Croatia

1. Croatia Social Impact of the Crisis and Building ResilienceWorld Bank and UNDPZagreb, June 30, 2010

2. Objectives • To determine the impact of the crisis on labor markets and poverty • To assess the effectiveness of employment and social safety net policies in response to the current crisis • To present options the enhance the efficiency of social protection system and to build resilience against future demand shocks

3. Main Findings • The impact of the crisis substantial, despite the fact the unemployment increased somewhat less than in other countries • Large fall in formal employment led to a significant increase in the poverty rate, although cushioned by the increase in informal employment • Policy response to the crisis was limited • Reliance on automatic stabilizers: unemployment benefit and means-tested social welfare allowance • Little adjustment in employment policies • Substantial room to enhance the efficiency of the social protection system within the existing resource envelope

4. Outline • Summary of main results • Labor market impact • Poverty impact • Assessment of the policy response to the crisis • Building resilience: options for the reforms of the social protection system

5. 1. Crisis’ impact on labor markets and poverty Summary of main results

6. Labor market impact: employment • Background: 6% fall in GDP • Formal employment: 6% fall  high elasticity • Crisis or delayed restructuring? • Total employment (LFS): 2.4%  elasticity within the regional range • Wage moderation: 3% fall  limited the adverse employment effect • Substantial growth in registered unemployment: 25% higher • But modest increase in unemployment rate (LFS): 1.1 pp (less than EU average) • However, coupled with fall in labor force participation • Result: fall in employment/population ratio • 57% well below EU average  raising it should be top policy priority • Recently: inflows into unemployment dropped close to pre-crisis level  end of the crisis?

7. Labor market impact: profile • Manufacture, trade, tourism and construction industries suffered the most • Industrialized, low unemployment regions were hit hardest  equalization of labor market conditions • New unemployed: prime age skilled blue-collar male workers  differ from “old” unemployed

8. Low unemployment regions were affected by the crisis more than high unemployment regions

9. Poverty impact • Crisis has undone gains in social welfare achieved during the years of fast economic growth before the crisis • Assuming baseline poverty rate of 10%, simulation results suggest that the poverty rate increased by 3.5 pp. • Employment status, age, education, family size important poverty correlates • The lower middle-income class was hit hardest by consumption decline • Poverty increased faster in richer urban areas than in poorer rural areas

10. Poverty impact: profile • “New poor” are economically active, better educated and younger than the “old poor” • Better chances to escape poverty • Child poverty is set to rise, especially among multi-children families

11. 2. Policy response to the crisis An assessment

12. Policy challenges in the face of a recession • Provide income support to individuals who lost their jobs, and families which fell into poverty • Prevent short-term unemployment to turn into long-term unemployment, and transient poverty to turn into chronic poverty • Given fiscal strain, balance the needs of short-term unemployed and new poor with those of long-term unemployed and chronic poor

13. Limited policy response to the crisis • Income support • Reliance on existing instruments: unemployment benefit and social welfare allowance • Many new unemployed and new poor were not eligible and were not covered • Prevention of long-term unemployment and chronic poverty: active labor market programs • Run on a small scale and further scaled down during the crisis for fiscal reasons • Little impact on job prospects of the new unemployed

14. Limited policy response to the crisis • Policy focus: new vs. old unemployed and poor • Minimal adjustment of existing policy mix to the crisis conditions  focus on the old poor rather than on the new poor or those at risk of poverty • No additional instruments to provide income support to workers affected by the crisis but not eligible to UB or social welfare allowance  coverage gaps • ALMP mix only partly adjusted to tackle unemployment resulting from the fall in labor demand • Short-time work subsidy -- new instrument designed to prevent lay-offs – had no impact due to a very low take-up rate caused by its design features

15. Income support policies: unemployment benefit • Majority of the new unemployed not eligible • Received mostly by the poor • Lifts recipients out of poverty •  Effective income support instrument for those covered, but coverage limited Unemployment benefit is received mostly by the poor and lifts them out of poverty

16. Income support policies:social assistance • Social welfare allowance • Well targeted • Low coverage due to low poverty threshold • Unlimited duration  labor supply disincentives • Take-up rate did not increase during the crisis (new poor not poor enough to qualify?) • Program’s role may increase after a time lag • Poverty threshold should be raised to enhance program’s impact • Categorical benefits • Numerous and absorb considerable resources • Poorly targeted • Not effective in mitigating the effects of economic downturns

17. Income support policies: social spending effectiveness • Social spending remains comparatively high even w/o war vet pensions. • Child tax allowance absorbs additional 1% of GDP, but favours only medium- and high-income groups.

18. Income support policies: social spending effectiveness • Social assistance remains the best targeted program in Croatia, but continues to have a very low coverage rate. • Child allowance has an ‘elite capture’ problem.

19. Income support policies: fiscal restraint measures protected the vulnerable • Simulation of policy changes w/ significant distributional impact (solidarity tax; the rise in supplemental health insurance premium; the elimination of free textbooks) shows significant distributional impact Impact assessment of selected policies • However, their impact on the poor has been partially mitigated by a policy of waivers or exemptions for lower income households.

20. Active labor market programs • Short-time work subsidy – additional anti-crisis measure • Strict eligibility criteria • Limited benefit amount  weak incentives • Few firms benefitted  virtually no impact • Active labor market programs (training, subsidized employment, etc.) • Low coverage • Expenditures reduced and programs scaled down during the crisis • Program mix only partially adjusted to the demand shock (public works) • Focus on training  not effective during downturns when few vacancies • Regional allocation: capacity rather than needs, or effectiveness based • Little impact due to small scale

21. Limited role of active labor market programs Low spending Low coverage

22. 3. Building resilience Options for social protection reforms

23. Crisis as an opportunity for reforms: building resilience • Outcomes of social protection policies could be strengthened within the existing resource envelope: • Improved program mix • Higher coverage • Better targeting: reduced errors of exclusion and inclusion • Higher impact: lower unemployment and less poverty • Administrative simplification at central and local levels

24. Building resilience: reforming income support policies • Temporarily extending coverage of unemployment benefit by relaxing eligibility criteria • Developing activation policies to reintegrate the long-term unemployed welfare recipients into the labor market (workfare approach) • Increasing the coverage of well targeted means-tested income support programs by adjusting the income threshold (by scaling down poorly targeted categorical benefit programs) • Realigning the targeting rules across programs • Improving the cost-effectiveness of pro-birth policies by reallocating towards families with more children.

25. Building resilience: reforming active labor market programs • Scaling up effective interventions so that ALMP have a detectable impact on employment • Adjusting program mix to changing labor market conditions • Downturn: scale up programs that compensate for weak labor demand • Upturn: scale up programs that address structural issues (skills mismatch) • Adjusting regional allocation of ALMP funds to the changing regional needs • From capacity based to needs and effectiveness based allocation rule • Improve implementation capacity in regions facing an increase in unemployment

26. Building resilience: reforming administrative capacity • Achieving better outcomes requires strengthening institutional capacity to design, monitor, implement and evaluate social protection policies • Addressing institutional fragmentation of the social safety net system at central and local levels • Merging relevant functions under fewer ministries and offices at local levels to ease access to social assistance and integrate social policy with efforts to address low labor force participation) • Simplifying the design and administration of benefits: a single, unified welfare benefit administered by one central agency/ministry and provided through one-stop shop • Upgrading the social assistance information system beyond the planned MIS in CWS - reduce the errors of exclusion and inclusion and costs for clients

27. Thank you for your attention!www.worldbank.hrwww.undp.hr