Keynote Address - International Conference on Economic Stress, Human Capital, and Families in Asia: Research and Policy Challenges

H. E. Dr. Vivian Balakrishnan, Minister for Community Development, Youth and Sport,

Professor Tan Chorh Chuan, President, National University of Singapore,

Distinguished participants,
Ladies and Gentlemen,

It is an honor for me to join all of you at this International Conference on Economic Stress, Human Capital, and Families in Asia.

I would like to congratulate the Asian Research Institute at the National University of Singapore for convening this Conference and for asking me to speak on a topic close to my heart: Building a stronger social foundation for more inclusive, resilient and sustainable communities.

In recent years, the global financial crisis, volatile food and energy prices, and climate related disasters have increased risks, vulnerabilities, and stress on families, and on people, beyond the existing pressures of living.

These interconnected crises have severely tested capacities – human and institutional, putting additional burden on the states and institutions, on family structures and on the human capital required to manage complex responses to address the multiple threats to development and to turn them into opportunities for shared prosperity, social progress and ecological sustainability.

My talk today will consist of three parts:

I will first describe the nature of the current economic crisis and its impact on families, women and children. Following this, I will show how Asia can rebalance itself, turning threats into opportunities. Finally, I would like to propose an agenda for social protection that moves from a narrow safety net approach towards a broader and more systematic approach for the management of risk and vulnerability throughout a life cycle.

Let me take you on this journey for the next 30 minutes.

Part I: The Nature and Impact of the Economic Crisis

By the third quarter of 2008, what started as a housing crisis in the US had turned into a global financial crisis affecting the real economy everywhere. This crisis presented Asia with its most difficult economic challenge in recent times. With its major trading partners in deep economic trouble, there is no way for Asia to “export” out of this crisis, unlike its 1997 crisis.

The crisis revealed the limits of the region’s export-oriented, low-cost, labour-intensive growth model. Exports dropped sharply at rates that were almost twice as large as and more widespread than those experienced in past crises. This was followed by massive job losses in many of the key export manufacturing industries in the region, including textiles, garments, electronics and autos. We estimated that by 2009 the number of unemployed in the Asia Pacific region increased by 10 million compared to 2007, bringing up the unemployment rate to 5.0%. While some might argue that this rate is still below that of 8.2% experienced by OECD countries, there are features that are particularly worrisome.

First, as a region that has the lowest level of public expenditure on social protection, millions who took decades to work their way out of poverty, slipped back into poverty within months or even days, as any personal savings quickly dried up and assets were wiped out. On the basis of current growth estimates over 2009-2010, the crisis will trap an additional 21 million people below the extreme poverty line of $1.25-a-day and 25 million based on the $2-a-day poverty line. The working poor are the hardest hit and they take much longer to recover as recovery in employment takes much longer than recovery in GDP.

Second, official unemployment figures, even in countries where they are collected at regular intervals, mask the depth of the problem. In the absence of social protection systems, unemployment is untenable for many workers who have lost their jobs or whose income is reduced. To survive and support families, people try to cope by switching jobs often from formal to informal and casual jobs, many of them falling prey to exploitative conditions giving up rights at work. Such increases in informality are difficult to reverse; real wages take time to recover as does labour productivity. Previous economic crisis points towards a recovery lag in the labour market that can trail behind economic recovery by as long as 4-5 years. Unemployment figures in Asia are therefore a crude measurement that grossly underestimates the fallout from the crisis.

Third, severe economic recessions often lead to irreversible changes in the labour market and permanent job losses. Poorer people are affected more because they have fewer buffers and because the range and effectiveness of their buffers are inadequate. Families may react to the declining income of primary wage earners, and overall decline in a family’s purchasing power by taking measures that continue to keep them poor. This includes reducing the number and quality of meals, reducing health and education expenditure, pushing more family members out to work in difficult and often dangerous situations. Typically this involves more vulnerable family members, particularly young women, children and sometimes the elderly. Children who cease schooling may never return. Girls who are trafficked to help their families survive may never recover from the social fall out. Women who are required to work longer hours are further relied on to provide care for the sick, elderly and extended family, increasing their burden and their “crisis of time”. Unemployed or under-employed youth quickly turn to petty crime resulting in increased criminality often linked to violence against women.

Fourth, remittances have become an increasingly important source of external development finance, far larger than FDI flows, in many countries, thus not only providing balance of payments support but also providing income relief to the poorest households. However, during the crisis, total remittances fell by 1.5 % in East Asia and 1.8 % in South Asia in 2009. While these falls are much smaller than the volatility experienced by other capital flows to developing countries, looking forward, there is a danger in over-relying on such flows. With double digit unemployment levels and labour market conditions that are expected to remain depressed in most destination countries, socio-political pressures against migration are building and a number of countries have already introduced policies to restrict migrant workers’ access to labour markets. The export of labour services may therefore also have reached the limits of its success, not unlike the export boom of manufactures. Similarly, with the economic crisis in the richer countries, high end tourism has also been badly affected.

