannot be obtained (knowledge problem). In times
of crisis, for example, it is particularly difficult to
assess which qualification profile is at a high risk
of no longer being in demand due to increasing
adjustment processes in the economy. Often, only
very rough criteria can be used for this purpose
which again increases the costs. Finally, another
trade-off between targeting and efficiency applies:
The more sophisticated the participation criteria
in programmes, the higher the requirements and
costs for the administration to manage the sophis-
ticated approach. In the same way, information
costs of potential participants are also increasing
which constitutes a problem, particularly for target
groups in developing countries (poor households).
As a result, significantly fewer people than planned
can be reached by the instrument. The quality of
targeting therefore is a central issue – particularly
for developing countries – that contributes to the
success or failure of a policy. To the extent possible,
the following analysis of individual measures will
try to look at the practical problem of focusing on
target groups, as well.
Based on the above considerations, we will now
present approaches to different active labour mar-
ket policies that, at least in terms of direction, ade-
quately consider the above aspects of labour market
policy. At the same time, we will identify measures
that are not or less suited for combating crises. Un-
fortunately, the available data do not allow more
than a rough plausibility analysis. As mentioned
earlier, there are hardly any effectiveness analyses
for a developing country context and, in addition,
no effectiveness analyses are yet available with re-
gard to the GFEC. The following active labour mar-
ket policy instruments will be examined:
1. Public employment services
2. Further vocational education and training
(or labour market training)
3. Wage and salary subsidies
4. Public works programmes
Public employment services
Under normal circumstances, public employment
services are considered to have positive effects
on employment which – compared to other pro-
grammes – can be reached at relatively low costs
(see Betcherman et al. (2004), p. 53; Sanchez Puer-
ta (2010)). It is difficult to assess in how far this is
also true for developing countries. It is assumed
in general that the positive effects of employment
services on employment and income dwindle with
increasing structural problems (see ILO (2010a), 38).
It can be said that, even during normal times, less
than half of those using the employment services
are fit for a friction-free transition to another job
(see ibid.). As explained before, the general expan-
sion of employment services is not a focus of la-
bour market policies for managing crises. However,
assuming that during a crisis more job-seekers with
a difficult recruitment background need to be sup-
ported with advice, those services may experience
more demand (see also ILO (2010a), p. 42), which
has to be compensated for accordingly.
What is more important, however, is that the ex-
pansion of the capacities of public employment
services can contribute to increasing the effective-
ness of other labour market policies. (see also the
explanations provided in section 5 based on specific
case examples). While synergy effects can main-
ly be used in countries with already functioning
public employment services, the expansion and
restructuring of the public employment services for
the purpose of bundling crisis measures should still
be considered, even under significantly more diffi-
cult framework conditions.
45
Further vocational education and training
Despite the fact that measures of further vocation-
al education and training29 play a decisive role in
“normal” times as well as in times of crisis across
all countries, effectiveness analyses show a rather
mixed result (see also World Bank (2009c), p. 72):
It is striking, in general, that there is hardly any
systematic evaluation of frequently used schemes.
This applies especially to training measures in de-
veloping countries (mainly for combating youth
unemployment).30
The lack of rigorous evaluations leads to an over-
valuation of these schemes in the political deci-
sion-making process (see also Betcherman et al.
(2007)). Based on effectiveness analyses mainly
from industrial countries, Betcherman et al. (1999)
come to the conclusion that while training meas-
ures improve the employability of the unemployed,
they have rather little effect on the income of those
already employed. Also, the costs involved are usu-
ally very high (see ibid., p. iii). Positive effects can
mostly be found where the schemes focus on small,
specific target groups. General training measures,
particularly for the young, aimed at balancing defi-
cits of primary and secondary education, provide
no positive effects (see e.g. Sanchez Puerta (2010), p.
19; Betcherman et al. (2004), p. ii). It is furthermore
pointed out in the context of a meta-analysis by
Card et al. (2009) that the positive effects of pro-
fessional training measures only materialise 2 to 3
29 Further vocational education and training as part of active la-bour market policies usually “includes training where there is some form of public support. That support can come in the form of direct provision of training (e.g, through public training insti-tutes), financial support for trainees (e.g., funding training costs and/or subsidizing trainees), or providing “infrastructure” ser-vices (e.g., labor market information, licensing, monitoring and credential services)” (Betcherman et al. (1999), p. 5). Countries tend to focus on retraining aimed at the long-term unemployed or displaced workers due to massive enterprise/industrial re-structuring and training programmes for young people (e.g. school drop-outs) (see ibid.).
30 Almost 40% of the schemes for combating youth unemploy-ment compiled by Betcherman et al. (2007), for example, pro-vided no information on the results. Only one quarter of the reviewed schemes were evaluated with regard to their net effects (i.e. by using a control group) (see ibid., p. ii).
years later (which also means that some effective-
ness analyses may provide a too negative assess-
ment if only short-term effects were considered)
(see ibid., p. 25 et seqq). According to Betcherman
et al. (2004) effectiveness analyses from developing
countries show even worse results (see ibid., p. ii).
The best effects are achieved where on-the-job
training is provided and companies are actively
involved (see World Bank (2009c), p. 71 et seqq.).
Betcherman et al. (2004) eventually conclude from
effectiveness analyses of training measures in the
context of a collective redundancy situation, that
the majority of these measures also fail to provide a
positive effect (see ibid., p. ii).31
With regard to the potential role of further voca-
tional education and training measures, two ap-
plication options might be generally feasible: On
the one hand, the increasingly occurring times of
unemployment could be used for further educa-
tion and, on the other hand, an attempt could be
made at increasingly integrating disadvantaged
persons in the labour market whose prospects of
being integrated in the labour market were further
reduced by the crisis. In view of the above effec-
tiveness analysis, the broad-scale further education
of previously laid-off workers/employees appears
to make little sense during a crisis. It is also ques-
tionable whether the labour market administration
and the vocational education and training system
would be able to react quickly enough to these re-
quirements. It is therefore recommended to focus
the instrument of further vocational education
and training on integrating the young. Positive
examples can be found in this regard – also in the
context of developing countries – that are all based
on the principle of a combined approach (educa-
tion measures, income replacement/social security,
31 In other studies of OECD countries from 1985–1999, training measures appear to be the best option for reducing unemploy-ment, followed by public works programmes with a (slightly) positive effect. According to these studies, subsidised employ-ment provides no positive effect at all (see Boone/van Ours (2004)).
46
advice and employment services) and are clearly fo-
cused on certain target groups (see e.g. World Bank
(2009c), p. 71 et seqq.; Sanchez Puerta (2010), p. 17 et
seqq.). Combined youth programmes, in particular
schemes such as the Jóvenes programmes used in
Argentina, Peru, Chile and Uruguay, show positive
employment and income effects (see Sanchez Puer-
ta (2010), p. 18; see also World Bank (2009c), p. 71 et
seqq.). The positive effects of these programmes are
largely achieved through a combination of different
active labour market policies. This imposes quite
high demands on the contentual focus of current
qualification measures (e.g. alignment with the cur-
rent qualification requirements of companies, com-
bination of on-the-job training and schooling). The
combination of different measures also increases
the problems in managing public finances and co-
ordinating the measures with the private sector (see
also Godfrey (2003), p. 39 et seqq.).
Wage and salary subsidies
As explained above, wage and salary subsidies ap-
pear to be particularly suited for creating new jobs
in a crisis management context. The instrument
could also be used for maintaining jobs. Indeed,
wage and salary subsidies were used as an anti-cri-
sis instrument (see Figure 4: labour market policy
responses to the GFEC), but predominantly in in-
dustrial countries. Many wage and salary subsidies
were paid to prevent retrenchments (see World Bank
(2009c), p. 73). The instrument is hardly used in de-
veloping countries. Documentation on this instru-
ment is mainly found in connection with the Asian
crisis as a tool for preventing retrenchments (see
Godfrey (2003), p. 23 et seqq.).
However, evaluations of effectiveness analyses
regularly show a poor result: “Wage/employment
subsidies most often do not have a positive impact
and have substantial deadweight and substitution
costs. Targeting and monitoring may help but at the
cost of reducing take-up rates.” (Betcherman et al.
(2004), p. ii). In view of the relative ineffectiveness
of “preventive” wage and salary subsidies, a general
consensus has developed in the context of tackling
structural labour market problems that direct sub-
sidies for workers/employees are to be preferred to
job subsidies.
However, the usefulness of wage and salary sub-
sidies in a crisis management context very much
depends on the actual configuration of the scheme
and its implementation conditions. As explained
in section 3.2, the short-time working arrange-
ment largely used in Germany in the context of the
GFEC is considered as successful (see e.g. Broyer/
Brunner (2009), ILO (2010e), p. 58). In the context of
short-time working arrangements, companies can
request salary subsidies when working hours are
reduced (67 percent of the monthly net wage for
hours not worked). This was supplemented in some
cases by further collective agreements (e.g. in the
metal processing and chemical industry) to contain
the drastic decline in orders in the context of the
GFEC (see ILO (2010e), p. 58). While wage and salary
reductions due to short-time work lead to a re-
duction in demand on a macroeconomic level, the
alternative option – the retrenchment of workers
– is considered to be even more problematic for the
economic adjustment process. The probability that
bilateral wage policy measures with a less drastic
effect on the overall adjustment process are taken
is increased if public subsidies are available (see
short-time working arrangement). In this case, the
burden is carried on three instead of two shoulders.
Depending on the amount of public subsidies, this
may also contribute to absorbing the much-feared
slump in demand, at least in part (see Broyer/Brun-
ner (2009)).
However, the success of wage subsidies in con-
junction with reductions in work hours depends
on various framework conditions, among others
on an only temporary slump in demand with an
otherwise efficient economic performance, no full
income compensation (reduces moral hazard), an
47
efficient public labour market administration and
longstanding experience with the instrument, a
viable social dialogue, fiscal room for manoeuvre,
etc. Therefore, the successful use of this instrument
goes along with relatively high implementation
barriers that most developing countries are unable
to overcome. Therefore, it may often not be possible
to increasingly use the instrument as such when a
crisis occurs (similar see also World Bank (2009c), p.
70). However, to keep up hard-won successes, e.g. in
the competitive export sector, also during an exog-
enous economic crisis, it is particularly worthwhile
for emerging economies to establish the corre-
sponding prerequisites for using these instruments
in an emergency context in the long term.
Public works programmes
When evaluating public works programmes as an
anti-crisis instrument, the different goals of PWPs
in industrial and developing countries must be tak-
en into consideration. Public works programmes
as an active labour market policy instrument are
becoming increasingly less significant in industrial
countries while they are regularly used in devel-
oping countries (see also Annex 3). Unfortunately,
the programmes are seldom subject to a systematic
evaluation with regard to their effect on the labour
market (see Betcherman et al. (2004), p. 53).
Evaluations of PWPs come to the conclusion that
they do not contribute to increasing employment
and income security in the medium to long term
(see Betcherman et al. (1999) and Betcherman et al.
(2004)). To avoid high free-rider effects and a nega-
tive impact on the wage structure in the first labour
market, the wages paid by PWPs should be below
those paid by the private economy (with regard
to questions regarding the configuration of such
programmes, see also Subbarao (2003), Wray (2007),
Del Ninno (2009), Lieuw-Kie-Song/Philip (2010),
Subbarao et al. (2010)). This self-selection mecha-
nism and the usual further restriction of the target
group often contribute to the negative image of
PWPs which makes it difficult for the participants
to return to regular jobs. Effects on the qualification
of participants which might compensate this effect,
are not visible. This mostly poor result of PWPs
with regard to their effects on the labour market
also applies to developing and emerging economies
(see Betcherman (2004), p. 53). Therefore, the pro-
grammes constitute an inefficient instrument for
offering participants a long-term perspective in the
labour market. Consequently, the recommendation
of PWPs as an instrument of active labour market
policy is limited to short-term use and only as an
instrument of social security for the disadvantaged.
The widespread use of PWPs as a crisis manage-
ment tool in MIC therefore expresses the attempt
to cushion the negative impact of the economic
crisis on the poor population because there are no
alternatives (see Figure 4, p. 23).32 While this applies
even more in LIC, financing problems, lack of polit-
ical will and poor administration capacities prevent
the increased use of this instrument in times of
crisis. In view of the different directions of PWPs
in developing countries, we will revisit the issue in
the context of our analysis of passive labour market
policies in the following section.
This shows that of the entire theoretically available
range of labour market policies, only a small por-
tion seems to be suited for immediately combating
a crisis. These include the reinforcement of the
management, consulting and information func-
tion of the public employment services (or general
labour market administration) and combined pro-
grammes tailored to the needs of specific target
groups. Qualification measures, wage and salary
subsidies as well as information and placement ser-
vices can contribute to keeping persons with a dif-
ficult recruitment background from loosing touch
with the labour market during an economic crisis.
32 On the general features of social security systems in developing countries as shock absorbers of crises, see the overview provided by EPRI (2009).
48
4.1.4 Passive labour market policy options
According to the analyses presented in section 3.2,
passive labour market policy in the form of un-
employment insurance has provided the most
significant contribution by labour market policy
to combating crises in industrial countries (see also
World Bank (2009c), p. 75). In the same way, unem-
ployment insurance proves to be highly effective
as compared to other discretionary fiscal policy
measures.33 Active labour market policy measures,
in contrast, only play a complementary role in crisis
management. Depending on the scope of unem-
ployment insurance, this is also true for transition
countries.
With view to the key role of institutionalised pro-
tection of the working population against the risk
of unemployment, the question arises to what ex-
tent the introduction of this instrument as a crisis
mitigation tool would be possible in the first stage.
This step, i.e. the introduction of unemployment
insurance (with much simplified conditions) was,
for example, recommended by the World Bank as
a potential option for developing countries (World
Bank (2009c), p. 76). These options for action have
not yet been implemented in practice. In any case,
the available literature does not provide informa-
tion on the new introduction of an unemploy-
ment insurance in a country. Even South Korea
which is often quoted as a positive example for
the introduction of unemployment insurance, had
introduced this insurance before the Asian crisis
and systematically expanded it based on the expe-
riences made in connection with the Asian crisis.
The conditions under which the introduction of an
unemployment insurance may be reasonable dur-
ing the first crisis management stage already, will
be explained in more detail in section 5.
33 According to a study for the US, expenses for unemployment insurance in conjunction with food schemes provided better multiplying effects than tax exemptions and infrastructure investments (see ILO (2010a), p. 24) for example. Similar effects are confirmed by empirical studies (see ibid., p. 23).
The option for action in connection with unem-
ployment insurance in the short-term manage-
ment of a crisis therefore concerns the question of
how it should be adjusted. The necessity of adjust-
ments to the unemployment insurance depends
(1) on the starting conditions of unemployment
insurance and (2) on the expected negative employ-
ment effects due to the crisis. Hence, countries (e.g.
Denmark) with an already relatively high level of
security through unemployment insurance require
fewer adjustments than countries with a low level
of security and a limited range of cover. Adjustment
options were mainly used in Europe, Canada and
the US, but not in transforming and developing
countries with existing unemployment regulations
(see World Bank (2009c), p. 75).
Unemployment insurance has a major impact on
the reachability of the unemployed. The potential
effectiveness of active labour market policies can
therefore be increased by combining them with
passive measures. Other advisable options for the
management of a crisis may aim at the focused
integration of active and passive measures, also in
the context of planned expansions and a strength-
ening of the public employment services which
often manage the unemployment insurance.
With regard to the decision-making situation
in developing countries for increasing the scope
and the level of security provided by existing un-
employment insurances, the general problems
of unemployment insurances in countries with a
high rate of informal jobs must be taken into con-
sideration: To be able to finance an insurance, it
is deemed necessary to limit the circle of entitled
beneficiaries to those working in the formal sector.
To avoid misuse, it is also necessary to have a rela-
tively costly monitoring system in place to verify
compliance with the prerequisites and criteria (see
also Vodopivec (2009)).
49
The best way for extending the scope of unemploy-
ment insurance in these cases would be to increase
the security level as this does not require chang-
ing the system. Due to the lacking financing basis,
however, this measure would have to be completely
funded by the state. As a result, a relatively small
group of persons that is already considered as priv-
ileged over those in informal jobs, would be put in
an even better position in the context of the crisis,
especially in countries with a high share of informal
employment. With view to the regressive distri-
bution effects of such programmes, the Brazilian
government opted for a relatively small increase of
wage replacement payments only and instead spent
more on the broad-based cash transfer program
(CTP) Bolsa Familia (see ILO (2010a), p. 18).
Irrespective of distribution questions, much bigger
income effects can be achieved by widening the
circle of beneficiaries. However, this cannot be
realised without major changes to the parameters
and implementation structures of the unemploy-
ment insurance. The extent to which these struc-
tural changes can be financed and implemented
relatively quickly depends significantly on the pre-
vious configuration of the unemployment insur-
ance and on available administrative capacities (let
alone financing possibilities via the state budget).
This requires a decision in the respective country
context. In addition, alternatives to unemployment
insurance (see EPRI (2011), p. 13 et seqq.) should
also be considered. This includes:
1. Regulations concerning redundancy payments.
2. Unemployment insurance savings accounts
(UISAs).
3. Public works programmes (PWPs).
4. Social transfers (CTP).
The potential and limitations of these measures in
the context of discretionary crisis management will
be discussed below.
Regulations concerning redundancy payments
Instead of unemployment insurance, redundancy
payments often are the only regular type of protec-
tion for formal employment relationships in devel-
oping countries. The instrument offers very little
protection in normal times already (see also Annex
3). This is because the level of protection depends
on the financial position of the company which is
mostly poor in times of crisis. An expansion of the
redundancy regulation in times of economic crisis
would also further deteriorate the financial posi-
tion of the companies still operating in the market
and therefore produce a procyclical effect.
Unemployment Insurance Savings Accounts
(UISAs)
Unemployment insurance as a kind of social insur-
ance and redundancy payments as enterprise-re-
lated insurance solution are two very different
types of protection. Some developing countries,
especially in Latin America, use unemployment in-
surance savings accounts (UISAs) supplemented by
state subsidies as a potential middle road. In these
cases, the addition to the UISAs of state subsidies
in times of crisis constitutes a potentially effective
instrument of protection for workers/employees
that are often particularly hit by unemployment as
a result of a crisis (e.g. export sector).
Public works programmes (PWPs)
The less the consequences of unemployment and
underemployment are covered by insurances, the
more recourse is made by developing countries to
PWPs and Cash Transfer Programmes (CTPs) (see
ECLAC (2010), World Bank (2009c), p. 75). Evalua-
tions have shown that PWPs generally have a posi-
tive effect on the income situation of the poor (see
e.g. Subbarao (2003), Betcherman et al. (2004), World
50
Bank (2009c)). Hence, PWPs can be used as effective
instruments for securing work income in a crisis
management context34.
However, the costs, scopes and intensity of the ef-
fects of PWPs vary greatly in an international con-
text (see Del Ninno et al. (2009)). Correspondingly,
the success of PWPs can also vary greatly, i.e. the
devil is in the details: The extent to which a country
should further expand existing PWPs or introduce
new ones in times of crisis depends on the possibil-
ities to adjust the configuration of a programme to
the objectives and framework conditions of a coun-
try. While PWPs generally provide sufficient con-
figuration flexibility to be adjusted to the objectives
and framework conditions of a country (see also
Annex 3), their configuration options are limited by
internal trade-offs.
First of all, the multiple objectives of employment,
investment and social security inevitably lead to
trade-offs within the programme. For example,
similar to the unemployment insurance, a conflict
between security and efficiency may arise. If the
wages paid by a PWP are higher than the actual
minimum wages, substitution effects will arise, but
the participation in the programme and, hence, the
security provided by it, will be superior. And while
PWP wages significantly below actual minimum
wages ensure that only the poorest will consider
participating in the programme, the “automatic
selection” mechanism will result in lesser partici-
pation and a lower security level for the individual
participant (see Lieuw-Kie-Song/Philip (2010), p. 24
et seqq. or Del Ninno et al. (2009), p. 18 et seqq. for
other internal trade-offs).
Secondly, and in particular in countries with little
political will and leadership, weak administration
structures and lacking financing options, trade-offs
arise from the availability of the programme and
34 While PWPs are usually considered as an active labour market policy instrument, the focus here is on their potential safety function.
the option to control the measure in a national
political context. For PWPs to be implemented
at all and/or with the necessary speed in times
of crisis, they are financed, controlled and imple-
mented with the major participation of donors and
non-government organisations (see also Annex 3).
Fully donor-financed programmes with mixed im-
plementation responsibilities play the major role on
LIC (see Del Ninno (2009), p. 34). The participation
of different organisations and levels does not only
increase the coordination effort for the programme
itself, it also makes it more difficult to integrate the
programme in the national policy context and to
steer, execute and control the programme in the
context of the system of public finances.
Social transfers
Social transfers (or unconditional CTPs) are a quick
and generally effective way of mitigating the neg-
ative effects of exogenous shocks on the poverty
situation (see EPRI (2011), p. 17). CTPs constitute
a reasonable emergency measure, particularly for
countries that are unable or only insufficiently able
to use other instruments such as PWPs. However,
social transfers are also faced with implementation
problems: In situations where the supply of goods
is limited, it may happen that the purchase power
cannot or only insufficiently be used to improve the
individual situation. While this approach is easier
in terms of administration, minimum requirements
still apply (also with regard to the capacities of the
banking system) (see ILO (2009a), p.35 et seqq.). And
finally, it may be difficult to define the target group
due to insufficient statistical data on the poverty
situation.
While unconditional social transfers should be
limited to a short period of time, conditional so-
cial transfers are more suited to tackle chronic
poverty problems (see IDB (2009a), p. 9 et seqq.).
Tailoring the programme to certain target groups,
tying its conditions to other social policy goals
(e.g. health, education) and creating the necessary
51
administrative and financing structures requires
time and much planning. Here also, the efficiency
and effectiveness of the programmes varies signif-
icantly. Successful CTPs such as Bolsa Familia in
Brazil or Oportunidades in Mexico only cost a frac-
tion of what is used for the same purpose in Africa
(among others also in South Africa) (see EPRI (2011),
p. 20).
Because the poverty situation may change signifi-
cantly in the course of a crisis while sufficient data
are not available quickly enough, the Inter-Ameri-
can Development Bank (IDB) is of the opinion that
conditional social transfers often are not able to
cope with an extension to the new poor population
(IDB (2009a)).35 While existing CPTs therefore are
often reaching their limits as a crisis mitigation
instrument, the transformation of unconditional
CTPs to conditional CTPs is a frequently observed
process (particularly in Latin America; see EPRI
(2011), p.22). Consequently, the use of social trans-
fers against the background of cyclical crises will
increase with sufficient funding. The increasing
recourse to CTPs in Latin America over the last ten
years (see IDB (2009a), p. 9), might then not just be
the result of a higher crisis frequency but reflect the
use of conditional and unconditional social trans-
fers in different circumstances.
