By Mukul G Asher
Associate Professor of Economics and Public Policy, Department of Economics (AS2) National University of Singapore, 5 Arts Link, Singapore 117570, E-mail: firstname.lastname@example.org
Research Assistance provided by Rahul Sen is gratefully acknowledged. The usual caveat applies.
It is well known that the East Asian region experienced substantial social and economic development in the three decades preceding the financial crisis which began in July 1997 with the devaluation of the Thai Baht. The main indicators of social development are education and health outcomes; incidence of poverty and degree of income, consumption, wealth, gender and other inequalities; and social security arrangements. Five factors appear to have contributed to the region’s social development during this period, albeit to varying degrees in different countries. These are: i) small holder based rural development ii) rapid growth in the demand for non-agricultural labor iii) widespread public provision of basic education and health services iv) flexible labor markets and low labor market dualism and v) Upgrading workforce skills and investing in education ahead of demand (Atinc and Walton, 1998a).
In the aftermath of the East Asian crisis of 1997, the focus has understandably been on the macroeconomic and financial sector reforms designed to assist the region in resuming its accustomed high rates of economic growth. Initially, there was a great deal of justifiable concern about the social dimensions of the crisis. It centered on the implications of: i) the acceleration in rates of inflation and sharp currency depreciation leading to sudden increases in prices of traded goods (including food), and of public sector services, including utilities; ii) a significant fall in the demand for labor; iii) the expected squeeze in public spending for the social sector, and iv) the erosion of the social fabric due to an abrupt fall in the living standards of a large proportion of the population, combined with visible wealth and conspicuous consumption at the top, particularly in the countries most affected by the crisis such as Korea, Indonesia and Thailand (Atinc and Walton, 1998b, pp.12-14). There was also concern that the environmental factors such as drought in South-East Asia due to the effects of El Nino phenomenon could worsen the food security situation. The crisis also had implications for the transition economies of Vietnam, Myanmar, Cambodia and Laos as it could adversely affect trade and investment flows; and reduce prices for their exports. In general, the crisis has made their transition from centrally planned to market economies, as well as their adjustment to the requirements of regional organizations such as ASEAN (Association of South East Asian Nations) and APEC (Asia Pacific Economic Cooperation) much more difficult. The crisis has also meant that these countries cannot shift as quickly from extensive responsibility for social protection and social services through state enterprises to a system more in line with the market economy and with the countries’ capacity to bear such burden. This in turn has had an adverse impact on their integration into the world economy.
The main objective of this paper is to examine the role of social safety nets in addressing the social dimensions of the crisis in East Asia. It should be recognized that the concept of social safety nets is narrower than that of social development. Social safety nets are designed to protect the real consumption of individuals and their families against an abrupt and sharp fall in living standards in the event of unemployment, disability, sickness, incapacitation or retirement. Thus, both chronic incapacity to work and earn (chronic poverty) and a decline in this capacity from a marginal situation that provides minimal means for survival with few reserves (transient poverty) are constituents of Social Safety nets (Subbarao, et.al. 1997, p.2).
The above suggests that the social safety nets involve both short run phenomena such as unemployment or minor sickness, as well as long- term phenomena such as retirement or incapacitation. It should be stressed that in designing retirement protection schemes, the goal is not just to alleviate poverty, but also to help maintain accustomed standards of living.
In designing social safety nets for a country, a number of factors need to be considered. These include the number and composition of the poor, the potential effects of reform policy measures, financial and administrative constraints and existing social security arrangements (Chu and Gupta, 1998, pp.8-9). The main instruments of social safety nets are targeted consumer subsidies through a variety of delivery instruments, including public distribution system; targeted public works; and formal and informal social security arrangements. In general, the approach of East Asian countries towards social safety nets has been based on the following three key assumptions.
