69101 Weathering the Crisis: Social Benefits Programs in Europe and Central Asia Aylin Isik-Dikmelik programs, are expected to expand in times of crisis and contract as the economy recovers. These programs can be Key Messages cost effective in channeling assistance to the poor and  Social benefits can reduce the effects of a crisis vulnerable. In contrast, expanding universal entitlement and protect the poor by assisting existing programs, such as social pensions, disability benefits, and beneficiaries and expanding to cover newly child allowances, during crises can be costly due to their vulnerable populations. broad coverage.  In Europe and Central Asia (ECA), social While many studies estimate the impacts of a crisis, there is benefits systems responded more decisively in little evidence of the actual response of social safety nets to countries hit most severely by the global financial systematic shocks. This brief outlines the main findings crisis. Unemployment claims typically increased from a study that traced the response of social benefits as a “first-line� response, with social assistance during the 2008-10 global crisis for 14 countries in ECA.1 expanding as unemployment benefits expired. Specifically, monthly administrative data collected in the “ECA Social Benefits Observatory� were analyzed to  Pre-crisis preparedness matters. In some compare observed patterns within social benefits programs countries, benefits expanded quickly; in others, to the expected response, taking into account the two key significant reforms or investment in basic safety factors that influence the degree to which social benefits can net operating systems were required-resulting in be expected to respond to a crisis: the severity of the crisis delayed or negligible response by social benefits. and pre-crisis preparedness of the social benefits systems.  Design and implementation features affected response (or lack thereof). In many countries, Where Would We Expect to See Social Benefits minimum-income eligibility thresholds had Respond? eroded to such low levels that the programs had The ECA region was hard hit during the 2008–10 global become too small and narrowly targeted to recession in terms of reductions in GDP and the rise in protect the poor and newly vulnerable. Programs unemployment. However, the severity of the crisis varied with decentralized financing and administration significantly across the region. Some countries, such as also faced constraints that hampered their ability Latvia, Ukraine, Lithuania, and Armenia, faced sharp to respond to the crisis. declines in GDP and employment (figure 1), as well as the  To further strengthen social safety nets in ECA, largest change in fiscal balances during the crisis period. governments should consolidate benefits, Others, such as Romania, Hungary, Croatia, Montenegro, harmonize program rules and governance, and Bulgaria, Georgia, and Serbia, encountered significant but invest in efficiency improvements in benefit more moderate reductions in GDP (and less severe administration systems. unemployment), but also worsening fiscal balances. A third set of countries, including Macedonia, Albania, and Kyrgyz The Role of Social Benefits in a Crisis 1 This Knowledge Brief is based on a study by Aylin Isik-Dikmelik, “Do Social benefits can potentially play an important role in Social Benefits Respond to Crises? Evidence from Europe & Central Asia During the Global Crisis� (Washington, DC: World Bank, protecting the poor and minimizing the impacts of an forthcoming). economic crisis. Conceptually, some social transfers, such as unemployment benefits and targeted social assistance ECA Knowledge Brief Republic, experienced insignificant changes in GDP and identified: (1) countries where a strong response was needed unemployment as a result of the economic crisis.2 and expected, given the severity of the crisis and the pre- Figure 1. Severity of the Crisis: Change in GDP and crisis readiness of their social benefits systems; (2) Unemployment Rate, 2008–09, ECA Countries countries where a strong response was needed, but where limited pre-crisis preparedness could constrain the response 15 of their social benefits systems; and (3) countries where the LV impact of the crisis was limited, so little (or no) response 10 LTH EE was expected. 