Here again, we find the same problems as with
PWPs: The original ad-hoc character of the instru-
ment in conjunction with the described path de-
pendence (from unconditional to conditional CTPs)
leads to a discretionary, inefficient (due to the rep-
lication of implementation structures) and difficult
to coordinate social security system.
It needs to be noted that recommendations re-
garding the use of labour market and employment
35 In the opinion of the World Bank (2009c), however, existing conditional transfers also provide an important contribution in times of crisis (see ibid., p. 77 et seqq.). This applies in particular to programmes involving the schooling of children as a condi-tion to receive benefits. This helps to counteract the risk of child labour which has significantly increased in the developing coun-tries in the context of the GFEC.
policy instruments during the first stage of crisis
management depends relatively strongly on the
respective country context (economic situation,
existing policy packages, fiscal room for manoeuvre
and administrative capacities). To this end, section 5
will provide a more specific description of selected
options for action for various typical country situ-
ations.
4 2 Shaping the transition in times of fiscal consolidation
4.2.1 How to determine the time of consolidation
The necessary consolidation of public finances en-
tails the risk of triggering contractive adjustment
processes by the economy. The main aspect for the
compatibility of austerity measures and economic
recovery therefore is the extent to which an eco-
nomic upswing is sustainable, i.e. will continue
without further support by government policy
action. It follows from the above that timing is im-
portant for choosing the right strategy for consol-
idating the budget and further stabilizing the up-
swing. Premature austerity measures can cut off the
economic upswing and eventually be more costly
for a government than a somewhat longer contin-
uation of an expansive fiscal policy (see ILO argu-
mentation (2010d)). Due to the high interest and
repayment burden for the state budget, a delayed
budget consolidation not only reduces the room for
manoeuvre for future economic policy measures
but also negatively impacts the real economy (e.g.
inflation, crowding-out of private demand, little
incentive to start working, etc.).
While the right timing is indeed important, this
insight proves to be little helpful in the actual crisis
management situation. It is impossible in real life
to determine the best exit moment. Against the
background of significant weaknesses of economic
forecasts, it is difficult to forecast the develop-
ment of an economy in as much detail as would be
52
necessary (e.g. with regard to the development of
employment and income). I.e., the moment when
an economy can – figuratively speaking – stand on
its own feet again, is difficult to forecast with the
necessary exactness and certainty.36 Second, the
necessity of fiscal consolidation is not determined
by the development of the current crisis alone but
also by a country’s debt and budget situation before
the crisis. Highly indebted countries will have to
take austerity measures faster than countries with a
low debt ratio. The same applies to poor countries.
As explained, many LIC so far have been able to
avoid a procyclical fiscal policy, but with a contin-
ued poor development of their economy, austerity
measures will become more urgent for them.
Empirical evidence regarding the consolidation of
state budgets in OECD countries also shows that
austerity measures, and in particular cuts in ex-
penses, often did not have the expected negative
effect on the economy. In fact to the contrary, many
austerity measures were followed by a distinct
increase in economic growth (see Alesina (2010), p.
4). Measures for restoring the public finances and,
hence, the state’s ability to act, appear to have ab-
solute priority. In the case of relatively high public
debts it should therefore not be about the ques-
tion whether austerity measures are necessary but
rather about the “how”, i.e., to determine on which
criteria austerity measures should be based. It ap-
plies in principle that those discretionary policy
measures should be discontinued that produce the
least “withdrawal effects” in the real economy. With
regard to labour market and employment policy
approaches the focus here should be even more on
the target groups that profit the least from an eco-
nomic recovery – if not already done so when the
additional measures were taken in the first stage.
(e.g. long-term unemployed, low-qualified workers,
etc.) (see also Ernst et al. (2010), p. 77).
36 In this regard, the different exit scenarios provided in the literature (e.g. with Ernst et al. (2010), p. 75 et seqq.) are not very relevant.
The described process of a beginning economic
recovery and consolidation of public budgets in
the context of the GFEC has already started (see
IMF (2009) and (2011); Ernst et al. (2010) with regard
to consolidation measures). A first comparison be-
tween announced discretionary economic stimulus
programmes and announced austerity measures of
the G20 countries provides a quite heterogeneous
picture (see Ernst et al. (2010), p. 63)37: the austerity
measures in some countries have a significantly
lesser scope than the previously announced eco-
nomic stimulus programmes (e.g. India, Indonesia)
while other countries would even like to go beyond
the scope of their economic stimulus measures
(France, the Netherlands, the UK, among others).
Most of the reviewed austerity programmes include
tax increases, cutbacks in social insurances (e.g.
pension, health and unemployment insurance),
lesser expenses for public employees (salary and job
cuts) as well as cutbacks in infrastructure, military
and development aid expenses (see ibid., p. 64).
Due to the fact that many of the announced aus-
terity measures also concern labour market- and
employment-relevant areas, Ernst et al. (2010) takes
a critical view of the consolidation process. The cut-
backs in employment-relevant areas are considered
as premature. It appears, however, that this assess-
ment, without further knowledge, e.g. of the dis-
tribution of the expenses to individual policy areas
prior to the crisis, is too superficial, i.e. a meaningful
evaluation would require a detailed analysis of
measures actually taken and their background in
a country context (initial situation, structure of the
actually implemented economic stimulus package).
37 The validity of this comparison (see Ernst et al. (2010), p. 63) is limited, however, as it only compares announced measures. Hence, they may significantly deviate from actually implement-ed measures. Also, the information provided on the individual measures is incomplete. In some countries, the share of the economic stimulus programme is stated in percent of the GDP but no information is provided on the actual amount of the economic stimulus programme. The same applies to data on the expenses in connection with austerity packages. The calculation basis for the percentage value, however, remains unclear in both cases.
53
As explained in the previous section, some of the
discretionary labour market and employment
policy instruments (e.g. PWPs, adjustments of
unemployment insurance to balance additional
unemployment unconditional social transfers)
show a positive balance in the short term only.
Hence, a continuation of these measures would
not be reasonable, even if there was no necessity
for austerity measures. It is necessary to integrate
these measures in the existing policy package irre-
spective of a necessity for austerity measures. The
budget consolidation only increases the pressure
to also review the labour market and employment
policy for effectiveness. The medium- to long-term
reform steps should then ideally be based on these
analyses.
4.2.2 Information on existing policy packages
A thorough analysis of the previously existing poli-
cy packages and their effects, however, requires that
the respective information is available. As already
mentioned before, significant deficits exist in this
regard, particularly in poorer developing countries.
Relatively little public control and administrative
capacities in conjunction with frequently poorly
coordinated donor contributions result in a situa-
tion where little systematic knowledge on the ac-
tual situation of the policy packages is available.
In this context, the ILO Global Jobs Pact con-
stitutes a new approach in the attempt to close
the information gap with regard to employment
promotion and protection in the context of crisis
management. The policy package was adopted by
the International Labour Conference in 2009 and
covers all policy tools considered as significant to
combat crises and stabilise income in the long term
(see ILO (2010b), p. 8). According to the ILO, the
Global Jobs Pact provides a reference framework for
developing effective policies for promoting job cre-
ation and protecting jobs. “It is a framework for the
period ahead and a resource of practical policies for
the multilateral system, governments, workers and
employers that will enable each country to formulate
a policy package for a sustainable recovery.” (ILO
(2010b), p. 8).
Upon request, countries interested in adopting this
“integrated” policy package are supported by the
ILO. This includes, first of all, help in performing a
so-called Global Jobs Pact Country Scan as the policy
package needs to be tailored to the individual situ-
ation of a country (see ibid., p. 8). The analysis of the
labour market situation and of the policy responses
in the context of the crisis serves as a basis for rec-
ommendations to the partner government as to the
further procedure. To this end, the policy package
of the Global Jobs Pact is used as a reference guide.
Hence, it is reviewed in the context of the country
scan to what extent a government has taken an-
ti-crisis measures in all areas of the Global Jobs Pact.
According to this principle, any gaps that may be
found indicate fields where action is required. In
addition to a country scan for Indonesia, published
country analyses for Bulgaria, Jordan, and South
Africa are available to date (see ILO (2011a), (2011b),
(2011c)).
The current format of the Global Jobs Pact Coun-
try Scans, however, is not sufficiently explicit to
provide the basis for a national dialogue and im-
plementation process (see ILO (2010b), p. 8). This is
mainly due to the reference framework used by the
Global Jobs Pact approach as it does not provide an
integrated policy package for the management of
a crisis. While policy measures beyond the narrow
scope of labour market policy are formulated – this
is particularly important for analysing anti-crisis
measures as combating a crisis with isolated ap-
proaches cannot be successful – no integration
in the sense of a consideration of the trade-offs
between individual measures and an evaluation
of the measures with regard to their ability to help
overcome the crisis takes place (see also Annex 5).
Hence, the Global Jobs Pact constitutes the smallest
54
common denominator that could be agreed upon
on an international level. It includes “best practices”
and general statements without specifying relevant
trade-offs or specific application problems in a
country context. Furthermore, announced and ac-
tually implemented measures are not differentiated
sufficiently enough. All in all, there are hardly any
approaches to a critical appraisal of measures in the
light of previous country experiences. The added
value of this paper for national reform discussions
is questionable as it remains on such a general level
that it appeals to anybody. It is therefore recom-
mended to develop the analysis format in such a
way that information on the substantial directions
of policies is provided and LMP and EP governance
aspects are considered.
4 3 Medium- to long-term improvements of labour market and employment policy packages
Crises increase the reform pressure. By this they of-
fer societies the opportunity of overcoming politi-
cal resistances based on distribution considerations
(winners vs. the losers of reforms), the preference
of short-term solutions and problems of collective
actions (see OECD (2006a), p. 194, see also Alesina
(2010), p. 9). Therefore, the best time to implement
reforms is immediately after a recession (see ibid., p.
200). Various studies indeed identified a significant
connection between an approaching economic re-
cession on the one hand and a tendency to perform
structural reforms (see ibid.). “Economic crises may
improve awareness of the existence of inefficient pol-
icy settings. The economic recovery that follows the
crisis may offer room for manoeuvre for pursuing the
reform process.” (OECD (2006a), p. 200).38
38 From a historical point of view, economic crises have had a major impact on the labour market- and employment policy packages of countries (see also the respective evidence in OECD (2006a), p. 183–200). This applies, for example, to active labour market policy which was originally included as an anti-crisis instrument in the policy packages of industrial countries and in the meantime – due to its integration in passive labour market policy – has become an integral part of long-term labour market and employment policy.
The choice of labour market- and employment-re-
lated emergency measures in the first manage-
ment stage of a crisis is first of all limited mainly
by already available instruments. Secondly, mainly
such measures are chosen to combat the crisis that
counteract the temporary drop in demand and in-
vestments as well as job losses. These measures are
predominantly financial policy measures. There-
fore, they usually constitute so-called “second best”
approaches as they do not deal with the underlying
causes of susceptibility to external shocks. And this
– the tackling of the roots of labour market- and
employment problems of a country – is exactly the
object during the third stage of crisis management.
There are two key questions when it comes to la-
bour market and employment policy reforms in the
third stage of crisis management: the question (1)
as to the content and (2) the way of implementa-
tion of the policy measures. A (subjective) selection
of the major aspects of both questions is addressed
below.
4.3.1 Conceptual orientation of reforms
In the context of analyses of the causes of the Asian
crisis, system-related deficits in the financial sector
and in handling capital market transactions were
already identified. The fact that basic problems of
market failures are not just a problem experienced
by developing countries, was now confirmed by the
GFEC (see also explanations in Annex 2). Therefore,
reforms of the financial markets constitute a ma-
jor preventive element for an improved mitigation
of future financial crises.
From an employment policy perspective, it is im-
portant to make a conscious decision in favour
of structural industrial change (see e.g. for the
Asian countries ADB (2009), p. 50 et seqq.). In this
regard, a consensus has formed in the meantime,
that export-oriented strategies in conjunction with
an opening of their economy provide developing
countries with better opportunities for economic
55
development than protective strategies (see e.g.
Krueger (1997)). Indeed, most empirical studies
show a favourable relationship between trade liber-
alisation and economic growth (see Winters (2004);
Wacziarg/Welch (2008)). 39
The support of SMEs should be defined in more de-
tail based on this basic approach to industrial poli-
cy. What matters mainly in this regard is to lastingly
remove expansion barriers40 for small and medi-
um-sized companies whose production is linked
to the export sector. This means that “second-best”
approaches such as loan programmes should be
given lower priority than measures directly aiming
at improving the general availability of loans for
SME (e.g. financial market regulations, banking su-
pervision, guarantee of ownership rights, see Balk-
enhol (2011)).
With regard to education policy, studies suggest
that the envisaged structural change only makes
sense if it is accompanied by significant invest-
ments in primary education.41 The transition from
traditional production to state-of-the-art compet-
itive products requires investments in initial and
further vocational training on an industry level.
Due to externalities, it is not possible to rely on the
SME to promote further education in the compa-
nies themselves. Combined approaches that are
also considered as useful in the context of active
labour market policy (initial vocational education
and training combined with practical experience)
provide an option for lowering the expansion
barriers of SME. With regard to the entrepreneurs
themselves, SME incentive programmes with subsi-
dised business development services (BDS) (e.g. basic
39 Industrial policy measures should, however, not be overrated (see discussion by Krugman/Obstfeld (2006), p. 336). They are, for example, not considered as crucial for the economic success of the Asian Tigers.
40 This includes, among other things, limited access to loans, infrastructure deficits, segmentation of product markets, external factors in professional education (see ADB (2009), p. 35).
41 It is interesting to note that the successful countries of East Asia, for example, frequently had relatively high and increasing expenses for the public education system (see Krugman (1994)).
management training) have led to good results in
Peru (see ADB (2009), p. 42). It is interesting to see
that those entrepreneurs profit the most from the
training measures who, due to their already ex-
tensive experience, showed the least demand for
the services. These results suggest that a lack of
qualification even exists in companies with a mar-
ket potential. With view to the lacking awareness
of this deficit, market prices for BDS would not be
recommendable.
The considerable infrastructure deficits consti-
tute a key expansion obstacle for SME (see ADB
(2009)). According to recent analyses, the average
cost of a connection to the electric power network
in Sub-Saharan Africa is 5,400% of the per capita
income while it is only 93% in industrial countries
(see World Bank (2011c), p. 2). Even once this obsta-
cle has been overcome, frequent power cuts lead to
a situation where only larger companies with suffi-
cient finances can use alternative power sources for
their supply (power generator, change in location).
The integration of structurally weak rural areas, e.g.
via value-added chain approaches, also depends
very much on the transportation routes and the
availability of infrastructure in general.
Major reforms of government policies are also nec-
essary to improve the business and investment
climate. The World Bank “doing business index”
tries to empirically record the respective expansion
obstacles for companies (see World Bank (2011c)).
However, the doing business index must be careful-
ly interpreted. The index usually “rewards” a mini-
mum level of regulation and thereby looks only at
the costs of regulations for the individual company
without assessing the economic or social benefits
provided by the regulation. Despite increasing re-
form activities – particularly in Sub-Saharan Africa
– to simplify the framework conditions of entre-
preneurial activity, substantial differences between
industrial and transition countries remain.
56
This is also due to the fact that in addition to the
formal design of the rules, economic activity and
the generation of income and employment oppor-
tunities very much depend on the quality of the
public administration and the enforcement of the
rules. According to empirical studies by Rodrik et
al. (2002) on the causes of growth and development,
the quality of the institutions of a country has a
greater impact on the development prospects of a
country than geographical factors or trade liberal-
isation alone. Among the particularly critical areas
of public and social control mechanisms are (see
Rodrik (2007), p. 153 et seqq.; see also Winter (2004),
p. 14 et seqq.):
}control of property rights,
}activities of regulatory authorities to correct
market failures (e.g. competition authorities,
banking supervision),
}institutions for macroeconomic stabilisation (e.g.
central bank),
}social security system
}mechanisms for managing social conflicts (e.g.
social dialogue).
If such institutions are important for the develop-
ment of a country in “normal” times, they matter
even more in times of crisis. Economic crises con-
stitute a stress test for the functioning of the public
decision-making and income distribution mech-
anisms of a society. Depending on the severity of
a crisis, deficits in the political decision-making
processes (lacking citizens’ participation, demo-
cratic deficits, deficits in the rule of law, weak social
dialogue42) and in the social security networks sig-
nificantly contribute to destabilising a society.
42 Tripartite agreements may contribute to improving the manage-ment of crises under certain circumstances but do not necessar-ily have to. I.e., not every dialogue platform that may be support-ed by donors in times of crisis will provide positive results. See more on this theory in Annex 4.
It follows from the above that the systematic
expansion of social security systems is a major
prerequisite for long-term economic development.
While this may bear the risk of providing negative
incentives (e.g. with regard to the readiness to work)
and entailing significant administration and financ-
ing costs as well as rent-seeking, there are hopes
that the costs are more than balanced in times of
crisis by the stabilising effects of the social security
systems.43 Eventually, key determinants of the work
environment should be influenced by a balanced
participation of employees’ and employers’ rep-
resentatives (collective agreements and social dia-
logue). However, the respective reforms often fail in
developing countries due to a lack of political will
and considerable rent-seeking by industry associ-
ations and trade unions which usually represent
minorities only (see also the relevant explanations
in Annexes 3 and 4).
4.3.2 Quality of the reform processes
Despite the opportunities provided by crises for
basic reforms of labour market and employment
policy packages, not all countries seem to be using
them in the same way. This means that the insight
alone gained by the crisis that previous policy
measures were insufficient and, hence, should be
revised, is not sufficient for successful reforms. In
addition to a commitment to reforms, the reform
options are determined by the initial situation in
a country and the development of the economy in
the subsequent period. Better fiscal scope and ad-
ministrative capacities increase the range of re-
form options and improve the quality of the reform
process.
43 Indeed, the development of social security networks in a coun-try is often very much motivated by paste crises. While most developing countries have no unemployment insurance, trends can be observed where measures directed at creating social secu-rity were gradually expanded and linked to labour market policy elements (e.g. in Argentina, Chile, South Korea).
57
However, the political framework conditions are
just as important for long-term reforms and for
their actual implementation: According to the New
Political Economy, politicians focus on electoral
votes. And, while reforms are desirable for a society
and also generally demanded, they usually result
in individual groups getting more and others less
burdened.
Therefore, reforms may be jeopardized by influ-
ential interest groups whose members see their
individual income position threatened (see Alesina
(2010), p. 8 et seqq.). Such an (anticipated) stonewall-
ing attitude, e.g., may have significantly contributed
to the fact that the social security reform in Indo-
nesia decided by law in 2004, is still pending in 2010
despite the original intention to reach a general
level of security for all citizens by 2009 (see Knoess
(2010), p. 139 et seqq.). I.e., the failures of policy
makers tend to lead to a shortage of long-term re-
form approaches.
To circumvent such stonewalling attitudes, a re-
form approach can be used where pilot measures
are introduced that can then be expanded step by
step (see also OECD (2006a), p. 196 et seqq.). With
regard to the necessary expansion of the social
security networks, the introduction of an unem-
ployment insurance, for example, may even make
sense in developing countries with a high share of
informal employment and weak administrative
structures. Irrespective of the practical implement-
ability which will be discussed in more detail in the
following section, the set-up of new social security
elements provides the advantage that reforms in
other areas (e.g. highly regulated labour markets)
can be introduced by softening stonewalling atti-
tudes (see also OECD (2006a), p. 197).
Another major aspect during the third stage of
crisis management is to use the integration of the
discretionary anti-crisis measures as an instrument
for improving the general effectiveness of the pol-
icy. In Asia, for example, SME promotion measures
usually suffer from too many different ideas which
may even be in conflict with each other (see ADB
(2009), p. 40 et seqq.). Due to their cross-sectional
character, SME subsidy programmes are usually
managed by several public authorities. There is no
coordination, e.g. by a central coordinating body (in
Cambodia, for example, SME policy strategies are
executed by 25 different ministries and organisa-
tions with their own SME subsidy programmes; see
ibid., p. 41). A particular problem, however, lies in
the fact that monitoring and evaluation approaches
are seldom pursued. Accordingly, there is not even
the necessary information basis for improving
effectiveness. Similar deficits as described in the
example of SME promotion can also be identified in
other major policy areas such as social security, but
also in labour market policy.
Therefore, the step-by-step expansion of social
security systems and the general expansion of la-
bour market policies should be accompanied by
a systematic expansion of monitoring and eval-
uation systems. M&E systems should not only be
anchored in the programmes, they should also be
used to show the relative contributions and costs of
the individual programmes to the national policy
strategies (e.g. PRSP, national employment strat-
egies, budget goals for a programme, etc.) in the
context of an institutionalised M&E system. Even if
it is to be expected that the quality of effectiveness
analyses will initially be rather poor, the creation of
a M&E format is worthwhile as it helps making the
performance as well as the payment flows of active
and passive labour market policies more transpar-
ent. This information is needed for the necessary
integration of active and passive labour market pol-
icies and for the related reforms of administrative
structures (e.g. creation of “one-stop” employment
services). Eventually, the integration of labour
market and employment policy programmes in
the public financial system constitutes a decisive
factor for political control and for the possibility of
the parliament, the public and the social partners
58
to participate in the decision-making process.
To improve the incentives and possibilities for a
government to actually implement and reach the
targets of employment promotion and protection
defined in the national strategy documents, the
programmes must be reflected in the national
budgets. Information about the performance and
financing structures of the labour market adminis-
tration provides an important basis for identifying
obstacles in the administration of funds in the con-
text of budget planning, execution and control (see
e.g. GTZ (2009), p. 3).
59
5 Innovative labour market and employment policy approaches for the management of crises in a country context
In this last chapter we want to present and discuss
some not quite explored response options to crises
based on two typical country cases.
5 1 Reform of public employment services in emerging nations
The “emerging nation” case is about a LMIC with a
transformation background (e.g. post-Soviet states).
Despite the presence of a significant informal sec-
tor, there is a noteworthy formal sector with ex-
port-oriented industries. With generally significant-
ly poorer administrative and controlling capacities
than industrial countries, the EP is generally struc-
tured in analogy to the EP of the European OECD
countries. For example, there is an unemployment
insurance and the public employment services con-
stitute the central hub of the labour market admin-
istration.