First, the policymakers have relied on the continuation of rapid economic growth, and the consequent continuing reduction in the poverty levels in the region to take care of the financing of old age. Second, the policymakers have generally regarded social security provision for the non-public sector component of the labor force as essentially a private concern for the families, communities and employers concerned (Phillips, 1999, p.4; Schmidt, 1998, pp. 32-33, Liu, 1998, p.40). Third, the East Asian countries have leaned towards the organic view of the relationship between the individual and the state under which society is conceived of as a natural organism; and the needs and the goals of the community are stressed above those of the individual. This is in contrast to the mechanistic view, which regards government as an artificial entity created by individuals to achieve certain common objectives more efficiently. In East Asia, the organic view has been combined with close government-business relations, and active role of government in mobilizing the society towards primarily the economic growth objective. Social safety nets thus have been considered secondary to the growth objective and to the needs of the business sector.
The above key assumptions have meant that social security institutions and safety nets have been much less developed in East Asia in relation to its level of economic development.
The rest of this paper is organized as follows. In Section II, the issue of the desirability of the social safety nets in East Asia is examined. It is argued that the crisis has brought to the surface the underlying forces, in particular globalization and demographic trends, which have increased the necessity to go beyond viewing the issue of social safety nets in general, and of social security arrangements in particular, predominantly in the family or the private charity context. The following section (Section III) briefly discusses the feasibility of the development of the appropriate social safety nets, particularly formal social security arrangements in the region. The final Section provides the concluding observations.
II. DESIRABILITY OF SOCIAL SAFETY NETS
The East Asian region, including the countries most affected by the crisis, has proved to be considerably more resilient than was initially expected. In particular, informal social safety nets and agriculture-based exports have significantly contributed to this resiliency. As a result, the initial dire predictions of a sharp rise in unemployment and poverty levels, and significant reductions in school enrolment rates have not materialized1. This is not to underestimate or belittle the hardships suffered by the people in the crisis affected countries, but to simply point out that the impact was not as severe as first feared.
After the initial hesitation, expansionary fiscal and monetary policies pursued by the countries in the region including those formally under the IMF Program, have also helped in cushioning the fall in household income and consumption levels. Thus, the IMF has permitted rather large budgetary deficits (e.g. In Indonesia, it has permitted a budget deficit equivalent to 8.5 percent of GDP in 1998, all of which is to be financed from abroad) and has accepted budgetary outlays for social programs ranging from 2 percent of GDP in Korea to about 6 percent of GDP in Indonesia in 1998 (Lane, et.al. 1999, p.116).
The IMF programs in Indonesia, Korea, and Thailand included measures in four broad areas of the social sector; i) Measures to raise income transfers by strengthening and broadening the scope of existing social safety nets; ii) Measures to limit unemployment through government support for various types of employment and training schemes, as well as self employment initiatives; iii) Measures to limit the impact of price increases on the consumption of poor households through new support schemes or the continuation of existing subsidies for basic goods and services , such as food, energy, and transportation ; and iv) Measures to maintain access by the poor to health care and education2 (Lane et.al. , 1999, pp.116).
The other multilateral institutions such as the World Bank and the Asian Development Bank have also supported social safety net programs in the region both directly and indirectly through their lending and assistance policies. Japan has also recently shifted a significant share of its bilateral aid to East Asian countries from project to program loans. It has also permitted counterpart funds generated by its aid to be used for the purposes related to social safety nets.
Moreover, it does appear that the short run needs for social safety nets arising from the crisis are not as acute as first thought. This in turn has led to a rethink concerning the desirability of certain types of short term formal safety nets viz. unemployment insurance schemes or establishing a specialized fund for the unemployed in many East Asian countries, including in Malaysia and Singapore in which the multilateral institutions have not played any formal role.
As a result of the above reasons, the medium to longer-term needs for social safety nets, particularly for meeting social security and health needs of the population, remains an urgent unfinished task. The following discussion focuses on this longer term unfinished task.
There are at least six reasons why it would be desirable to begin seriously addressing the longer term unfinished task noted above, particularly the reform of the existing social security arrangements. It should be noted that the main function of a social security system is to provide to a substantial proportion of the current and future retirees socially adequate level of replacement rate3 with a high degree of sustainability. This should however be achieved while minimizing possible adverse effects on economic growth, fiscal burden, equity, and international competitiveness4.
