Global Economic Downturn and Social Protection in East Asia: Coping crisis and reducing poverty

1. Introduction

The global economic crisis that was triggered by the collapse of financial institutes in the US and Europe in 2008-9 poses a great risks to livelihood of the vulnerable people in the world. While people in the North are faced with tough economic prospect, citizens in the developing countries are exposed to high economic and social risks. In middle income countries, firms tightened their business activities that led to many lay-offs of workers. Jobs are lost not only in manufacturing and construction sectors, but also in tourism and service sectors. Regarding the poor in the Least Developed Countries (LDC) including Land-locked and Small Island Countries, the livelihood was already worsened by the hike in the food and oil price in 2007 before the global economic crisis took place. The global economic crisis poses a further serious threat that could derail the progress toward meeting the MDGs in the LDCs.

In relation to East Asia, it is the second crisis just over ten years, following the East Asian economic crisis in the 1997-8. Despite hefty social and economic cost, the East Asian countries hit by the previous crisis, such as Korea, Thailand, Indonesia and to less extent Hong Kong and Singapore came back with strong economic recovery and better social protection systems (Kwon, Mkandawire, and Palme 2009). Nevertheless, the current economic crisis is different in nature from the previous one in many ways. One of the most obvious differences of the current crisis is, firstly, that it did not originate from East Asia. The epicentre of the crisis was at the heart of the global capitalism: global financial institutions at the Wall Street. In the previous East Asia economic crisis those severely affected countries in the region could come out quickly by exporting goods and services to the vibrant markets in the North America and Europe. In contrast, given the weak consumer demand in these markets in the coming years, export to those markets would be weaker and, therefore, export-orient strategy may not be a path out of the crisis as effective as before. In order to avoid the situation of prolonged economic downturn, East Asia would need strong endogenous economic drivers for recovery.

If the economic downturn lasts long, it would hurt the most vulnerable hardest since their coping mechanism to economic and social risks is limited in choice and short in duration. Given that the poor people in East Asia had been hit by food and fuel crises in 2007 before the global economic crisis, their coping mechanisms of livelihood was already significantly weakened. Without adequate policy response to enable the poor to cope with social risks, it is feared that the progress made in poverty reduction in East Asia would be lost. 

Secondly, the immediate social impacts of the current economic crisis vary widely across East Asia and within each country. Those countries with strong economic links with the US and European economies have been affected immediately while the countries with economies less exposed to global economic risks have not felt the immediate impacts strongly. For example, Singapore's and Hong Kong's economic conditions which have shown great sensitivities to economic fluctuations of the US economy were the first group of economies that felt the financial crisis of the US economy. Another example is the Korean economy. As the liquidity fell short for the demand in the financial market in the US in an effort to deleverage borrowings in the late 2008, many international investors withdrew their money from the Korean market, which put strong pressure on the exchange rate of the Korean currency. Such immediate impacts on these economies alerted those governments, which produced a series of stimulus package as policy responses. China also reacted swiftly since its economic interest is very much linked to the fluctuation of the US economy. Those countries seem to be better prepared now than ten year ago (Mehrotra 2009).

In contrast, the developing countries such as Cambodia, Laos PDR and Myanmar did not experience immediate impacts of the global economic downturn, which led to lukewarm responses from the governments. Nevertheless, considering the scale of the crisis at the global level, there is little room to be complacent about the social impacts of the economic crisis on the poor in the developing countries. Migrant workers from these countries working other countries will send smaller amount of money to their homes and many of them may lose work and have no other options to come back. More importantly, these small and poor countries lack in effective instruments to influence global economic fluctuation.

As the impacts of the economic crisis vary, policy response for social protection should also be different in accordance to each country's social conditions and administrative capacity. In some countries, policy efforts to establish a institutional structure for social security might be a good solutions but in others short-term but immediate support such as cash transfer could be acutely in need. In other words, social protection in the wake of the global downturn should address the country specific needs while addressing universal human needs. In this context, this paper will examine the social protection mechanisms in East Asia from a comparative perspective and seek to find out the policy lessons that can improve their ability to provide the poor and vulnerable with adequate protection. 

In terms of the scope of analysis, this paper will select four East Asian countries, which represent different sets of countries in the region. First this paper will discuss the case of the Republic of Korea. As in Japan, Taiwan, Hong Kong, and Singapore, Korea has a welfare system that includes a range of social insurance and assistance programmes. It also belongs to the group of countries with relatively high level of per capita income (21,530 US$, see Table 1). In the previous East Asian economic crisis in 1997-8, Korea was one of the hardest countries but responded to the crisis with social policy reform that strengthened the welfare system. This paper will look into whether social policy programmes that had been instituted during the last East Asian crisis helped Korea dealt with the global economic crisis effectively. The second country under study is China, a fasting growing economy but with an inadequate social protection system. While China has reduced poverty in an impressed speed, inequality has been deepened between regions; different hukou holders; farmers and urban people. We will look into the social policy responses to the inequality in China as well as to the global economic crisis. Third, this paper will examine social policy evolution in Indonesia. Indonesia is one of the low-middle income countries with a size of 100 million populations. It was one of hardest hit countries during the East Asian economic crisis but responded with a range of assistant programmes including cash transfer programmes. There have been many policy evolutions with the cash transfer programmes. Lastly, we will pay attention to social protection system in Cambodia. The country is one of the poorest countries in the region with little social policy programmes like Laos PDR, and Myanmar. The country's ranking in the Human Development Index stands at 136th which belongs to the group of least developed countries (see Table 1). We will discuss the policy challenges and options for Cambodia in the context of the global economic crisis.