The relatively well developed labour market ad-
ministration, as exemplified in our “emerging
nation” example, makes it possible to increase the
effectiveness of active and passive EP measures
through a concentration of the measures with the
public employment services. The public employ-
ment services can be reinforced, in particular with
regard to administration, information and coordi-
nation.
a. Administrative role: According to an ILO (2009c)
study of 37 industrial and developing countries,
public employment services were mainly used as
implementation unit for the discretionary labour
market programmes in times of crisis (see ibid.,
p. 1). The particular importance of public em-
ployment services also affects the way the unem-
ployment insurance is used: Due to the expected
increased use of the social security system and
of the information and consultation services in
general, the equipment of public employment
services was in some cases improved and staff
numbers increased. It is noticeable in this con-
text, that many countries reactivated the pro-
grammes used in previous crises and/or adjusted
them to the circumstances of the current crisis
(e.g. Mexico, Chile, Canada, USA, Cameroon) (see
ibid.).
b. Information role: To the extent that the admin-
istration of various programmes was taken over
by the public employment services, they were
able to bundle the information on the options
provided and present it to the users. While – as
described above – the demand for employment
services is relatively low in developing countries,
their services may attract more users if they
function as a “one stop agency” for information
and consultation regarding various programmes
in times of crisis. This has positive effects on the
reachability of relevant target groups. With the
creation of mobile service units, some countries
were able to react particularly quickly to the de-
mand for information and placement services of
workers in specific regions and/or in companies
that were particularly hit by the economic crisis
(e.g. Croatia, Thailand, Pakistan) (see ILO (2009c),
p. 1).
c. Coordinating role: In some countries (e.g. Neth-
erlands, New Zealand, Germany and Croatia) the
crisis was used as an opportunity for intensifying
the cooperation between public employment
services and private placement agencies (see ILO
(2009c), p. 1). Especially in cases where the public
60
employment services had good information sys-
tems at hand and reacted to changes in labour
market data, the input by the public employment
services could be used to speed up decisions
on the expansion of labour market policies (see
ILO (2010a), p. 38). In the same way, public em-
ployment services in some countries facilitated
the social dialogue by forming a so-called rapid
response team with the participation of all major
stakeholders (see ibid., p. 39).
However, the actions taken so far have not been
able to solve a key problem of placement servic-
es in transition countries: While the payment of
unemployment benefits provides an incentive for
workers to use the employment services, this does
not apply to employers. As explained in Annex 3,
the effectiveness of placement services in transition
countries is usually reduced by the lacking partic-
ipation of employers. Instead of cooperating with
the placement services, they are first and foremost
regarded as a supervisory authority (similarly to
a workplace inspection). SME in the grey area be-
tween the formal and the informal sector in par-
ticular avoid any contact with public employment
services.
A potential new approach would be to systemati-
cally empower public employment services to pro-
vide information and advice to SME (e.g. on SME
subsidy programmes). While the corresponding
services for larger companies of the formal sector
are usually provided by the industry associations
themselves, this does not apply to SMEs of the ex-
porting sector that have a particularly high insol-
vency risk during a crisis. However, this would re-
quire reviewing existing SME subsidy programmes
for consistency and identifying potential coordina-
tion deficits.
5 2 Protection of workers in developing countries with medium per capita income
As a LMIC with an export sector which is relevant
for the generation of income, this type of coun-
try (e.g. in Latin America or Asia) is susceptible to
exogenous shocks stemming from economic and
financial crises of other countries. In contrast to
transition countries with unemployment insurance
systems, workers are mostly protected by redun-
dancy payments. Due to the significant share of
informal jobs, the general safety level is relatively
low. Regulations for pensions and health insurance
are in place, at least for the formal sector. To reduce
the unevenly distributed poverty rate (high poverty
rate in rural areas with subsistence economy) pub-
lic works programmes (PWPs) and social transfers
(CTPs) are used on a regular basis.
Against the background of the described country
situation, the options for actions for improving the
level of social security in a crisis management con-
text are described below.
5.2.1 Adjusting unemployment insurance to a developing country context
An interesting approach in this context is the Emer-
gency Loan Facility for Displaced Workers fund in
the Philippines that was created in the context of
the GFEC: Based on their previous contributions to
social insurances, retrenched workers can obtain
wage replacement payments. Vodopivec (2009)
presents a similar model as a potentially effective
alternative to the OECD type of unemployment
insurance. This is a UISA that, in view of the exist-
ing weaknesses of a mere savings model, is expand-
ed by giving workers the option to take out a loan
if his account is no longer in the plus (see ibid., p.
25 et seqq.). The loan is secured by the claims accu-
mulated by the worker through his social security
contributions (e.g. pension claims). If the debt is not
paid back at a later time, pension payments will be
shortened accordingly during retirement.
61
The advantage of the “UISA plus loan” model for
developing countries as compared to the OECD
type of unemployment insurance is that by using a
stricter self-financing approach (through contribu-
tions by employers and wage earners) and applying
the funding principle, typical moral hazard prob-
lems of unemployment insurances are circumvent-
ed. The crucial advantage is that it does not need
costly administration and extensive verification of
eligibility and participation modalities. This is usu-
ally also not manageable in developing countries
(see ibid.). Hence, it is no longer necessary to narrow
the focus on formal employment relationships to
avoid stress on administrative capacities. The dis-
advantage of an unstable and often lower level of
protection can be partly reduced by the option to
take out a loan. Linking this approach with exist-
ing social insurances provides the advantage that
administrative structures that have been tested in
practice and a useable information basis are already
available. As the loan has to be paid back, moral
hazard problems are almost excluded. In terms of
administrative structures, this type of unemploy-
ment insurance could easily be introduced within
4–6 months, and could therefore already be used as
an anti-crisis instrument in the first stage.
This strict type of self-financing of unemployment
insurance has not yet been tested in practice –
probably also due to the fact that the above model
is suitable for an individual protection against un-
employment, but insufficient as a security feature
in a developing country context. If the risk of oc-
currence can only be minimally influenced by own
behaviour (and not at all in times of crisis), a strong
partner is necessary for overcoming the problem.
Therefore the actual UISAs models deemed as suc-
cessful work with elements of public subsidies.
Compared to the strict self-financing model, how-
ever, moral hazard problems with a corresponding
loss in effectiveness (longer unemployment period)
are inevitable (see Vodopivec (2009), p. 26). Hence,
the extent of public subsidies should mainly be
conditional on the administrative capacities in a
country. This also means that the system can be
adjusted with the improvement of administrative
capacities in a country and/or easier documenta-
tion of employment relationships in the context of
the economic development of a country (i.e. more
formal employment relationships).
5.2.2 Configuration aspects of public works programmes (PWPs)
The previous “integrated developing country” type
has also generated some labour market approaches
that are considered as relatively successful (e.g. with
regard to PWPs) and can be used for crisis manage-
ment. These approaches may constitute an advan-
tage in advising countries with significantly poorer
administrative and financing conditions (e.g. many
LIC in Sub-Saharan Africa). Even if the implemen-
tation of these measures in such a country context
usually still fails due to a lack of integration in the
existing policy package, the introduction of such
measures should still be aimed at as a medium- to
long-term reform option.
The common feature of public works programmes
rated as successful is that they were developed
from already available predecessor programmes
and quickly ready for use (see Liew-Kie-Song et al.
(2010), p. 12). While PWPs are most efficient as a
short-term measure, the longer-term maintenance
of PWPs still provides certain advantages, especially
for the management of crises. Hence, the crucial
point is how to design PWPs for the long term to
reach the required minimum effectiveness and ef-
ficiency.
Major design aspects are explained below based
on experiences with a public works programme in
Argentina: Against the background of the severe
financial and economic crisis in 2002, the provision
of social security for the poorest of the popula-
tion with the existing isolated and little coordi-
nated programmes seemed no longer sufficient.
62
Therefore, the Jefes y Jefas de Hogar Desocupados
programme (programme for unemployed heads of
households) was established (see Wray (2007), p. 26
et seqq.). To be able to finance this comprehensive
public works programme on a national level, many
other individual social security programmes were
either discontinued or their scope was significantly
reduced. As a result, the employment situation and
social security for the population was significantly
improved without excessive costs (the costs for the
introduction of Jefes and the subsequent Familia
and Seguro programmes together was less than 1%
of the GDP in 2003; see Wray (2007), p. 32 et seqq.;
Rofman/Ringold (2008)).
The Jefes y Jefas PWP was managed by the ministry
of labour and covered 28 provinces and 2,300 mu-
nicipalities in Argentina. Due to the relatively rare
scale of the programme – also in an international
context – it was possible to reach approximately
16% of all Argentinean households (see Kostzer
(2008), p. 20). As the actual implementation on a
municipal level was controlled by so-called local
councils (see Kostzer (2008), p. 19), the programme
included distinct decentralized elements. Hence,
the instrument provided sufficient flexibility
to adjust to regional differences (in some of the
provinces, for example, almost 40% of the house-
holds obtained funds from the programme). While
significant capacity problems in managing the
programme were observed on a local council lev-
el, this problem might be solved in the long term
through accompanying (training) and information
measures. The programme in general responded in
a sufficiently countercyclical manner, i.e. with the
increasing economic recovery, more and more par-
ticipants were able to leave the programme.
In contrast to PWPs where the focus is on the
building sector (e.g. road construction), signifi-
cantly more women than men profited from Jefes
y Jefas (“gender bias”, see Kostzer (2008), p. 21). In-
terestingly, this constitutes a positive but originally
unintended outcome from a poverty and gender
perspective. Instead, it is the result of the individual
participation strategies of many households: For in-
formal and/or non-registered civil partnerships, the
household income could be maximised if the male
heads of the households for whom the programme
was originally intended, used their opportunities
for (occasional) employment in the informal sector
and the women who usually have lesser opportu-
nities in the labour market participated in the pro-
gramme.
Certainly also due to the high female participation
rate in the programme, the implemented employ-
ment measures differ significantly from those of
usual PWPs in an infrastructure context (see below
Kostzer (2008), p. 23 et seqq.). In addition to meas-
ures for improving the infrastructure (construction
and maintenance of local infrastructure such as
schools, parks, etc.) many participants also partici-
pated in the production of local consumables (e.g.
bakeries, textile production, recycling). Further-
more, projects in municipal service areas were im-
plemented (e.g. child care, geriatric care, healthcare
programmes, school meals). The establishment of
micro-companies (e.g. cooperatives) for the produc-
tion of goods and services (e.g. domestic aid meas-
ures) was also supported.
The decisive advantage of employment measures
in the municipal services sector or also in the envi-
ronmental sector is that they respond to a demand
that is not only found in times of crisis. Therefore,
the public works programme can be set up and
adjusted to the above described long-term perspec-
tive. Furthermore, these are services to which the
poor usually have no access. I.e., the programme
does not only increase household income but caters
to specific needs thereby creating an added value
for poor households. Eventually, the requirement
profiles for employment in these areas are often
suitable for women so that a broader participation
can be reached. Accordingly, such PWPs are also
63
considered as “innovative” approaches by ILO (see
Lieuw-Kie-Song et al. (2010), p. 36 et seqq.).
However, this advantage – i.e. the provision of basic
services which are in demand locally – at the same
time also constitutes the problem for the long-term
implementation of this type of PWPs: As also con-
firmed by experiences made in connection with the
Jefes y Jefas programme, an increasing problem of
distinguishing the works programme of the sec-
ond labour market from the private economy and
from public activities arises, at least once the crisis
has been overcome (see below: Kostzer (2008), p.
22 et seqq.; Lieuw-Kie-Song et al. (2010), p. 37). Not
only the products and services of the works pro-
grammes frequently compete with services provid-
ed by the public sector (e.g. child care) but the wages
paid indirectly have a minimum-wage-effect with
regard to competing employment alternatives.
To avoid significantly reducing the number of
seasonal workers (and thereby increasing the cost
of labour in the informal sector), the participants
of the programme in Argentina were permitted
– after protests in this regard by private economy
employers – to have temporary jobs outside the
programme. To differentiate offers by PWPs and job
offers in the first labour market, ILO recommends
to systematically ensure a decentralized, i.e., local
project selection as the best approach for avoiding
distortions of competition and inefficient dupli-
cations (see Lieuw-Kie-Song et al. (2010), p. 36 et
seqq.). The consequence of this approach, however,
is that economies of scale in production cannot
be reached. It becomes difficult, for example, if the
type of service requires a long-term, stable work
commitment (e.g. child care).
The described conflict cannot be solved in general
as PWPs constitute a “second best” approach. In the
long term it would be preferable, both in terms of
a provision of goods and services to the population
and in terms of employment and income oppor-
tunities, to eradicate the root cause for the deficits
in the provision of basic public services (inefficient
public administration, poor infrastructure invest-
ments, lacking development of a private economy
due to expansion obstacles, etc.). The supply created
by PWPs can therefore only serve to complement
obvious deficits in the supply of goods and services
by the state and by the private economy.
The Argentinean government decided in 2006
to convert the Jefes programme to two new pro-
grammes: Familias and Seguro de Capacitacion y
Empleo. This was done against the background of a
positive development of the economy, decreasing
participation in the programme and increasing
concerns about the long-term effectiveness of the
programme (see e.g. Wray (2007), p. 27; Iturriza
et al. (2008)). While Familias basically is a social
welfare programme for households with 3 or
more children, Seguro is more focused on the em-
ployment-seeking working population (see Wray
(2007), p. 32 et seqq.; Rofman/Ringold (2008)). It is a
non-contributory (i.e. publicly financed) unemploy-
ment insurance which is combined with qualifica-
tion measures and placement services.
64
6 Conclusions for development cooperation
What are the conclusions for the German develop-
ment cooperation from the analysis of labour mar-
ket- and employment policy-related crisis manage-
ment options in this study?
The analysis of crisis management has shown that,
while policy reactions in times of crisis initially
respond to other requirements than those of a
LMP and EP in “normal” times, both policy areas
are closely linked: As soon as there are prospects
of a “normalization”, anti-crisis measures must be
integrated in the existing policy package. To reach a
long-term economic development and increase the
resilience of an economy against economic crises,
reforms of employment policy (e.g. SME promotion,
education policy, social policy) as well as labour
market policy are necessary.
It is therefore recommended to review the prod-
ucts of development cooperation for their system-
atic compliance with the abovementioned crisis
management aspects. The integrated approach to
employment promotion44, for example, should
be expanded by the instrument of passive labour
market policy. This also means that the interfaces
between labour market policy and social policy
must be defined (in analogy to the already defined
interfaces with a promotion of the private economy
and with education policy).
Furthermore, it seems appropriate to identify po-
tential interfaces with crisis management for cur-
rent development cooperation programmes with
regard to LMP and EP. To this end, some of the lines
of argumentation presented in this study could be
discussed in a more country-specific context.
It is also important for a medium to long-term re-
form of LMP and EP, to review the existing policy
packages. In this regard, significant information
44 See GTZ (2010a).
deficits were repeatedly pointed out in this study.
Also the Global Jobs Pact of ILO developed in the
context of the GFEC and/or the instrument of
Global Jobs Pact Country Scans are not sufficient.
To this end, it is recommended for the German
development cooperationto develop a meaningful
analysis and evaluation format for labour market
and employment policies based on an interna-
tional exchange. The analysis should start with an
overview of the main features of the existing policy
packages in a country (e.g. in connection with an-
ti-crisis management). Based on this presentation
of the policy packages and labour market institu-
tions available in a country, the system should then
be evaluated according to standardised criteria. This
evaluation is not only about a content-related as-
sessment of the measures but also about analysing
how the measures are managed. Key questions are,
for example: How are the measures planned, exe-
cuted and monitored? What are the responsibilities
and competences of the responsible administrative
bodies? How are the policy packages controlled?
How are they integrated in the system of public
finances? Is the implementation of the instrument
transparent for the parliament and for the general
public? Are M&E systems systematically recorded
and, if yes, how are their results used?
Eventually, the use of a standardised analysis and
evaluation format would also have a positive effect
on the effectiveness of development cooperation.
Particularly in LIC, many labour market policy
instruments are financed by donors and execut-
ed via their own implementation structures. The
integration of these programmes in the national
objectives is usually mainly reviewed based on
their compliance with the defined objectives of the
partner country. However, national development
strategies are usually quite abstract and of a rather
general nature. For this reason, trade-offs cannot
65
be identified and specific compelling operational-
isation guidelines cannot be deduced. The review
for compliance with the objectives of a national
programme is therefore easy to perform in practice.
What is not systematically reviewed is in how far
the donor-financed programmes focus on certain
areas while other areas which might be just as im-
portant remain unattended. Overlaps with other
programmes and a corresponding unnecessary
duplication of work are not made transparent. The
same applies to coordination problems resulting
from the lack of integration in the national admin-
istrative structures. A standardised analysis and
evaluation of national policy packages for employ-
ment promotion could create transparency which
might be a better incentive to improve the coordi-
nation between donors.
66
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Annex 1: Explanation of country categories
As there is no clear, internationally agreed defini-
tion of country categories according to economic
criteria, a brief overview of the major categories
used by World Bank and IMF and their common
features and differences is provided below. ILO
generally uses the World Bank classification (see
ILO, 2009a). This classification takes the economic
performance of a country (per capita income) as the
main criterion for classifying economies (see World
Bank, 2011b).
According to the World Bank classification, the cat-
egory of “industrial countries” includes all high-in-
come countries (HIC) with a calculated per capita
income of USD 12,616 or more per year (based on
the gross national income (GNI) of 2012, see World
Bank (2013b)). Also the IMF classification counts the
countries below among the industrial nations (here
so-called advanced economies) (sorted by region):
}European countries (euro-zone countries, Iceland,
Denmark, UK, Norway, Sweden, Switzerland,
Czech Republic)
}Israel as the only country in the Middle East,
}Various Asian countries with a considerable de-
velopment success (the so-called Asian Tigers
and/or newly industrialized Asian economies ac-
cording to IMF, including Hong Kong, South Ko-
rea, Singapore, and Taiwan),
}Japan, Australia, New Zealand, Canada, and the
US.
The income position of a country is significantly
changed by raw material reserves, particularly oil
and gas. Accordingly, a high per capita income may
result despite the fact that the underlying econom-
ic performance and income distribution is more
Figure 6: Four-tier world
Source: Own presentation based on World Bank classification (2013b).
Low-income countries (1,035 or less*)
Lower middle-income countries (1,036–4,085*)
Upper middle-income countries (4,086–12,615*)
High-income countries (12,616 or more*)
No Data available
*annual gross national income per capita in USD
77
on a developing country level. To account for this
fact, the IMF intentionally does not count some of
the World Bank HIC among the advanced econ-
omies: These include, e.g. Kuwait, Bahrain, United
Arab Emirates, and Saudi Arabia. And, despite being
classified as HICs, the IMF classification continues
to not include the transition countries of Hungary,
Poland and Croatia that are now members of the
EU as advanced economies.
The second category, “developing countries” is not
only much larger in terms of members, it is also
much more heterogeneous. To better present the
wide gap in the economic performance between
the countries, the World Bank further differentiates
between very poor countries (so-called low-income
countries (LIC) with a per capita income of USD
1,035 or less), and countries with a middle-income
(so-called middle-income countries (MIC)). However,
with an income ranging between USD 1,036 and
USD 12,615, the gap is still too wide to be able to
indicate sufficiently clear differences. Therefore,
this country category is further subdivided and the
lower third is referred to as lower middle-income
countries (USD 1,036–USD 4,085). Accordingly,
countries with a per capita income above USD 4,086
are referred to as so-called upper middle-income
countries.
The regional distribution can be easily recognised
in the above chart. The African continent, in par-
ticular, is suffering from poverty. High poverty is
also seen in some transition countries (particularly
in the LIC of Kyrgyzstan, Tajikistan, but also in Ar-
menia, Ukraine, Georgia, Moldova, Uzbekistan and
Mongolia). A higher concentration of poor coun-
tries is also found in South Asia (e.g. Afghanistan,
Pakistan, Nepal), and in South East Asia (among
others in Bangladesh, Myanmar, Cambodia, Viet-
nam, Indonesia).
Some Middle Eastern countries as well as the tran-
sition countries of Russia, Kazakhstan, Azerbaijan
(among others) profit from their enormous oil and
natural gas resources which is reflected in their per
Figure 7: The G20 countries
Source: Own presentation
78
capita gross national income (GNI). The economic
performance of the Central and South American
Countries is mostly in the middle range. Notewor-
thy are Chile and Uruguay which are considered as
HIC since 2011 and 2012.
Finally, for the purpose of analysing employment
and labour market policies, the G20 group of coun-
tries is also relevant, as most ILO publications refer
to this group of countries.
“The G20 group includes the strongest industrial
nations and emerging economies. According to
own information, the group represents two thirds
of the world’s population, approximately 90 percent
of the global economic power and 80 percent of
world trade. The group was formed in 1999, mainly
in response to the Asian economic and financial
crisis. (Focus Online G20: Background, http://www.
focus.de/intern/archiv/g20-hintergrund-g20_
aid_523292.html (18.08.2011) and the official web-
site of Russia’s G20 Presidency http://www.g20.org/
docs/about/g20_en.html).”
The G7 group including France, Germany, the UK,
Italy, Japan, Canada, and the USA is expanded by
the following developing countries: Turkey and
Russia, Saudi Arabia from the Middle East, India,
China and Indonesia from Asia as well as Mexico,
Brazil and Argentina from Latin America, and fi-
nally South Africa as the only representative of the
African continent. The group is complemented by
representatives of the EU, IMF and World Bank.
79
Annex 2: Types, causes and consequences of financial crises
Types of financial crises
The different types of financial crises are named
after the element of the financial sector affected by
the crisis: The term “financial crisis” is used if, first
of all, the financial institutions are no longer able
to comply with their obligations. This is the case,
for example, in a banking crisis in which the banks
no longer have sufficient funds (deposits) to cover
their debts. Secondly, financial markets can also
experience a crisis. This is the case when the prices
in the market no longer reflect the fundamental
data or vary significantly over a short period of time
without any changes in the fundamental data. (see
overview provided by Hott (2002), p. 5). Typical ex-
amples are stock market crises (e.g. the stock mar-
ket crash in 1929) or monetary crises (abandoning
of the exchange rate regime in the foreign exchange
market).
Crises of the financial markets and banking crises
(i.e. crises of financial institutions) often go hand
in hand. This is because banks and other financial
intermediaries (e.g. insurances, investment funds,
etc.) are usually severely hit by a crisis of the finan-
cial markets (see overview provided by Allen/Gale
(2007), p. 19 et seqq.). Depending on their involve-
ment in the market affected by the crisis, they lose
a large part of their receivables and have to perform
corresponding write-downs. Due to mutually in-
terlinked receivables between the banks (payment
transaction systems but also financing via inter-
bank trading) a banking crisis can also develop if
only a subsegment is in difficulties. However, finan-
cial market crises can also be the consequence of
banking crises and/or be exacerbated by them. For
example, the frequent collapse of banks between
1929 and 1933 were a major contributing factor to
the formation of the “Great Depression” in the USA
(see Richardson (2007)). The cause for such collapses
of banks lies at the core of the banking business.
The core business of a bank is to accept short-term
deposits and invest them in the form of longer-
term loans. The profit comes from the yield differ-
ences due to the different maturities. However, the
different maturities can also create a situation in
which a bank has not enough short-term funds to
satisfy its creditors in an emergency situation. This
leads to a loss of trust by investors which may result
in a panic (so-called bank run) and lead to the col-
lapse of a bank which – under “normal” conditions
– would be solvent. The interlinked receivables
between the banks and herding behaviour can lead
to a situation in which the crisis spreads across the
entire banking system (see also overview of the cri-
sis models provided by Hott (2002), p. 6 et seqq.).