The first reason is that, as a result of rapid economic growth and accompanying industrialization and urbanization, the East Asian region is likely to further experience an erosion of informal systems based on family and community which have traditionally taken care of the aged on a long term basis5.
Second, the East Asian countries are expected to experience both individual ageing (reflected in higher life expectancy at birth) and population ageing (reflected in increasing share of the population above 60 years of age). Table 1 provides demographic and labor force indicators for selected South-East Asian countries. The data in Table 1 indicates that in Singapore the share of those above 60 years of age will increase by 3.5 times between 1990 and the year 2030; in Thailand, the corresponding share is expected to triple; while in the other countries, the share is expected to more than double. The Elderly Dependency Ratio (EDR) is expected to rise significantly in all five countries, but particularly in Singapore and Thailand (Table 1). As women live longer than men, many older persons will be women. Indeed, in all five countries, women already outnumber men among the old-old, i.e., those above 75 years of age (Bos et al., 1994). But, typically women have lower degree of exposure to the labor market and lower level of earnings than men. Policymakers in East Asia thus need to be quite sensitive to the gender issues in designing and implementing social safety nets.
China is also expected to experience rapid ageing during the first few decades of the 21st century. Thus in the year 2000, about 8 percent of China’s population is expected to be above 65 years of age, much lower than the (approximate) 13 percent projected for the United States, but by the year 2040, the proportion of the aged in the two countries is expected to be equal at around 22 percent of the total population (Liu, 1998, Figure 3, p.24). This implies that the population of the elderly in China in the year 2040 would be nearly equal to the entire population of the United States today; and even in the year 2040, China’s per capita income is likely to be below that of the United States today.
During the 1990-2000 period, except for Singapore, the population grew at a faster rate than the working age population (Table 1). As a result, rapid labor force growth could be potentially relied on as an avenue for rapid economic growth. This situation may be termed the demographic gift (Asian Development Bank, 1997, p. 14.2). Reliance on this gift, however, would need to be gradually reduced, Thus, during the 2030-50 period, all five countries are projected to experience demographic burden, i.e., when the rate of growth of the working age population will lag behind that of the total population. One of the ways these countries could capture the benefits of favorable demographic trends is to set up sustainable social security arrangements before demographic gift turns in to a burden.
Third, individual and population ageing, along with modernization, neglect of the environment, and higher income are expected to lead to a convergence of the morbidity (i.e., nature of illnesses affecting the population) and mortality profiles of East Asian countries towards those currently obtained in industrial countries, i.e., towards more chronic non-communicable diseases such as cancers, cardiovascular diseases, and neuropsychiatric disorders (Heller, 1997, p. 5). This, in turn, will increase the demand for health care substantially. In addition, technological change is expected to increase per unit cost of medical care. As a result, greater resources will be required to finance old age.
Fourth, once the interruption in economic growth brought about by the crisis is reversed, and there are already encouraging signs of such a reversal (IMF, 1999, pp.2-3), the per capita income in East Asia will once again resume its upward trend. As a result, demand for economic security by individuals in East Asia is expected to increase. Moreover, if international experience is any guide, continued economic growth and westernization are likely to bring about an attitudinal shift towards more individualistic life styles and consumption patterns. One of the consequences would be to make parents less willing to live with their children in their old age and vice versa.
Deeper integration of the East Asian economies with the world economy will necessitate provision of adequate social safety nets if these countries are to sustain the necessary internal social cohesion and political support for globalization. This is because globalization is likely to lead to considerably greater economic insecurity, and would require much greater tolerance of income and wealth inequalities. Indeed, there are already indications of the East Asian businesses gradually, though grudgingly, adopting more Anglo-Saxon types of legalistic and adversarial labor management relations. Retrenchment of excess labor, and merger and acquisitions activities are accelerating in East Asia. There is also some evidence to suggest that the earlier trends towards greater equalities of income and consumption, have suffered a setback in recent years, and this trend may well accelerate (Rao, 1999). In the transition economies, particularly China and Vietnam, the large-scale retrenchment of workers is considered essential for a shift to more market based economy is unlikely to be effective. In Vietnam, for example excess staff in the state enterprises is estimated to constitute 20 to 30 percent of the total workers in these enterprises (The World Bank, 1998, p.34).