5 UKR ARM MLD MNT SK TR CZ SRB S RUS RO HU BG PL Figure 2. Expected Crisis Response: Typology According to CRT GRG BIH BLR KZK ALB KOSALB 0 MKD KZK PL KOS Severity of Crisis and Pre-crisis Preparedness BLR MKD -5 Pre-Crisis Preparedness of SB SRB BIH SK TR CZ GRG MLDCRTMNTBG Most Reasonable Need reforms Least prepared RO HU -10 S RUS prepared to ability to to enhance respond respond ability to -15 EE respond Reform Needed UKRLTHARM for Expected -20 LV Response GDP growth 2009 Change in unemployment rate (2008 to 2009) Severe Armenia Ukraine, Lithuania Latvia Estonia Hardest Hit (Most Severe) Limited Crisis Impacts on Severity of Crisis Moderate Croatia, Hungary, Romania, Russia, Moldova, GDP and Unemployment Montenegro Georgia Bulgaria, BiH Turkey, Serbia, Source: IMF, World Economic Outlook, April 2011; ILO, Short Term Limited Poland Albania, Belarus, Indicators of the Labour Market Azerbaijan, Kazakhstan, Limited response FYR Kosovo, Kyrgyz, expected Macedonia Tajikistan, Evaluating Preparedness Red: SBO PLUS Sample 1 Pre-crisis preparedness can influence how social benefits Source: Author’s calculations using a combination of the typology for programs reduce the effects of a crisis. To determine how classifying countries according to their pre-crisis preparedness. well prepared their social benefits programs were in advance of the crisis, ECA countries were classified by How did Social Benefits Respond? examining the pre-crisis existence, performance, and coverage of (1) last-resort social assistance programs, (2) Actual responses were largely in line with expectations. unemployment benefits, and (3) child allowance programs, Social benefits expanded more decisively in countries hit as well as the readily available administrative data from severely by the global recession, compared to countries less management information systems. The first three indicators affected. Ukraine was an exception, however; although included the existence and performance of programs that severely hit by the crisis, it significantly limited social could be expanded to respond to a crisis. The latter category benefits by tightening eligibility criteria in the face of fiscal - readily available administrative information on social pressures. benefits - was a proxy for administrative capacity and the ability to monitor and manage such programs. Pre-Crisis Preparedness Matters These preparedness factors were then combined with the Pre-crisis preparedness also clearly influenced the ability of severity of the crisis to determine “expected crisis social benefits to respond to the crisis. In some countries, responses� (figure 2).3 Three main groups of countries were benefits expanded quickly, typically with unemployment claims increasing as a “first-line� response, and then with 2 These countries make up the 14 countries included in the Social social assistance expanding as unemployment benefits Benefits Observatory (“SBO Plus�) sample for monitoring the response expired (e.g., Lithuania, figure 3). Other countries were less of social benefits to the crisis. The countries monitored (i.e., “SBO Plus� prepared, for example, in Latvia, the system underwent sample) includes Hungary and Lithuania, with the corresponding data structural reforms when the crisis hit, causing nearly a year from the study “2010 Update of the Joint Assessment by the Social Protection Committee (SPC) and European Commission of the Social lag in response. However, once the reforms were Impact of the Economic Crisis and Policy Responses� (Brussels: Council implemented, social benefits expanded significantly. Other of European Union 2010). countries such as Moldova and Tajikistan, lacked the basic 3 The pre-crisis preparedness indicator is specific to the ECA region and systems (e.g., registries and targeting mechanisms) needed utilizes detailed data from the “ECA Social Protection Database.� It to operate social safety nets and were unable to respond documents the relative preparedness of social benefits across ECA, which reflects a finer categorization of these countries. In comparison to other even to food price increases at the start of the economic regions, most ECA countries are relatively well prepared, as many have downturn. at least one well-targeted social assistance program that can be scaled up during a crisis. ECA Knowledge Brief Figure 3. Response Pattern of Social Benefits: Lithuania Minimum Income programs (GMI), which had eroded over Lithuania time with inflation. Along with expanding coverage, some Indexed Number of Beneficiaries countries also extended the size of child allowances or 600 550 Onset of the crisis Start of recovery introduced public works schemes as part of their crisis 500 450 mitigation policies. 