A close connection between a crisis of the financial
markets and a crisis of financial institutions is also
found in a monetary crisis. A monetary crisis oc-
curs if, at the request of the government, the central
bank attempts to link the value of the local curren-
cy to that of another currency. To ensure a stable
exchange rate, the central bank has to balance a
potential excessive supply or demand using its own
funds. Hence, when the currency is exposed to de-
valuation pressure, own currency reserves have to
be sold. Adjustment pressure is created in particular
if the government and/or central bank continue to
pursue an independent monetary policy parallel
to the fixed exchange rate, which is not compatible
with the fixed exchange rate in the long term (see
Hott (2002), p. 6, 44)
80
Hence, as a result of the ongoing budget and per-
formance deficits, the central bank is losing its cur-
rency reserves. Eventually, a currency crisis occurs
in the foreign exchange market because the fixed
exchange rate has to be abandoned.
Latin America offers many examples of currency
crises: They include the more recent currency cri-
ses, e.g. the so-called Tequila Crisis at the turn of
1994/1995 caused by turbulences in the Mexican fi-
nancial markets, or the Brazilian crisis in 1998/1999
that was started by a massive flight of capital due
to a downgrading of the country’s credit rating by
international rating agencies in September 1998
(see Sangmeister (2000), p. 3 et seqq.). In the 1980s
already, most Latin American countries battled
with currency crises due to their high debts which
eventually led to the surrender of their until then
fixed exchange rate regimes (see ibid.).
Empirical analyses have shown that so-called twin
crises (currency and banking crises) result in a
particularly strong slump in the real economy (see
Bordo et al. (2001), p. 72 et seqq.). A currency crisis
spreads to the banking sector if the massive loss
in value of the local currency leads to a sudden,
massive withdrawal of deposits from banks. As de-
scribed above, this can lead to a collapse of credit
institutions and/or require considerable rescue
measures by the government (expansion of the
refinancing options of credit institutions or even
nationalisation). The contrary can also happen in
an actual situation: A banking crises triggers a cur-
rency crisis because low central bank base rates and
high credit lines improve the banks’ refinancing
options, but increase the devaluation pressure with
regard to the exchange rate (see Allen/Gale (1999),
p. 11). If the banking crisis then leads to a massive
flight of capital to other countries, the exchange
rate often can no longer be maintained (as has hap-
pened during the Asian crisis in 1997/1998).
Reinhart/Rogoff (2009) calculate in their empir-
ical analyses that, in the last one hundred years,
banking crises have led to an increase in govern-
ment debts by 86% (see Reinhart/Rogoff (2011), p.
7 et seqq.). From a historic perspective, financial
crises (and banking crises in particular) are among
the main contributors to debt crises in addition
to armed conflicts. In a debt crisis, the debt of a
country significantly exceeds the country’s eco-
nomic performance leading to doubts about the
country’s ability to pay back the debts. A vicious
circle is created because the risk premium for more
loans additionally increases the borrowing cost. The
increasing share of interest and repayments in the
public budget narrows the financial policy options.
In the case of a preceding financial crisis, the debt
crisis is not just the result of considerable expenses
for rescuing the banking system (so-called bail-out).
But the negative impacts of the financial crisis on
the real economy (e.g. drastically dropping tax in-
come) and “costly” economic stimulus programmes
(see section below) contribute to a significant
budget deficit, as well. In extreme cases, a country
fails to pay back its debts in full (so called sovereign
default; e.g. as has happened in Argentina at the be-
ginning of 2002 with a massive debt cut and mainly
private bail-out).
Causes of financial crises
Major triggering factors of financial crises are po-
litical crises. Political crises are events such as the
Cuban Missile Crisis, the murder of John F. Kennedy
or the attacks against the World Trade Center on
September 11, 2001 in New York (see Bloom (2009)).
Such dramatic changes in the political environment
create enormous uncertainties in the market with
regard to the further development of the economic
framework conditions. In an analysis of the effects
of political crises on the economy, Bloom (2009)
draws the conclusion that stages of high uncertain-
ty with regard to the development of productivity
and demand closely correlate with a volatility of
the financial markets (e.g. stock exchange). Politi-
cal crises are not only reflected by “nervous” stock
81
exchange markets but also have visible negative ef-
fects on the real economy, i.e. on employment. This
initial reaction is followed by a countermovement
stage which begins approximately 6 months after
the initial shock (see ibid., p. 674; see also box 1).45
Box 1: Economic consequences of the terrorist attacks on 9/11
The attacks created a profound uncertainty and panic with many private consumers in the US. The stock market came under strong selling pressure as many investors wanted to restructure their stock portfolio in view of the uncertain-ties. Within just a few days, the value of various US companies (particularly airlines) dropped by several billion US dollars. Consumer demand dropped and jobs were lost (here also especially in the airline sector). A general drop in the gross domestic product in the fourth quarter of 2001 was observed: instead of a growth of almost 2.0% at the beginning of 2001, the growth rate was now only 0.1% (see Fischer (2009), p. 7).
As shown by the above explanations, there are
many different kinds of crises that often are also
closely connected. Hence, in practice the different
types of financial crises (crisis of the financial mar-
kets, banking crisis, currency crisis), economic crisis
and debt crises do not occur separately from each
other. Empirical analyses of previous financial and
economic crises show instead, that the different
types of crises manifest themselves together over
a relatively short period of time. The Asian crisis
in 1997/1998, for example, follows the pattern of
a currency and banking crisis followed by an eco-
nomic crisis, while the current global financial and
economic crisis started out as a banking crisis and
then increasingly spread to become an economic
and debt crisis.
45 Political crises cannot only trigger financial and economic cri-ses but also occur as a consequence thereof. The deposing of President Mahuad in Ecuador on 01.21.2000 by the military, for example, was a reaction to the country’s currency crisis (in 1999 the local currency, Sucre, lost almost 200 percent in value over the US dollar) (see Sangmeister (2000)).
Due to the close mutual interconnections between
individual types of crises, a clear causal chain is of-
ten difficult to identify (see also Bordo et al. (2001),
p. 63 et seqq.). In addition, financial crises can often
coincide with a “normal” economic recession. If a
recession is introduced by a crisis, it is difficult to
differentiate retrospectively if and how a recession
would have occurred even without the crisis (see
also Rose (2001), p. 76f).46 Therefore, the diverging
explanation approaches for financial crises should
not be regarded as isolated explanation models.47
Rather, it becomes obvious that the evolution of a
crisis is influenced by many different parameters.
As a matter of principle, however, the economic
policy of a country plays a major role in the evolu-
tion of a crisis. This is true for currency crises but
also for banking crises.
In the case of currency crises the problem with re-
gard to economic policy is that the linking to anoth-
er currency for the purpose of monetary stabilisa-
tion (and inflation reduction) involves considerable
risks and side effects. Exchange rates provide a price
relationship to other national economies. They are
therefore formed in the market. The higher the
differences between national economies linked to
each other via the exchange rate, the more difficult
it becomes to maintain a fixed exchange rate de-
fined in the political process. The often futile efforts
of the central bank in the foreign exchange market
therefore only constitute the last step in a longer
process. As demonstrated by experiences with the
so-called Bretton Woods system of fixed exchange
rates, all market transactions contributing to a di-
verging development of the economies linked by
the exchange rate, increase the adjustment pressure
on the exchange rate in the medium to long term.
This includes also capital transactions (particularly
46 Based on a mere ex-post analysis of past crises, Bordo et al. (2001) come to the conclusion that crises during a normal down-turn period significantly increase the costs due to the loss in growth (see ibid., p. 60–64).
47 See also the literature overview provided by Allen/Gale (2007).
82
in the short term). Deficits in the financial sector
(see below) therefore lead just as much to the bal-
ance of payment crises as do unrealistic exchange
rate parities (and/or a refusal by the government to
adjust the exchange rate) and a monetary and fiscal
policy that increases the adjustment pressure on
the currency (see also the discussion by Sangmeister
(2000)). Moreover, fixed exchange rate regimes are
susceptible to speculative attacks.48 For example,
if a devaluation of a currency is expected by many
market participants, they will sell their inventories.
This will eventually result in a devaluation pressure
(so-called self-fulfilling prophecies see Hott (2002), p.
9), depending on the number of participants sell-
ing their inventories. It is interesting to note that
Bordo et al. (2001) point out that not a single global
banking crisis worth mentioning occurred during
the Bretton Woods era (1945–1971) while regular
banking crises occurred in the previous observation
period (1880–1939) and afterwards (1973–1997) (see
ibid., p. 59). In view of the fact that relatively strict
financial market regulations applied under the Bret-
ton Woods system49, the conclusion can be drawn
that the liberalisation of the financial markets is
an important contributing factor to the formation
of banking crises. Indeed, banking crises in recent
times are always preceded by a period of liberal-
isation of the financial markets (see Allan/Gale
(1999)). This applies to developing countries as well
as industrial countries (see Bordo et al. (2001), p. 58).
A potential cause for the unfavourable connection
between a liberalisation of the financial markets
48 Speculation refers to a process where goods are purchased or sold due to expectations of short-term price changes without the owner of the goods intending to use the goods (see Hott (2002), p. 9 et seqq.). The potential profit therefore lies in the price difference and not in the potential to use it, e.g. to use it for the production of marketable goods or save it for future con-sumption.
49 Due to the highly regulated banking sector, the possibilities for higher risk speculative financial transactions were relatively limited (see Allen/Galen (2007), p. 5; see also Reinhart/Rogoff (2011), p. 6). This high degree of regulation may have contrib-uted to avoiding banking crises. At the same time, however, the regulations resulted in a considerable limitation of financial transactions which would have been beneficial for the economic development (e.g. loans for financing start-ups, etc.).
and the banking crises is the fact that financial
markets exhibit systemic deficits. Due to the agency
and/or moral hazard problem, the lack and/or insuf-
ficient enforcement of certain financial market reg-
ulations may be conducive to a banking crisis (see
Hott (2002), p. 31 et seqq. or Allen/Gale (1999), p. 12):
Because bank and other financial intermediaries
usually do not act for their own account but for the
account of third parties, liability and information
issues play a decisive role in the type and extent of
financial transactions. The staff of financial insti-
tutions usually has much better information than
their clients. They can exploit this knowledge for
their own benefit and at the expense of their clients.
Furthermore, profit and loss are unevenly distrib-
uted in the case of a purchase on account of a third
party. If a profit is achieved, the financial interme-
diary will also profit (commission, better price arbi-
trage possibilities); in the case of a loss the trader is
not liable, only the investor loses his receivables.
This constitutes a fundamental problem, which
means that it cannot be completely resolved. It
can only be reduced by using different regulatory
approaches, e.g. prohibition of highly speculative
transactions such as short selling, creation of trans-
parency through the disclosure of balance sheets
and regular standardised reporting, establishment
of independent rating agencies, cover fund regu-
lations for issuing loans (e.g. Basel I or II), deposit
guarantee schemes, a banking and financial market
supervision with the will and the power to enforce
rules, etc. However, since the regulators and the
banking supervision have a fundamental infor-
mation problem, the control mechanisms are also
subject to limitations. In addition, the sanctioning
options of the central bank and/or government
are impaired by the fact that the insolvency of a
bank has considerable consequences for the entire
banking system (so-called too-big-to-fail problem).
Hence, the knowledge of implicit state guarantees
leads to a higher risk taking by the banks than
would otherwise be the case.
83
While deficient financial market regulations are an
important contributing factor to banking crises,
they are not sufficient to create a crisis on their own.
Only in connection with an expansionary mone-
tary policy can it happen that the financial values
and also the prices of other investment assets (in
particular real estate) deviate from the fundamental
prices to such an extent that a subsequent collapse
becomes likely (see Allen/Gale (1999), p. 12). This is
due to the fact that an expansionary monetary pol-
icy makes it more attractive to finance the purchase
of assets by taking out a loan. This is the case, in par-
ticular, if the real economy is unable or unwilling to
absorb the fresh funds due to a lack of competition,
unfavourable framework conditions for business
transactions, etc. If the demand for asset purchases
is high, prices are increasing. In view of these price
increases of the investment asset (e.g. real estate)
the expected future sales profits are significantly
higher than the cost of the loan. At the same time,
loans seem to be secured by the increasing value of
the asset. This interaction between money creation
and price increases comes to an unexpected end
when the price bubble bursts (see also in general the
overview on the causes of financial crises provided
by Hott (2002)). This is the origin from which the
current global financial and economic crisis and
many other crises before it have evolved (e.g. Japan
at the beginning of the 1990s, but also Norway, Fin-
land and Sweden in the 1980s). The trigger for the
bursting of the bubble can vary. In the case of Japan,
it was an abrupt change in the monetary policy, in
Finland in 1990/1991 it was the decline in trade as
a consequence of the disintegration of the Soviet
Union, in Norway at the end of the 1980s it was a
drastic drop in oil prices that led to a contraction of
the economy (see Allen/Gale (1999), p. 10).
Eventually, the risk of a crisis also depends on a
country’s relative position with regard to other
countries. This applies especially to emerging na-
tional economies such as Brazil and Argentina in
Latin America. As long as these countries are not
able to finance their own investment requirements
by own savings ratios and improving their own
current account deficit, they will be dependent on
foreign capital (see Sangmeister (2000), p. 9). In this
context, a massive capital drain triggered by a crisis
poses just as many problems as a massive inflow
of capital. According to general opinion, the long-
standing problems in the Japanese banking sector
in the 1990s combined with an expansive monetary
and fiscal policy have contributed significantly to
the formation of the Asian crisis. Because the write-
off of problematic loans in Japan was not enforced
by stricter financial market regulations, the “cheap”
money created by an expansive monetary policy
went abroad – mainly to the continuously growing
markets of the emerging economies in Asia (see
Box 2: Significance of capital controls for the formation of and combat against financial crises
The opinions in the literature on the significance of controlling capital traffic differ widely. In view of the complexity of the subject and the multi-faceted different determining factors of crises, it would be quite unrealistic to find to a clear answer in this regard. Empirical analyses by Bor-do et al. (2001) show an ambivalent result (see ibid., p. 66): Countries with capital traffic controls seem to be at a higher risk of financial crises than countries without such financial market regu-lations. This may be explained by the fact that governments might have a false sense of security with regard to a sudden capital drain. Hence, they take more risks in their monetary and fiscal policy and may under certain circumstances neglect the adjustment of a fixed exchange rate. At the same time, there is a negative correlation between cap-ital traffic controls and banking crises. According to interpretation an overheating of the financial sector can be the result of an absence of traffic controls in connection with a safety net for banks and – in the case of fixed exchange rates – an implicit hedging against exchange rate fluctua-tions. Despite the seemingly contrary significance of capital traffic controls, both arguments under-line the high relevance of the other institutional framework conditions in the financial sector and of the economic policy of a country.
84
Dieter (2000), p. 4 et seqq.). And while the inflow of
capital does not create an automatic process, the
combination of the above-discussed problem situa-
tion (insufficient regulation of the financial market
and insufficient financial supervision) increases the
risk of a price bubble in the investment sector.
Transmission paths of financial crises:
So far, we have analysed the characteristics and
causes of financial crises. However, what is relevant
in the context of this study is the relationship be-
tween financial and economic crises. What is the
probability that a financial crisis is followed by an
economic crisis in a country? Depending on the
type of financial crisis, the following spill-overs are
usually seen:
}When a price bubble bursts, an enormous drop
in value usually occurs. This makes it difficult for
companies to obtain loans. Companies suffering
such a drop in value (e.g. in the case of a crash of
the stock exchange market) may be forced to re-
duce production costs which goes along retrench-
ments, a shift in investments, etc.
}If assets were financed by loans (e.g. in the real
estate market) a massive loss in assets occurs
which may even result in the insolvency of the
investor. Together with negative employment ef-
fects and a general massive loss of confidence and
negative expectations, this results in a significant
drop in the demand for goods and services. The
corresponding drop in sales for the companies
increases the negative effects on the employment
situation.
}The bad debt losses force the credit institutions
to make high write-downs, which considerably
reduce their ability to issue loans, and businesses
suffer from a lack of capital.
}In the case of a currency crisis, the concomitant
flight of capital negatively affects the financ-
ing possibilities for real economy activities. In
addition, there are the consequences of a usually
massive depreciation of the exchange rate: Export
goods indeed are getting cheaper. However, most
developing countries have a trade balance deficit
(i.e. they import more than they export) and are
therefore in the short term dependent on consid-
erable imports. Due to the depreciation, imports
are becoming much more expensive which leads
to a drop in the income of private households (ei-
ther directly attributable to the price increases or
via indirect price increases if the imported goods
are needed for domestic production). The indirect
price increase leads to a drop in sales for the com-
panies which, correspondingly, results in a trend
to lay-off workers.
Particularly as a result of increasing international
economic integration of national economies, the fi-
nancial and economic crises of a country constitute
a potential danger for other national economies.50
A transmission is generally possible via the inter-
linked financial sectors and/or via the real econ-
omies. The situation of the Argentinean economy
in the context of the Brazilian crisis in 1998/1999
stands for a transmission channel that was mostly
restricted to the real economies (see box 3).
In any case of interconnections of the finance and
real economy sectors, negative consequences can
be felt in other countries. However, it depends
on the economic situation and the institutional
framework conditions of the “receiving country”
to what extent an external shock will result in an
actual crisis. Argentina, for example, plunged into
a deep recession as a consequence of the Brazilian
crisis in 1998/1999. However, due to increasing
debts and a fixed exchange rate to the US dollar
that did not correspond to the country’s economic
50 However, it should be noted that the stage preceding a crisis – as described above – often goes along with a significant increase in the volume of money in the future crisis country. Especially those national economies tend to directly (via inflow of capital) and/or indirectly (via a higher export demand) profit from this, which are then particularly susceptible to the transfer of crises. The isolated analysis of crises therefore does not do justice to the globalisation phenomenon.
85
performance, Argentina had already continuously
moved to the brink of disaster before the crisis (see
also Schweickert (2002), p. 170). There is therefore
strong evidence that a recession would have come
anyway. Eventually, Argentina’s financial system
collapsed in 2001/2002.
Other crises are transmitted via financial and real
economy-related paths and may even spread to an
entire region (see also Kaminsky et al. (2003)). These
include, for example, the Asian crisis in 1997/1998
but also the global financial and economic crisis
since 2008. To date, the following transmission pat-
terns can be identified for the GFEC:
1. Financial crisis to financial crisis
The bursting of the real estate bubbly initially led
to a banking crisis (so-called subprime crisis51) in
the USA which reached its temporary climax with
the insolvency of Lehman Brothers on 15.09.2008
(see Elliot (2011)). The banking crisis also spread to
the financial markets of other industrial countries
(see transmission path 1 in Figure 8 below: Multiple
transmission paths of financial crises) via the “tra-
ditional” channels (interbank market, general loss
of confidence, “herd behaviour”, stock market crisis,
etc.). The main contributing factor, however, was a
new type of refinancing which had been extensive-
ly used by US banks and financial intermediaries.52
In order to provide the market with more liquidity,
banks in the US had already started in the 1970s to
securitize interest and repayment claims of banks
from mortgage loans (see below Fischer (2009), p.
16). The claims could then be traded as so-called
asset-backed securities in the national and interna-
tional financial market. Especially hedge fund com-
panies specialising in high-risk transactions invest-
ed in this instrument and offered it through funds
in the global market. With this “financing chain”,
default risks were spread globally. This is generally
positive for the stability of a financial market and
proved to be positive for credit institutions and
borrowers alike as it created additional possibilities
for issuing loans (see Binding/Winteroll (2007), p. 4).
However, the above explained moral hazard prob-
lems increase with each additional member in the
financing chain. Not only did banks neglect their
risk management and waive credit worthiness
checks, the bundling of various high-risk loan se-
curitization instruments made it difficult for the
participants to identify default risks. This informa-
tion problem also applied to rating agencies which
51 “Subprime” stands for real estate loans with a lower credit rating. These were increasingly issued by the banks in the course of the overheating of the real estate market.
52 Almost 60% of all real estate loans in the USA were no longer in the books of the credit institutions (see Fischer (2009), p. 25).
Box 3: Impact of the Brazilian crisis in 1998 on the Argentinian economy
“Negative effects from the Brazilian disaster were also felt in Argentina whose considerable econom-ic growth of the last years had benefited from the intensified foreign trade connections with neigh-bouring Brazil. While the financial markets of Ar-gentina were mostly spared from the turbulences in the neighbouring country, exports to Brazil ac-counting for one third of Argentina’s total exports, dropped significantly after the devaluation of the Real while, at the same time, imports of consum-ables and raw materials from Brazil tripled as a result of the exchange rate-related drop in prices. In 1998, the trade balance deficit of Argentina had risen sharply to approximately three billion US dollars with the budget deficit reaching 14.7 billion US dollars. Due to the statutory pegging of the Argentinean Peso to the US dollar, the government in Buenos Aires was not able to counter with a devaluation of the national currency. The systemic limitation of the money supply due to the trade balance deficit considerably restricted the growth potential of the Argentinean economy thereby impeding a reduction of the high unemployment rate. In 1999, the Argentinean gross domestic product dropped by three percent over the previous year and the per capita GDP in real terms dropped by more than 200 US dollars” (Sangmeister (2000), p. 4). In 1999, the foreign trade between MERCO-SUR partners Argentina, Paraguay, Uruguay, and Brazil dropped by a total of 25 percent over the prior year (see ibid., p. 4 et seqq.).
86
also were not remunerated by the investors but by
the issuing financial intermediaries. Eventually, the
subprime crisis also led to a banking crisis in other
countries (e.g. in Europe) because their banks and
financial intermediaries largely acted as investors in
securitized US claims (see also Figure 8).
Institutional investors (e.g. pension funds, insur-
ances and investment funds) and the commitment
of large banks in general also played a major role
in the propagation of the financial crisis in Asia in
1997/1998 (see Dieter (2000), p. 5; Kaminsky et al.
(2003), p. 68 et seqq.). If several countries have the
same investors, a financial crisis in a country can
result in a considerable restructuring of the portfo-
lios of investors. As a result, funds may also be with-
drawn from so far “unproblematic countries” (as
has happened in the case of Singapore, Hong Kong,
and Taiwan during the Asian crisis, see Kaminsky et
al. (2003), p. 69 et seqq.). The contortions created by
the moral hazard problem are exacerbated by a lack
of market transparency and “herd behaviour”.
2. From financial crisis to economic crisis
The financial crisis that was triggered in other
countries via this transmission mechanism then
spilled over to the real economies of the respective
countries (transmission path 2 in Figure 8).
3. From economic crisis to economic crisis
If the countries affected by the financial crises also
have strong economic ties (e.g. within the EU, but
also with the USA), an additional collapse of the real
economy in the above-described form occurs (see
transmission path 3).