Part II: Sustaining Growth by Addressing Multiple Imbalances

Ladies and gentlemen,
If Asia cannot “trade” itself out of the crisis, Asia has “spent” itself out of the crisis. The good news is that Asia is experiencing a V-shaped recovery supported by massive fiscal stimulus packages. ESCAP’s latest Economic and Social Survey projects a 7.0% growth in 2010 of the Asia-Pacific developing economies, led by China growing at 9.5% and India, at 8.3%. However, the recovery is fragile besides further uncertainties created by the European debt crisis. Furthermore, rising inflation in a number of countries especially in food prices, growing asset bubbles and appreciating exchange rates in a weak growth environment require a tough balancing act on fiscal and monetary policies and will make 2010 a year of complex policy making.

Beyond these short-term challenges, a serious consideration has to be given to the prospects of sustaining the recovery beyond the fiscal stimulus packages. It is not possible to return to ‘growth as usual’ and ‘trade as usual’ scenario given global macroeconomic imbalances and the unwinding of debt-fuelled consumption. This clearly means that Asia has to develop new sources of demand that would make up for the shortfall in the advanced economies like the US.

The key long-term challenge for the region is locating new drivers of growth to supplement the previous engine of demand in developed countries. The solution for the region lies in sustaining growth by addressing its own macroeconomic, social, ecological, and development imbalances and development gaps. This can be done by empowering the poor and making growth “greener”. The result will be greater demand from within the region, as well as growth which is more inclusive of the poor and which is more ecologically sustainable.

The region has to address development gaps to drive growth. With 950 million people in poverty, Asia has large headroom for expanding aggregate demand and thus reducing dependence on external consumption. Asia is also lagging in terms of achieving many other MDG targets. Wide infrastructure gaps in the region also provide an additional potential of generating demand in this region. Similarly, the ecological stresses are growing with the process of development and environmental sustainability becomes an important challenge.

ESCAP has come up with a four pronged policy agenda for expanding domestic consumption and inclusive and sustainable growth:

• Firstly, we need to attach a high importance to strengthening social protection. If poor households can rely on systems of social protection that will automatically trigger social safety nets at times of adversity they will be able to maintain food intake and continue to use education and health services. Just as important, at normal times they will have less need to maintain precautionary savings and can use more of their income to meet their consumption needs.

• Second, as the majority of poor people live in the rural areas and derive most of their income from agriculture, they are likely to benefit from agricultural growth. We need a second, more knowledge-intensive green revolution that combines advances in science and agricultural engineering with the region’s unique traditional knowledge to make agriculture more environmentally resilient.

• Third, the Asia-Pacific economies have the opportunity to develop new and greener industries and businesses based on innovations that are eco-efficient and will save energy, water and value earth’s resources. This way they can provide more affordable green products and services while maintaining growth and promoting environmental sustainability.

• And fourth, we need to make our financial system more inclusive so that millions of unbanked can access modern financial services and small and medium enterprises can be assisted to contribute to development.

All this means investing in human capital so that Asia is able to shape a more knowledge intensive and innovative economy of the future – one that is low in carbon but high in poverty reduction.

My fifth policy agenda is to exploit the potential of regional economic cooperation to complement the national policy actions to rebalance economic growth.

A number of initiatives have been taken over the past decade in the direction of regional cooperation in Asia at sub-regional, bilateral and regional levels. These include a number of FTAs and comprehensive economic partnership arrangements. These arrangements need to be deepened and broadened to create a larger unified market. It is my belief that with some of the world’s largest and fastest growing economies, Asia can become an even greater economic powerhouse if it develops a more integrated regional market. In that direction the initiative taken by the East Asia Summit involving 16 countries at their Summit in Hua Hin to pursue a comprehensive economic partnership of East Asia (CEPEA) is an important one.

Regional cooperation should also involve developing regional transportation networks and improving trade facilitation. Strengthening regional ICT connectivity is another important aspect. ESCAP has been assisting the region in developing regional transport networks, trade facilitation and ICT connectivity as summarized in the Survey.

I must say that the discussions on reforming the international financial architecture at the G-20 and other forums need to find their counterpart within the region. The regional financial architecture in Asia is in its infancy and should be improved in line with the region’s greater trade integration. Particular areas include designing a regional crisis management fund, boosting exchange rate coordination, and establishing a regional investment fund to direct regional reserves to regional needs. The multilateralization of the Chiang-Mai Initiative is an important step but with combined reserves of nearly $ 5 trillions, the possibilities are immense. The region now has the ability to develop a more ambitious regional cooperative architecture for serving its needs and in investing in itself.

Ladies and gentlemen,
We know from the 1997 Asian financial crisis that social recovery takes twice as long as economic recovery and cannot be taken for granted. We therefore need an agenda for social equity to ensure that governments invest in their people and build the foundation for inclusive and sustainable development.