As globalization also leads to a much greater labor mobility, at least among professional, managerial, and skilled workers, appropriate amenities, including competitive social security systems, would need to be provided to retain and to attract such workers from abroad. The acute scarcity of such workers in some parts of East Asia, particularly when measured against the urgent need to move production up-market to counter competition from China and India demonstrates the relevance of this point for the region. Within East Asia, Malaysia, Singapore, and Thailand are also recipients of substantial number of unskilled and semi-skilled workers. Their social security needs, at present largely ignored by the recipient countries, would also become an issue in regional cooperation.
Fifth, the contagion6 effect of the East Asian crisis has underscored the need to address the heightened anxiety of the population of these countries concerning their future economic well being (Sato, 1998).
Sixth, the formal social security systems for private sector workers in East Asia are heavily reliant on mandatory savings, and the trend is towards increasing their role (Asher, 1998). Many East Asian countries such as Hong Kong, Thailand, Philippines, and Indonesia are anticipating that greater use of such mandatory savings to finance social security needs would improve their national savings rate. Such pre-funding of retirement financing does have many advantages, and indeed recent international pension reforms have this as an important element. Managerial and institutional arrangements for the mandatory savings schemes in East Asia however do vary greatly (Asher, 1998). Hong Kong’s recent mandatory Provident Fund (MPF) scheme is aimed at minimizing the political risk, and thus adopts Chilean style decentralized investment practices, with private sector participation and individual choice.
Under such an arrangement, large funds are accumulated. Thus, as at end 1998, the accumulated balances in the national provident funds in Malaysia and Singapore were equivalent to about 56 percent of their respective GDP. These funds need to be invested in prudent yet remunerative manner. This, in turn requires resilient and sophisticated financial and capital markets, backed up by strong regulatory regimes, corporate governance and transparency. It is in this sense that while financial sector and capital market reform is not the primary objective of pension reform, without such reform, objectives of pension reform including higher national savings rates, cannot be realized.
As there is strong evidence that financial sector weaknesses and poor corporate governance practices contributed significantly to the occurrence and the depth of the 1997 crisis in East Asia (Claessens and Glaesner, 1997), financial sector and other broader sets of reforms would be required if the pension reform is to be successful in providing an adequate replacement rate to the current and future retirees in East Asia. Currently, the replacement rate for mandatory savings plans in East Asia ranges from 10 to 40 percent, well below the 75 percent rate considered necessary for financial security in old age (Asher, 1998).
The above analysis thus clearly demonstrates the strong inter-linkages between reforming and strengthening the existing social safety nets on one hand and broader reforms, such as those relating to financial sector and corporate governance are necessary to lead to resumption of sustainable high growth in a globalized world, while maintaining social cohesion.
III. FEASIBILITY OF SOCIAL SAFETY NETS
The feasibility of social safety nets in East Asia may be examined from a variety of interrelated vantage points involving political, financial, institutional and other aspects. The crisis has diminished the revenue generating capacity of the governments, as well as centralized control over the fiscal systems (Asher and Heij, 1999). At the same time, the crisis has led to increased expenditure demands on the government, including the cost of restructuring of banks7 and other financial institutions, debt servicing costs, and the cost of bailing out of “too big or politically too important to fail” firms and business groups. Current levels of fiscal deficits permitted by the IMF, and particularly their financing from foreign sources, are clearly not sustainable. The above suggests that the strengthening and reform of safety nets, whose strong desirability has been established in Section II, would need to be undertaken within the constraints of diminished fiscal capacity and in a more decentralized and participatory manner.