The presentation of the spill-over of financial cri-
ses to the real economy (and, hence, also to the
labour market) shows that the extent to which
crises spread depends very much on the national
economic situation of a country and its integration
into the international financial markets and trade.
With regard to the global financial and economic
crisis, for example, negative effects can be observed
mainly in the industrial countries (USA, Europe).
In many developing countries (e.g. in Africa), spill-
overs are only noticeable to a minor extent in their
national economies.
Figure 8: Multiple transmission paths of financial crises
Source: Own presentation
Country A Country B
Finance Sector Finance Sector
Real Economy Real Economy
1
2 2
3
87
A particularly high risk arises if an economic crisis
spreads across many countries with close mutual
trade connections (so-called highly synchronized
recessions, see IMF (2009), p. 111 et seqq.). This sit-
uation may lead to a severe, long recession with
serious economic and social consequences for the
population. Traditional anti-crisis measures remain
ineffective because the national economies cannot
mutually help each other to overcome the reces-
sion. IMF analyses on past highly synchronized
recessions (1975, 1980 and 1992) show that the
recessions were by 40–45% deeper for crises with
a low spread (simultaneous recession in less than
ten industrial countries). Economic recovery also
was much slower and the economic growth took
twice as long to reach the pre-crisis level (see ibid.,
p. 112).53
53 For the question of overcoming the current global financial and economic crisis it constitutes a ray of hope for the USA and Eu-rope, that particularly emerging countries(and most of all China) have recovered relatively quickly.
88
Annex 3: Determining factors, common features and differences of LMP and EP in a country context
As explained in the main part of this study, meas-
ures for combating economic crises take effect with
a delay. Therefore, they are usually very much lim-
ited to the existing portfolio of employment and
labour market policies. Hence, to be able to discuss
the applicability of potentially promising political
actions to other countries, we need information
about the actual labour market and employment
policies in a country context. Because, at least in the
short to medium term, the mix of instruments (or
synonymous: the policy package for the promotion
and protection of employment) available in a coun-
try constitutes the action framework for develop-
ment cooperation. The following information is
intended as background information in this regard.
However, a mere description of the very different
policy packages is neither useful nor possible: The
set of actually used labour market and employment
policies does not only vary between industrial and
developing countries, it also varies considerably
within the country categories (see explanation of
country categories in Annex 1). Due to the global
perspective of this study, the attempt of a coun-
try-specific description of the policy packages
would go by far beyond the scope of this study.
While literature provides relatively good compila-
tions of the different labour market situations of
individual countries (e.g. development of employ-
ment, information on unemployment and wage
development, segmentation of labour markets, etc.),
there is no systematic overview of currently used
combinations of employment and labour market
policy instruments, especially in the very heteroge-
neous group of developing countries.
In the context of our analysis of existing labour
market and employment policies in a country con-
text, we will therefore first of all present the major
factors that have contributed to the actual manifes-
tations of labour market policies (section A3.1). On
the one hand, the knowledge of these determining
factors facilitates the understanding of typical
sets of instruments. On the other, it is important
for the further analysis to know the mechanisms
determining certain sets of labour market and
employment policy instruments. Section A3.2 will
then provide a presentation of the major common
features and differences of actually existing policy
packages.
A 3.1 Determining factors of labour market- and employment policies
The specific configuration of labour market and
employment policies in a country depends on three
factors: (1) Economic development, (2) political
framework conditions, and (3) their interaction
over time.
A 3.1.1 Economic development
According to Betcherman (2002, p. 14 et seqq.)
different trends can be observed that have a deci-
sive influence on the labour market situation and,
hence, also on the policy instruments.
First of all, along with the continuing economic
growth, the global economic structure has changed.
The share of the agricultural sector has continued
to decrease in favour of the industrial sector and/
or of the service industry (see also Figure 9 below).
This structural change is accompanied by consid-
erable technical progress. While technical progress
89
has contributed to rationalisation and, hence, to the
retrenchment of workers, new products and mar-
kets were created at the same time. This applies in
particular for the information and communication
technology sector.
The structural change has led to shifts in the work-
ing population with corresponding lay-offs and
the creation of new jobs. This so-called structural
unemployment occurs if the supply of labour can-
not sufficiently adjust to the changing qualification
requirements (see also GTZ (2010b), p. 5). It has con-
siderable consequences for a country’s education
policy. With view to the production of goods and
services in the information and communications
technology (ICT) sector, for example, there is a
general consensus that this can only be achieved
by a better qualification of the workforce (so-called
skill-biased technological change, see Betcherman
(2002), p. 26).
Other types of unemployment, by contrast, cannot
be excluded by policy measures: They include fric-
tional unemployment (duration of the transition
from one job to the next), seasonal unemployment
(fluctuation, e.g. in the building industry, in agricul-
ture and tourism due to seasonal factors (see GTZ
(2010b), p. 5)). These types of unemployment do
not occur due to a wrong matching in the labour
market but are caused by technical factors. Due to
job search, information and negotiation costs, a
job search must be expected to go along with 1 to 3
months of unemployment. The causes of seasonal
unemployment are anchored in the type of pro-
duction. Economic cycles with boom and recession
periods are the characteristic feature of a market
economy. They are “market immanent” and can-
not be changed by improving the functioning of
markets. Therefore, the approaches of employment
and labour market policies only aim at attempting
to reduce the severity of the above-described types
(e.g. by a countercyclical economic policy, diversifi-
cation of the national production structure, etc.).
However, despite a trend towards structural change,
the above source (see Betcherman (2002), p. 14)
also makes it clear that particularly the poorest
countries will continue to be dominated by agri-
cultural production while the big challenge for the
emerging and industrial countries currently is their
change towards a service society. Therefore, from a
global employment policy perspective, subsistence
economy, underemployment and a high share of
informal employment must be discussed on the
one side while questions of labour market flexibi-
lisation and adjustments to the continuously in-
creasing qualification requirements in the industri-
al countries are in the fore for industrial countries
(“life-long learning” and “employability”).
Secondly, the described change in economic struc-
ture is accompanied by significant migration to
urban centres. Despite the fact that industrial coun-
tries generally have the highest share of urban pop-
ulation, huge metropolitan centres have formed in
developing countries in the upper middle-income
category (UMIC) (e.g. Bombay, Sao Paulo, Lagos,
Shanghai) (see Betcherman (2002), p. 15 et seqq.).
But, due to a high population growth, more and
more mainly young workers in poor developing
countries (LIC) are moving to the urban centres. As
a consequence, the strong pressure on the urban
labour market creates a significant informal sec-
tor54. Originally regarded as a transitional phenom-
enon, we now have to acknowledge the fact that
the informal sector in most developing countries
is an integral part of the economy (see ibid., p. 29;
see also Sanchez Puerta (2010), p. 22 et seqq.). The
two labour markets (formal vs. informal sector)
significantly affect the selection of adequate labour
54 The main characteristics of informal employment relationships are (1) lack of registration in the legal system with corresponding positive and negative consequences (no payment of taxes, easy to take up a job, no legal security, strategies for avoiding controls which might negatively affect expansion considera-tions, etc.), (2) a mixture between dependent, non-formal em-ployment relationships and independent work as a one-person enterprise or microenterprise, and (3) a mostly low wage and/or income level with a correspondingly high percentage of poor population (“working poor”) (see GTZ (2010b), p. 7).
90
market policies because many of the policy meas-
ures developed and tested in an industrial country
context, do not even reach a large part of the labour
market in developing countries. The influx of pre-
dominantly young people in search of work to the
urban centres does not only increase the share of
informal employment but also leads to high youth
unemployment and underemployment of young
people.
Thirdly, growing economic interdependencies
between countries and a continuously increasing
global trade volume can be observed (see Betcher-
man (2002), p. 17 and Figure 10). The trade between
industrial countries continues to constitute a large
part of the international trade volume. Still, in-
creasing trade flows, increasing capital transactions
and an intense exchange of technologies (via direct
investments) can also be seen for the developing
countries (see Figure 12 below). However, when tak-
ing a closer look at the exact distribution of exports
of industrial goods, for example, we see that in the
1990s only 12 countries and territories made up ap-
proximately 74 percent of the total volume (see also
Figure 11). The described development of world
trade which is often also referred to as globalisation
influences the selection of the labour market policy
instruments of a country. Due to their dependency
on the economic situation of other national econo-
mies, those countries must expect to be affected by
external shocks that are increasingly integrated in
the global economy.
In addition to handling national economic cycles,
policy makers will therefore have to find answers
for coping with externally generated crises. As
is obvious from Figure 13 below, the increase in
global trade flows does not go along with a decrease
in their volatility. The positive trade development
between 2002 and 2008, for example, was longer
and better than in the previous decade (1990s), but
the collapse in 2008 in the context of the global
economic and financial crisis was all the more
devastating.55 However, because the majority of
the developing countries so far has only been inte-
grated in world trade to a minor extent (see Figure
11) and is therefore less exposed to volatility, a
differentiated analysis is urgently required. In re-
lation to their contribution to the global economy,
the crisis risk of an, in absolute numbers, relatively
small group of developing countries does indeed
constitute a problem. It should also be borne in
55 This unusually long period of growing world trade after the collapse of the Bretton-Woods era, was significantly impacted by the events of 9/11 in the USA in 2001. The terrorist attack was a traumatic experience for the USA and led to an abandoning of the restrictive use of marcropolicies for controlling economic cycles. To prevent a deterioration of the recession which had already been in the making prior to the terrorist attacks, the monetary policy was considerably relaxed. In conjunction with significantly increasing expenses for military and domestic security, tax reductions for higher incomes and other expansive measures (among others in the real estate market), an economic bubble of enormous proportions could develop.
Figure 9: GDP composition by industry and country category, 1990–1999
Agriculture Industry Services
1990 1999 1990 1999 1990 1999
GDP share in percent
LIC 29 26 31 30 40 44
LMIC 21 14 39 39 40 46
UMIC 8 6 40 33 52 60
HIC 3 3 33 30 64 67
All countries 6 5 34 31 59 63
Source: Betcherman (2002), p. 14
91
mind that, according to various analyses of past
financial and economic crises, emerging economies
seem to have a stronger reaction to economic crises
than industrial countries (see Bordo et al (2001), p.
58; Reinhart/Rogoff (2011), p. 8). Even if many de-
veloping countries might be less affected by global
economic crises, one-sided export structures with a
correspondingly high dependency on world market
prices, e.g. for natural resources, can still result in
considerable adjustment problems in the respective
country.56
A 3.1.2 Political framework conditions
The explained problems in the labour market do
not automatically lead to an (adequate) response in
terms of labour market policy. As impressively de-
scribed in the context of the “public choice theory”,
political decision-making processes and structures
are subject to a dynamism of their own.57 This prob-
lem has been described as “policy failure” in section
2.2.3.
56 This applies, e.g. for many LIC of Sub-Saharan Africa.
57 See also the abstracts on “Public Choice” by Mueller (1976) and Blankart, Charles B. (2008) on the use of these approaches in the context of the economic theory of the state and of the behaviour of states. Botero et al. (2004) e.g. analyse public choice approach-es with regard to the explaination of different regulation levels of labour markets.
Whether governments intervene in labour market
processes at all and how they do it depends, first of
all, on the political and social structures. Political
structures include, for example the extent of dem-
ocratic decision-making processes, the degree of
checks and balances in a country, the implementa-
tion of the rule of law, etc.
However, as is shown by experiences with the wave
of democratisation in Africa after the collapse of
the Eastern bloc, for example, formal structures of
democratic decision-making processes alone are no
guarantee for viable political decisions. Instead, the
extent to which checks and balances and the rule
of law are actually applied significantly depends
on the social structures (see Mummert/Mummert
(2010), p. 36 et seqq.). Democratic decision-making
processes are never free of conflicts because major-
ity votes overrule parts of the population. Further-
more, the problem of collective action continues to
apply, also in a democracy, and this may result in a
situation where majority decisions may actually not
be for the benefit of the majority (see Olson (1965)).
And, while a redistribution policy by the state may
support internal peace which is also beneficial for
the population with a higher income, they would,
from their individual perspective, be in an even bet-
ter position if they would not have to pay the taxes
Figure 10: Development of world trade volume, 1950–2010
* USD at current 2010 prices and 2010
Source: UNCTADstat 2010, own chart
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
16000000 Absolute trading volume*
1950 1960 1970 1980 1990 2000 2010
92
Figure 11: Distribution of exports of industrial goods by developing countries
Source: International Labour Office (2004), p. 30
Figure 12: Shares of different country categories in world trade 1948–2010
Source: UNCTADstat 2010, own calculation based on the UNCTAD country categories
China 18%
Taiwan 15%
Singapore 13%
Mexico 10% Malaysia 7%
Thailand 5%
China, Hong Kong 4%
Brazil 4%
India 3%
Indonesia 3%
Turkey 2%
Total volume for the1990s (in percent)
South Korea 16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Developing economies
Transition economies
Developed economies
1950 1960 1970 1980 1990 2000 2010
93
that are required for this purpose. Hence, they have
a considerable interest in convincing politicians of
the necessity of exemptions. In this case, unevenly
organised interest groups with usually different
approaches to political decisions then create a
situation where reasonable political decisions or
reforms are not tackled at all or existing systems are
undermined by actions that are inconsistent with
the system.
The described problem of collective action (diver-
gence between individual and collective interests) is
particularly relevant for the configuration of labour
market and employment policies. As explained
above, labour market policy is not so much about
technical questions of the functioning of the labour
market but about a “fair” balance between the in-
terests of employers and employees. The decision
about what exactly is “fair” and how fairness can
be achieved by political actions, is a political deci-
sion. Societies with a functioning representation of
interests of employers (industry associations) and
workers/employees (trade unions) and with politi-
cal decision-makers, who act within clearly defined
boundaries, would probably be the best option
for balancing interests for the good of the society.
Fragmented societies, however, which are typical
for Africa due to the many different ethnic groups,
often result in a corresponding fragmentation of
the political landscape. Unstable societies that are
shaken by food crises and armed conflicts are usu-
ally characterised by a high level of inequality. This
is reflected accordingly by unequal opportunities
for a representation of interests, by patronage net-
works and non-transparent structures within the
state apparatus and the suppression of a critical
public opinion. This situation is of particular im-
portance for the political management of economic
crises as the immediate compensation for the loss
of income in times of crisis is a key element of fiscal
anti-crisis measures.
The described political decision-making process
determines an economic consensus which char-
acterises economic policy in general. After the
collapse of the planned economies of the Eastern
bloc, most national economies today are based on
market economy principles. However, there are
different concepts for the design of an economic
constitution (i.e. the framework conditions of the
economy). The different labour market policies in
the USA as compared to most European countries
are attributable to different concepts of the extent
to which a state should interfere in an economy.
The differences exist despite a joint commitment to
the principles of market economy (see also Mildner
(2008)). As a result of the neoliberal policy approach
in the US according to which the state should in-
terfere as little as possible in the free play of market
forces, the share of the public sector and the tax
Figure 13: Annual growth rates of world trade and world economy
Source: UNCTADstat 2010, own calculation
1970 1980 1990 2000 2010 1975 1985 1995 2005 –40%
–20%
0%
20%
40%
60%
Growth rate, GDP
Growth rate, trade volume
94
ratio are significantly below the European average.
The (European) social state concept is unfamiliar to
the US society as its social model focuses on indi-
vidualism, efficiency and self-responsibility.
A 3.1.3 Interaction over time
It is not sufficient to identify the labour market
problem (parameter 1) and decide on adequate
measures in the political decision-making process
(parameter 2). The actual labour market policy is
significantly influenced by the extent to which the
public administration is technically able to imple-
ment actions and by the available public funds. Ca-
pacity deficits of the public administration and lack
in finances narrow down the room for manoeuvre
of labour market and employment policies. The
problem is that a poor economic development
again negatively impacts the room for manoeuvre
of labour market policies which can lead to a vi-
cious circle.
Furthermore, administrative and legal traditions
also play an important role. Botero et al. (2004)
for example show that the different legal systems
of common law and civil law are significant for
explaining different regulation levels of labour
markets. In the same way, the role model function
of successful countries is important. The Japa-
nese labour market model, for example, for a long
time served as a role model for South Korea (see
Abrahart/Verme (2001), p. 63).
All in all, it will be a slow process for a society to
move beyond the interdependency of economic de-
velopment and room for manoeuvre with regard to
labour market and employment policy. Indeed, past
labour market and employment policy approaches
taken by industrial countries show, that incre-
mental (i.e., step-by-step) reform approaches are
generally used. In the context of the labour market
reforms in OECD countries in the 1980s and 1990s,
for example, adjustments were made in all labour
market policy areas without challenging the system
itself (see also OECD (2004), p. 73 et seqq. with re-
gard to reforms of labour market regulations). A
deeper break with past policy traditions is observed
in the wake of crisis experiences (Japan, for exam-
ple, but also Malaysia and Singapore in the context
of the Asian crisis, see Abrahart/Verme (2001)).
But even in these cases it depends very much on
the development of the labour market and on the
general ability to finance certain actions, whether
newly developed approaches are maintained and/
or expanded.
It also follows from the above, that the long period
of time required to develop today’s labour market
policies and the strong path dependency in the
Box 4: The Danish labour market model from a historical perspective
The Danish labour market model of so-called “flexicurity” (a mixture of flexible labour market laws and collective agreements accompanied by social security), which in the meantime has be-come a model for Europe, dates back to an agree-ment between the unions and the industry in 1899. Among others a relatively low level of dis-missal protection was agreed upon in this agree-ment 100 years ago (see Madsen (2008) and Bred-gaard et al. (2005)). The relatively comprehensive level of security for workers and employees in the Danish labour market model as compared to in-ternational standards is attributable to decisions made decades ago. This includes in particular the takeover and expansion by the state of the un-employment insurance in 1970 which, until then, had been organised by the trade unions (so-called Ghent system, see Scruggs (2002)). Hence, the high flexibility of the Danish labour market is not the result of the reforming zeal of the 1980s and 1990s, but rather dates back to much older sig-nificant decisions. A relatively high unionisation rate (see Lind (2007)) and the strong involvement of both unions and management in the labour market reforms in the 1990s, found a broad con-sent by the population. Without the development of corporatist structures in the past, many of the actions taken may not have been enforceable (see Madsen (2008), p. 75).
95
development constitute major determining factors
(see also Jäkel (2010), p. 154 et seqq.). They indicate
that policy measures can only be transferred to a
very limited extent, which constitutes a challenge
for consulting in the context of development co-
operation where project periods of 10 years are al-
ready considered as very long (see also box 4).
The mentioned parameters are not only important
cornerstones for development cooperation with re-
gard to employment promotion and job protection.
The economic cooperation with other countries
and multinational organisations (World Bank, IMF,
United Nations Development Program (UNDP),
etc.) itself influences the decisions of a country with
regard to labour market and employment policy.
Despite the best of intentions by development
assistance it remains a fact that the incentives for
the political decision-makers of a recipient country
change with changes in the economic cooperation.
There are also open and/or hidden conditions in
connection with the allocation of funds as they
need to be justified within a donor country and/or
with regard to the member states of a multinational
organisation. If other players are involved in the
implementation of bilaterally agreed development
assistance measures (e.g. GIZ, Danish International
Development Agency (DANIDA), Department for
International Development (DFID) and Swedish
International Development Cooperation Agency
(Sida), etc.) a complex pattern is created between
the tax payers of the donor country, the govern-
ment of the recipient country, development aid
organisations, implementing organisations of the
partner country, political decision-makers in the
partner country and its population. Each group of
players has own interests and ideas that only agree
in part with those of the other players (see, e.g.,
analyses in Martens et al. (2002)). Hence, the out-
come of this interaction will not correspond to the
concept of an effective and efficient labour market
instrument in the partner country.
Different ideas by the donors58 with regard to la-
bour market and employment policies and/or
their relative importance in the context of national
development strategies increase the costs for the
donor as well as for the partner in connection with
the strategic control of labour market and employ-
ment policies. While principles for the implemen-
tation of development aid59 have been developed
(so-called principles of the Paris Declaration on
Development Aid Effectiveness 2005) that explicit-
ly tackle this problem, the OECD implementation
reports continue to show enormous deficits in the
coordination of development cooperation (see also
Mummert/Mummert (2010), p. 42 et seqq. and the
overview provided by OECD (2011)).
A 3.2 Similarities and differences between policy packages for employment promotion and job protection
The similarities and differences in the national
labour market- and employment policies are based
on the following characteristics of the labour
market60:
1. Labour market regulations.
2. Collective negotiations.
3. Labour market administration.
4. Labour market policies in a more specific sense.
58 World Bank and the IMF, for example, are more influenced by the American neoliberal economic policy than the ILO. This UN organisation provides explicit advice and support for its 181 member countries with regard to labour market and em-ployment policy and takes a more employee-oriented approach (decent work) (see also presentation in ILO (2001), p. 55 et seqq.). Bilateral donors usually take their national policy experiences as a guideline. However, certain trends and standards have emerged in the context of the international discussion within the ILO, OECD or EU, among others (see also BMZ (2007), and the presentation by Boldemann et al. (2009)).
59 They are recorded in the “Paris Declaration on Development Aid Effectiveness” (also abbreviated as the OECD Paris Declara-tion) of 2005. They include self-responsibility, harmonisation, partner alignment, result orientation and mutual accountability obligation.
60 See also overview of labour market institutions based on the ILO concept in Kausch/Trommershäuser (2002), p. 20 et seqq.
96
A 3.2.1 Labour market regulations
Literature usually provides information on the so-
called de jure labour market regulations only, i.e.,
on restrictions to the freedom of contract stipulat-
ed by the government by way of law or statute (see
e.g. OECD (2004), p. 64 et seqq. with regard to the
structures of the OECD employment protection indi-
cator). However, such restrictions do not necessarily
require legal action. Instead, it can be observed that
very little or no governmental regulation with re-
gard to severance payments in some countries for
example is “compensated” by general contract
agreements (e.g. in Japan) or by collective provisions
(see OECD (2004), p. 67).61 In the same way, the
standardisation of employment contracts can be
influenced by jurisdiction. This applies in particular
61 If such non-governmental restrictions to the freedom of con-tract are well documented and concern a sufficiently large num-ber of employment contracts, they are considered in the OECD Employment Protection Indicator. This does not apply to the USA where – according to surveys in 2000 – only approximately 20% of workers and employees are protected by redundancy plans based on collective agreements (see OECD (2004), p. 67).
to common law 62 countries. These countries have a
lower level of regulation because the social control
mechanisms are generally based on case law and
judicial decision and less on public laws and regula-
tions (see Botero et al. (2004), p. 7 et seqq.). In addi-
tion, labour courts or specially created committees
are used in some countries to verify employment
contracts and solve labour disputes (see ibid., p. 65–
70, see also Betcherman (2002), p. 40).