Part III: An Agenda for Social Protection

We can no longer expect families to be the shock absorbers of risks and vulnerabilities that we face. Risks and vulnerabilities are no longer sporadic. We now have to build new resilience in a constant climate of shocks from weather-related disasters to volatility in commodity prices, to global economic crises, to sudden illnesses or disabilities. Family structures have been stretched to breaking point. They are already changing due to several factors such as delayed age of marriage, declining fertility, disruption of marriages, a rapidly ageing population, international migration, rise in female-headed households, family members being dispersed and living apart due to global employment patterns, and displacement due to conflict and political unrest. With urbanization and urban housing patterns, there is also a shift from the extended family to the nuclear family.

Given these macro and micro changes, the state and the private sector need to rethink how it can invest in new human capacity development, resilient institutions and state-corporation-citizen accountability interfaces as part of our twenty-first century reality of globalization and interdependence.

The region’s most important asset is its peoples, and human capital is embodied in the quality of our future development. At the same time, the crisis exposed the need to create a new paradigm for inclusive economic growth within the Asia region – a paradigm that accelerates economic growth and sustains recovery by investing in people. It is built on the premise that there can be no further economic transformation without social transformation.

Let me outline some elements of this social transformation process:

Rising economic stresses and large scale and persistent poverty in the region calls for more resilient and inclusive social protection systems. This agenda must include four equally important, policy goals:
(a) Reduce entrenched poverty and protect the population at large from the risk of falling into poverty as a result of not only economic crisis, but also life changing exogenous shocks such as disasters, illness and disability
(b) Social inclusion for inclusive growth and political stability
(c) Human security as a basic right
(d) Achievement of MDGs.

These goals can be addressed through social protection as a key component of broader economic and social development policies aimed at supporting household consumption, and providing meaningful access to education, health and other services that will pave the way to MDG achievement, promote better chances of individual development, family well-being and social cohesion.

At the same time, we must change the way we formulate and implement social protection strategies. I believe two major changes are required.

First, the goal and structure of social protection programmes and interventions must be transformed from solely a welfare to an investment strategy. In addition to targeting risks and vulnerabilities associated with crises and upheavals, the enhancement of social protection must be mindful of the structural elements that place social groups in a situation of exclusion and vulnerability in the first place. What are some examples?

• Spatial such as remote locations, isolated rural areas, and slums. These need to be connected to development services.

• Economic and financial, such as disparities in the distribution of incomes and productive assets as well as limited access to employment opportunities.

• Socio-cultural, such as identity-based forms of exclusion – ethnicity, religion, gender, age, and physical ability.

• Legal, such as complicated registration systems for birth certificate and home registration, leading to statelessness or “people without papers.”

Existing social protection frameworks rarely include social exclusion as a source of vulnerability.

These challenges need to be addressed by appropriate social protection investments if we are to have inclusive societies.

It is also important to acknowledge that risks and vulnerabilities are not static but dynamic processes. At the level of the individual, they are the result of changes over the life course of a person.

Conditions are dynamic also at the level of communities and nations, namely demographic and economic shifts. Some of the changes that social protection strategies need to address are: (1) urbanization and migration; (2) ageing populations; and (3) the breakdown of informal support structures based on the extended family.

This leads to my final point, namely that we need an approach that builds on the synergies between various social protection schemes, and between social protection and other social and economic policies. To give you an example, conditional cash transfers for children to go to school will not be effective if schools are not properly staffed or the quality of the teaching is poor. Furthermore, securing the intended effect of social protection strategies requires careful attention to potential impacts on the economy. For example, in countries where the population has started to age rapidly – or will be doing so in the near future – we will see an increased emphasis on the how social protection is to be sustainably financed. Social protection must not simply be seen as a handout. It is an investment in inclusive growth. It is an investment in human capabilities to get people out of exclusion and poverty and to build resilience to risks and vulnerabilities.

The opportunity is now for Asia to emerge as a leader: in the global economy, in the realm of social progress, and in safeguarding our global environment. Asia’s development relies on our ability to achieve three balances on our shared development journey.
First, balance between our economic growth, our social needs and the limits of the earth: the three interconnected pillars of development;
Second, balance between the individual and the collective; how to transform the initiative of each into the common good for all; and
Third, balance between the power of the market and the power of the state: the global financial crisis of the past two years underscores the limits of relying solely on the market to correct itself and the dangers of over-regulation by the state.

Ladies and gentlemen,
In conclusion, along side rapid growth and wealth generation, income inequalities, chronic poverty and socio-political exclusion are all part of the Asian experience. Economic stresses bring to the fore complex policy challenges, and opportunities. It is those countries that maintain an explicit and unrelenting recognition that human development rests on the integration of economic and social policies that will manage to build resilience to future crises. Working together, Asia can shape the forces of the economic recovery by investing in its people, its human capital and its social foundations. As a region, we must build upon our collective strengths if we are not only to recover from the present crisis, but make social progress that will see the region’s peoples live wealthier, healthier, and longer lives in solidarity with each other.

I Thank You.