In many East Asian countries, there is considerable leakage during the process of disbursement of funds allocated for programs relating to social safety nets. Multilateral institutions such as the World Bank and the Asian Development Bank are increasingly making improved governance, including civil service reform, a part of their package of conditionalities for providing loans and grants. The administrative costs of many mandatory savings programs in countries such as Indonesia and the Philippines are considerably higher than the comparable international benchmarks, while the compliance rates are much lower (Asher 1998).
As a result, greater efficiency in the delivery systems for public services; and better targeting of expenditure programs will be needed. More innovative financing methods, and linking of cost recovery and user charges with visible improvements in the quality of public services will also be required. Partnership between the government, business and the civil society will need to be fostered and encouraged.
The Statistical systems, and a shift in attitudes from regarding socio-economic information as a public good rather than as a strategic instrument to be used in pursuit of technical advantage and in managing domestic and foreign perceptions, will also be needed. The recent decision by Vietnam to publish its government budget, though only an initial step, is encouraging, and other transition economies should be encouraged to follow Vietnam’s example. Those East Asian countries wanting to access international financial and capital markets on reasonable terms would at the minimum need to adhere to the IMFs’ voluntary special Data Dissemination Standard (SDSS). Each country may also consider developing more specialized databases relevant for devising polices on social safety nets.
In many East Asian countries, such as Malaysia, Indonesia, Thailand, and the Philippines, the pension provided to public sector employees is rather generous, and financed either predominantly or wholly through non-contributory methods from general taxes (Asher, 1998). This, along with various implicit or explicit guarantees given on loans and other uses of pension funds in pursuit of governmental objectives , has created very large contingent liabilities. In many countries in East Asia, the extent of such contingent liabilities is so large that sustainable macroeconomic policies , including fiscal policies , cannot be pursued without introducing pre-funding features in the public sector pension systems. The differential replacement rates between public and private sector employees have also resulted in considerable inequalities in economic security in old age between the two groups.
The above suggest that without reforming the pension systems for public sector employees, adequate, efficient, and equitable social safety nets cannot be constructed in many countries in East Asia. This task will require sustained political commitment. While there have been encouraging trends towards democratization and the rising importance of civil society, in some East Asian countries viz. Indonesia , Korea and Thailand it is as yet unclear whether a fundamental change in the mindset and in the configuration of political and economic power among various groups will materialize. There is a danger that the significant recovery in the financial and real sectors of the economy being experienced in recent months, could delay or reverse the needed fundamental changes in the mindset, and in institutional and regulatory structures. As noted in the previous section, the financial sector reforms and better corporate government practices are necessary if the objectives of pension reform designed to provide greater financial security in old age in a sustainable manner without impinging on efficiency in resource allocation and international competitiveness of a country are to be attained.
It appears that the main constraints in reforming and strengthening social safety nets in East Asia are likely to be mainly political and institutional, rather than financial or fiscal. As a result, the progress is unlikely to be linear or rapid.
IV. CONCLUDING REMARKS
The East Asian region has coped much better with the short run social impact of the financial crisis of 1997 than was feared at the height of the crisis. It has, however brought to the surface the underlying forces, in particular globalization and demographic trends, which have increased the necessity for the East Asian countries to go beyond viewing the issue of social safety nets in general, and of social security arrangements in particular, predominantly in the family or the private charity context.
The paper has also argued that reforms in formal social security arrangements in East Asia are essential for the resumption of the sustained high growth, thereby establishing a strong link between reforming and strengthening of social safety nets on the one hand and overall economic reform on the other. Such a strong link notwithstanding, progress in reforming and strengthening social safety nets is not likely to be either smooth or rapid. This is because strong political commitment and capacity, as well as extensive institutional and regulatory reforms required are not easy to achieve. Thus, progress in these reforms will neither be rapid nor linear.
The East Asian countries would need to strengthen statistical databases necessary to formulate policies concerning social safety nets; and to be willing to share such data much more widely.
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