Due to the fundamental nature of employment
contracts, labour market regulations can be found
in all countries. In the light of the described
62 The term common law in English-speaking countries stands for a legal system which is generally not based on laws but defined by significant court rulings. These rulings are successively updat-ed by further judicial interpretation. The civil law of the coun-tries of Continental Europe is based on state-defined laws and regulations. While this approach also involves a certain judicial interpretation, jurisdiction plays a subordinate role only. Both legal systems have spread across the world through expansion and colonisation: Common law is used in England, Ireland, the US, Canada, Australia, New Zealand, India, Pakistan and in other countries of South and South-Eastern Asia. The legal systems in Western Europe (France, Germany, Spain, Portugal, Italy, Belgium and the Netherlands), in Northern and Western African Countries, in all Latin American countries and in some countries of Asia (Japan, Korea, Taiwan) are based on civil law. The legal traditions of the former socialist states are also more in line with civil law (see Botero et al. (2004), p. 7 et seqq.).
United Stat
es
United Kingdom
Canad
a
New Zea
land
Irelan
d
Australi
a
Switzerl
and
HungaryJap
an
Denmark
Czech
Republic
Korea
Slovak R
epublic
Finland
Poland
Austria
Netherl
ands
Italy
German
y
Belgium
Norway
Sweden
France
Greece
Spain
Mexico
Turke
y
Portugal
Regulation on temporary forms of employment
Speci�c requirements for collective dismissal
Protection of permanent workers against (inididual) dismissal
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
2003 (Scale 0–6)
Figure 14: Employment protection index in 2003
Source: OECD (2004), p. 72
97
diversity it is not surprising that labour market
regulations vary considerably between countries
with regard to type and extent of regulation. Within
the group of the industrial countries alone (OECD
countries), labour market regulations range from
countries with a low level of regulation such as the
common law countries (USA, UK, and Canada) on
the one hand and the civil law countries of South-
ern Europe with relatively strict labour market reg-
ulations (Greece, Spain, Portugal, and Turkey) and
Mexico on the other hand (see also Figure 14).
Within the group of the developing countries there
are also considerable differences in the types and
levels of regulation. In analyses for the Asian region,
for example, Malaysia has a relatively low level of
regulation (see below Vandenberg (2008), p. 47 et
seqq.). China has reduced its originally high level
of regulation through comprehensive reforms (e.g.
right to work), and at the same time introduced
new statutory regulations to expand the scope of
employment contract regulations to cover other
types of employment (e.g. part-time work, tempo-
rary employment, limited employment relation-
ships). Relatively strict labour market regulations
(e.g. protection against dismissal) are found in India
and Sri Lanka. As the scope of the regulations is
very much restricted by the law (e.g. only applica-
ble to companies with more than 100 employees)
and both countries have a high degree of informal
employment (in Sri Lanka approx. 70%, in India
more than 90%), labour market regulations de fac-
to have less weight than in countries with a high
level of application. Most Latin American countries
traditionally have a relatively high level of labour
market regulation. The instrument of minimum
wages is particularly often used (see Boeri et al.
(2008), p. 7 et seqq.).63 Relatively strict labour market
regulations can also be found in Sub-Saharan Africa
(see Taylor (2009), p. 216) and in the former social-
63 Boeri et al. (2008) refer to studies on Brazil, Chile, Colombia, Cos-ta Rica, and Mexico. Minimum wages in the agricultural sector were also analysed in Morocco, Ghana, and Kenya.
ist countries. The legal traditions play a major role
for the mechanisms used to monitor employment
contracts in a country. According to Botero et al.
(2004), the relatively high level of regulation in the
countries of Continental Europe and in many de-
veloping and emerging nations is a consequence of
the (compulsory) adoption of civil law and/or of the
socialist legal system.
If the validity of a comparison of de jure existing
labour market regulations in industrial countries
is often limited due to the presence of other regu-
lating mechanisms, the same also applies in a de-
veloping country context (see also Sanchez Puerta
(2010), p. 10), but often for different reasons: As
explained above in the example of India, labour
market regulations usually apply to formal em-
ployment relationships only. It is difficult to clearly
differentiate formal and informal employment re-
lationships (which is therefore the subject matter of
controversial debates in the literature, see Sanchez
Puerta (2010), p. 22 et seqq.). Still, statements of
trends can be made. The reason that labour market
regulations do not apply to the majority of employ-
ment relationships is that they are either officially
not defined for small and micro-enterprises and/
or that the latter – due to their informal character
– remain below the radar of the public administra-
tion. I.e., the validity of labour market regulations is
frequently limited by the fact that the adoption and
enforcement of laws and regulations is often insuf-
ficient (e.g. inconsistent, fragmented legal regula-
tions, inadequate work place inspections, difficult
access to courts of law) (see e.g. Abrahart/Verme
(2001), p. 78 et seqq.).64 This enforcement problem of
developing countries can increasingly be noted in
times of crisis, as irregular, informal and precarious
employment relationships increase in an adjust-
64 Tangian (2008), for example, states in an empirical analysis, that Turkey has the most regulations with regard to formal institu-tional labour market flexibility. However, this is of no signifi-cance for the also determined actual labour market flexibility, because almost 70% of the surveyed workers had no formal employment contract (see Tangian (2008), p. 104).
98
ment process to a decline in sales and demand (see
also ILO (2010a), p. 53 et seqq.).
However, the described deficits in the legal and
judicial systems do not only impact the “legal vac-
uum” of informal employment relationships. Espe-
cially in countries with a high level of corruption,
enterprises in the formal sector can systematically
deploy the possibility of bribery to pay ransom and
use government-related patronage networks to be
exempt from certain regulations. According to the
Corruption Perception Index 2010, the risk of a mal-
functioning public labour market regulation and
administration is particularly high in Africa (with
the exception of Southern Africa), and in the coun-
tries of the former Soviet Union. A more mixed
result concerning corruption is provided for Latin
America, the Middle East, and Asia (see Transparen-
cy International (2010) and Annex 2).
While most of the 181 ILO member states commit
to the core labour standards (see Figure 15), the
ratification of the agreement does not mean that it
is effectively implemented (see Kausch/Trommer-
shäuser (2002), p. 21 et seqq.). First of all, the usually
very vague conventions have to be translated into
actual legal regulations and/or political action. ILO
supports its members in this process. However, this
does not help against potential political resistance
from companies that profited from the previous,
liberal approach. Therefore, the implementation
is not so much a question of available technical
capacities but first and foremost a matter of the
political positions and decision mechanisms in a
country. In the context of the so-called follow-up
mechanism (see ILO (2011e)) the members com-
mit to reporting the implementation progress on
a regular basis. In the same way, stakeholders in
the respective countries can have implementation
deficits analysed in more detail by the International
Labour Conference. However, this does not change
the fact that ILO has no sanction options. It can
only publish progress and deficits in the context
of its overall reporting (see ILO (2011g)). Finally,
the above-described limitations to the effective-
ness of labour market regulations must be borne
in mind. I.e., even if the commitment is translated
into national legislation, it remains questionable in
how far the rules are actually enforced. ILO is very
much aware of this problem and tries to advance
the discussion and implementation process by
Figure 15: Scope of application of the ILO core labour standards 2010
No Agreement(Short description)
Number of declarations of commitment by the member states
Percentage of committing members
29 Forced labour, 1930 173 96%
105 Total eradication of forced labour, 1957 170 94%
100 Equal wage 167 92%
111 Anti-discrimination 168 93%
138 Minimum age 156 86%
182 Child labour 172 95%
87 Freedom of association 149 82%
98 Freedom of association and collective bargaining
159 88%
Source: ILO (2011 et seqq.), own calculation
99
providing support (see also overall reporting on the
implementation of individual conventions, e.g. ILO
(2009b) on forced labour and ILO (2010c) on child
labour).
The analysis of labour market regulations in a
country context generally shows that the scope of
options in this area usually is of relatively little sig-
nificance for combating economic crises. The use of
this instrument does not only depend on the polit-
ical framework conditions but also on the legal tra-
ditions and the social control systems (jurisdiction
and administration) that have developed in a coun-
try over decades and on their quality. With view
to the considerable delays in the decision-making
process of labour market regulations and in their
taking effect, this instrument appears to be little
suited as an immediate anti-crisis action.
A 3.2.2 Collective bargaining
Collective bargaining of wages and other terms
of employment are a major element of the labour
market and its constitution. The extent of collective
bargaining depends more on the unionisation rate
of workers than on the organisation rate of em-
ployers. Employers find it relatively easy to organise
themselves: Their interests are more homogenous
and easier to bundle than those of workers. Enter-
prises are already organised and the incentive for
organisation is even reinforced by that fact that
industry associations can also be used for political
lobbying.65 Therefore, company organisations are
found in industrial as well as in developing coun-
tries, and these organisations may also act as em-
ployer’s associations.
There are significant differences in the unionisa-
tion rate between industrial countries. As is shown
in Figure 16, the Nordic countries in Europe have
the highest unionisation rate (more than 70% of
65 For European employers´ associations, collective bargaining is no longer the main purpose. Instead, their focus is on providing services for their members and on lobbying (see European Com-mission (2011a), p. 5).
wage and salary earners), followed by some other
European countries in the middle third (between
30% and 60%). The majority of the OECD countries
has a unionisation rate of less than 10% of the wage
and salary earners. With the exception of Italy,
these include all G7 countries.66
It is also noticeable that the trend towards lesser
unionisation continues in the industrial coun-
tries. “This is attributable to a lesser and further
declining unionisation rate of young workers and
employees and to problems regarding the recruit-
ment and loyalty of members in the service sector,
in small companies and among workers/employees
with flexible and limited employment contracts
(European Commission (2011a), p. 5).”
While the classification of the USA as a country
with a relatively low unionisation rate corresponds
to the general impression of the labour market, this
does not apply to the classification of France in the
available statistics as the OECD country with the
lowest unionisation. This apparent contradiction
is resolved if state measures are considered that
protect the functionality of collective bargain-
ing through legal and political actions (regarding
the key elements of respective state measures see
Schulten (2010), p. 38 et seqq.). The historic back-
ground of these measures in Europe is that they
were aimed at integrating the at the time still much
stronger trade union movement. The key elements
were:
}legal privileges for the parties to collective agree-
ments; e.g. the exclusive right for the trade unions
to conclude collective agreements.
}organisational support, e.g. the Ghent system in
the Nordic countries whereby the main respon-
sibility for the administration of unemployment
66 The unionisation rate measures the share of wage and salary earners in a country who are members of a trade union and compares it to the total number of wage and salary earners in this country (see OECDstat, Trade Unionisation rate, available at: http://stats.oecd.org/Index. aspx?DataSetCode=UN_DEN (15.09.2011)).
100
benefits is held by the trade unions with a corre-
spondingly high incentive effect for becoming a
member (for more details see Scruggs (2002)).
}extension of the validity of collective agreements
beyond the scope of the parties entering into the
agreement (usually to all workers/employees).
}extension of the collective agreements to
companies that are not members of the industry
association.
Despite the relatively low unionisation rate in
France, the country has a high coverage by collec-
tive agreements because the instrument of extend-
ing the scope of collective agreements is used to a
considerable extent (see Schulten (2010), p. 39). I.e.,
the unionisation rate can only be used to a certain
extent to describe the actual effects of collective
negotiations and systems of collective wage/salary
agreements. Public support mechanisms for collec-
tive bargaining are equally important.
Collective bargaining generally plays a much lesser
role in developing and transition countries (see
Kausch/Trommershäuser (2002), p. 19 below):
}This is, first of all, due to the fact that the trade
unions usually represent a minority of the work-
ing population only. Because of the problem of
forming an organisation, only workers/employ-
ees with formal employment relationships (par-
ticularly in the public sector or in industries with
a small number of large companies) form a trade
union. Medium-sized companies and people with
informal employment relationships usually have
to manage without a representation of interests
(see also Rudra (2002), p. 419 et seqq.). In addition,
the obstacles for organising the interests of work-
ers/employees are further complicated in many
African countries by a considerable fragmenta-
tion of the society (e.g. ethnic groups, clan struc-
tures, etc.).
}Secondly, the formation of functioning, com-
petent trade unions is hampered by the state
in many developing countries. Instead of
Figure 16: Unionisation rate of workers/employees in OECD countries, 1999 and 2008
Source: Own presentation with data from OECDstat, unionisation rate, http://stats.oecd.org/Index.aspx?DataSetCode=UN_DEN (15/09/2011)
France
Turkey
Korea
United Stat
es
Chile
Estonia
Mex
ico
Spain
Switzerl
and
Japan
Portugal
Hungary
New Zea
land
Netherl
ands
Poland
Australi
a
German
y
Greece
Czech
Republic
Canad
a
United K
ingdom
Slovak R
epublic
Ita
ly
Austria
Irelan
d
Luxe
mbourg
Belgium
Norway
Denmark
Finland
Sweden
Icelan
d
Slovenia
100
90
80
70
60
50
40
30
20
10
0
1999
2008
101
strengthening the functioning of collective bar-
gaining as is the case in Western Europe, coun-
tries like e.g. China, Malaysia, and Indonesia focus
on safeguarding the interests of enterprises and
foreign direct investors rather than those of the
workers/employees (e.g. restrictions to trade un-
ion rights in export production zones). Also in
Latin America, the formation of trade unions was
suppressed during military rule.67
}Especially in some Central and Eastern Euro-
pean countries, many trade unions battle with
trust issues as they historically used to have close
connections to politicians. This would be, for ex-
ample, in their capacity as trade unions for state
enterprises or for highly regulated industries with
close connections to the state.
}Eventually, the structural adjustment pro-
grammes of the IMF and changes in the econom-
ic structures (globalisation) as explained above
have again deteriorated the situation for the
already low unionisation rate of the working pop-
ulation. Similar to the development in industrial
countries, layoffs in the context of privatisation
and restructuring of industry sectors also contrib-
uted to a loss in members.
For the purpose of analysing labour policy response
options to economic crises, it is important to an-
alyse the different social partnership systems be-
cause well-functioning social partnerships support
the necessary political dialogue and have the poten-
tial to contribute to quick and efficient changes in
the labour market system. Any external support by
donor countries of the participation of trade unions
and civil society in countries without social part-
nerships can in no way replace this process which
has evolved over decades.
67 The described political restraint in developing and transition countries is also reflected to a certain extent in ILO`s core labour standards 87 and 98 on collective bargaining: They were ratified by a much smaller number of countries than, e.g. the core labour standard on forced labour and anti-discrimination (see Figure 15).
A 3.2.3 Labour market administration
While there are different ILO conventions on the
issue of labour market administration68 (e.g. con-
vention no. 150), it remains much more difficult to
achieve a minimum consensus for all countries in
this area than, for example, on substantial issues of
labour market configuration (e.g. core labour stand-
ards). This is due to the fact that considerations on
the best possible structure of labour market admin-
istrations significantly depend on (1) the contents
of labour market policies and (2) the framework
conditions of public action in a country. Both vary
considerably.69
On an international level, the following basic struc-
ture of labour market administration is often
used:
At the centre of the labour market administration
system is the ministry of labour. This is usually the
competent ministry for preparing and formulat-
ing labour market policies (often including bills).
The ministry mostly also has a supervisory and/or
coordinating function with regard to other central
labour market institutions (see Kausch/Trommer-
shäuser (2002) p. 37).
Among these are especially the so-called public
employment services (PES). In all countries, the
public employment services assume the task in the
context of active labour market policy of improv-
ing transparency in the labour market and thereby
contribute to increasing the matching. Among the
68 The “labour market administration” category includes, first of all, the public administration bodies working in the context of labour market policy. Secondly, the interaction between these bodies and the consideration of the interests of the social partners also plays a role for the planning, implementation and monitoring of labour market policies (see Kausch/Trommer-shäuser (2002), p. 37). The latter aspect – the coordination be-tween the various bodies – is further characterised by the distri-bution of responsibilities: What are the tasks of the individual bodies and how are they defined? How are they financed (own financing or budget allocation?) What are their competences in executing their task (spending)?
69 It is therefore not surprising that only 70 member states ratified ILO convention no. 150 on labour market administration (La-bour Administration Convention, 1978) in 2010 (see ILO (2011 et seqq.)).
102
key functions are placement services, information
and advice for job-seekers and statistical reporting
on their own activity (see Kausch/Trommershäuser
(2002), p. 38; see also Vandenberg (2008), p. 26 for
various Asian countries and Hansen et al. (2005) for
the former Soviet states).
Based on this basic structure, there is a broad range
of differentiation between the labour market ad-
ministrations. The major differences are presented
below:
In addition to the key functions, public employ-
ment services in industrial countries assume
many more tasks. These include career counselling,
execution of active labour market policies such as
qualification and employment promotion or the
payment of unemployment benefits (see Kausch/
Trommershäuser (2002), p. 38). Depending on the
degree of economic development and on the polit-
ical framework conditions, these functions are also
among the responsibilities of the public employ-
ment services in developing countries. A survey in
2000 and 2003 among the members of the World
Association of Public Employment Services (WAPES)
provided the following distribution of services pro-
vided by public employment services70: 90% offer
labour market information. Job boards are managed
by 75% of the members, always via the internet as
job board portal. Approximately half of the public
employment services also manage the unemploy-
ment insurance. 80% of the surveyed public em-
ployment services are responsible for the execution
of active labour market policies (for a more detailed
distribution see the next section, labour market
policies in a stricter sense).
However, the majority of the public employment
services in developing countries struggles with
functional deficits which are usually attributable
70 58 of the 90 members of the World Association of Public Employ-ment Services (WAPES) participated in the survey. The members ratio between industrial countries and developing countries is approx. 1:2 (see Hansen et al. (2005), p. 22 and www.wapes.org).
to the following factors (see ibid., p. 38 et seqq.; see
also on the example of Tajikistan: Kuddusov (2009)):
}unreliable and inconclusive information on de-
velopments in the labour market,
}information deficits on the qualifications of
job-seekers and requirements of employers,
}no regular contacts to employers,
}lacking personnel and technical equipment,
}insufficient internal organisation (e.g. separation
of the services for job-seekers and employers by
which the organisation itself continues the seg-
mentation and lack of transparency in the labour
market),
}poor external organisation (coordination with
other ministries, particularly education ministry).
The functional deficits may mutually reinforce
each other: Due to the ineffective and inefficient
operation of the employment services, job-seekers
and employers tend to make less and less use of
them. Incentives for using the services that are often
provided in industrial countries (e.g. via the man-
agement of unemployment benefits or job subsi-
dies), are not available or only to a minor extent. En-
trepreneurs, particularly those operating in the grey
area of labour market regulations, reduce their con-
tacts with public bodies to the absolute minimum.
Therefore, the statutory obligation to report job
openings or the retrenchment of workers/employ-
ees is often ignored. With regard to job openings for
low-skilled workers, private information exchange
platforms (word of mouth within the family, clan,
village) are much more attractive for entrepreneurs
(particularly in the informal sector). The less the
services are used by employers and employees, the
more their quality declines. The lacking cooperation
for example reduces the data basis and, hence, the
possibility for the employment services, to obtain
meaningful and reliable information as a basis for
the consulting and placement services. In the worst
103
case a negative selection is created. And indeed, the
majority of job-seekers in developing countries are
of the opinion that public employment services are
responsible for the worst problem cases only (see
Kausch/Trommershäuser (2002), p. 39).
Due to the described functional deficits, many pub-
lic employment services in developing countries
provide a very limited range of services only. In
many developing countries, the public employment
services historically have developed as departments
of the ministry (of labour) and/or its regional offic-
es (see Kausch/Trommershäuser (2002), p. 37). An
outsourcing of these services often is inappropri-
ate due to the organisational effort and costs that
would go along with it. With an increasing range of
functions and improved administrative capacities,
however, an outsourcing of this policy area to spe-
cialised agencies is also recognisable in developing
countries (see e.g. Vandenberg (2008), p. 26 et seqq.
among others for China, Malaysia, Sri Lanka and
India, or also for some transition economies).
Differences between industrial and developing
countries also become obvious in the management
of social insurances (particularly unemployment
insurance) and in the organisation of the super-
vision of labour market regulations. As many de-
veloping countries have no passive labour market
policies, the respective administrative structures
are not necessary. Whether existing unemployment
insurances are managed by the public employment
services or by separate institutions (often involving
a tripartite administration) usually depends on the
historical and political circumstances in a country.
Furthermore, significant differences can be iden-
tified with regard to the integration of labour
market and employment strategies in the national
programme (see Boldemann et al. (2009) for the
argumentation below). Industrial countries usu-
ally define national employment strategies. The
European Employment Strategy formulated in
1997, for example, provides for joint employment
guidelines that are to be implemented by national
reform programmes. The implementation is sup-
ported by a systematic monitoring of its effects, by
country-specific recommendations and joint em-
ployment reports. Over the last ten years, more and
more developing countries have started – with the
support of donors – to include employment pro-
motion and job protection goals in their national
programmes – mostly in connection with formu-
lating Decent Work Country Programmes (DWCPs)
and/or national poverty reduction strategies (PRS).
In terms of substance, they are based on the ILO
Global Employment Agenda. Particularly in Africa,
Asia, and in Central and Eastern Europe, nation-
al employment strategies are increasingly being
defined (see ibid., p. 49 et seqq.). An analysis of dif-
ferent national employment strategies shows that
many developing and transition countries still have
significant weaknesses in the management of their
national strategies (e.g. lacking ownership and po-
litical will, lacking policy coherence and prioritisa-
tion of intervention areas, low level of preparation
for the operationalisation of strategies, etc., see also
Mummert/Mummert (2010)).
Eventually, the functioning of a labour mar-
ket administration is shaped by the framework
conditions of the public finances system as the
explained institutions are a part thereof. The han-
dling of public finances in many developing and
emerging nations is much worse than in industrial
countries. It will therefore be explained below,
which problems in the public finances system in
developing countries are particularly relevant for
the analysis of labour market and employment pol-
icies and consulting in the context of development
assistance.
Excursus: Good Financial Governance and
employment promotion
The major elements of public finances are as fol-
lows (see GTZ (2006), p. 3):
104
}With regard to the generation of revenue:
Revenue policy and management.
}With regard to actual execution via the disburse-
ment of funds: budgetary policy and expendi-
ture management including the financial man-
agement in the line ministries and public debt
management.
}With regard to the management of public resourc-
es on a subnational level (e.g. provinces, districts,
municipalities): the configuration of the national
financial structures. Decentralised approaches for
employment promotion, for example, which are
of importance for reaching rural labour markets,
cannot be lastingly established without a func-
tioning subnational administrative structure.
}With regard to supervisory bodies: parliamen-
tary control. It is responsible for verifying that
announced and budgeted policies are actually
implemented and reviewing the quality of the
implementation. The fulfilment of this task is
mostly based on the audit results of the Supreme
Audit Institution.