400 350 300 Disability Assistance Benefits also Expanded 250 200 150 Surprisingly, disability benefits also expanded during this 100 period. For crisis-affected countries within the sample that 50 0 operate disability benefit programs (e.g. Armenia, Serbia, 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 2008 2009 2010 and Montenegro), on average, the number of monthly beneficiaries increased by 5 percent from 2008 to 2009.4 Lithuania Social Benefit Lithuania Unemployment Benefit Lithuania unemployed ILO This is puzzling, as there is no discernible reason why an Source: Council of Europe (2010) economic crisis - as opposed to wars, earthquakes, or other natural disasters - would increase disability rates. This Unemployment Benefits Were the First to Respond phenomenon was also observed in the United States, where Unemployment benefits were generally the first line of people sought disability status in order to receive benefits as response in countries that have them, and they expanded their unemployment benefits lapsed, and where lax rapidly with the spread of the crisis. Their coverage, disability certification criteria and generous benefits were however, is generally limited to formal sector workers, and blamed for the crisis-driven expansion. Similarly, coverage as the informal sector is sizable in many ECA countries, of disability benefits expanded significantly in FYR unemployment benefits constitute only a partial crisis- Macedonia and Albania over the crisis period, even though response tool. In addition, unemployment benefits generally these two countries were not strongly affected by the global have a limited time duration, and indeed, ran out in several recession. countries before the onset of recovery. In some cases, social assistance benefits expanded as a last resort measure to The Importance of Action: Reforms, Design, and compensate for the expiration of unemployment benefits. Implementation Figure 4. Observed and Expected Responses of Social Structural reform, design, and implementation affect the Benefits to the Global Crisis, ECA success of social benefits programs. Comparing how Observed Response countries use these tools is valuable in ensuring that the UI LRSA Other MT Armenia Strong↑ Modest ↑ n.a. effects of a crisis are minimized. Structural reforms can aid (severe crisis) (+ reforms) in protecting the poor during a crisis by securing social Ukraine Modest ↑ but Falling Modest ↑ Response (severe crisis) Unsustained Coverage (!) benefits, which can be illustrated by a comparison of Latvia Needed & Croatia Moderate ↑ Modest ↑ and Ukraine. Both countries faced extreme fiscal pressures Expected Montenegro Moderate ↑ Modest ↑ Modest ↑ and severe crisis impacts. However, Latvia’s response to the Expected Response Hungary Strong ↑ Strong ↑ + Public Works global recession, even with the delay, outperformed Georgia n.a. Moderate ↑ Lithuania Strong ↑ Strong ↑ expectations due to the implementation of serious structural Response (severe crisis) reforms. Yet despite apparent fiscal space for a better Latvia Strong ↑ Strong ↑ Needed, but (severe crisis) allocation of spending across targeted benefits, Ukraine Reforms Needed to Ensure Romania Strong ↑ Modest ↑ Modest ↑ underperformed, partly due to drastic cuts in benefits response Strong ↑ Modest ↑ Bulgaria coverage. Serbia Moderate ↑ Moderate ↑ Limited Response Albania Design elements, such as eligibility criteria and indexing of Expected FYR Macedonia Observed response was limited, as expected Kyrgyz Republic (negligible increase in benefits) eligibility thresholds, are also important in ensuring that the Source: Author. Data for Observed Responses from World Bank Social vulnerable are covered during a crisis, as shown by a Benefits Observatory, SBO Plus Sample (including Hungary and comparison of the GMI programs in Bulgaria and Serbia. A Lithuania from EC/SPC report 2010). tight eligibility threshold in Bulgaria resulted in declining Social Assistance Benefits Expanded coverage and the marginalization of the program over time. While the threshold of the GMI program expanded to help In addition to protecting existing beneficiaries, social cushion the impacts of the crisis, the increase was relatively assistance programs expanded coverage during the crisis. modest and the program remained a marginal element of the However, in many instances, the increase was more 4 moderate than that in unemployment benefits, possibly due Coverage of disability benefits did not decline in any of the countries in to the low eligibility thresholds common for Guaranteed our sample over that same period (despite fiscal pressures). ECA Knowledge Brief social assistance system in Bulgaria. Meanwhile, the Invest Now: Strengthen Safety Nets Before the Next Crisis eligibility threshold for the Material Support program (MOP) in Serbia was indexed to inflation and appears to With a renewed economic downturn, social safety nets and have responded more flexibly. unemployment insurance will once again be called upon to alleviate crisis impacts, which will likely be transmitted Institutional and financing arrangements are a third