The systems of public finances in developing and
transition countries usually have significant deficits
(see also the information of the Public Expendi-
tures and Financial Accountability (PEFA) joint
programme by World Bank, IMF, European Com-
mission and a number of bilateral donors). Accord-
ingly, labour market administration, as a part of the
public administration and of the financial system, is
also affected. The following lists present the major
components of the public finances system and typ-
ical scenarios for developing countries:
}Due to a usually very limited tax basis, the in-
come position is weak. This is exacerbated by
deficits in the tax system (e.g. non-transparent,
unequal burdening of certain income categories)
and tax management deficits. This has negative
consequences for the economic and income
development (see also the World Bank doing
business index). In this situation it is necessary to
exactly review whether tax incentives should be
used at all for promoting employment and how
they should be used.
}Outsourced budgets of semi-public institutions,
subsidiary budgets and funding pots of line
ministries undermine the control function of
the general state budget. Especially with regard
to response options to expected and/or actual
economic crises, the control of political actions
depends on the ability to assess the impacts of
the crisis on the budget. This is done via tax rev-
enue estimates, the collection and updating of
macroeconomic key data and their adequate con-
sideration in the budget benchmark papers (or
equivalent parameters constituting a calculation
framework for the requirements planning of the
line ministries). Deficits in this area increase the
probability of incorrect planning of requirements
that also affects the labour ministries.
}Generally, the budget preparation process often
is not based on clearly defined preparation and
reconciliation procedures between finance minis-
try and line ministries. Poor budget classifications
and lack of information, particularly in the line
ministries, with regard to the correct planning of
the financial requirements result in a situation
where the plan does not reflect the political fo-
cus areas and shaping approaches or show any
change in priorities over the prior year period. In
many cases, there are only basic approaches to a
multi-annual budgeting process which, among
others due to appropriations for commitments
(commitment to expenditures by the government
in connection with investment projects over
several years), lacks reliability. Due to the lack
of (reliable) documentation and integration, the
members of parliament (if a critical opposition
with the necessary know-how for budget analysis
exists at all) and the public are hardly able to in-
fluence the policy in the planning stage.
105
All in all, it can be assumed that the actual budget
approaches reflect not so much the goals and pro-
grammes defined in strategy papers but the current
distribution of political power in the government
and its strategic goals until the next election.
}Budget implementation is also characterised by
manifold problem areas. Access to and payout
of funds during the year often suffers from sig-
nificant deficits in the management of accounts
(e.g. in many countries separate accounts exist
for the line ministries which makes it difficult for
the exchequer of the finance ministry to control
these funds). Due to deficits in the public procure-
ment systems, particular problems in controlling
the access to funds exist especially in ministries
with a high rate of public procurement. Because
procurement processes tend to be lengthy, many
funds are called during the second semester only,
resulting in shortages. De facto, funds that were
actually approved in the budget are not allocated
or only allocated with a significant delay. These
obstacles must be borne in mind when analysing
labour-intensive public investment programmes
or employment schemes. The question is, wheth-
er the framework conditions allow the extension
and swift implementation of such employment
policies at all.71
}The control mechanisms of public finances usu-
ally function to a certain extent only. Particularly
in countries with major democracy deficits or in
very young democracies without any experience
in handling the accountability obligation of pub-
lic bodies, there are little incentives and/or possi-
bilities for the members of parliament to control
government expenses and the allocation of funds.
71 The late disbursement of funds in connection with a public employment programme in India, for example, was a major contributing factor to the failure of the programme: Because the funds were only released by the government during the last quarter and had to be forwarded to the recipients on a municipal level via a longer chain of payments, the funds only arrived late and for the harvesting season only (see Del Ninno (2009), p. 35). I.e. hardly anybody participated in the programme because most potential participants were needed for the harvest.
Lacking internal control mechanisms but, most
of all, no or only rudimentarily working supreme
audit institutions result in an insufficient infor-
mating of the parliament on the quality of the
management of funds by the government.
}The public administration in developing coun-
tries generally suffers from significant capacity
deficits. They are often not only lacking adequate
technical equipment (the implementation of
a financial administration is impossible with-
out modern information and communication
technologies), but often also have no sufficiently
qualified and motivated staff. Administrative
structures on a sub-national level usually are
exposed to even more restrictions because the
often centralised structure of the administration
has prevented the formation of competent, suffi-
ciently funded regional and local authorities for
political reasons. This becomes evident in a corre-
spondingly imbalanced, non-transparent system
of vertical financial equalisation and in a strong
dependency of the regional and local authorities
from the superordinate level. These framework
conditions should be borne in mind when con-
sidering a more decentralised performance of
labour market policies.
A 3.2.4 Adjustment-oriented labour market policies
In industrial countries, active labour market poli-
cies were originally developed and/or expanded to
respond to economic crises (e.g. the Great Depres-
sion beginning in October 1929 and reaching into
the 1930s, the oil crises in 1973 and 1979/1980) and/
or to the continued high unemployment rate in the
1990s (see e.g. Calmfors et al. (2004), p. 2 et seqq. on
the example of Sweden, see also Vodopivec (2009),
p. 30). As explained in section 2.1.1, active labour
market policies include a wide range of different
measures. Analyses of the composition of active
labour market policies among OECD members
106
reveal the following picture (see OECD (2006a), p. 69
et seqq.; also De Koning (2005), p. 10 et seqq.; Betch-
erman et al. (1999), p. 9 et seqq.): Figure 17 shows
that measures for further vocational education and
training and subsidised employment (job as well as
wage subsidies for regular employment) are the
most frequently used instruments in the average
OECD country followed by expenses for the place-
ment services of the public employment services
including the costs of managing the programmes.
Expenses for employment services are the only
category that has continuously grown between
1989 and 2002. A major contributing factor to the
increase were more and better monitoring and
control measures on the use of labour market pro-
grammes and unemployment benefits (see OECD
(2006a), p. 69). Aid programmes for special target
groups in OECD countries focused on the integra-
tion of the young and of disabled workers into the
labour market.72
72 Unweighted average expenses for Australia, New Zealand, Japan, Canada, USA, and in Europe for Ireland, the UK, Finland, Nor-way, Sweden, Denmark, France, Belgium, Netherlands, Germany, Austria, Switzerland, Portugal, Spain, and Greece (see OECD (2006a), p. 71).
Also the ratio of total expenses for active OECD la-
bour market policies and GDP varied over time (see
Figure 17). The high unemployment rate in many
countries (especially in Europe) in the 1990s is re-
flected by the significant increase in the share of
total expenditure in the GDP in 1993 as compared
to 1989. The decline in overall expenses for active
labour market policies in 2000 is mainly attribut-
able to a strong reduction of public employment
programmes at the end of the 1990s as a conse-
quence of improved labour market conditions (see
OECD (2006a), p. 69 et seqq.). Bottom-line, the total
expenses in 2002 are only increased slightly above
the expenses in the 1980s.73 Furthermore, the share
of expenses for active labour market policies in
relation to the overall development of labour mar-
ket policies between 1985 and 1997 has remained
unchanged in most OECD countries; in more than
one third of the countries, the share of active labour
market policies in the overall expenses has even
dropped (see Martin (2000), p. 88).
73 Expenses for active labour market policies in OECD countries on average increased from 0.7% of the GDP in 1985 to 0.8% of the GDP in 1997 (see Martin (2000), p. 88).
Figure 17: Composition of active labour market policies in OECD countries72, 1985–2002 Total expenses of active labour market policies in percent of the GDP
Source: OECD (2006a), p. 71
18% 17% 18% 18% 20%
25% 31% 27%
26% 26%
12% 12%
12%
11% 11% 28% 22%
27%
27% 24%
17% 19%
16%
17% 19%
1.2
PES and administration
Training
Youth
Subsidised employment
Disabled
0.0
0.2
0.4
0.6
0.8
1.0
1985 1989 1993 2000 2002
107
Therefore, a general trend among the OECD
countries towards an expansion of active labour
market policies cannot be identified. Against the
background of partially disappointing evaluation
results, active labour market policies continue to be
mainly used as a discretionary policy instrument
for unforeseen circumstances by many countries
(e.g. USA) (see also Martin (2000), p. 88 et seqq.). This
means that analyses of different active labour mar-
ket policy packages may quickly become obsolete.
Particularly in countries with more comprehensive
passive labour market policies, reforms of active
labour market policies of the last years were mainly
directed at increasing the quality and efficiency of
active labour market programmes than at expand-
ing them.74 This is intended to be achieved by an
integrated management of active and passive la-
bour market policy approaches. The central concept
of integrated management is to better link both
policy elements by creating so-called “one-stop”
employment services (see also Martin (2000), p. 104).
The following reform approaches were frequently
used (see OECD (2006a), p. 69 et seqq.):
Improvement of placement services by using cer-
tain techniques (e.g. profile formation) or better
support of job-seekers (so called customised assis-
tance).
}Greater emphasis on the obligations of job seek-
ers to reduce misuse of unemployment benefits.
The regular, close, and mandatory contact be-
tween job seekers and public employment servic-
es is intended to increase the readiness to accept
work. Also the role of public works programmes
has changed in this regard. Instead of providing
alternative occupation in the second labour mar-
ket, “1-euro jobs” in some countries are regarded
as a test of the readiness to work and as an option
74 At the same time, many modernisation programmes for public employment services in EU countries were co-financed by the European Social Fund. For more details on the programmes see European Commission (2011b), p. 80 et seqq.
for maintaining the employability of the partici-
pants (see also De Koning (2005), p. 12).
}Early intervention by the public employment
services to avoid impending unemployment and
mandatory participation in programmes.
}Increase in the efficiency of the public employ-
ment services (e.g. by improving the integration
of previously outsourced agencies in the sup-
ply-side structure, tenders for all services, to cre-
ate a market for employment services (Australia)).
Figure 16 shows average numbers from 20 different
industrial countries, thus differences in active la-
bour market policies between different countries
are not recognisable. Expenses for active labour
market policies are much lower in non-EU coun-
tries of the OECD than within the EU (see Figure
18 as well as OECD (2006a), p. 71). While Australia,
Canada, New Zealand, USA, Norway and Switzer-
land on average spend approx. 1% of their GDP for
active labour market policies, the EU countries (not
including the Czech Republic, Hungary, Greece,
Italy, Poland and the Slovak Republic) spend almost
2.5% of their GDP. Within (Western) Europe there is
again a north-south divide with an above-average
expenditure level in the northern countries (e.g.
Sweden, Norway, Denmark) and an expenditure
level that tends to be below average in the southern
countries (see OECD (2006a), p. 71).
Our comparison shows a quite high heterogeneity
within the individual programmes. The parame-
ters influencing the programmes may vary greatly
from country to country. The financial volume of
the programme plays a role as does the selection
of various partial measures (e.g. only certain ser-
vices or a combination of services for certain tar-
get groups), and the organisational and execution
structure of their implementation (e.g. participating
administrations). The area of further vocational
education and training, for example, which is used
by many countries, provides an example for the
108
differences between the structure of programmes.
In principle, further vocational education and
training can be supported in different ways (see
Betcherman et al. (1999), p. 5):
1. The benefit recipients are directly trained by the
government via respective public further educa-
tion institutions.
2. The government finances education pro-
grammes by public and/or private education
institutions.
3. The government supports the benefit recipients
in the documentation and marketing of their ac-
quired qualifications (e.g. labour market informa-
tion, licensing, quality control and certification
of further education institutions).
Hence, the observed heterogeneity of further voca-
tional education and training can be attributed to
differences in the composition of the measures and
to further education markets that are usually very
differently organised (see De Koning (2005), p. 2).
The trend in industrial countries to focus on ac-
tive labour market policies (see e.g. OECD (2006a),
(2006b)) can also be observed in developing and
transition countries. And the composition of the
different labour market programmes in developing
countries is not very different from industrial coun-
tries: Here also, the focus usually is on placement
services and administration by public employment
services as well as training measures. However, the
average level of spending is significantly below the
OECD average (see Betcherman et al. (2004), p. 8 et
seqq.). The following regional differences can be
observed:
}Transition countries are using active labour
market policies mainly to reduce frictions from
the transformation process (restructuring of
industries with corresponding unemployment)
(see Hansen et al. (2005), p. 30). While countries
such as Estonia, Hungary, Russia, and Ukraine
with participation rates of 25% and more of the
unemployed reach relatively large numbers of
job-seekers, rates are much lower in other coun-
tries. Qualification measures and public works
programmes are among the most important
categories of actions. The latter, however, were
reduced in countries with an advanced level of
transformation (and, hence, more absorption
of the unemployed by the private sector) and/
or generally combined with other measures (e.g.
on-the-job training, certain infrastructure pro-
jects). Some countries such as the Czech Republic,
Hungary, Poland, and the Slovak Republic invest
relatively large amounts in job and wage subsidies
for the long-term unemployed, young people,
and unemployed persons in problem regions.
Incentives for business start-ups are only used to
a lesser extent due to the costs involved.
}With the exception of public works programmes,
most Asian countries until 1997 had no long-
standing experience with active labour market
policies (see Betcherman et al. (1999), p. 25). The
expansion of active labour market policies that
can be observed in some of the countries over the
past few years is attributable to the Asian crisis
but also to the general structural change, particu-
larly in transition countries (see Betcherman et
al. (1999), p. 25 et seqq.; Islam (2003); Vandenberg
(2008)).
}The picture is similar for Latin America, as this
region has almost continually undergone eco-
nomic crises in the 1980s and 1990s. Especially
the Brazilian crisis and the crisis in Argentina,
which affected two major emerging countries
of the region, had consequences for the neigh-
bouring countries and, among others, resulted
in the creation of active labour market policies
(see e.g. IDB (2009a)): Initiation of public works
programmes, creation of social security instru-
ments in case of unemployment, expansion of
public employment services, increased usage of
109
programmes for further vocational education and
training, especially for the young.
}Active labour market policies are on a low, mostly
neglectable level in the LIC of Sub-Saharan Af-
rica.75 The efficiency and effectiveness deficits of
the (few) active labour market programmes are
mainly attributable to financing problems, defi-
cits in the public financial system and considera-
ble deficits in the management of labour market
policies. The situation in Senegal can be used as
an example (see World Bank (2007) for the follow-
ing argumentation): Despite (or maybe because
of) numerous different programmes, inefficient
administrative structures have emerged and ac-
tivities are not coordinated. In addition to the
“traditional” placement services, various funds
with their own independent implementation
structures were created. The focus of active labour
market policies is on wage and salary subsidies,
public works (via AGETIP (Agence d’Execution des
75 This excludes South Africa which is counted among the UMIC and is a member of the G20 (see also ILO (2011c). For the MENA region, there are hardly any systematic information on labour market policy packages (see Betcherman et al. (2004), p. 12).
Travauux d’Interet Public contre le sous emploi)
and the National Civil Service) and loans to SME/
business start-up credits (see ibid., p. 84). Without
AGETIP which is financed by the World Bank,
the total expenditure for active labour market
policy in Senegal in 2004 was 0.2% of the public
budget with a declining trend due to adminis-
trative problems and irregularities in one of the
programmes. The programmes reached only a
fraction of the unemployed in the country. The
performance of the public employment services
was also neglectable (approximately 50 place-
ments per year; see ibid., p. 88).76
In the industrial and in most transition countries,
passive labour market policies are an integral
part of the labour market process. Despite the fact
that active labour market policies have been in the
76 In the context of a more detailed analysis of the use of active labour market policies these expenses are often put in proportion to the level of unemployment (see e.g. EU (1999), p. 22 et seqq.). According to this information, the Netherlands, Denmark, Sweden, Ireland and Portugal spent more, while Spain, Greece and the UK spent less in the 1990s to combat unemployment by active labour market policy instruments. However, as active labour market policies are only a sub-section of measures for job creation and protection, the validity of this observation is limited.
Figure 18: Total expenses for adjustment-oriented labour market policies in OECD countries, 1985–2005
Source: Grubb/Puymoyen (2008), p. 113.
Share in percent of the GDP
Passive policies3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Other OECD countries:Unweighted average of Australia, Canada, New Zealand, Norway, Switzerland, and the USA.
EU average:Unweighted average of OECD-EU countries. The data include the Czech Republic, Hungary, Greece, Italy, Poland, and the Slovak Republic.
Active policies
1985 1990 1995 2000 2005 1985 1990 1995 2000 2005
110
political focus for quite some time now, expens-
es for passive measures are regularly higher (see
Figure 18). This is true for non-EU countries with
a frequently low expenditure level (e.g. the USA),
but also for the EU countries with high expenses.
However, differences between expenses for active
and for passive measures are usually less in non-EU
countries, which is attributable to a superior labour
market situation but also to different configura-
tions of passive labour market policies (e.g. for the
USA).
Unemployment insurance is the key element of
passive labour market policy in industrial countries.
In addition, most Western European countries have
unemployment benefits for the unemployed as a
second safety net (see Vodopivec (2009), p. 9). Most
unemployment insurances in industrial and tran-
sition nations are for all workers/employees across
all industries (see in the following ibid., overview,
p. 5). However, the self-employed and often also
homeworkers and casual workers are usually ex-
cluded from participating. Depending on the size
of the formal sector, transition countries usually
have a lesser scope of application of unemployment
insurance. While in the mid-1990s, for example,
87% of the Hungarian households with at least one
unemployed person and 65% of those in Poland
received unemployment benefits, the percentage
was only 17–19% of the corresponding households
in Estonia and Latvia (see ibid., p. 9). The wage re-
placement rate is also much higher in many indus-
trial countries77; some transition countries are using
a flat rate with additional benefits for relatives. A
limitation of the entitlement period and certain
eligibility criteria (3–12 months employment; reg-
istration, readiness and ability to work) applies in
all countries. In the majority of countries, the costs
77 The average net wage replacement income in the OECD is approximately 60%. Here also, some countries (most of them in Northern Europe, e.g. Denmark, Finland, and Sweden) have a much higher level of security with a wage replacement rate of 80%.; the lowest net wage replacement rates are in the US with 34% and in Greece with even less than 10% (see Vodopivec (2009), p. 10 et seqq.).
are borne by both employees and employers (often
with a higher share for employees in the western
industrial countries); potential deficits are balanced
by the state (e.g. in Germany, also in transition
countries) or administration costs are borne by the
government (e.g. USA).
Passive labour market policy and active labour
market policies are closely linked via the condition
to register and actively seek work. This is due to the
fact that there are interactions between the two
policy areas which have to be aligned with each
other. The unrestricted and/or overly generous
insurance of unemployment as compared to reg-
ular working conditions reduces the readiness to
actively look for work. The wage replacement rate
also impacts the readiness to take up work (see Vo-
dopivec , p. 12 et seqq.). Unemployment insurance
provides a strong incentive to register and partici-
pate in active labour market programmes. Without
this effect, it is much more difficult for the public
employment services to reach the unemployed (see
the situation in developing countries further be-
low). Hence, the crucial factor is the configuration
of the two labour market policies. The goal is to
ensure the integrating role into the labour market
of active labour market policy without abandoning
the safety function for the unemployed provided
by passive labour market policy. The safety function
does not concern the protection against essential
risks. Instead, the protection of work income in
general provides the unemployed with the oppor-
tunity to look for a job alternative in line with his/
her current qualification level.
Unemployment insurances are not common in
developing countries (see Sanchez Puerta, p. 10 et
seqq.; Vodopivec (2009), p. 7). Documentation on
unemployment insurances can only be found for
some Latin American (e.g. Argentina, Barbados, Bra-
zil) and some Asian countries (e.g. China, Taiwan,
South Korea, Kuwait, Iran, Turkey) (see Vodopivec
(2009), p. 7, 30). Despite the fact that unemployment
111
insurance is an integral element of labour market
policy in transition countries, the scope of the in-
strument is significantly below that of industrial
countries (see Figure 19).
Instead, provisions on redundancy payments and
occasionally so-called unemployment insurance
savings accounts (UISAs)78 take over the security
function for work income (see Sanchez Puerta
(2010), p. 11 et seqq.). Chile and Ecuador have mixed
UISA systems including a backup fund. The fund
provides support for workers/employees who have
used up their UISA (see ibid., p. 15). The UISAs in
Brazil and Colombia have emerged from a system
78 Savings accounts as an insurance against unemployment ba-sically work like a savings book: The employer (in some cases together with the employee) pays a certain monthly amount into the employee’s account. When the employee is laid off, he/she can access the saved amount (see Sanchez Puerta (2010), p. 15). The characteristic feature of this type of insurance is that the risk is not spread over a larger number of workers/employees. Therefore, a balancing of risks is generally not possible. By accu-mulating capital, the insured can only create a buffer for “rainy” days. Fluctuations in his/her work income are balanced over the working life. Unemployment insurance, on the other hand, is based on a sharing of risks between all workers/employees and works as a “pay-as-you-go” system.
of government-subsidised redundancy payments
and also constitute a mixed system (see ibid., p. 11).
There are various reasons for the low application
of unemployment insurances in developing coun-
tries. Among the major reasons is the fact that the
insurance principle is impossible to apply and that
there are considerable deficits in administrative
capacities.
1. Problems in applying the insurance principle
Social insurances are the result of the formation
of modern work relationships in the industrial
countries at the end of the 19th century. In an indus-
trialised and urbanised society, there are only two
options for the majority of the employable popula-
tion: to work or to be unemployed without income
opportunities79 (see Vodopivec (2009), p. 4). This ba-
sic situation does not apply in developing countries.
As a result of their economic structure, the majority
79 Contrary to popular belief, the unemployed are not those who would particularly frequently work illegally (or are working in the informal sector of industrial countries) (see Mummert/Sch-neider (2002)).
Figure 19: Proportion of unemployed with benefits from unemployment insurance
Source: ILO (2009a), p. 33
Total
Western Europe
North America
Latin America
CIS
Asia
Arab States
Africa
20100 5030 806040 70 90 100
Unemployment receiving unemployment bene�ts contributory (%)
Unemployment receiving unemployment bene�ts non-contributory (%)
Percentage of total unemployment with unemployment bene�ts (contributory and non-contributory), weighted by labour force
Central and Eastern Europe
112
of the working population in developing countries
is under-employed and/or works in the informal
sector. There is hardly any open unemployment be-
cause most of the households cannot afford it (see
ibid., p. 18). Accordingly, it can be noted that those
who are officially unemployed in developing coun-
tries are not among the poorest of the population
(see ibid., p. 19).
It follows from the above that the configuration
of unemployment insurance as a type of social
insurance is not very viable in developing coun-
tries. Social insurances are based on the insurance
principle. Good and bad risks are bundled to cover
all members. This is more difficult, if the majority
of risks of an insurance are bad risks. Because the
small number of good risks is in no way able to
finance the contribution for the bad risks, public
financing is necessary (e.g. through general taxes).
However, in view of the necessary scope and the
general scarcity of public resources, this is mostly
not a financing option. Therefore, existing unem-
ployment insurances are in practice mostly focused
at covering the (more or less) small group of the
formally employed.
2. Administrative capacity deficits
When there is hardly any open unemployment,
eligibility conditions are difficult to establish. There
is a considerable risk of misuse (obtaining benefits
in addition to income from informal employment).
Huge control activities by the administration would
be necessary to combat the problem of misuse. Ex-
periences from industrial countries show that this
is only possible to a certain extent, even under fa-
vourable framework conditions (good staffing situ-
ation, modern technologies, functioning reporting
and documentation, etc.) (see Vodopivec (2009), p.
21 et seqq.). As explained above (see section A3.2.3),
most labour market administrations, particularly
in LIC and LMIC, might be unable to cope with the
high administrative requirements of an industri-
al-country-style unemployment insurance.
And it is also only a small group of workers/em-
ployees who profit from redundancy payment reg-
ulations. In addition, such payments are relatively
unstable as they depend on the financial position of
the paying company (see Sanchez Puerta (2010), p.
12). They can also not provide protection for longer
periods of unemployment.
To still provide a certain level of protection for cer-
tain, often marginalised groups of persons, public
works programmes (PWP) are used in developing
countries (see Subbarao (2003), p. 2). While they are
generally considered as an active labour market
policy instrument, they have an important social
security function80 in view of the lacking passive
labour market instruments and the generally weak
social security system of developing countries.
The multiple goals of PWPs in developing countries
are also underlined by the following definition:
“Public works programs provide temporary employ-
ment to unskilled and semi-skilled workers on la-
bor-intensive activities while providing income sup-
port to the poor and contributing to the creation and
rehabilitation of public infrastructure.” (Costella/
Manjolo (2010), p. 1). All programmes therefore have
in common that they simultaneously aim at creat-
ing (1) jobs, (2) social security and (3) infrastructure.
However, due to various conflicts between the goals
it proves to be quite difficult in practice to pursue
all three goals in the same way (let alone their quite
demanding implementation requirements). To
reduce inherent conflicts between goals, the indi-
vidual goals are weighted differently which then
impacts the programme design:
For “short-term” public works programmes for
example, the focus is on their income replacement
role. Sustainability in terms of effects on employ-
ment and in terms of infrastructure improvement
is of subordinate importance. Therefore, they are
80 An overview of the extent and quality of social security systems in LIC is provided by the Economic Policy Research Institute (2009).
113
usually used as a traditional anti-crisis instruments
(economic crisis, climate catastrophe) for a certain
group of particularly severely affected persons
(regional limitation) and only provide short-term
(usually 1–3 months to 1 year max) employment
(see McCord (2009), p. 1 et seqq.; Betcherman et al.
(2004), p. 43).
Some countries (e.g. India) manage longer-term
public works programmes (also called employment
guarantee schemes). Here also, the focus is on social
security. However, it is about the longer-term em-
ployment of a group of persons who would find no
permanent income and job opportunities in the
labour market (i.e. the state acts as an “employer of
last resort”) (see McCord (2009), p. 3).81 Due to the
long-term nature of the programmes and their
usually wider scope, they are mostly a replacement
for unemployment insurance. Accordingly, the fi-
nancial burden on the public budget is much larger.
The long-term linking of work and social security
which is pursued by PWPs, has proven to be prob-
lematic in practice: Due to financial restrictions on
the public budget, the participation conditions even
of universal programmes are often de facto restrict-
ed.82 Additional restrictions on the entitlement to
claim benefits are often set up in times of crisis
when public budgets are under stress (e.g. in the
Productivity Safety Nets Program in Ethiopia) and/
or it proves to be difficult to create sufficient job
opportunities (e.g. in the Employment Public Works
Programme in South Africa, see ibid.). The prob-
lem is also that, due to the linking of performance
and consideration, the programmes fail to reach
81 The fact that a (productive) performance is required with this type of programme often leads to its classification as an em-ployment promotion approach (see e.g. Lieuw-Kie-Song/Philip (2010), p. 5). However, it is doubtful in many cases that this is about temporary employment in the second labour market only and that the actual goal is the integration into the first labour market. The transfer of participants to long-term, sustainable employment and income opportunities in the private sector is not explicitly provided for, especially not in programmes with employment guarantees. Instead, employment constitutes a means to an end: to serve as a minimum income guarantee.
82 “In practice, no Employment Guarantee Program has yet been able to be truly universal (Lieuw-Kie-Song/Philip (2010), p. 10).”
households that are unable to offer manpower (e.g.
due to malnutrition, illness (e.g. Aids), pregnancy,
etc.). In most cases, however, these are the poorest
of the society who would have the most need for a
basic protection from social risks. Therefore, Lieuw-
Kie-Song/Philip (2010), for example, are in favour
of linking PWPs and so-called social transfer pro-
grammes83 and/or minimal transfer elements (see
ibid., p. 25). Finally, the trade-off between creating
jobs for the poor – usually people with low quali-
fications – and the quality of infrastructure devel-
opment must be considered. Good infrastructure
development does not only require sophisticated
management processes but – depending on the
region – also high capital investments (e.g. building
of bridges) and a well-trained workforce (see Karl-
huber-Vöckl (2001)). Due to the fact that complex
and demanding infrastructure projects offer more
rent-seeking possibilities, the implementation
of PWPs often goes along with a departure from
labour-intensive approaches (especially since the
management of a large number of workers can also
increase the complexity) and/or shortfalls in the
implementation of the targeted labour intensity
(see Subbarao (2003), p. 19, see also Kausch/Trom-
mershäuser (2002), p. 73).
The conflict of interest between infrastructure de-
velopment and job creation becomes particularly
obvious with infrastructure projects intended to be
implemented completely or in part by labour-in-
tensive methods (see McCord (2009), p. 3). Typical
83 Social transfers (also called cash transfer programmes (CTPs)) contribute to securing risks which may arise, for example, from price increases for basic goods in connection with a lack of income and employment opportunities (see Fleddermann et al. (2010), p. 1). The programmes help prevent situations where “poor households have to sell their livelihood (e.g. livestock, land) in crisis situations to compensate for higher prices” (ibid.). They include non-cash and cash benefits and can be designed as short- or long-term programmes on a regional or national level, the transfers may or may not be subject to conditions. In the case of so-called conditional cash transfers (CCTs) the benefit payments are tied to conditions (e.g. schooling or health checks). In Latin America, the number of such programmes has contin-uously risen over the last years. However, only very few of these programmes (Mexico and Brazil) are managed on a national level with a high coverage of the very poor population (see IDB (2009a), p. 9).
114
examples of this type of PWP are, e.g., the Ethiopian
Rural Roads Authority (ERRA), the already men-
tioned AGETIP programme in Senegal and related
programmes supported by the network AFRICATIP
in West Africa, and the Employment-Intensive In-
vestment Programme by ILO (see ibid.).
In the context of a survey and analysis of interna-
tionally used PWPs, the following trends can be
identified (see below: Del Ninno et al. (2009), p. 15 et
seqq.): PWPs are much more frequently used in LIC
than in MIC. The same distinct differences tend to
apply with regard to the financing and implemen-
tation structure. While most PWPs in Latin America
and Asia are mainly financed by national resources,
the majority of PWPs in Africa is donor-financed.
Own contributions by the national governments
frequently refer to specific contributions in kind
and services in connection with the implementa-
tion of the programmes. Many PWPs in Africa are
part of larger, donor-financed social funds that
mostly manage CTPs and intended to supplement
their social policy approaches by PWPs. This fact, as
well as the frequently identified problem of weak
administrative capacities and lack of political will,
is also reflected by the chosen implementation and
control structures: While PWPs in Latin America
and Asia (particularly the major PWPs, e.g. in India)
are usually implemented and controlled by national
administrative bodies, mixed types of administra-
tion are increasingly found in Africa. Financing and
control (via project menus, tender terms, etc.) are
frequently in the hands of the donors and/or the
project-related project management units (PMUs).
The projects are implemented via the national ad-
ministration but in some cases also entirely via own
project structures (e.g. the AGETIP in Senegal which
is considered as relatively successful; see Del Ninno
(2009), p. 19).
Summary
Our analysis of the actual manifestations of policy
packages for job creation and protection has shown
some similarities between industrial, transition
and developing countries. They include the setting
of labour market regulations, basic types of labour
market administration with a ministry as the cen-
tral controlling power and public employment ser-
vices that offer at least placement services, and the
use of other active labour market policies. Beyond
this basic structure, however, enormous differences
can be found in the configuration of labour market
and employment policy measures.
Based on OECD (2006b) analyses, the presented dif-
ferences between industrial countries alone, can be
summarised as follows: According to this analysis,
two different but principally successful employ-
ment policy packages exist (for the argumentation
below see OECD (2006b), p. 18 et seqq.). The policy
package of many Anglo-Saxon countries shows a
low level of social security (e.g. lesser significance
of unemployment insurance), limited taxation, few
employment protection regulations and a relatively
limited role of collective bargaining. A similar posi-
tive correlation between unemployment and policy
package is also found in (European) countries with
a more generous social security system with corre-
spondingly higher financing by taxes and social se-
curity contributions, more restrictive employment
protection and more relevance of collective bar-
gaining for determining wages and salaries. The dif-
ferences lead to different distribution mechanisms.
The gap between the rich and the poor in Europe is
smaller than in the US, for example, but the burden
on taxpayers and public budgets in higher in the
EU. The common denominator of both policy ap-
proaches is, however, that macroeconomic stability
is considered as very important.
115
With regard to the configuration of policy packages,
transition countries follow the western examples:
Active and passive labour market policies are used
but the scope and reachability of the unemployed
and/or under-employed population is significant-
ly lower as compared to industrial nations. Most
countries in Asia, Sub-Saharan Africa and also in
many countries in Latin America and in the Carib-
bean, unemployment insurance does not exist and
collective bargaining usually plays a minor role.
These framework conditions differ significantly
from those found in the European Economic Area
and are not only reflected by a lesser extent of ac-
tive labour market policies, they also impact the
framework conditions planning, implementing
and controlling labour market policies: Because,
for example, active and passive labour market pol-
icy cannot be linked, public employment services
have to work on a much more isolated basis than
in industrial countries. Especially the public works
programmes, which are often managed by an inde-
pendent implementing organisation, tend to create
an implementation structure of labour market and
social policies that is little integrated and coordi-
nated.
116
Annex 4: The role of social dialogue in times of crisis
Social dialogue can play an important role in times
of crisis to achieve a faster, consensus-based imple-
mentation of anti-crisis measures. We will therefore
briefly look into the role of social dialogue and
consensus-building, for example in the context of
tripartite agreements.
The promotion of social dialogue and social
partnerships constitutes a major element of the
ILO Global Employment Agenda and decent work
approach. Collective bargaining and social partner-
ships influence the labour market situation. ILO
therefore generally attaches great importance to
agreements between the social partners and the
government (tripartite agreements) in the context
of a crisis (see ILO (2010), p. 57 et seqq.). Dialogue,
coordination and consensus-building between the
social partners is considered as a key factor for the
successful management of a crisis (see ibid., p. 57).
However, the approach neglects the fact that for
example the so-called tripartite agreements may
reflect a consensus that remains either relatively
ineffective and/or is based on measures whose costs
are mostly financed by the state, i.e. by the general
public. In both cases the social partners contrib-
ute relatively little in terms of personal sacrifices
to reach a balance of interests. In other words: It
is wrong to automatically deduce from the fact
that crisis talks are being conducted and tripartite
agreements reached, that a positive effect is reached
from the agreement between the social partners.
What is the contribution of social dialogue and
good social partnerships in times of crisis?
Collective agreements with room for industry and/
or enterprise-specific adjustment mechanisms are
an important contributing factor for a smooth-
er adjustment to the effects of a crisis on the real
economy (see ILO (2010), p. 61). The degree of ef-
fectiveness of such a bilateral agreement depends
on the degree of organisation of the social partners
and on the significance of collective agreements in
the labour market. Due to the fact that the unioni-
sation rate in industrial countries is on the decline
and that trade unions play a quite subordinate role
in emerging and developing countries (see Annex
3), the relative importance of collective bargaining
and social dialogue today is mostly determined
by framework conditions set by the state through
wage policy and labour market legislation. Hence,
the contribution of bilateral agreements between
companies and workers/employees is of lesser
importance in those countries where collective bar-
gaining plays a subordinate role only (either due to
the lack of organisation of interests and/or govern-
ment support).
While adjustments to the collective bargaining law
provide advantages for overcoming a crisis, they are
usually not sufficient to remedy the severe conse-
quences for the employment situation. It matters
therefore, how an economic policy responds to the
crisis. The question here is, in how far tripartite
agreements that are based on a social dialogue
can contribute to improving the management of a
crisis. While a social dialogue with agreements on
social partnerships can be very useful in general,
it does, however, not guarantee a better response
to the crisis by the parties. This is because the in-
volvement of the state creates a new constellation
of interests: The fact that a much more powerful
partner, the state, is now taking part in the negotia-
tions, substantially changes the incentives to coop-
erate. Instead of finding a mutual solution in which
both parties would have to compromise (otherwise
it would not constitute a cooperation solution), it
117
may be quite attractive for both industry organisa-
tions and trade unions to convince the government
of labour-intensive actions thereby minimising
own cost contributions. If both sides act according-
ly, this usually results in a solution where the main
cost burden is borne by the state (i.e. by the general
public).
Consequently, a tripartite agreement does not
automatically result in an improved situation.
However, to the extent that the existing social se-
curity systems and the discretionary active labour
market policies offer a support basis for companies
and workers/employees in times of crisis, social
partnerships can build on this basis (see European
commission (2011a), p. 8). A potential added value
is only created if, within the scope of a tripartite
agreement, concessions by the social partners are
made and documented in addition to government
measures. From this perspective, the consensus on
employment policy measures in Germany to com-
bat the crisis, which was praised by ILO, does not
necessarily constitute a constructive consensus (see
ILO (2010a), p. 58). The short-working instrument
which is considered as a central element of the
relatively quick recovery of the German economy,
already existed before the crisis; the costs of the
extended scope of the instrument is borne by the
community of the insured (and/or by the taxpayer
through the compensation of the deficit of the Fed-
eral Employment Office). If the government cre-
ates a win-win situation for the Confederation of
German Employer Organisations (BDA) and for the
German Confederation of Trade Unions (DGB), this
does not constitute a test for the social partnership
because the costs are borne by the community.84
Our analysis so far shows that effectiveness consid-
erations resulting in the equation “well-organised
social partnership + trained voting procedures +
84 In addition, the agreed measures were considered as insufficient by the DGB, hence, there was no general consensus (see ILO (2010a), p. 58).
social dialogue + tripartite agreements (consensus)
= improved crisis management” do not always
correspond to reality. In the context of manag-
ing the GFEC, a wide range of different levels of
agreements and/or disagreements between the
social partners and governments could be observed
within the EU (see European Commission (2011a),
p. 7). However, neither the degree of severity of the
crisis nor the different systems of social partner-
ships could provide an explanation for the different
consensus-building processes between the social
partners.
The above arguments also significantly affect the
assessment of social dialogue, joint platforms and
tripartite agreements in the context of developing
countries. The low level of organisation, especially
of trade unions, and the lacking political support
of collective bargaining are considered as key ob-
stacles for the formation of social partnerships (see
also Annex 3). On the other hand, this also means
that the promotion of social dialogue and joint
platforms, especially in times of crisis, can contrib-
ute positively to managing the crisis.
But careful: Because developing countries usually
have weak social security systems and possibilities
for an active integration in times of crisis are very
limited, they can offer very little to industry asso-
ciations and trade unions in the context of joint
platforms and attempts at building a consensus in
return for their concessions. From the perspective
of the social partners it is therefore attractive to use
lobbying as a way of getting the government to take
political actions that reduce their losses in connec-
tion with the necessary adjustment responses to the
crisis. As industry associations and also trade un-
ions in developing countries tend to represent mi-
nority interests only, we must increasingly expect
political crisis mitigation measures that protect
particular interests at the expense of the general
public.
118
In the context of the GFEC, two extreme examples
of political pressure from groups with particular
interests are found in Zambia. We would like to
use these examples to clarify the presented rela-
tionship: In the context of the crisis, the Zambian
government maintained the social expenses for the
pension funds of public employees while necessary
cuts were made in other social policy areas. This de-
cision is even more important because the expenses
for pension claims of employees in the public sec-
tor correspond to approximately 75% of all expens-
es financed by the state budget (see Te Velde et al.
(2009), p. 30). The government also discontinued a
long-term tax reform aiming at a progressive tax-
ation of income from copper production because
the (mainly foreign-owned) companies argued with
the losses due to the short-term price erosion (see
Green et al. (2010), p. 25). While the price of copper
was back on the pre-crisis level within five months,
the implementation of the tax reform was still on
hold.
A social dialogue aiming at an exchange of infor-
mation and expectations is generally important and
should be used in the context of combating crises.
Furthermore, bilateral agreements contribute to
facilitating adjustments to the economic crisis and
stabilising the society. However, caution is rec-
ommended when assessing the value of tripartite
agreements. The existence of an agreement per se is
not really meaningful and should therefore not be
overrated. What is more important is the extent to
which the agreement is based on a real cooperation
between the social partners and involves mutual
concessions and obligations.
119
Annex 5: Global Jobs Pact Country Scans of the ILO
Role of the Global Jobs Pact Country Scan:
A key element of the ILO‘s strategy to support constituents in applying the Global Jobs Pact is the prepara-
tion of the „Global Jobs Pact Country Scan“. This document is intended to provide a description of the im-
pact of the crisis in the country, a detailed description of the policy responses using the GJP portfolio as a
checklist, and recommendations on how national policies can contribute to shaping a fair and sustainable
globalization. It looks at the country situation and policy responses „through the lens“ of the Pact and has
three essential parts:
}Part I: Overview of crisis impact on Decent Work in the country
}Part II: Description of crisis response and recovery policies
}Part III: Shaping a fair and sustainable globalization
This document provides the Global Jobs Pact Scan for Indonesia. It is intended to support constituents
as they extend and review crisis response policy packages and to be used as an input into national policy
dialogue and implementation processes (vgl. ILO (2010b), S. 8).
Structure of part I: Analysis of the impact of the GFEC on the economic situation of a country
Part I: Overview of crisis impact on Decent Work in Indonesia 9
1. Impact on major macroeconomic variables 9
2. Impact on the real economy – key sectors affected and regional differences 9
3. Impact on labour market and employment 9
4. Impact on systems for social protection 11
5. Impact on wages and working conditions 13
6. Impact on labour standards, including freedom of association and the right to collective bargaining 14
Important knowledge gaps that exist in understanding the impact
of crisis which need to be filled for improved policy-making 15
120
Structure of part II: Description of crisis responses by the country based on the Global Jobs Pact Portfolio which includes all potentially significant crisis responses.
Part II: Description of crisis response and recovery policies
A. Accelerating employment creation, jobs recovery and sustaining enterprises 16
1. Measures to boost effective demand and help maintain wage levels through including macro-economic policies such as: 16
2. Investment in infrastructure, public services, green production, and R&D 17
3. Protection of employed workers through employment retention measures through well-designed schemes implemented through social dialogue and collective bargaining 19
4. Help workers find employment through active labour market measures 19
5. Address youth unemployment through the provision of vocational and technical training and entrepreneurial skills development 21
6. Other targeted programmes such as public employment guarantee schemes, emergency public works, and other direct job creation schemes 21
7. Support to public and private enterprises (including cooperatives) and micro- entrepreneurs through measures like: 21
8. Support job creation across sectors of the economy, recognizing the value of the agricultural sector and the need for rural infrastructure, industry and employment 23
9. Important knowledge gaps 25
B. Building social protection systems and protecting people 25
1. Cash transfer schemes 25
2. Building an adequate social protection for all, drawing on a basic social protection floor 27
3. Extending duration and coverage of unemployment benefits 29
4. Ensuring the long-term unemployed stay connected to labour market 29
5. Providing minimum benefit guarantees in countries with inadequate funding 29
6. Measures to improve pension fund design to protect workers‘ savings 29
7. Providing adequate coverage for temporary and non-regular workers 29
8. Helping vulnerable groups most hard hit by a combination of income support, skills development and enforcement of rights to equality and non-discrimination 29
9. Measures to avoid deflationary wage spirals through social dialogue, collective bargaining, statutory or negotiated minimum wages 30
121
10. Measures to regularly review and update minimum wages 30
11. Measures to ensure that negotiated wage rates in procurement contracts are respected 30
12. Measures to narrow gender pay gaps 30
13. Measures for domestic and international migrant workers migrant workers, protection and support in receiving countries, or measures ensuring the protection
of migrant workers in the case of return 31
C. Strengthening respect for International Labour Standards 32
1. Increase vigilance to achieve the elimination and prevention of an increase in forms of forced labour, child labour, trafficking, and discrimination at work 32
2. Measures to increase the respect for freedom of association, the right to organize, and the effective recognition of the right to collective bargaining 34
3. Measures that recognise the relevance of international labour Conventions and Recommendations 34
4. Measures to promote the application of the ILO Tripartite Declaration of Principles concerning
Multinational Enterprises and Social Policy, including to enterprises in the supply chain 36
D. Social dialogue: identifying priorities, stimulating action, bargaining collectively… 36
1. National agreement through tripartite social dialogue 36
2. Collective bargaining agreements at all levels 38
3. Tripartite monitoring mechanism of policy implementation 38
4. strengthen capacities for labour administration and labour inspection 39
5. Have the social partners been involved in shaping and implementation of
crisis response measures? 40
122
Structure of part III: Overview of other policy measures also contributing to the employment and income situation in a country
Part III: Shaping a fair and sustainable globalization 41
A. Policy coordination, coherence and cooperation between government ministries 41
B. Policies that promote efficient and well-regulated trade, and markets that benefit all and avoid protectionism. Varying development levels of countries must be taken into account in lifting barriers to domestic and foreign markets 42
C. Policies, including industrial policies, that enhance economic diversification by building capacity for value added production and services to stimulate both domestic and external demand 43
D. National supervisory and regulatory framework for the financial sector, so that it serves the real economy, promotes sustainable enterprises and decent work and better protects savings and pensions of people 44
E. Policies that contribute to building adequate social protection for all, drawing on a basic social protection floor including: access to health care, income security for the elderly and persons with disabilities, child benefits and income security combined with public employment guarantee schemes for the unemployed and working poor 44
F. Policies that ensure that young women and men have the appropriate education, skills and opportunities to participate in the economy 46
G. Policies that address informal employment, in urban and rural areas, and promote the transition to formal employment in order to reduce inequalities and promote more inclusive economies 48
H. Policies that facilitate shifting to a low-carbon, environmentally friendly economy that helps accelerate the jobs recovery, reduce social gaps and support development goals and realize decent work in the process 50
I. Policy measures, such as minimum wages, that can reduce poverty and inequity, increase demand and contribute to economic stability 50
J. Strategies to create fiscal space to put in place systematic, well-resourced,
multidimensional programmes to create decent work opportunities and
sustainable enterprises 51
Sources: ILO (2010b), p. 4 et seqq. (Table of Contents).
I m p r i n t
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