factor through labor markets that have not fully recovered from that can affect the ability of social benefits programs to the 2008-10 crisis (persistent unemployment). Fiscal cover the vulnerable during a crisis. Experiences in Latvia constraints mean that many ECA governments will be under and the United States suggest that central financing and increasing pressure to cut back on spending, indicating the administration respond more aptly to recessions than need to improve effectiveness and consolidate and target decentralized schemes. In Latvia, local governments social (including universal) benefits, which could create financed 100 percent of the GMI program benefits prior to tensions with the middle classes. Sustained structural the crisis; local governments, however, are required to carry investments in strengthening social safety nets are thus a balanced budget, which can lead them to ration benefits. warranted, even for higher-capacity countries. Recognizing this constraint, the central government revised the financing arrangements to ease the pressure on local To assist in crisis-preparedness, governments can government and ensure that the GMI program responded consolidate benefits, harmonize program rules and successfully to the crisis. In the United States, the federally governance, and invest in efficiency improvements in funded and administered Supplemental Nutrition Assistance benefit administration systems. First, consolidating benefits program responded well to the crisis, dramatically into fewer programs should be focused on clear objectives, expanding coverage. In contrast, the cofinanced and state- social policy goals, and priorities, and design features administered Temporary Assistance to Needy Families should be simplified and harmonized across programs. program was not as responsive. In both cases, flexibility in Assistance, including many universal benefits, should be central financing played a vital role in crisis response. focused on those in need, while last-resort programs should be expanded to cover a larger share of the poor and Challenges Remain vulnerable. Second, governments can continue investing in systems and tools to improve implementation efficiency, While many in ECA had social benefits programs ready to such as unified applications and intake processes, automated address the crisis, challenges remain to ensure that all ECA integrated management information systems, unified countries are prepared in the future. In terms of outcomes, payments systems, strengthened oversight and controls, poverty impacts of public spending on social assistance are monitoring and evaluation, and clarified institutional rules, limited in many ECA countries due to low coverage of the roles, and financing with investments in capacity. poor5 and inadequate benefits levels. This low coverage is more prominent among lower-income countries, but Finally, governments can strengthen the links between coverage gaps also persist in several higher-income benefits, employment, and social services to reduce countries. Eligibility thresholds for poverty-targeted dependency and promote employability. Diagnostic tools programs are commonly very rigid and too narrow, which and case management can help identify and tailor activation limit crisis responses and result in large errors of exclusion. approaches to target groups. Governments should also seek Benefits are also fragmented, as most countries operate to promote these linkages by investing in capacity, numerous programs with diverse application procedures and integrating service delivery, and optimizing institutional eligibility rules. Navigating multiple schemes is costly for incentives for effective employment support. Consolidation the beneficiaries and parallel administration is costly for of benefits and investment in efficiency will continue to governments; gaps and duplications abound. Benefits strengthen social safety net systems across ECA and prepare administration in many instances is also weak, with paper- countries to respond to future crises. based records and inadequate management information About the Author systems or oversight and controls. Aylin Isik-Dikmelik is an Economist for the Social 5 Protection Unit of the Europe and Central Asia Region of Penny Williams, et al., “Social Safety Nets in Europe and Central Asia; Preparing for Crisis, Adapting to Demographic Change, and Promoting the World Bank. Employability,� ECA Knowledge Brief Vol.48 (Washington, DC: World Bank). “ECA Knowledge Brief� is a regular series of notes highlighting recent analyses, good practices, and lessons learned from the development work program of the World Bank’s Europe and Central Asia Region http://www.worldbank.org/eca